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claims is that somebody else, like it or not, pays the bill for cable television's free ride. As a matter of elemental fairness, cable television should pay for its own ride. Under Teleprompter's scheme somebody else would continue to pay for it.
The Teleprompter scheme would enable cable television to continue to use local broadcast signals and network signals without any payment for them in order to build an audience and a revenue base to enable cable to import distant broadcast signals and to originate its own programs with which to undermine the audience and the revenue base of local competing broadcast stations.
Having disposed to its own satisfaction of the necessity for payments for local programming and for network programming, Teleprompter indicates on p. 4 of its Memorandum that in recommending its formula for payment for a distant signal, Teleprompter is “extremely generous” because its formula "completely ignores the benefit to the originating station (and thus to the copyright owner) of cable's carriage of distant signals."
Because of the completely oversimplified and misleading nature of Teleprompter's cavalier claim that cable confers such a benefit, it is necessary at this point to include an analysis of a hypothetical, though typical, distant program importation situation so as to make clear the effect of the cable television system's free ride not only on the cable-carried distant station, but also on the economic interests of the other parties affected by the importation.
ANALYSIS OF THE EFFECTS OF CABLE TELEVISION SYSTEM IMPORTATION One purpose of our analysis is to discover in a general way who pays the bill for the distant cable television system's free ride. Another purpose is to observe the distortion caused by the free ride to our general economic system as it applies in this anomalous area. (i) Effect on the Program Supplier
Obviously, the carriage of a program by a cable system severely limits the possibilities of sale of that program to a television station in the market. So, unless the program supplier is compensated for it, the supplier is always injured by the use of his program in any market or potential market-and every cable television system community is a market or potential market for the program supplier. The program supplier must look to the television station whose signal is carried in the distant market for any compensation the supplier may get for the cable system use there. This is so because under the governing copyright structure the program supplier's only license negotiation for the use of its program is with that television station. The supplier cannot even seek to be paid where it should—the supplier does not have any legal means to force any payment from the cable television system. Whether the supplier will succeed in getting the television station to pay for the cable system use will depend on the strength of the supplier's bargaining position vis-a-vis the broadcast station. In some situations the supplier will succeed, in some the supplier will not.
Conclusion.-—The program supplier is injured by the distant cable system carriage unless the supplier is able to secure payment from the broadcast station the supplier licenses and whose signal is carried in the distant community. (ii) Effect on the Broadcast Station Whose Signal is carried By the Cable Tele
vision System in the Distant Community The broadcast station, in contracting for the program, will try to avoid paying the program supplier for the cable television system's use of the program in the distant market. Whether the station will succeed will depend on its bargaining position vis-a-vis the program supplier. In turn, when the broadcast station deals with a potential advertiser it will try to get a payment from the advertiser for the distant market coverage. Whether the station will succeed will depend on its bargaining position vis-a-vis the advertiser. One factor significantly affecting the bargaining will be whether the advertiser has an outlet in the distant market for its goods or services, for without such an outlet the advertiser will derive no benefit there from the increased viewer exposure to the advertisemeat.
1 If it be objected that the program supplier is not injured by the cable system carriage in a community where there is no television station, the answer is that the cable television system itself is a potential customer of the program supplier. Cable television systems originate programs of their own and free carriage by the cable television system of the program in question eliminates the possibility of a sale by the program supplier of the right to the cable system to cablecast the program.
Additionally, of course, the broadcast station must bear the risk that no advertiser will be found for the program.
Conclusion.The broadcast station whose signal is carried is sometimes injured by the distant cable system carriage. When the station is not injured it is because it is able to resist paying the program supplier for the distant community, the advertiser may switch its business to a competitor of the broadcast get paid by the advertiser for the distant community. (iii) Effect on the Advertiser in the Program Carried in the Distant Community
The advertiser will try to avoid paying for the cable television system's use of the program in the distant market. Whether the advertiser will succeed will depend on its bargaining position vis-a-vis the station. That position will be affected by whether other advertising outlets are available to the advertiser. Iaced by a demand from the broadcast station for payment for the distant community and/or because it finds an advertiser for the program and manages to station (to another broadcast station if there is one, perhaps whose signal is not carried in the distant community) to avoid paying for the distant market. However, in some cases the advertiser will have to pay for advertising coverage which the advertiser does not want and which will do it no good, e.g., when the advertiser does not offer the advertised goods or services in the distant market."
