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mittee and the Congress must consider in arriving at fair copyright legislation.
The Constitution and the courts have recognized that copyright protection has a twofold purpose, to encourage creativity and equally as important, to promote the dissemination of knowledge to the public.
Cable television, through its reception and distribution of television broadcast signals, promotes the dissemination oi knowledge to the public. Indeed, without this service, significant numbers of Americans would be denied the fruits of creative labor. Congress should be cognizant of this vital CATV role. Legislation which, for whatever reason, restricts or decreases the dissemination of knowledge to the cable television public would not be consonant with the primary public interest concern of copyright.
Second, the ('ongress should be aware that imposition of copyright liability will have an impact on the CATV subscribing public. To a significant extent, the cost of copyright liability will be borne by cable subscribers.
Let me make several further observations on the current financial state of the industry. It has taken several years, but an awareness is growing that CITV is not the pot of gold it was once thought to be. Last year, for example, nine of the top publiely held companies companies who will bear a very sizeable percentage of the copyright burden--suffered a combined net loss of nearly $17 million on total revenues of $267 million.
CATV is a capital intensive business. It is also a business whose expenses, for the most part, are fixed, subject to very little influence of the CATV manager. Cable systems experience a number of substantial expenses, whose levels are established arbitrarily by some authority, not subject to the moderation of competitive pressures. Some of these expenses are subject to change, with little opportunity of the CATV operator to influence the level. Examples of these are pole rents, microwave charges, interest, franchise taxes, property taxes, and FCC fees.
Because most cable expenses are fixed, the only opportunity for cable operators to obtain and maintain a favorable profit margin is through additional subscribers, or by increasing subscriber rates-often difficult because city councils' approval must be obtained.
The uncertainties related to these uncontrollable expenses make financial planning and borrowing difficult and expensive.
Let me now turn to the specific provisions of H.R. 2223. Chapter 8 of the bill would create for the first time a Copyright Royalty Tribunal in the Library of ('ongress. This tribunal would be composed of three persons and would be empowered by statute to adjust copyright royalty rates, the revenue base, and in certain circumstances, the distribution of royalty fees. The tribunal is directed to undertake a review of royaliy rates within 6 months of the date of enactment of the law, and that review is to be completed within 18 months. Thenceforth, the tribunal would conduct a review every 5 years ad infinitum.
Mr. Chairman, we are opposed to the establishment of a tribunal with the uncertainty which is inherent in the tribunal's power, and we further believe that chapter 8 of this bill is laced with infirmities that represent a very serious threat to the future viability of the cable television industry. This tribunal carries with it the potential for substantial escalation of copyright fees in a very short period of time. The Office of Telecommunications Policy has already pointed out the damaging effect this uncertainty and lack of stability can have. You will hear further about the impact of uncertainty on cable's growth by a representative of the financial community following my presentation.
I do not think that I exaggerate when I say that virtually any sig. nificant copyright payment by this industry represents a financia) burden. An unknown periodic review as mandated in this bill presents, in my opinion, not potential, but actual grave economic problems to a growing industry. You are aware of the difficulties that all high-risk businesses are now facing in obtaining short-term financing. I do not wish to plead economic hardship to this subcommittee, but plead I must. We in the industry know too well the economic realities and the potential grave effects of further uncertainty on the capital market.
Further, chapter 8 contains no criteria to guide tribunal review of rates; it contains no provision for judicial review of the tribunal's decision other than for fraud, and in our opinion, it provides for no effective congressional review. In short, we find this section of the bill fraught with uncertainty, an uncertainty that this industry can ill afford.
I would like to suggest a more reasonable approach to the issue of insuring fair rates in the future. Such an approach is already contained in the bill. Section 111(d) provides for the establishment of a compulsory license for secondary transmissions by cable systems. Roy. alty fees are computed on the basis of escalating percentages of gross receipts from subscriber revenues. We believe that this progressive fee schedule, based on percentages, represents an eminently logical and reasonable approach. It substitutes marketplace economies for arbitrary decisions. It has the logic of a graduated income tax without the loopholes. It provides for the interests of the copyright owners, since their revenues from cable will increase as the cable system revenues increase. Such an approach takes both the industry's growth and inflation into account. If cable television is to grow and prosper. so will the owners of copyrighted product share in that growth and prosperity.
