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of the station's own market area. Similarly, national advertisers will place little, if any, value on duplicated coverage of their commercials by CATV when it imports these commercials into a different market and duplicates them with those carried by the local station in that other market.

It is because of these basic economic facts of the television program market that Mr. Foster is not correct when he claims that the "royalties now being paid by broadcasters to copyright owners are based, generally, on the size of the audience reached-including CATV subscribers". Indeed the Court of Appeals for the Second Circuit in CBS v. Teleprompter, 476 F.2d 338 at p. 342 (fn. 2) rejected a similar argument made by the defendant CATV systems in that case and said that "the amount that a broadcast station is willing to pay for the privilege of exhibiting a copyrighted program is economically tied more to the fees that advertisers are willing to pay to sponsor a program than to some projected audience size." The Court further observed that no evidence had been presented "to show that regional or local advertisers would be willing to pay greater fees because the sponsored programs will be exhibited in some distant market, or that national advertisers would pay more for the relatively minor increase in audience size that CATV carriage would yield for a network program." The Court of Appeals concluded that "indeed, economics and common sense would impel one to an opposite conclusion."

As to the use by CATV of programs from local stations the copyright owners are also entitled to receive just and reasonable royalties for the use of such programs by CATV. The fact that the local station has already paid for its own right to broadcast the program should not deprive the copyright owner of his right to collect royalties from CATV. Indeed, the cable system makes its own independent profit from the retransmission and out of these profits should make a fair contribution to the cost of program production.

A compulsory license is an extraordinary legal device demanded by the cable operators and accepted by the copyright owners in the Consensus Agreement because of the asserted administrative difficulty of clearing copyrights for cable systems. In fairness to all parties concerned, the amount of the compulsory license fees should be compensatory and for that purpose should approximate as closely as can be ascertained, the amounts which the beneficiaries of the compulsory license would have paid in a free market without administrative difficulties and without the compulsory license.

It is a fundamental principle of our economic system that if we use someone else's property for our own benefit, we must pay the owner of the property for permitting such use. Applied to the retransmission by CATV of signals for which the broadcaster has already paid a fee for his own use, this means that in a free market where the consent of the copyright owner for the use of the program would have to be bargained for, some payment would certainly be agreed upon between the copyright owner and the cable system in return for the granting of a contractual license. It is the amount of this payment which should be taken into consideration in setting license fees for local signals under the compulsory license.

It should also be kept in mind that in the nation's largest markets, the number of local signals available for carriage by CATV is likely to make the wholesale importation of distant signals unnecessary. At the same time, if the carriage of local signals by CATV were to be exempted from copyright royalties, the large revenues of these metropolitan systems would be immunized from contributing to the cost of program production by reason of the fact that these systems rely primarily on the retransmission of programs from local stations.

Equity requires that all cable systems should carry their fair share of the cost of production of the television programs which they use for their profit, that they should pay a reasonable compulsory license fee reflecting the value of the use of the programs to them including local signals, and that the burden of the cable industry's contribution to the cost of program production should be shared fairly between the various types of CATV systems in large as well as small markets.

5. SPECIFIC PROPOSALS PUT FORWARD BY NCTA FOR AMENDING SECTION 111 OF S. 1361.

In his statement of August 1, 1973, Mr. Foster, put forward certain specific proposals for amending Section 111 of S. 1361. With respect to these proposals we would like to make the following comments:

(a) NCTA proposes certain changes in Section 111 (f) which would affect the

definition of the terms "primary transmission," "secondary transmission," and "cable system." With respect to the definition of the term "cable system," NCTA suggests that it be limited to only those systems "within a political subdivision within which the facility operates." This definition is of critical importance to the copyright owners. In our initial statement to the Committee we took issue with this approach which would split up a cable system unrealistically whenever it crosses a political boundary and would fragmentize its revenues artificially under the progressive royalty rate. Accordingly, we urged the adoption of the following definition which comports more fully with the realities of the industry and is more logical in determining an appropriate copyright royalty fee:

"For purposes of determining the royalty fee under Subsection (d) (2) (b), two or more cable systems in contiguous communities under common ownership or control or operating from one headend shall be considered as one system."

As respects the proposed changes in the definitions of "primary transmission" and "secondary transmission," NCTA seeks to introduce new concepts and terminology into the language of the bill which are unsupported and which could distort basic meanings throughout the text. At this point in the long evolution of the copyright legislation, we see no reason to depart from the present definitional language absent some clear understanding of the purposes underlying the proposed amendments.

