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versed by the United States Court of Appeals for the Ninth Circuit, which held that the only judicially protectable rights, if any, in programs were the copyrights. Cable Vision, Inc. v. KUTV, Inc., 335 F.2d 348 (9 Cir., 1964).
Meanwhile, in 1960, a group of owners of copyrighted motion pictures decided to litigate their claim to copyright royalties for CATV carriage. A suit was accordingly instituted in the United States District Court for the Southern District of New York against two CATV systems. Initially, the District Court decided in favor of the copyright owners, United Artists Television, Inc. v. Fortnightly Corp., 255 F. Supp. 177 (S.D.N.Y., 1966). This result was sustained by the United States Court of Appeals for the Second Circuit, Fortnightly Corp. v. United Artists Television, Inc., 377 F. 2d 872 (2 Cir., 1967). However, the Supreme Court reversed this decision, holding that CATV's reception and distribution of television broadcast signals carrying copyrighted programs to subscribers does not constitute a "performance" needed for a violation of the Copyright Act. Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390 (1968). The Court stated that CATV systems were more in the nature of the passive receivers, like a rooftop antenna, than active performers.
The next chapter of this history began in 1964 when the Columbia Broadcasting System sued TelePrompTer Corporation, also in the United States District Court for the Southern District of New York. That suit was held in abeyance until after the Supreme Court's decision in Fortnightly. CBS has tried to distinguish the facts in Fortnightly by claiming that a CATV system becomes an active performer when it imports distant television signals, uses microwave to obtain signals, interconnects with other CATV systems, originates its own pro grams, or sells advertising. The District Court rejected all of these contentions, holding instead that Fortnightly was dispositive of the issue. Columbia Broadcasting System v. Teleprompter Corp., 335 F. Supp. 618 (S.D.N.Y., 1972). This result was reversed in part by the United States Court of Appeals for the Second Circuit. Columbia Broadcasting System v. Teleprompter Corp., 476 F. 2d 338 (2 Cir., 1973). That Court held that where a CATV system was carrying a "distant" television signal, such carriage stepped over the line of passive reception to become a “performance." The test for a "distant" signal was stated in the negative, i.e., a signal is "local" if it can be received in or near the CATV community. The lower court was sustained in all other respects. Both parties have asked the Supreme Court to review the Second Circuit's decision. Should this decision stand, several other issues remain to be litigated, e.g., specific application of "distant" signal test, validity of program copyrights and extent of damages.
There is yet another factor which has been raised before this Subcommittee for its consideration in fashioning copyright revision legislation: The so-called "Consensus Agreement” or “OTP Compromise."
For your convenience, the copyright provisions of the OTP Compromise follow :
A. All parties would agree to support separate CATV copyright legislation as described below, and to seek its early passage.
B. Liability to copyright, including the obligation to respect valid exclusivity agreements, will be established for all CATV carriage of all radio and television broadcast signals except carriage by independently owned systems now in existence with fewer than 3500 subscribers. As against distant signals importable under the FCC's initial package, no greater exclusivity may be contracted for than the Commission may allow.
C. Compulosry licenses would be granted for all local signals as defined by the FCC. and additionally for those distant signals defined and authorized under the FCC's initial package and those signals grandfathered when the initial package goes into effect. The FCC would retain the power to authorize additional distant signals for CATV carriage; there would, however, be no compulsory license granted with respect to such signals, nor would the FCC be able to limit the scope of exclusivity agreements as applied to such signals beyond the limits applicable to over-the-air showings.
D. Unless a schedule of fees covering the compulsory licenses or some other payment mechanism can be agreed upon between the copyright owners and the CATV owners in time for inclusion in the new copyright statute, the legislation would simply provide for compulsory arbitration failing private agreement on copyright fees.
E. Broadcasters, as well as copyright owners, would have the right to enforce exclusivity rules through court actions for injunction and monetary relief.
Let me hasten to add that the Congress was not a party to this so-called compromise, nor to our knowledge was it consulted with, nor is it bound by the terms, in any way.
Let me also point out that the Federal Communications Commission did not adopt rules which comported in all respects with that "compromise." Notably, at the urging of television broadcasters in the Rocky Mountain region, a very important part of the Compromise (relating to network exclusivity) was sabotaged before the final Federal Communications Commission rules were adopted. Furthermore, Broadcasting magazine, in its February 14, 1972, issue reported that the licensee of KVVU-TV, Las Vegas, Nevada, had sought court review of the FCC's new rules with an eye toward obtaining their reversal. In addition, major broadcast elements, i.e., CBS, did not support the "compromise."
