[Federal Register Volume 60, Number 207 (Thursday, October 26, 1995)]
[Rules and Regulations]
[Pages 54815-54817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26526]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76
[MM Docket Nos. 92-266, 93-215, FCC 95-343]
Rates for Cable Programming Service Tiers; External Costs
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: This Twelfth Order on Reconsideration (``The Order'') amends
the Commission's rules to eliminate the requirement that cable
operators, when adding home shopping channels to cable programming
service tiers, offset the per channel mark up with revenues received as
sales commissions from such home shopping channels.
EFFECTIVE DATE: February 23, 1996.
FOR FURTHER INFORMATION CONTACT:
Paul Glenchur, Cable Services Bureau, (202) 416-1150.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's
Twelfth Order on Reconsideration in MM Docket Nos. 92-266 and 93-215,
FCC 95-343, adopted August 7, 1995 and released August 8, 1995. The
complete text of this document is available for inspection and copying
during normal business hours in the FCC Reference Center, 1919 M St.
NW., Washington, DC, and also may be purchased from the Commission's
copy contractor, International Transcription Service (ITS) at 2100 M
St. NW., Washington, DC 20037, (202) 857-3800.
I. Introduction
1. In the Sixth Order on Reconsideration, Fifth Report and Order,
and Seventh Notice of Proposed Rulemaking (``Going Forward Order''), 59
FR 62614 (December 6, 1994), the Commission adopted rules providing
incentives for cable operators to add new channels to their cable
programming service tiers. Those rules allow operators a per channel
mark up of up to 20 cents. With respect to home shopping channels,
however, operators are required to offset this mark up with sales
commission revenues received from such channels. Several programming
entities, including Home Shopping Network, Inc. (``HSN'') and QVC, Inc.
(``QVC''), filed petitions for reconsideration of the sales commission
offset requirement. In this Twelfth Order on Reconsideration, the
Commission grants these petitions for reconsideration and eliminates
the home shopping offset requirement.
II. Elimination of Offsets
A. Background
2. Generally, an operator will pay a licensing fee to a programmer
for the right to carry that programmer's service. This licensing fee,
or program cost, is part of the overall cost that a programmer can
recover as an ``external cost'' when rates are adjusted to account for
the addition of a program service to an operator's channel lineup. In
an effort to ensure that an operator's program cost reflects the actual
cost of carrying a program service, the Commission, in the Report and
Order and Further Notice of Proposed Rulemaking, 58 FR 29736 (May 21,
1993), required that revenues received from a programmer, or shared by
a programmer with an operator, be netted against programming costs when
calculating net programming costs that can be recovered through
regulated rates.
3. In the Going Forward Order, the Commission established new rules
governing the amount by which an operator can mark up its rates in
addition to license fees to account for the addition of new channels to
its CPST. These rules establish a mark up per channel of up to 20 cents
subject to an overall cap of $1.20 for the first two years. Moreover,
in that Order, the Commission applied the revenue offsetting
requirement to the per channel mark up for channels added to Cable
Programming Service Tiers (``CPSTs''). Specifically, the Going Forward
Order provided that revenues received from programmers must be deducted
from programming costs and, to the extent revenues remain, from the
operator's mark up. Offsetting applies on a channel-by-channel basis.
In addition, the Going Forward Order reaffirmed that commissions
received by an operator from programmers will be treated as revenues
received from programmers. Thus, commissions received by operators must
first be netted against programming costs. Remaining commission
revenues must be deducted from the per channel adjustment.
B. Petitions for Reconsideration
4. A number of parties filed petitions for reconsideration in
response to the Going Forward Order. Home shopping entities such as
QVC, Inc. and Home Shopping Network, Inc. contend that requiring
operators to offset the operator's mark up with sales commissions
discriminates against home shopping services. They argue that other
programming networks offer advertising availabilities to operators and
the value represented by such advertising availabilities is not offset
against programming costs or the channel adjustment. In their view,
this establishes a regulatory disincentive to add home shopping while
encouraging the addition of traditional programming. Moreover, QVC
contends that mark ups for channels added to the CPST reflect ``network
costs'' which, unlike programming costs, are not as susceptible to
manipulation or artificial inflation. Consequently, QVC argues, a
primary purpose for restricting external cost recovery to net operator
cost is absent in the case of network cost recovery embodied in the
operator's mark up. HSN and Jones Infomercial Network further contend
that the regulatory complexity and burdens associated with the
accounting and offset of commission revenues discourage operators from
adding home shopping channels. Furthermore, Petitioner Black
Entertainment Television (``BET'') argues that the elimination of the
offset for sales commission revenues could benefit subscribers by
allowing sales commission revenues to cover some of its channel's
operating costs. In turn, BET asserts, operators would be less inclined
to raise subscriber rates for the service. BET also contends that the
offset rule discourages operators from carrying niche programming that
may contain both a traditional programming component and a shopping
service.