(b) NCTA also suggests that Section 111(b) pertaining to the secondary transmission of a primary transmission to a controlled group should be a matter for regulation by the FCC and should not be included in the copyright law. We disagree strongly with this suggestion.

Section 111 (b) provides that the secondary transmission to the public of a primary transmission embodying a performance or a display of a work is subject to full copyright liability if the primary transmission is not made for reception by the public at large but is controlled and limited to reception by particular members of the public. This provision is derived from a provision which was contained in H.R. 2512 which passed the House of Representatives in 1967. House Report No. 83 (90th Congress, 1st Session), p. 56, states the purpose for which this provision was included in the bill:

"There are, however, a number of primary transmissions that are to the 'public' but are not capable of reception by the public at large. Examples include background music services such as Muzak, closed circuit broadcasts to theatres, pay-TV, and CATV itself. Clause (4) of Section 111 (b) makes clear that a community antenna system has no privilege of retransmitting a primary transmission that is not made for reception by the public at large but is controlled and limited to reception by particular members of the public.'"

By urging that this provision should be deleted from the bill, NCTA takes the view that the general public should pay for over-the-air subscription programs but cable subscribers should not. Thus, if a sports event or a movie is offered to the public by a pay-television station using "scrambled" or coded signals, cable systems would be enabled by NCTA's proposed deletion to unscramble and redistribute these programs to their subscribers without any additional charge or payment. Such a result is patently unfair to the public as well as to the copyright owner. Indeed, it is the very result which Section 111(b) seeks to avoid.

Further, the claim that this change in Section 111(b) is necessary to meet the rules and regulations of the FCC does not withstand analysis. It is based on the assumption that the requirement of carriage of all local signals by cable systems includes the carriage of "scrambled" pay-television broadcast signals and their "unscrambling" by cable systems. Not only is there nothing in the FCC rules or regulations to support such an interpretation, but the rules are directly to the contrary. Section 76.55 (b) of the FCC rules provides:

"There a television broadcast signal is carried by a cable television system, pursuant to the rules in this subpart, the programs broadcast shall be carried in full, without deletion or alteration of any portion except as required by this part."

Thus, even assuming that the rules can be construed to require cable systems to carry all local signals including such "scrambled" signals as may be emitted by a local pay-television broadcast station, they specifically prohibit the alteration or "unscrambling" of these signals. In short, under the guise of conforming the copyright law to the FCC rules, NCTA is attempting to reap a windfall by permitting the unauthorized secondary transmission of pay-television programs by cable systems.

(e) NCTA suggests that the exemption from copyright liability for hotels,

apartment houses, or similar establishment that retransmit signals to the private lodgings of guests or residents in Section 111(a) (1) should be eliminated and that such systems should be treated as cable systems subject to the compulsory license fee. The thrust of this position is that there is no difference between so-called master antenna systems and a cable system where the cable system receives and distributes only local signals. NCTA takes the position that since master antenna systems obtain the benefits from using copyrighted programs, they, too, should pay copyright royalties. It is our view that if such copyright liability is imposed on master antenna systems an exemption be provided for systems with fewer than a specified number of subscribers.

(d) NCTA also suggests that the exemption for government owned and nonprofit cable systems in Section 111 (a) (4) should be eliminated and that these reception and distribution facilities should be treated as cable systems subject to the compulsory license fee. We agree that the exemption for governmental and nonprofit systems is overly broad, but we do not agree that the provision should be deleted.

In our initial statement filed with the Committee on August 1, 1973, we pointed out that this provision is concerned with the operation of nonprofit "translators" or "boosters" which do nothing more than amplify broadcast signals and retransmit them to everyone in an area for free reception. These translators and boosters have always been subject to FCC regulation and require retransmission consent of the originating station under Section 325(a) of the Communications Act.

However, the language of the exemption contained in Section 111 (a) (4) would be equally applicable to cable systems which are operated by governmental bodies or nonprofit organizations. Thus, in order to limit the exemption to nonprofit translators and boosters and similar secondary transmitters, we proposed to insert into the text of Section 111 (a) (4) the words ". . . is not made by a cable system. . .". Since we continue to believe that the exemption should be maintained for the benefit of the translator and booster systems described, we submit that complete elimination of this exemption would be improper and that the appropriate solution is adoption of the amendment we have submitted in Appendix V to our initial statement.