It should also be pointed out that the FCC's position on legislation, announced in a letter from Chairman Dean Burch to Senator John O. Pastore, dated March 11, 1970, and to the best of our knowledge still in effect today, is as follows:
"For example, the concept of 'adequate television service' in S. 543, defined as precisely as it is, or the use of fixed mileage concepts like the 35-mile zone for program exclusivity, or the inflexible FCC non-duplication requirement specified, may not be legislatively sound, even recognizing that in some respects there is some authority given the agency to make future revisions. The approach which has been taken in the Communications Act seems preferable to us-namely, the Congressional determination of general guidelines, with the Commission left to develop and, most important, revise detailed policies to implement those guidelines in the light of rapidly changing communications technologies, and with Congress overseeing such Commission activities, particularly through the legislative hearing process.
"We therefore believe that clarifying legislation in this field should set forth general guidelines and eschew detail. This approach, we believe, may also be employed as to any copyright legislation dealing with CATV. Such legislation can be broadly framed-for example, the Congress could adopt a provision that a CATV system shall have a compulsory license for such signals as the Commission, by rule or order, may authorize the system to carry. The copyright law could then specify the appropriate amount to be paid, or method of determining the amount, a method for distributing the funds thus paid in (e.g., a so-called "ASCAP-BMI" method), a provision for periodic adjustments in the amounts to be paid, and any exemption
for existing small systems deemed desirable." With the benefit of observing the various threads just mentioned, we can turn to the fabric of copyright revision affecting CATV. I must point out, that because of the complexity of the subject matter, it is most difficult to achieve unanimous agreement on the approach to be followed. In this hearing however, I will present NOTA's positions and the rationale for them.
The single most vexious issue is that of establishing a fair schedule of royalty fees to be paid by CATV systems in return for receiving the statutory copyright license.
Over the past five years the CATV industry has supported legislation imposing copyright liability on CATV systems for the carriage of off-the-air broadcast signals. NOTA committed itself to seeking passage of fair and reasonable copyright legislation. With respect to the payment of royalty fees, NCTA offers the following comments on various aspects of Section 111 of S. 1361,
STATUTORY LICENSE FOR COPYRIGHTED PROGRAMS
Once a copyright holder has permitted the sale of his product for broadcast use, equity dictates that CATV systems should be allowed to receive broadcast signals without alteration provided appropriate payment is made. CATV systems would, therefore, have reasonable access to broadcast programming.
A typical television broadcast station carries over 5,000 programs per year. A typical CATV system carries at least five television stations, and often several radio stations. Thus, it is administratively impossible to negotiate with every copyright owner prior to reception and distribution of programs. A CATV system also has absolutely no way of knowing in advancé what programs are protected by copyright since a cable system is a passive reception device.
A practical solution to overcome this problem is legislation granting CATV systems a statutory license. There is ample precedent for compulsory licensing since ASCAP, BMI, and SESAC contractually grant them to networks, local broadcasters and others for all musical works. Subsection (c) of Section 111 provide for a statutory license for programs on all permitted broadcast signals.
The regulatory provisions of subsection (c) are rendered unnecessary by the FCC's 1972 Cable Television Report and Order. NCTA submits that no other limitations on the FCC's authority to authorize further signal carriage should be substituted.
Copyrights are held by thousands of people and ownerships of copyright changes daily. The burden for CATV systems to negotiate price and terms with each copyright owner would be overwhelming. Thus, a fixed fee payable to a single point is essential. Such a fixed schedule gives the copyright owner an additional fee for his product and the broadcaster a strong bargaining point for reduction of his fee. This is provided for in subsection (d) of Section 111. Under other provisions of S. 1361 other interests, such as juke box owners, would also pay a fixed fee to a central point.
ESTABLISHMENT OF A STATUTORY COPYRIGHT TRIBUNAL FOR FUTURE ARBITRATION
To overcome objections to a fixed fee schedule for the life of the statute, Chapter 8 of S. 1361 establishes a copyright royalty tribunal. Three years after the statute is in effect and then every five years thereafter, any interested person can petition for an adjustment in the fees. The tribunal, after hearing evidence of the previous period of experience, would make a recommendation on the proposed adjustments. This will allow a practical market determination of fair rates in years to come, and the CATV industry supports this provision as written.