Conclusion.—The advertiser is sometimes injured by the distant cable system carriage. When the advertiser is not injured it is because the advertiser is able to resist paying the station for the distant community and/or because the advertiser benefits from the advertising in the distant community.
To summarize, the effect of the free ride by cable television on these parties, each of whom must bargain in the marketplace, is: There is always an initial economic injury to the program supplier. He tries to pass the burden to the television station he licenses whose signal is carried in the distant cable community. The station, in turn, tries to pass the burden to the advertiser who may or may not benefit by the distant community carriage. The marketplace bargaining process is distorted. Those who bargain in the marketplace must involuntarily take into account, take risks for, sometimes are injured by, the deliberate operations of an irresponsible entity which does not have to enter the marketplace at all. The cable system bears no burden at all and remains immune from the necessity of paying for its own vital operation—the importation and retransmission of programs contained in broadcast signals.
CONCLUSION CBS believes the Committee should give short shrift to Teleprompter's eleventhhour scheme either to forestall copyright law revision entirely—thus preserving the present state of copyright anarchy in the cable television field from which cable television benefits-or to eliminate entirely the possibility that under the revised law copyright payments by cable television for its compulsory license would ever reach a reasonable level. CBS supports the present compromise compulsory license provisions for cable television of Section 111, on the condition that the Copyright Royalty Tribunal would be available as provided by Section 801 (b) to assure the possibility that future royalty rates might be reasonable. Sincerely yours,
ROBERT V. Evans, Vice President and General Counsel.
To: The Honorable Robert E. Kastenmeier.
and President, The Association of Motion Picture and Television Producers. Re: The Teleprompter Inc. proposal to the copyright bill, H.R. 2223.
This memorandum is in response to your letter on November 4, 1975, inviting our comments on a proposal submitted informally to the staff of your Subcommittee, by Teleprompter, Inc., as a possible amendment to certain sections of the pending Copyright Bill, H.R. 2223.
? When the advertiser's goods or services are not avallable in the distant market at all, or are not available on the same terms advertised, the advertiser may be injured in another way by the advertising coverage there—the advertiser may have to contend with the wrath of disappointed potential customers.
The members of this Association, the members of the Association of Motion Picture and Television Producers, Inc., and the Committee of Copyright Owners, who together represent the major copyright owners of materials that are viewed over television and cable in the United States, appreciate your courtesy in inviting our views.
The Teleprompter proposal, wholly apart from its merits or demerits, has been surfaced after the conclusion of the Subcommittee's formal hearings involving public witnesses. None of the parties concerned with and affected by section 111 and chapter 8 of the bill, have had the opportunity to testify before the Subcommittee in open session on the one hand to explain and justify the proposal, and on the other to analyze it and present its alleged deficiencies.
We have nevertheless, upon receiving your letter, sought to comply in the hope that this memorandum and its attachments, will be carefully considered by the Members of the Subcommittee, and of course be made a part of the formal record.
We have engaged the services of a distinguished constitutional authority to analyze and comment upon the legal question raised as part of the Teleprompter proposal.
Additionally, we have requested one of the most respected and widely recognized economic research firms in the Nation to analyze the mechanics and thrust of the Teleprompter formula in an effort to determine how it would operate, whether it is a practicable and workable idea in the marketplace, and what would be its economic and fiscal effect on various classes of cable systems, on copyright proprietors, and on the public interest.
The Teleprompter proposal consists of three parts :
(a) a memorandum by Professor Ernest Gellhorn of the University of Virginia concluding that certain provisions of H.R. 2223 concerning copyright Royalty Tribunal are "vulnerable to constitutional attack under the due process clause";
(b) texts of amendments to the bill which would eliminate the Tribunal's jurisdiction over cable copyright liability and the initial rate schedule in the bill and substitute for them a rather complicated cable-copyright formula ; and
(c) a memorandum by the Teleprompter Corporation purporting to explain the formula.
