[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Proposed Rules]
[Pages 2365-2367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-439]



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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. RM 89-2A]


Cable Compulsory License: Notice of Inquiry Regarding Merger of 
Cable Systems and Individual Pricing of Broadcast Signals

AGENCY: Copyright Office, Library of Congress.

ACTION: Extension of comment period.

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SUMMARY: The Copyright Office is reopening the comment period in Docket 
RM 89-2 (Merger of Cable Systems) to broaden the scope of this 
proceeding. Specifically, the Office seeks comment as to the copyright 
royalty implications of a la carte offerings of broadcast signals by 
cable operators and the permissibility of allocating gross receipts 
among subscriber groups for a la carte signals in computing royalties 
due under the cable compulsory license of the Copyright Act.

DATES: Initial comments should be received by February 23, 1995. Reply 
comments should be received by February 8, 1995.

ADDRESSES: Interested persons should submit fifteen copies of their 
written comments, if delivered by mail, to: Copyright GC/I&R, P. O. Box 
70400, Southwest Station, Washington, D.C. 20024. If delivered by hand, 
fifteen copies should be brought to: Office of the General Counsel, 
James Madison Memorial Building, Room LM-407, 101 Independence Avenue, 
S.E., Washington, D.C. 20540.

FOR FURTHER INFORMATION CONTACT: Marilyn J. Kretsinger, Acting General 
Counsel, Copyright GC/I&R, P. O. Box 70400, Southwest Station, 
Washington, D.C. 20024. Telephone (202) 707-8380. Telefax: (202) 707-
8366.

SUPPLEMENTARY INFORMATION:

I. Background

    On September 18, 1989, the Copyright Office published a Notice of 
Inquiry (NOI) in Docket No. RM 89-2 to inform the public that it was 
examining the issues of merger and acquisition of cable systems and 
their impact on the computation and reporting of royalties under the 
cable compulsory license, 17 U.S.C. 111. 54 FR 38390 (1989). At the 
heart of the 1989 NOI were the royalty filing questions raised by the 
application of the ``contiguous communities'' provision of the section 
111(f) definition of a cable system. That provision provides that two 
or more cable facilities are considered as one cable system if the 
facilities are either in contiguous communities under common ownership 
or control or operating from one headend. See also 37 CFR 201.17(b)(2).
    The Office highlighted some of the difficulties created by cable 
systems in contiguous communities becoming a single system through 
either merger or acquisition by a common owner:

    For example, assume a situation where there are two completely 
independent but contiguous cable systems. System A carries two non-
permitted (3.75% rate) independent station signals and System B, 
assigned a different television market, carries the same two 
independent station signals but on a permitted (base rate) basis, 
plus a superstation signal on a non-permitted (3.75% rate) basis. 
Systems A and B are purchased by the same parent company and 
apparently become a single cable system for purposes of the 
compulsory license. The purchase raises several problematic issues 
as to the calculation of the proper royalty fee. Should the 
independent stations be paid for at the 3.75% rate or the non-3.75% 
rate system-wide, or should the rates be allocated among subscribers 
within the system and, if so, on what basis? Furthermore, if 
allocation is the answer, what rate can be attributed to new 
subscribers to the merged system? Finally, there is the question of 
the superstation signal which is only carried by former cable System 
B. At the time of acquisition, should the superstation be attributed 
throughout the entire system, even though many subscribers do not 
receive the signal (a so-called `phantom' signal)? And which 
system's market quota (A's or B's) should be used for the entire 
statement?
54 FR at 38391
    Based on the above scenario, the Office also formally posed a set 
of further questions--many of which addressed the creation of 
subscriber groups for attributing signals and royalty rates. Among 
these questions were whether cable operators should be allowed to 
attribute distant signals among their subscribers in accordance with 
the conditions that existed prior to the merger or acquisition, and 
whether cable operators should only be required to include in gross 
receipts the revenues generated from subscribers who actually 
[[Page 2366]] received a broadcast signal. Id. at 38391-92.
    Several parties, who commented on the 1989 NOI, proposed a possible 
``solution'' to the above described scenario.<SUP>1 Their proposal is a 
two step approach: aggregation, and then allocation of gross receipts. 
Cable systems would first aggregate the gross receipts of all of their 
subscribers to determine which Copyright Office form (and hence royalty 
rates) to use; then cable systems would report carriage of distant 
signals according to subscriber groups. Thus, in the above example 
provided by the Office in the 1989 NOI, Systems A and B would aggregate 
their gross receipts to determine which form to use (either SA 1-2 or 
SA-3) and the corresponding royalty rates, and then continue to file 
separately (i.e. as they were filing prior to the merger/acquisition). 
Thus, if System A and B's aggregated gross receipts total was in excess 
of $292,000, both systems would file a separate form SA-3 with the 
corresponding royalty rates. System A would file an SA-3 and report two 
non-permitted independent signals at the 3.75% rate, based only on the 
gross receipts of the subscribers in the communities System A serves. 
System B would also file an SA-3 and report both the non-permitted 
3.75% superstation signal and those same two independent signals on a 
permitted basis, based on the gross receipts of the subscribers in the 
communities System B serves. See comments of American Television and 
Communications Corp. at 10; comments of Baraff, Koerner, Olender & 
Hochberg, P.C. at 2-3; comments of Adelphia Communication Corp et. al. 
at 10; comments of National Cable Television Association at 13; 
comments of Program Suppliers at 7-9. But see comments of Joint Sports 
Claimants at 3. The referenced commentators argue that this approach is 
consistent with the ``contiguous communities'' provision of section 
111(f) since that provision speaks only to how systems are to be 
classified, not how they are to report carriage, and sustains the 
purpose of the provision to prevent fragmentation of cable 
systems.<SUP>2