AN INITIAL FEE SCHEDULE SHOULD BE SET BY CONGRESS
Section 111 provides for a progressive copyright fee schedule of 1 to 5 percent of gross revenues from the basic cable service. Consequently, the larger a CATV system becomes, the greater the percentage of its revenues to be paid as a copyright fee. As pointed out above, S. 1361 provides a mechanism for periodic revision of the fee schedule. The CATV industry supports the Congressional establishment of the initial fee schedule in the legislation along with the provision of compulsory arbitration procedures for future adjustments.
Some parties have suggested altering Section 111 so as to have even the initial fee schedule set by an arbitration tribunal. The CATV industry views this as an erroneous approach for several reasons. First and foremost, sufficient empirical data simply does not presently exist to permit arbitrators to fairly establish an initial fee schedule. Up until quite recently, CATV merely served as a master antenna for smaller and more remote communities in order to improve reception and/or provide program diversity. The financial performance of this traditional CATV operation is well known. However, the gross dollar volume of this portion of the industry is not large and will not increase a great deal. Hopefully the gross revenue that CATV will ultimately attract in the cities will be much larger. The real target for cable is the top 100 television markets. About 85% of the American people live in these markets, and CATV presently serves about 2% of this number. The principal reason for this state of affairs has been the regulatory posture of the Federal Communications Commission. In the mid-1960's, when CATV technology began to permit cable development in the cities, fear of CATV's potential impact on broadcasting led the FCC to enact a series of restrictive regulations culminating in an absolute freeze on new CATV development in the larger markets lasting from December, 1968, to March, 1972. In 1972 the FCC at last opened the door to major market CATV development. But that development is not happening overnight. First, the local franchising process and subsequent FCC approval takes many months. Second, large amounts of money must be found to finance construction. Third, construction takes time even in small communities. And finally, even a constructed system takes a year or two to develop in a market. In other words, the CATV industry still has little evidence on how well it will do in the bigger cities, or whether, in fact, it will do well at all. Such data will not be available in any meaningful quantity for a few years,
What does exist, in great quantity, are projections of CATV's growth in the cities. These projections vary widely from rosy optimism to gloomy pessimism. These are educated guesses at best. Since there are few facts, and much speculation, arbitration at this time would be mere conjecture. The only logical way to proceed is for the Congress to set an initial, moderate set of fees with arbitration after facts have been developed. The Subcommittee's procedure in Section 111 is clearly correct.
AMOUNT OF FEES TO BE PAID
The CATV industry does believe that the fee schedule set forth in Section 111 establishes fees which are too high for most CATV systems. A recent study by Dr. Bridger Mitchell entitled "Cable Television Under the 1972 FCC Rules and Impact of Alternative Copyright Fee Proposals” supports this position (see Attachment A). This study assesses the profitability of CATV in the major markets under the current FCC rules and then gauges the impact of three possible copyright fee schedules, Dr. Mitchell found that the effect of the fee schedule in Section 111 would be to reduce the rate of return on total capital a full percentage point for profitable and near-profitable systems. In all but a few situations this reduction drops the rate of return below the generally accepted necessary 10%. For example, large systems on the edge of large markets will earn a 10-13% rate of return, large systems in middle markets will not earn more than 10%, and intermediate and small systems will be only marginally profitable. Thus a one-point reduction in the rate of return could be devastating. Beyond that, of course, is the fact that a one-point reduction in the rate of return on total capital will effect the return on equity to an even larger extent because of leverage. This effect is multiplied when the costs of borrowing increase. This could easily result in the postponement or cancellation of the riskier big city cable construction. Thus because of the fairly restrictive nature of the FCC's rules and the marginal viability of big city CATV systems, the investment environment may well be adversely affected by copyright payments at or above those required in Section 111.
Criticism of Dr. Mitchell's study has largely been centered on certain key assumptions related to revenues. These criticisms are generally without substance. For example, Dr. Mitchell assumed a mature penetration figure of between 35 and 40% using a study made by Dr. Rolla Park for the Rand Corporation wherein Dr. Park estimated CATV demand in various markets under the FCC's 1972 rules. Critics say that penetration will be significantly higher. That is possible, but Dr. Park's study is the best estimate available, and it is not inconsistent with other forecasts. Other figures used by Dr. Mitchell can be questioned too, but his overall results are conceded by many observers to be quite valid. The CATV industry hopes that the more optimistic studies will be correct, but if the present thinking proves true, then Section 111's initial fee schedule is too high.
In the May 15, 1973, issue of Cablecast, economist and analyst, Paul Kagan, points out:
"Consider the enigma of the motion picture company: friend to the cable operator as a potential box office partner and foe to the cable operator over differences in copyright payments for distant signal importation.
