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Federal Communications Commission referred to in subclause (C) of clause (1) of this subsection (c); or

(B) Where the community of the cable system is in whole or in part within the local service area of one or more television broadcasting stations licensed by the Federal Communications Commission and

(i) the content of the particular transmission program consists primarily of an organized professional team sporting event occurring simultaneously with the initial fixation and primary transmission of the program; and

(ii) the secondary transmission is made for reception wholly or partly outside the local service area of the primary transmitter; and

(iii) the secondary transmission is made for reception wholly or partly within the local service area of one or more television broadcasting stations licenseli by the Federal Communications Commission, none of which has received authorization to transmit said program within such a rea.

(d) COMPULSORY LICENSE FOR SECONDARY TRANSMISSIONS BY CABLE SYSTEMS.

(1) For any secondary transmission to be subject to compulsory licensing under subsection (c), the cable system shall at least one month before the date of secondary transmission or within 30 days after the enactment of this Act, whichever date is later, record in the Copyright Office, a notice including a statement of the identity and address of the person who owns or operates the secondary transmission service or has power to exercise primary control over it together with the name and location of the primary transmitter, or primary transmitters, and thereafter from time to time, such further information as he Register of Copyrights sball prescribe by regulation to carry out the purposes of this clause (1).

(2) A cable system whose secondary transmissions have been subject to compulsory licensing under subsection (c) shall during the months of January, April, and July and October, deposit with the Register of Copyrights, in accordance with requirements that the Register shall prescribe by regulation and furnish such further information as the Register of Copyrights may require to carry out the purposes of this clause (2)—

(A) A statement of account, covering the three months next preceding, specifying the number of channels on which the cable system made secondary transmissions to its subscribers, the names and locations of all primary transmitters whose transmissions were further transmitted by the cable system and the gross amounts irrespective of source received by the cable system.

(B) A total royalty fee for the period based upon a schedule or schedules to be determined as follows:

(i) Within sixty days after the enactment of this Act, the Register of Copyrights shall constitute a panel of the Copyright Royalty Tribunal in accordance with Section 803 for the purpose of fixing a schedule or schedules of just and reasonable compulsory license fees.

(ii) The schedule or schedules of compulsory license fees shall be determined by the Tribunal in a like manner as if the Tribunal were convened to make a determination concerning an adjustment of copyright royalty rates, provided, however, that Sections 806 and 807 shall not apply and that the determination of the Tribunal shall be effective at the end of the twelfth month after the enactment of this Act or on the date the Tribunal renders its decision, whichever occurs sooner.

(iii) The Tribunal, immediately upon making a determination, shall transmit its decision, together with the reasons therefor, to the Register of Copyrights who shall give notice of such decision by publication in the Federal Register within fifteen days from receipt thereof. Thereafter, the determination of the Tribunal may be subject to the judicial review in a like manner as provided in Section 809 but no other official or court of the United States shall have power or jurisdiction to otherwise review the Tribunal's determination.

(iv) Notwithstanding any of the provisions of the antitrust laws (as designated in § 1 of the Act of October 15, 1914, p. 323, 38 Stat. 730, Tit. 15 U.S.C. $ 12; and any amendment of any such laws) owners of copyrights in different works and owners of cable systems may among themselves or jointly with each other agree on, or submit to the Copyright Tribunal for its consideration, one or more proposed schedules of compulsory license royalty fees, and proposed categories of secondary transmissions and cable systems for inclusion in any of the schedules to be established or adjusted by the Tribunal pursuant to this subsection and Section 802.

(C) The preceding subclause (B) of clause (2) of this subsection (d), shall not apply to cable systems that before March 31, 1972, were operating in accordance with the rules and regulations of the Federal Communications Commission, served less than 3,500 subscribers, and were not, directly or indirectly, by stock ownership or otherwise, under common ownership or control with any other cable systems serving in the aggregate more than 3,500 subscribers, provided that this exemption shall continue to apply as long as the cable system continues to serve not more than 3,500 subscribers and is not directly or indirectly, by stock ownership or otherwise, under common ownership or control with any other cable systems serving in the aggergate more than 3,500 subscribers, and provided further, that such cable system files annually at the Copyright Office in accordance with requirements that the Register of Copyrights shall prescribe by regulation, a statement setting forth the names and addresses of other cable systems directly or indirectly in control of, controlled by, or under common control with the cable system filing the statement, the number of subscribers served by each of such other cable systems; and the names and addresses of any person or persons who directly or indirectly own or control the cable system filing the statement and directly or indirectly own or control any other cable system or systems, and the names and addresses of the cable systems so owned or controlled. For the purposes of this subclause (C) of clause (2) of subsection (d), "subscriber" shall mean a household or business establishment, or, if a hotel, apartment house or similar establishment, it shall mean a lodging or dwelling unit within such establishment containing a television receiving set.