5. Several parties, in response to petitions for reconsideration,
have urged the Commission to retain the offset requirement for home
shopping revenues. The Arts and Entertainment Network favors retention
of the offset requirement. It argues that direct cash payments to
operators in the form of commissions encourage operators to base
programming choices on financial incentives offered by home shopping
services rather than on the quality of a channel's programming.
Lifetime TV argues that the offset requirement is needed to enable non-
shopping networks to compete for limited channel space on cable
systems. According to Lifetime, traditional program networks
[[Page 54816]]
cannot match the economic incentives of home shopping channels if
carriage of such channels allows recovery of both a channel adjustment
mark up and unrestricted revenue from sales commissions. With respect
to advertising availabilities, a number of respondents challenge the
petitioners' view that the absence of an offset for advertising
availabilities discriminates against home shopping channels.
Respondents argue that local advertising availabilities differ from
commissions because they do not involve direct cash compensation and
require operators to incur costs to produce advertisements and to
acquire equipment necessary to air them. In addition, ESPN claims that
home shopping channels are not disadvantaged in comparison to
traditional programmers because home shopping channels can also provide
advertising availabilities to local operators. Finally, the City of St.
Joseph and Benton Charter Township (West Michigan Communities), in a
petition for reconsideration, urge application of the revenue offset as
a tier-based adjustment rather than an adjustment on a channel-by-
channel basis. In response to the West Michigan Communities Petition,
QVC and Time Warner argue that governing statutes do not require tier-
based offsets and that Commission rules properly apply the offsets on a
channel-by-channel basis.
C. Discussion
6. Based on the petitions for reconsideration and other comments in
the record, we have determined that requiring operators to offset the
mark up with home shopping sales commissions creates a disincentive for
operators to carry home shopping services. Accordingly, in this Order,
we eliminate this requirement.
7. We agree with petitioners that requiring operators to offset the
per channel mark up with home shopping sales commissions creates a
disincentive for operators to add home shopping services. As we
explained in the Going Forward Order, the twenty-cent per channel
operator mark up falls within the historical range of rate increases
imposed by operators who add new channels and adjust their rates
accordingly in competitive environments. The allowance of this mark up
is independent of the type of programming or the program licensing fee
associated with adding the channel. Requiring operators to offset this
mark up with revenues derived from sales commissions effectively
eliminates the mark up in any case where commission revenues exceed
program costs to the operator (usually zero in the case of home
shopping channels) and the otherwise allowable mark up. Although we
presume that cash payments to the operator in the form of commissions
represent significant value to the operator, the partial or complete
elimination of the mark up for adding a home shopping channel is a
disincentive for an operator to add such a service. At the same time,
we recognize that other programming networks may offer local
advertising availabilities to operators for carriage of their services
without putting the mark up at risk. By reducing or eliminating the
operator mark up when home shopping channels raise sales commission
revenue for operators, the offset requirement effectively penalizes the
operator, and home shopping channels indirectly, by taking away the
mark up simply because many customers in the operator's territory
purchase products from the home shopping service. Consequently, the
offset requirement has the effect of disfavoring carriage of home
shopping services while favoring the carriage of traditional
programming services that can provide incentives to operators in the
form of advertising availabilities not subject to the revenue offset
rule.
8. As indicated above, some commenters argue that the Commission
does not have to treat offsets against sales commission revenues and
advertising availabilities in the same way to promote neutral
incentives to add channels. For example, it has been argued that
availabilities are different because operators may incur production and
equipment costs when utilizing the availabilities. Although advertising
availabilities may entail some production costs, as suggested by ESPN
and Lifetime Television, we believe that operators, as a general
matter, limit their utilization of availabilities to instances where
the net gain from such use exceeds the associated costs. Therefore, we
do not think commissions are so different from availabilities to
warrant granting different offset treatment. Finally, we are
unpersuaded by suggestions that, because home shopping services
theoretically could offer advertising availabilities, exempting the
value of advertising availabilities from the offset requirement does
not provide a comparative advantage to traditional networks. Generally,
home shopping channels, unlike traditional program networks, are not
developed or designed to attract commercial advertisers to air
advertising time as is traditionally the case with other programmers.
Consequently, advertising availabilities do not appear to be a viable
alternative for home shopping channels. Exempting the revenue offset
requirement for advertising availabilities creates an inherent
disparity between home shopping services and channels that have been
developed with the objective of becoming attractive advertising
vehicles.
9. The offset requirement for home shopping sales commissions also
creates administrative and practical difficulties. Although the channel
adjustment factor remains available to the operator if revenues from an
added shopping service fail to match the 20-cent markup, the operator
is still obligated to incur accounting costs and burdens, and some
degree of regulatory scrutiny, to ensure compliance with the revenue
offset rule. This burden may be sufficient to discourage an operator
from adding to the CPST an innovative shopping service or a hybrid
channel containing both additional programming and shopping services.
As a regulatory matter, the revenues derived from sales commissions can
vary with each reporting period which renders difficult the
incorporation of these fluctuations into the ratemaking process.
Indeed, the Commission has not applied the offset requirement to
advertising availabilities in part because of similar administrative
burdens. Recently, the Court of Appeals upheld as reasonable the
Commission's decision to forgo an offset requirement for advertising
revenues.