“In its role as foe, the Motion Picture Assn. of American has distributed an economic study to discredit a previous cable industry report that showed how little CATV can afford to pay for copyright.
“Understandably, the MPAA study shows how rich a cable company is, and thus how easy it would be for CATV to meet copyright owner demands for as high as 16% of a cable company's gross.
“We have compiled a list of fallacies in the MPAA study including its disregard of startup deferrals in computing operating costs of a cable system; its equating of merger/acquisition values with projected operating results and its basic conception that cable companies are not courting bankruptcy, and are indeed among the best investments now known to man.
"A prime example of the vulnerability of the MPAA study is this statement from page B-4:
‘Most systems do not report financial statistics to the public since their
securities are not publicly traded.' Because of this, the study concluded, it was not possible to work with precise CATV operating cost data.
"Had MPAA's economists simply read CABLECAST, of course, they might have learned that the 15 public companies we regularly follow have over 3.3 million subscribers, or nearly 48% of all the cable homes in the country. Quite precise operating cost data is liberally sprinkled in the public record.
"Copyright payments are limited by the constraints of operating a cable system that are known to anyone who has ever studied a cable system. There are only so many nickels you can extract from one dollar of revenue.
"Because of the sundry other bills the modern cable ssytem must pay, including a stiff microwave fee just to get the distant signal, it isn't likely the copyright owner is entitled to more than one of those nickels (i.e., 5% of gross revenue).
"It's curious that the MPAA study infers cable systems will be able to subsidize distant signal copyright fees from possible future pay TV income. Curious because motion picture producers are also negotiating forcefully for maximum percentages on pay TV revenue.
"All signs currently point to the subsidization of pay TV terminals and marketing of pay TV services not by the motion picture company, but by the cable company, at the cable company's risk.
“Considering the dollars involved in the pay cable future, movie companies would seem ill-advised to extract excessive tithes from other cable operations, unless of course they hoped to control cable revenues without having to take ownership of the actual franchises.
"Perhaps we are simply witnessing a titanic struggle between economic forces over the sharing of tomorrow's entertainment medium pie.
“Or perhaps it is merely a case of the British asking the Hessians to help them subdue the colonies, but first charging the Hessians three times the going price for musketballs."
But even beyond the validity of predictions, the effect of Section 111's fee schedule is severe as applied to the existing industry's financial posture. Since nearly 90 percent of the nation's television households are within the top 100 television market areas, it is clear that the copyright owners anticipate that nearly all of their incomes from copyright fees will be obtained from the revenues generated in the major markets. Cable development in the major markets is thus vital to the copyright owner. How soon those markets are developed and how sool significant subscribed penetration is achieved should be obvious matters of con cern to him.
Most cable systems of any size, that is over 3,500 subscribers, are owned by the multiple system operators. These entities are in the forefront of the companie: currently building cable systems in the major markets, or holding major city, franchises, or seeking franchises from major market cities. Thus the effect oi copyright payments on the earnings of these companies is crucial to the majoi market development of cable television.
To ascertain the effect of the face schedule on the multiple system owner, NCTA asked eight of the largest MSO operators to determine from their most recently available fiscal quarter reports the total amount of copyright fees that would be payable by their cable systems if s. 1361 were in effect today. They were also asked to determine what percentage of their pre-tax income was represented by the copyright fee payments. The responses ranged from 7.5 percent to a high of 32 percent of pre-tax income, averaging out at 19 percent per company: Company A, 32 percent; Company B, 31.2 percent; Company C, 22.8 percent; Company D, 20.6 percent; Company E, 14.5 percent; Company F, 11.8 percent; Company G, 11.4 percent; Company H, 7.5 percent.
This average reduction of nearly 20 percent of pre-tax income through copyright fee payments would have a serious adverse effect on the already limited ability of these companies to borrow funds from investment sources. And the resulting lower net income would reduce the number of dollars that would go back into new system construction. With eroded borrowing power and reduced income, the pace of new system development is bound to suffer and further contribute to the already delayed development of cable television in our major cities.
Even without the added burden of high copyright fee payments, most large cable companies are faced with the prospect of declining earnings in the next several years as construction costs for major market cable systems outpace subscriber growth. Cable system costs in the metropolitan areas bear no relation to traditional cable construction costs in the smaller markets. FCC technical requirements as to channel capacity and "two-way” transmission capability add to these costs. While on the other hand, FOC television station carriage rules and regulations protecting the in
market stations' programing serve to limit the