(e) NCTA favors the adoption of Section 111 (d) "as written." It suggests, however, that systems of 3.500 subscribers or less be exempt from copyright fees and that an appropriate amendment be made to accomplish this purpose. The question of providing an exemption for cable systems with fewer than 3,500 subscribers is discussed at length in our initial statement. We made clear that the exemption for smaller systems was an integral part of the Consensus Agreement and that if the Agreement were disturbed as to any one part, particularly the question of arbitration of fees, the copyright owners would not support the 3,500 exemption. In this regard we must point out that NCTA has abandoned the Consensus Agreement on the question of arbitration of fees while vigorously maintaining its support of the 3.500 exemption. Indeed, the statement of Mr. Barco, goes even further and urges the application of the 3.500 exemption to all systems as a basic deduction from the payment of all fees. It should also be noted that neither NCTA nor Mr. Barco mention that under the Consensus Agreement the exemption for systems with 3.500 subscribers or less would only apply to "independently owned" systems "now in existence." (ie., at the time of the Consensus Agreement). To insure that these conditions are met, we have proposed an amendment to Section 111(d) to implement the proposed 3.500 exemption as well as other clarifying language. These amendments are contained in Appendix V to our initial statement. They are dependent, of course, on full implementation of the Consensus Agreement.

(f) NCTA supports the provisions of Section 111(e) with adjustments "to reflect the elimination of the regulatory aspects." We concur in the view that Section 111(e) relating to preemption of other laws and regulations should be amended. However, since NCTA has not suggested any draft language, we direct the Committee's attention to the language contained in Appendix V of our initial statement.

(g) Finally, NCTA suggests an amendment to Section 110 (5) of the bill for the purpose of clarifying the relationship of secondary transmissions to the dissemination of educational television programs. Since Section 110 (5) does not pertain to an exemption for educational purposes but to an exemption for the communication of a transmission embodying a performance or display of work

on a single receiving apparatus, we see no basis for the amendment offered by NCTA nor any logical need for a change in Section 110 (5) of the bill to conform it to the provisions of the legislation on a cable television.

APPENDIX A

COMMENTS OF ROBERT W. CRANDALL AND LIONEL L. FRAY

INTRODUCTION

In their statements before the Subcommittee on August 1, 1973, representatives of the cable television industry, and their economic consultant, Bridger Mitchell, argued in part that the growth of the cable television industry would be impaired even if the very low schedule of compulsory copyright fees proposed in

S. 1361 were adopted. In addition, they made other statements regarding the industry's economics.

We believe some commentary from a different perspective would be of benefit to the Subcommittee. Our comments are organized topically as follows.

1. Economic Analyses of Copyright Fee Payments

2. Subscriber Penetration

3. The Effects of New Cable Services upon Estimated Profitability

4. Owners' Expectations of Cable Profitability

5. New Systems and Franchises in the Top 100 Markets

6. Effects of the Definition of a Cable Television System

7. The Effect of Modifying the Proposed Fee Schedule

8. Availability of Evidence for the Determination of Copyright Fees

1. ECONOMIC ANALYSES OF COPYRIGHT FEE PAYMENTS

The analysis submitted to the Subcommittee which relates to the economic effects of the schedule of copyright fee payments proposed in S. 1361 consists of two studies: one by Bridger Mitchell dated September 30, 1972, Cable Television under the 1972 FCC Rules and the Impact of Alternative Copyright Fee Proposals; the other by the authors of these comments, dated April 25, 1973, The Profitability of Cable Television Systems and Effects of Copyright Fee Payments. These two studies arrived at sharply different conclusions.

In his testimony before the Subcommittee on August 1, Mitchell summarized his study and its gloomy conclusion that a cloud of prospective low profitability hangs over the future development of the cable industry, and that even the very modest schedule of copyright fees proposed in S. 1361 in payment for the most essential ingredient in the cable television business-programming—would darken the cloud to the point where the rains would fall and the cable industry would be virtually washed away.