Here is our response to your letter:
1. With respect to the Gellhorn legal memorandum, we submit a memorandum prepared by Professor Louis H. Pollak, Albert M. Greenfield Professor of Law at the University of Pennsylvania Law School, formerly Dean of the Yale Law School, and a recognized authority on constitutional law. This legal brief by Professor Pollak expresses the opinion that the provisions of the bill to which Professor Gellhorn takes exception are constitutional.
2. With respect to the Teleprompter proposal, we submit a detailed and exhaustive analysis of that proposal by National Research Associates, Inc.
This analysis has determined that the Teleprompter formula :
Will tend to shift copyright liability from the larger systems to the smaller systems. It does this by exempting many larger cable systems from any copyright liability, pushing the burden of copyright payments to smaller and mediumsized systems, payments which in a number of instances are larger than what they would pay under H.R. 2223.
Will exempt substantial numbers of cable systems and their revenues from all copyright liability.
Will reduce the overall copyright liability of the Teleprompter Corporation by some 13 percent.
18 ambiguous, and internally illogical, and would be a formidable administrative burden.
The Teleprompter proposal also has these additional deficiencies :
1. The text of the Teleprompter amendments to carry out the formula conflicts with the text of the explanatory memorandum. They contradict each other.
2. A major element of the Teleprompter formula is the rate base (basic subscriber fees of cable systems) which may be a valid element in today's market, but which is unlikely to be valid in the marketplace in the future.
3. The formula is deficient in exempting network signals and local signals from copyright liability :
(a) The formula erroneously exempts such signals because it ignores the basis on which television advertising fees are computed and copyrighted programs are negotiated with buyers.
(b) The formula erroneously exempts such signals because it ignores the copyright concept of a separate payment for each commercial use.
4. The formula, if made a part of the Copyright Bill, would give the Commerce Committees an appropriate basis for claiming jurisdiction over H.R. 2223.
If the Teleprompter formula has any validity, the Company is free to submit it to the Tribunal for its consideration in making rate adjustments. The formula does, however, highlight two essential facts: it recognizes the substantial percentage of television broadcasting revenues devoted to procuring programs, and it acknowledges cable's liability for copyright.
The formula would give cable systems a shield of apparent copyright liability but, in practice, allows them to continue to act as parasites, living off the broadcast industry and copyright holders.
The cable television industry has become "big business” and is on the way to becoming much much bigger. The Department of Commerce estimated 1974 cable revenues as $590,000,000 and predicts that 1975 cable revenues will be threequarters of a billion dollars. (U.S. Industrial Outlook, 1975, U.S. Department of Commerce, pp. 311-312)
Under the fee schedule in H.R. 2223, cable would pay less than 1% of its revenues for programming—the one product which is indispensable to it. Yet, Teleprompter acknowledges in its explanatory memorandum that broadeisting pays thirty times that much of its revenues for program material. The NERA report states that 28 percent of broadcasting revenues in 1974 was devoted to program procurement.
The NERA report points out that the Teleprompter company's own copyright payments would be reduced by more than $135,000 annually if its formula replaced the pending bill's graduated rate schedule. The Teleprompter systems represent 4.5 percent of the nation's total cable systems. Thus, if a projection of the Teleprompter formula were to be made to all cable systems, a 13 percent slice in total copyright revenues nationally would take place. The effect is to cut nearly $1 million from the initial annual copyright revenue provided by the graduated rate scale in the bill.
Please keep in mind several crucial facts:
Fact 2: If Teleprompter has its way, the already reduced fee schedule would be cut still further, by at least 13 percent.
Fact 3: If that occurred, the total liability for copyright for all copyright owners (not just films and TV material, but also sports and music) would be about $6 million annually, for an industry with revenues today of some $700 million annually.
1. THE FORMULA IS CONFUSING AND COMPLEX AND CONFLICTS WITH THE EXPLANATORY
A crucial element of the Teleprompter formula is that copyright is to be imposed only in the case of signals a cable system is not required to carry. Put another way, all signals (programs) that the Federal Communications Commission requires a cable system to carry are to be exempt from copyright liability. But Teleprompter's explanatory memorandum says something else : local signals will be exempt from copyright while non-network distant signals will be subject to copyright.
Obviously, the formula text and the explanation contradict each other. Depending on the television market and other factors, some cable systems are required to carry what would normally be classed as distant signals. At the same time, some cable systems carry, but are not required to carry, local signals. Thus, the formula text fails to distinguish between local and distant signals and, in fact, imposes copyright liability for some local signals and at times erempts distant signals.