In summary, then, we strongly urge this subcommittee to retain the approach of the bill's progressive fee schedule based on a percentage of revenues, and discard the uncertainty that is inherent in the power of the tribunal to change these percentages. Such an approach avoids the need to establish yet another bureaucratic procedure and substitutes a logical and simple approach for an arbitrary and complicated one.
Section 501 of H.R. 2223 deals with infringement of copyright. Subsection (b) thereof entitles the copyright owner to initiate action for infringement. We have no objection to that provision. However, subsection (c) grants a television broadcast station rights as legal or beneficial owner of a copyright for purposes of instituting action for infringement. We very strongly object to this provision.
As you know, the rights to most television programs are held, not by the broadcaster, but by the copyright owner. In those cases, where the television station does hold the copyright, he is fully protected against infringement under subsection (b). However, subsection (c) would grant to hundreds of broadcasters the right to institute harassing suits against cable operators for very minor or even inadvertent violations of FCC regulations. Such a provision is, we think, an aberration, imprecedented in copyright law. It should be stricken from the bill. Adequate remedies for violations of FCC regulations already are available under the communications Act.
Mr. Chairman, in earlier testimony before this subcommittee Deputy Assistant Attorney General Irwin Goldbloom, of the Justice Department, urged that CATV systems not be required to pay copyright on local signals carried. He further stated that by carrying local signals, the cable system enhances the broadcaster's market, and that the copyright holder is helped, not hurt, by cable system carriage. XCTA fully supports this line of thinking. We note also that Thomas Keller, Acting General Counsel for OTP, stated to the subcommittee last week that local signals should not be liable for copyright.
While Mr. Goldbloom did not suggest to this subcommittee a method or mechanism for imposing liability only on signals outside the area of free use, the logic of his recommendation is undeniably sound. NCTA has addressed internally this question in great detail. We have researched and studied a variety of possible approaches to the Justice Department's concept of an area of free use.
We have, however, determined that it is apparently impossible to arrive at a fee formula embodying this concept applied on a systemby-system basis, which does not discriminate unfairly against one portion of the cable television industry, and consequently against the public receiving service from such systems.
We believe that the concept advanced by the Justice Department can and should be embraced in the following manner. Copyright liability for CATV distribution of broadcast signals should be imposed without respect to signals carried. There appears to be no fair way to impose liability for carriage of certain signals and not others.
By retaining the present fee schedule in HI.R. 2223 and exempting from liability the first $25,000 in gross quarterly subscriber receipts for all cable television systems, copyright legislation can give some recognition to that portion of cable service which fills gaps, or improves reception in the service areas of broadcast stations.
Such an exemption involves a reasonably small dollar amount in relationship to the total copyright revenues to be derived from cable now and in the future. It also has the benefit of providing substantial relief to the smaller, traditional community antenna systems. The owners of copyrighted proluet themselves have frequently stated that they are not primarily concerned with this type of cable system. Indeed, the 1971 consensus agreement envisioned a total exemption from liability for all cable systems serving fewer than 3,500 subscribers. The blanket exemption we propose would have the practical effect of exempting nearly all systems with fewer than 1,500 subsribers. We believe this kind of exemption to be an equitable and fair approach to the problem of copyright liability for local signals. We submit for your serious consideration an amendment to achieve this.
Mr. Chairman, I will now turn to the third matter XCTA would like to comment on. Earlier in my testimony I have alluded to the FCC's cable television regulations and to the close historical interrelationship between copyright and regulation as applied to cable. For your convenience, the most pertinent of those regulations are included in my text, but, in the interest of time I will skip over those and not read them.
It has been remarked, and I think not too facetiously, that while the Congress has been laboring to develop copyright provisions applicable to cable, the FCC has for some time now been guarding the copyright gate by promulgating copyright regulations of its own.
Earlier this year, in an address to the NCTA convention, Barbara Ringer, Register of Copyrights, stated that the FCC rules "contained the most elaborate copyright provisions I have ever seen anywhere."
She continued : I don't know much about communications law, but I know copyright law when I see it, and the exclusivity provisions of the FCC regulations are copyright regulations; in effect, the enactment of a copyright law through the regulatory process. And they are unquestionably the most complex and difficult to understand of anything I've ever read in this field.