10. We recognize respondents' concerns that allowing operators the
ability to recover the 20-cent mark up regardless of the success of an
added shopping service enhances the economic attractiveness of adding
such channels. We reaffirm our belief, however, that Commission
regulations should not influence the operator's decision for or against
such services by making standard cost recovery available for carriage
of one type of program service but not another. The decision to add a
shopping service or a traditional programming service should be left to
the operator's business judgment. Similarly, we will not discourage
``traditional'' services from adding a shopping component or providing
advertising availabilities, with concomitant revenue incentives for
operators, to their program offerings. By eliminating the revenue
offset requirement as it applies to the operator's mark up, we
neutralize availability of the mark up as a factor in the operator's
decision to determine what kinds of program services should be added to
the CPST.
11. This Order does not affect our requirement that revenue from
shopping
[[Page 54817]]
commissions must be applied as an offset against program costs. We
remain concerned that a programmer's definition of program cost can be
manipulated to raise such costs artificially. Accordingly, we limit the
scope of this Order to the revenue offset requirement for home shopping
sales commissions as it applies to the per channel mark up only.
III. Regulatory Flexibility Act Analysis
12. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
601-12, the Commission's final analysis with respect to the Twelfth
Order on Reconsideration is as follows:
13. Need for and purpose of this action. The Commission, in
compliance with section 3 of the Cable Television Consumer Protection
and Competition Act of 1992, 47 U.S.C. 543 (1992), pertaining to rate
regulation, adopts revised rules intended to ensure that cable services
are offered at reasonable rates with minimum regulatory and
administrative burdens on cable entities.
14. Summary of issues raised by the public in response to the
Initial Regulatory Flexibility Analysis. Comments were filed in
response to the Initial Regulatory Flexibility Analysis. HSN and Jones
Informercial Network explain that operators face significantly less
complexity when deciding to carry traditional advertiser-supported
channels rather than home shopping services. They argue that
advertising availabilities represent value to operators and that such
value, unlike shopping commission revenue, need not be offset against
the channel adjustment mark up, rendering less burdensome the addition
of non-shopping channels.
15. Significant alternatives considered and rejected. In the course
of this proceeding, home shopping channels and other programming
entities submitted requests to delete shopping commission revenue from
the offset rule. This was the only proposal advanced by petitioners and
the only alternative to current rules considered in connection with
this specific action. In this Order, the Commission is providing relief
to certain programmers seeking the elimination of regulatory burdens
associated with the carriage of their channels.
IV. Paperwork Reduction Act
16. The requirements adopted herein have been analyzed with respect
to the Paperwork Reduction Act of 1980 and have been found to impose
new or modified information collection requirements on the public.
Implementation of any new or modified requirement will be subject to
approval by the Office of Management and Budget as prescribed by the
Act.
V. Ordering Clauses
17. Accordingly, it is ordered that, pursuant to sections 4(i),
4(j), 303(r), 612 and 623 of the Communications Act of 1934, as
amended, 47 U.S.C. sections 154(i), 154(j), 303(r), 532, 542(c) and
543, the rules, requirements and policies discussed in this Order are
adopted and part 76 of the Commission's rules, 47 CFR part 76, is
amended as set forth below.
18. It is further ordered that the petitions for reconsideration
filed by QVC, Inc. and Home Shopping Network, Inc. are granted
consistent with this Order. The Petition for Reconsideration filed by
the West Michigan Communities is denied.
19. It is further ordered that the regulations established in this
Order shall become effective February 23, 1996.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Amendatory Text
Title 47, Part 76 of the Code of Federal Regulations is amended as
follows:
PART 76--CABLE TELEVISION SERVICE
1. The authority citation for part 76 continues to read as follows:
Authority: 47 U.S.C. 543(c).
2. Section 76.922 is amended by revising paragraph (e)(3)(ii) to
read as follows:
Sec. 76.922 Rates for the basic service tier and cable programming
services tiers.
* * * * *
(e) * * *
(3) * * *
(ii) Per Channel Adjustment. Operators may increase rates by a per
channel adjustment of up to 20 cents per subscriber per month,
exclusive of programming costs, for each channel added to a CPST
between May 15, 1994, and December 31, 1997, except that an operator
may take the per channel adjustment only for channel additions that
result in an increase in the highest number of channels offered on all
CPSTs as compared to May 14, 1994, and each date thereafter. Any
revenues received from a programmer, or shared by a programmer and an
operator in connection with the addition of a channel to a CPST shall
first be deducted from programming costs for that channel pursuant to
paragraph (d)(3)(x) of this section and then, to the extent revenues
received from the programmer are greater than the programming costs,
shall be deducted from the per channel adjustment. This deduction will
apply on a channel by channel basis. With respect to the per channel
adjustment only, this deduction shall not apply to revenues received by
an operator from a programmer as commissions on sales of products or
services offered through home shopping services.
* * * * *
[FR Doc. 95-26526 Filed 10-25-95; 8:45 am]
BILLING CODE 6712-01-M