This contradiction and inconsistency is also apparent when basic subscriber revenues are multiplied by copyright owner's percentage share and the total is multiplied by 100. The result converts percentages into whole numbers which produces astronomical copyright liability for a number of cable systems. Clearly such systems would strongly protest such a formula.
One other contradiction exists. The second element of the formula is based on all broadcasting (radio as well as television) revenues and program expenses. Yet the explanatory memorandum speaks in terms of television revenues and broadcast expenses. While this additional conflict is obviously not fatal, it does
evidence the lack of careful consideration that went into putting the Teleprompter package together.
Another example of the complexity of the formula is the burden that will fall on the FCC in certifying once every three months which signals are subject to liability and the “popularity” of each of those signals on a county-by-county basis. With more than half of the 3,200 cable systems subject to copyright liability, and assuming an average of two distant signals per each system, the FCC would be required to make 14,080 determinations annuallly, each of which could be the subject of a dispute.
Finally, the formula gives cable television a special incentive to petition the FCC to increase the number of required signals. Such a procedure grants cable additional signals with which to attract cable subscribers but the direct effect will be a reduction in copyright liability. In other words, cable will enjoy a double benefit-one of which is circumvention of copyright.
II. USING BASIC CABLE SUBSCRIBER FEES AS A PERMANENT ELEMENT OF THE FORMULA
The first element of the formula is basic subscriber revenues received by a cable system. The Teleprompter proposal would therefore lock into law, as the rate base, an element which is not likely to be a valid base for the future.
As admitted in oral argument before the Supreme Court in United States v. Midwest Video (406 U.S. 649, 1972, reported in 40 Law Week 3509), as cable advertising revenues increase, basic subscriber fees can be reduced. In short, advertising revenues will be uscd to provide basic subscriber services.
Another means of reducing basic subscriber fees is through the use of pay cable. For example, a cable system can sharply reduce a $6 a month basic cable subscription fee as an inducement to the basic cable subscriber to become a paycable user for fees that range from $9 to $12 per month for the pay cable channel. Indeed, at the 1975 National Cable Television convention in New Orleans, panel participants explained this policy as an effective means of securing pay-cable subscribers whose higher subscription rates would sharply increase cable system revenues.
These are just two methods of circumventing copyright liability under the Teleprompter formula. Doubtless, cable systems will find others. This is not to denigrate cable systems for doing so. They have a product to sell, and they will use means available to them to promote cable in the marketplace. But copyright owners should not be penalized, and cable copyright liability effectively nullified, because the methods of merchandising cable television change.
The Register of Copyrights testified before the Subcommittee on October 30, 1975, that she does not favor giving the Tribunal the power (as H.R. 2223 presently does) to change the rate base from basic subscriber revenues to another base: “In our opinion, this is a legislative function that should not be delegated.” (Draft of Second Supplementary Report of the Register, chapter 1', page 30).
The Register did not state whether her opinion is based upon constitutional grounds or policy reasons. On either basis, she is incorrect.
Professor Pollak, in his attached memorandum, has already made clear beyond any doubt that rate-making is a function which may be delegated. More importantly, the standard of "reasonableness", without any further embellishment, is a constitutionally acceptable standard when Congress delegates a rate-making authority. (See pages 6-8 of Professor Pollak's memorandum, attachment A, and cases cites therein.)
As a policy matter, there is no justification for not delegating to the Tribunal the authority to determine an appropriate rate base. The Supreme Court has recognized that prescribing rates involves several steps, generally two primary steps in determining a fair rate of return:
(1) the determination of the rate base, and
(2) the adjustment of the rate schedule. (See FPC v. Natural Gas Pipeline Co.. 315 U.S. 575, 1942.)
In short, the administrative agency is best suited to determine the rate base in adjusting rates, and this rate base may change from situation to situation. (See Permian Basin Area Rate Cases, 390 U.S. 747, 1968.)
Consistently, Congress has recognized that market situations change and that it does not have the expertise or time to determine rate bases and has, therefore, delegated that authority to administrative agency discretion using a standard of reasonableness. Examples of this delegation include the FCC for wire and