Absent legislation, or specific congressional direction, and in spite of Supreme Court decisions, the Federal Communications Commission has consistently invoked copyright principles to protect broadcasting from competition. The pervasive nature of the Commission's forays in a variety of regulatory matters into "exclusivity” of all types is in and of itself a subject for broad independent investigation.
For the purpose of these hearings, however, one thing ought to be indisputably clear. While the FCC's 1972 rules have granted cable systems the right to carry a limited number of broadcast signals, that right—and the value and market ability of those signals for cable operators-has in very large part been negated by the Commission's syndicated and network program exclusivity provisions. Stated in the simplest of terms, a cable operator has the right to carry signals, but has an obligation to black out most of the programing on those signals. And this is achieved through the Commission's "copyright regulations."
For example, the cable system under construction in Wauwatosa, Wis., must under the FCC's syndicated exclusivity regulation delete 62 percent of the programing on one channel it imports, and 58 percent on the other channel. What, the operator can fairly ask, is the value of carrying the signal? Appendix C of my testimony contains a more detailed explanation of this problem.
It ought to be beyond any logical dispute that if cable systems are to incur liability for the distribution of these signals, then they should have the right to show what has been paid for. Yet, if copyright legislation of H.R. 2223 were enacted today, that would not be the case. We believe it is imperative that the Congress should insure that cable operators get what they pay for. This should be done in this legislation, and we are submitting language to accomplish this aim.
I would like to invite the subcommittee's attention to several additional recommendations for perfecting changes in section 111 of the bill.
Section 111(b) of H.R. 2223 appears to make the secondary transmission of over-the-air pay-television signals an act of infringement, and one subject to civil and criminal penalties. This subcommittee should be aware that Federal Communications ('ommission regulations require CATV systems to carry the signals of all television broadcast stations in specified geographical areas, regardless of whether those signals are originated by commercial broadcast stations or STV stations. Therefore, under section 111(b) the cable system would be faced with either violating FCC rules and regulations, or the copyright law.
Next, section 111(a)(4) exempts government-owned and non-profit translators from the requirement to pay fees. As a matter of law, we believe that no rational distinction can be made between CATV systems whose purpose is to improve reception of television signals, and translators which serve the same purpose. Additionally, of course, HI.R. 2.223 does not exempt nonprofit and government-owned CATV systems. Should not such translators be placed on an even competitive footing with commercial translators and cable systems?
Third, section 111(a) (3), as currently drafteil, raises the possibility that cablo operators providing leased channels to the public or others could incur copyright liability for the material programed on those channels by the lessces. Federal ('ommunications Commission regulations require that certain cable systems make available channels for lease on a nondiscriminatory basis and that the cable operator may exercise no control over the program content on those channels. We respectfully suggest that the language of section 111(a) (3) be changed to insure that the cable operator does not incur copyright liability on leased channels. The lessee, of course, would remain liable for the payment of copyright.
Finally, portions of section 111 and the language of section 801(a) raise the possibility that copyright fees in the future could be based on cable revenues from sources other than basic CATV distribution of broadcast signals.
I believe it is not the intent of ('ongress to impose copyright liability on cable operations beyond the basie reception service, and indeed there would be no logic to such an approach. The liability contemplated in this legislation has no relationship to revenues derived from local origination, pay cable operations, or any other such service initiated by a cable operator.
We are submitting suggested clarifying language to deal with these four matters.
In conclusion I would like to say, Mr. Chairman, XOTI has for 8 years now worked hard under very trying circumstances to assist in achieving fair and reasonable copyright legislation for CATV. We will continue those efforts, and we stand ready to assist this subcommittee in every way possible. We are handing you copies of the amendments I have mentioned, and I will be very happy to respond to questions.
Mr. KASTEN MEIER. Thank you, Mr. Bradley. One point you mentioned, the consensus Agreement of 1971."
Mr. BRADLEY. Yes, sir.
Mr. KASTEN MEIER. Is that agreement, as far as you know, or as far as you are concerned, is that agreement still in effeci!
Mr. BRADLEY. It's in effect to the extent that its effect has not been denied by actions of the Senate in developing their version of the copyright bill; and certain actions of the FCC, and certain actions of certain broadcasters. Some of the provisions of the ('onsensus Agreement have been overlooked, or have been ignored. So, it is, in effect, a general type of agreement with some violations.
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