    \1\Although the Copyright Office has reviewed the comments, it 
has not reached any conclusions or decisions with regard to the 
suggestions proposed by the various commentators.
    \2\''Fragmentation'' is the practice whereby a cable system 
separates or ``fragments'' its system into as series of smaller 
systems filing separate forms, usually the SA 1-2, and corresponding 
lower royalty rates. The purpose of fragmentation its to reduce the 
operator's overall gross receipts and thereby create a substantially 
lower royalty payment under the cable license.
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    The referenced commentators' proposal advocates the creation of 
``subscriber groups'' within a single cable system, requiring 
allocation of gross receipts to specific groups of subscribers and 
application of varying royalty rates to those groups. Until now, the 
Copyright Office has looked with disfavor on allocation of gross 
receipts based on subscriber groups, since allocation among different 
subscribers, with one exception, is not specifically recognized by 
section 111 and creates problems in applying the royalty rates.<SUP>3 
The only express allowance for allocation in section 111 is the 
partially local/partially distant provision of section 111(d)(1)(B). 
That section provides that ``in the case of any cable system located 
partly within and partly without the local service area of a primary 
transmitter, gross receipts shall be limited to those gross receipts 
derived from subscribers located without the local service area of such 
primary transmitter.'' There are now other ``subscriber group'' and 
gross receipts allocation issues beyond those of section 111(d)(1)(B) 
and those presented by the merger and acquisition of cable systems.

    \3\The royalty rate problems include identifying the signals to 
which the 3.75% rate applies and in the case of permitted signals, 
what is the order of the DSE (first, second, third).
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II. The 1992 Cable Act

    In 1992 Congress passed the ``Cable Television Consumer Protection 
and Competition Act of 1992'' (1992 Cable Act) which, among other 
things, regulates the rates that cable operators may charge their 
subscribers for cable programming services. Although the 1992 Cable Act 
is telecommunications legislation, and not copyright, its passage has 
created additional issues related to creation of subscriber groups and 
allocation of gross receipts to those addressed in our 1989 NOI.
    The 1992 Cable Act permits the Federal Communications Commission, 
and in some cases local franchising authorities, to regulate the rates 
charged by cable operators for both broadcast and nonbroadcast 
programming services. While packages or ``tiers'' of programming 
services are subject to rate regulation, Congress excluded per-channel 
service offerings from such regulation. These per-channel offerings are 
known as a la carte signals because, to be exempt from rate regulation, 
subscribers must have a ``realistic choice'' in deciding whether to 
receive the signal. Report and Order and Further Notice of Proposed 
Rulemaking in MM Docket 92-266, 8 FCC Rcd. 5631 327-328 & n. 808.
    The exemption from rate regulation for a la carte signals 
encourages cable operators to offer some, if not all of their services 
(beyond the basic tier required by the 1992 Cable Act to be provided to 
all subscribers), on a subscriber choice basis. Thus, for example, a 
cable operator might offer subscribers three distant superstation 
signals (WTBS, WWOR, WGN, etc.) at $3 a month per signal. A subscriber 
could choose any combination of these signals, or none at all, and pay 
only the per signal charges for those signals selected. The result is a 
number of distant signal offerings by the cable operator, with varying 
numbers of subscribers within the system selecting, receiving, and 
paying separately for each signal.
    With the increasing ability of cable operators to offer subscribers 
essentially ``one signal tiers'' of broadcast stations, issues arise as 
to the proper calculation and reporting of royalty fees under the 
section 111 cable compulsory license. If every distant signal offering 
is allocated to the entire subscriber base of the cable system, ``one 
signal tiers'' that are purchased by just a few of the cable system's 
subscribers could result in costing the cable system more in royalties 
than the income it gets from the few subscribers. As noted above, the 
Copyright Office has had a longstanding policy against creation of 
subscriber groups and allocation of gross receipts, except as provided 
for in section 111(d)(1)(B). By extending the comment period in this 
proceeding, the Office is now re-examining this policy in both the 
context of merger and acquisition of cable systems and a la carte 
broadcast signals.