(3) The royalty fees deposited under clause (2) shall be subject to the following procedures :

(A) During the month of July in each year, every person claiming to be entitled to compulsory license fees for secondary transmissions made during the preceding twelve-month period shall file a claim with the Register of Copyrights, in accordance with requirements that the Register shall prescribe by regulation. Notwithstanding any provisions of the antitrust laws (as designated in $ 1 of the act of October 15, 1914, 38 Stat. 730, Tit. 15 U.S.C. $ 12, and any amendments of any such laws), for purposes of this clause any claimants may agree among themselves as to the proportionate division of compulsory licensing fees among them, may lump their claims together and file them jointly or as a single claim, or many designate a common agent to receive payment on their behalf.

(B) After the first day of August of each year, the Register of Copyrights shall determine whether there exists a controversy concerning the statement of account or the distribution of royalty fees deposited under clause (2). If he determines that no such controversy exists, he shall, after deducting his reasonable administrative costs under this section, distribute such fees to the copyright owners entitled, or to their designated agents. If he finds the existence of a controversy he shall certify to that fact and proceed to constitute a panel of the Copyright Royalty Tribunal in accordance with section 803. In such cases the reasonable administrative costs of the Register under this section shall be deducted prior to distribution of the royalty fee by the tribunal.

(C) During the pendency of any proceeding under this subsection, the Register of Copyrights or the Copyright Royalty Tribunal shall withhold from distribution an amount sufficient to satisfy all claims with respect to which a controversy exists, but shall have discretion to proceed to distribute any amounts that are not in controversy.

(e) Relation to other laws and regulations. Nothing in this section shall be construed as limiting or preempting the authority of the Federal Communications Commission to regulate the operations of broadcast stations or cable systems pursuant to any other Act of Congress ; Provided that, the Federal Communications Commission shall not limit the area, duration or other scope of the exclusivity a television broadcast station may acquire respecting secondary transmissions by cable systems that are not subject to the compulsory license provided for in subsection (c) of this Section 111 beyond any limits that may be applicable to the area, duration or other scope of the exclusivity a television broadcast station may acquire respecting other television broadcast stations.

(f) Definitions.-As used in this section, the following terms and their variant forms mean the following:

(1) A “primary transmission” is a transmission made to the public by the transmitting facility whose signals are being received and further transmitted by the secondary transmission service, regardless of where or when the performance or display was first transmitted.

(2) A "secondary transmission” is the further transmitting of a primary transmission simultaneously with the primary transmission without change in program or other message content.

(3) A "cable system" is a facility that in whole or in part receives signals transmitted by one or more television broadcast stations licensed by the Federal Communications Commission and makes secondary transmissions of such signals by wires, cables, or other communications channels to subscribing members of the public who pay for such service. For purposes of determining the royalty fee under Subsection (d) (2) (B), two or more cable systems in contiguous communities (including different political divisions or subdivisions) under common ownership or control or operating from one headend shall be considered as one system.

(4) The "local service area of a primary transmitter" as used in this section comprises the area in which a television broadcast station is entitled to insist upon its signal being retransmitted by a cable system pursuant to the rules and regulations of the Federal Communications Commission as published in Volume 37, Federal Register, page 3252, et seq., on February 12, 1972, or such similar rules as the Federal Communications Commission may from time to time lawfully adopt in the future in light of changed circumstances,

(5) The terms "full network station," "partial network station," "independent commercial station," and "non-commercial educational station" as used in subpart D of the rules and regulations of the Federal Communications Commission as published in Volume 37, Federal Register, page 3252, et seq., on February 12, 1972, shall be defined in accordance with the rules and regulations of the Commission of the same date with such additional elaboration as the Commission may from time to time provide consistent with the intent of this Act.

(g) This section shall be effective upon the enactment of this Aot, [Add the following to section 501]

(c) For any secondary transmission by a cable system that embodies a performance or a display of a work which is actionable as an act of infringement under subsection (c) of section 111, a television broadcast station holding a copyright or other license to transmit or perform the same version of that work shall, for purposes of subsection (b) of this section 501 be treated as a legal or beneficial owner if such secondary transmission occurs within the local service area of that television broadcast station.

Amend Section 801 (b) by deleting the words "continue to be reasonable" and by substituting the words "are just and reasonable."

THE PROFITABILITY OF CABLE TELEVISION SYSTEMS AND EFFECTS OF COPYRIGHT (Robert W. Crandall, Associate Professor, M.I.T. and Lionel L. Fray, Senior

Executive Consultant, T.B.S.)