We do not in general take issue with Mitchell's methodology of constructing a "financial model" of a typical cable television system as a basis for reaching public policy conclusions of the sort under consideration by the Subcommittee. Indeed, the model we employed in our analysis is very similar to his. But we differ sharply with Mitchell in specifying the values of several parameters which are inserted into the model and which dictate the low estimates of profitability which he obtains. Two of these parameters-subscriber penetration and revenue growth are critical in any calculation of profitability, and we believe that more optimistic values of these numbers, based upon projections developed by the cable industry itself, are a far more satisfactory basis for predicting the future profitability of cable investment. Utilizing these data and making a few other relatively minor modifications, we conclude that cable television systems could expect to earn enough profits to insure attracting all the necessary capital required for the industry's growth, even after payment of copyright fees substantially higher than those proposed in S. 1361.

Although our study was made widely available at the time of its publication some months ago, Mitchell did not dispute the evidence which determined these key differences underlying the two studies' respective conclusions, nor did he present new evidence which might affect them. We are therefore not able to under

stand how he continues to adhere to the conclusions of his earlier study which he reiterated before the Subcommittee.1

We might note in passing that the fees proposed in S. 1381 are based upon gross revenues. If, however, the Subcommittee wished to see profitability or ability to pay as a determinant of the amounts of copyright fee payments, the best single indicator we know of is penetration. This variable far outweighs all the other ones commonly used. But the fact remains that the accurate determination of system profitability is a complex function of many variables having to do with system location, availability of off-the-air signals, density, costs, etc. For this reason, a simple formula will almost always produce results which in many cases will be inequitable.

2. SUBSCRIBER PENETRATION

Subscriber penetration is the most important single determinant of cable system profitability. As used by both Mitchell and us, penetration is defined as the ratio of subscribers to the total number of homes passed by the trunk cable; that is, the potential immediately available to a cable system without laying more trunk cable. If penetration is low, only a few of the potential subscribers are contributing revenues to amortize a cable system's relatively large investment in capital equipment. In such a case, the profitability of the system would clearly be low or negative. If penetration is high, however, very substantial revenues will be generated relative to a cable company's investment. In such cases, profitability can be extremely high.

Mitchell's study projects that mature penetration near the edges of the top 100 markets-that is, the level of penetration achieved after many years of operation and promotion of the system services in the local market-will be 34 to 45%, and in the center of such markets only 22% to 35%. These projections are derived from an academic study conducted by his colleague, Dr. Rolla Edward Park of The Rand Corporation. This study is based upon a confidential sample of 63 systems whose identity have not been revealed. Moreover, there has been no verification of the predictions of this study in any publication. Finally, even its author does not utilize its results as literally as Dr. Mitchell in applying to real situations. For example, Park has predicted that Dayton will realize a subscriber penetration rate of 40 percent of homes passed, considerably above the 22 to 35% which Mitchell projects for central cities in the top 100 markets.

While Dr. Mitchell used the predictions of Park's model, we chose to use the industry's own predictions since the latter are based upon informed judgments of the potential appeal of cable services now beginning to develop, but which are totally ignored by Park. The NCTA's own survey to multiple system owners, furnished to the CCO by the NCTA, reveals that these firms expect much stronger demand for their services and they anticipate mature penetration of 65%.

How can these predictions diverge so dramatically with those reproduced by Mitchell from Park's study? The answer is quite simple. Even at present there is a strong movement towards nonbroadcast offerings by cable systems. Some are now offering special channels of recent motion pictures. Other systems are beginning to offer sports channels on a similar basis, and in testimony before this Committee it has been suggested that NFL teams may even begin offering their "blackout" games on a pay-cable basis to local patrons unable or unwilling to purchase a stadium ticket. Clearly, these services and many others which will develop shortly will have the effect of making cable much more attractive to households-even to those able to receive three network signals with clarity. We agree with Mr. Foster of the NCTA that academic studies of cable demand are not likely to provide good predictions because future conditions will be dif

1 The only attempted rebuttal was offered by Mr. Foster (pp. 30-31 of his testimony) in quoting Mr. Kagan's published remarks, whose only discernible point of possible substance related to the "vulnerability" of our report as exemplified in our statement that most systems do not publicly report their financial statements thus making precise cost estimates difficult. Mr. Kagan apparently failed to read the detailed section on operating costs which followed, for not only do we utilize reported cost data, but we present cost data for a sample of systems comprising 781,000 subscribers, more than 12 percent of the industry at that time. Mr. Kagan reports on this effort by noting that "Because of this, the study concluded, it was not possible to work with precise CATV operating cost data.'

There is no substantive criticism of our operating cost analysis in Mr. Foster's testimony, perhaps because we choose to present results based upon Dr. Mitchell's cost parameters.

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