III. Extension of Comment Period

    Because the royalty issues presented by a la carte broadcast 
signals resemble many of those presented by the merger and acquisition 
of cable systems, the Copyright Office is reopening this proceeding to 
receive comment on how compulsory license royalty payments should be 
made for a la carte offerings of broadcast signals by cable operators. 
Specifically, the Office seeks comment on the following inquiries:
    (a) As described in the ``System A and System B'' example in the 
1989 NOI to this proceeding, a ``phantom'' signal problem occurs when 
the superstation carried by System B is attributed to all subscribers 
throughout the merged systems, even though the subscribers in former 
System A do not actually receive the signal. In the case of a la carte 
broadcast signals, should carriage of each distant broadcast signal be 
attributed throughout the entire subscription base, even if many 
[[Page 2367]] subscribers do not actually receive the signal. The 
Copyright Office has historically required such attribution, based upon 
its interpretation that the Copyright Act permits only allocation of 
gross receipts among subscriber groups for partially local/partially 
distant signals. Does the 1992 Cable Act, or other circumstances, 
warrant a change in this interpretation? If so, on what basis?
    (b) It has been suggested by some that the Copyright Office should 
permit creation of subscriber groups for a la carte broadcast signals, 
and allow cable operators to allocate gross receipts only to those 
subscribers who select and receive a particular signal. Thus, for 
example, if a cable system has 1000 subscribers and only 500 of them 
choose to receive superstation X, the distant signal equivalent (DSE) 
value generated by superstation X would only be applied against the 
gross receipts generated from the 500 subscribers who took the 
superstation, as opposed to applying it against the system's total 
gross receipts.<SUP>4

    \4\This example assumes the cable system is an SA-3 form system, 
and therefore makes royalty payments based on the number of DSE's 
carried.
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    One concern with allowing that would be that it would offer the 
cable system an incentive to pull its distant signals from its basic 
tier offering, and offer them only as a la carte signals, thus reducing 
the subscriber base from which the royalty is calculated.
    The Cable Act of 1992 has made it more difficult for cable systems 
to restructure their distant signal offerings because it states that, 
for a basic tier subject to rate regulation, ``such basic service tier 
shall, at a minimum, consist of * * * (iii) any signal of any 
television broadcast station that is provided by the cable operator to 
any subscriber, except a signal which is secondarily transmitted by a 
satellite carrier beyond the local service area of such station.'' 47 
USC 543 (b) (7) (iii).
    Therefore, for distant signals that are imported by means other 
than satellite carrier, if the cable system offers it to one 
subscriber, it must offer it to all on the basic tier. In 1989, 48.2% 
of all instances of distant signal carriage on a Form 3 cable system 
were by means other than satellite carrier. 1989 Cable Royalty 
Distribution Proceeding, 57 FR 15286, 15294 (1992).
    However, 51.8% of distant signal carriage in 1989 was by means of 
satellite carrier, and those signals could be pulled from the basic 
tier without violating the 1992 Cable Act. In addition, cable systems 
that are not subject to basic tier rate regulation because there is 
effective competition in the system's franchise area, are also free to 
restructure.
    What would be the statutory basis for allowing a la carte 
allocation, and what effect would it have on the total amount of 
royalties paid?
    (c) If the Copyright Office allowed the type of gross receipts 
allocation described in question (b), what is the proper royalty rate 
to assess against the gross receipts of each subscriber group? For 
example, if a cable system carried two distant signals on an a la carte 
basis, one a permitted signal and the other a non-permitted signal at 
the 3.75% rate, how can it be determined which subscriber group is 
receiving the less expensive base rate permitted signal, and which 
group is receiving the more expensive 3.75% rate non-permitted signal? 
Obviously, there is a powerful incentive for the cable operator to 
assign the 3.75% rate to the signal with the fewest subscribers, and 
hence the lowest amount of gross receipts. A similar problem occurs in 
applying the decreasing rates for permitted signals. Are there any 
fixed factors which the Copyright Office could apply to prevent the 
repeated occurrence of applying the lower rate against the higher gross 
receipts? What effect would that have on the total royalty pool 
generated by section 111?
    The Copyright Office requests comment on the questions raised in 
this extended comment period, as well as any other issues related to 
compulsory license royalty payments for a la carte offerings of 
broadcast signals.

List of Subjects

    Cable compulsory license; Cable television systems.

    Dated: December 29, 1994.
Marybeth Peters,
Register of Copyrights.
    Approved by:
James H. Billington,
The Librarian of Congress.
[FR Doc. 95-439 Filed 1-6-95; 8:45 am]
BILLING CODE 1410-31-P