FEE PAYMENTS

SUMMARY

Following the implementation of new FCC regulatory policy for cable television in early 1972, representatives of the cable television and program production industries have been attempting to determine a mutually acceptable schedule of fee payments by the cable industry for the commercial use of copyrighted programming. Agreement on a schedule would facilitate the passage of legislation and permit the cable television industry more rapidly to fulfill its potential for serving the public, an objective supported by the FCC, OTP, and probably a majority of the Congress and the public—as well as by the copyright owners.

Unfortunately, agreement has not been possible chiefly because the representatives of the cable television industry argue that many cable systems are not sufficiently profitable to cover their capital costs, and that copyright fee payments in any significant amounts would reduce cable system profits to a level so low that the industry would be unable to attract new capital to permit future growth. The major evidence advanced to support their views is an economic study undertaken for the industry by Mitchell."

We have independently attempted to assess the profitability of cable television systems, and the likely effects of copyright fees upon their ability to attract sufficient amounts of capital to sustain future growth. The analysis incorporates not only much of Mitchell's evidence, but also additional data developed subsequent to the publication of his paper.

1 Bridger M. Mitchell in association with Robert H. Smiley, Cable Television Under the 1972 FCC Rules and the Impact of Alternative Copyright Fee Proposals, An Economic Analysis, Sept. 30, 1972.

20-344 0.73 . 21

Our results demonstrate that large and intermediate size cable systems in the top 100 markets could expect to earn high rates of return even after payment of copyright fees. These conclusions differ sharply with the Mitchell study which concluded that no system in the top 100 markets could realize a rate of return in excess of its cost of capital, even with no copyright fee payments.

An alternative interpretation of our results is to specify the extent to which prospective cable profits exceed a rate of return sufficient to attract new capital. If we posit this rate of return to be 15 percent, our results show that the excess return available for typical systems, expressed as a percentage of revenues, is as follows: Percentage of revenues available after allowance for 15 percent return on total capital

Percent Top 50 markets -

20 Market 51-100__

17 Market 101 plus.-

13 Thus, these systems could afford to pay more than 13 percent of their revenues for copyright fees, and still earn sufficient profits to attract the capital required to sustain their growth. The above results reflect certain reasonable assumptions regarding the growth rate of revenues, system location, size, and so forth. As Section E of the report shows, somewhat higher and lower values may be obtained via other sets of assumptions, but the general conclusions remain the same the systems are on the whole far from unprofitable.

Our conclusions are different from Mitchell's for two major reasons. First, we employ cable owners' predictions of future penetration which are substantially higher than those used by Mitchell. And second, our estimates of revenues per subscriber are higher, reflecting current reality and anticipations revealed by cable owners in their sales of current systems.

In short, our assumptions, which are based upon rather solid evidence from the industry itself, lead us to more cheering conclusions regarding the industry's future. Our calculations suggest that cable owners should prosper and that their profits should be sufficiently above the level required by investors that they should not find copyright fees an impediment to future growth. Moreover, these results are consistent with a very significant alternative source of data-the valuations of cable television systems sold in recent years, and the expected profitability they reveal.

ROBERT W. CRANDALL Robert W. Crandall is currently Associate Professor of Economics at the Massachusetts Institute of Technology where he has taught since 1966. His principal research interests are in the fields of industrial organization, antitrust policy, and public regulation, and he has published a number of articles on the economics of television broadcasting, vertical integration in the United States automobile industry, and the effects of subsidies upon low-skill labor demand.

While teaching at M.I.T., Professor Crandall has served as a consultant to the Antitrust Division of the United States Department of Justice, the Federal Trade Commission, the Urban Institute, and several private concerns. Prior to joining the faculty at M.I.T., he was a Johnson Research Fellow at the Brookings Institution where he pursued research on his doctoral dissertation. He received an A.B. degree from the University of Cincinnati in 1962, an M.A. in economics from Northwestern University in 1965, and a Ph.D. in economics from Northwestern University in 1968.

LIONEL L. FRAY Mr. Fray is a Senior Executive Consultant at Temple, Barker & Sloane, Inc., a management and economic counseling firm, where he is active in business and financial planning, with emphasis in the communications industry. Prior to joining TBS, Mr. Fray was Vice President of Harbridge House where he headed a group of consultants concerned with business planning and financial analysis.

Mr. Fray's experience in the cable television field began in 1966 when he undertook an assignment for CBS. Since then, he has directed a planning study for the Cable Television Bureau of the FCC; prepared evaluations of proposed business plans for a number of cable system operators, including Time, Inc.; and directed economic studies of the cable industry for a group of major film production companies.

Mr. Fray received s.B. and S.M. degrees in electrical engineering from the Massachusetts Institute of Technology, and the M.B.A. degree from the Harvard Graduate School of Business Administration.

[graphic]

April 25, 1973

The Profitability of
Cable Television Systems
and Effects of
Copyright Fee Payments

Robert W. Crandall

Lionel L. Fray

Associate Professor
M.I.T.

Senior Executive Consultant

T.B.S.

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