In the example, assume a system with 1,000 subscribers. A system this small would not actually pay based on DSE's because its revenue is too low, but for mathematical simplicity it will suffice here. All 1,000 subscribers get "Basic," at a cost of $7.00. "Basic" includes one independent distant signal. Only 300 subscribers also subscribe to the "Tier." They pay an additional $5.00 for the Tier, and for that they receive an additional three independent distant signals as well as other non-broadcast programing. Under the Copyright Office interpretation now in force, the copyright liability for the system would be calculated by taking the revenue from both the 700 "Basic-only" subscribers and the 300 "Basic + Tier" subscribers, adding those fees together and then multiplying this figure against the royalty fee percentages for the four distant signals which the cable system imports. This would mean that the cable operator would pay approximately $1,177.08 in copyright royalties. - Under the opposite "extreme" approach alternative #2 -- the cable operator would pay based on each distant signal separately -- that is, one DSE multiplied by the gross from 1,000 Basic subscribers and then three DSE's multiplied only against the revenue from 300 subscribers paying the "Tier" rate. Even assuming that the cable operator calculated the fees based on the highest per-signal valuation for the first distant signal in each category, the total liability would be about $498.03.1 The "moderate" approach -- alternative #3 -- falls in between. It is easiest to think of it as applying the fees to two separate systems -- one of 700 subscribers only seeing one distant signal, and the other of 300 subscribers seeing four distant signals. The TOTAL gross of the 300 subscribers for any revenue derived from tiers or Basic would be included in the calculations so long as there were distant signals on those tiers. In this calculation, the liability would be about $733.43. The "moderate" approach is simple to understand and to apply. If a cable subscriber (e.g., consumer) receives a distant signal, the subscriber pays for it. If reception of a distant signal does not occur, a copyright royalty is not in order. Further, this approach does not allow the hiding of distant signals on low cost tiers in order to avoid paying the appropriate level of copyright royalties. Several additional thoughts are necessary. Neither the draft bill nor the discussion herein deal directly with the of "prorationing" of gross receipts with respect to signals carried on tiers. That is, even though there is a mixture of broadcast and non-broadcast programming on a tier, and some of the non-broadcast programming has already been paid for in terms of direct compensation to copyright holders (e.g. CNN, MTV, etc.), if a distant signal appears on that tier, the total fee paid by the subscriber for that tier is included in the aggregate calculations. The cable industry is making efforts to have a further amendment added that would deal specifically with the proration issue. 1 This figure could be $471.37 instead of $498.03 depending on whether the three DSE's were considered as the 1st, 2nd or 3rd DSE's (as is assumed above) of the 2nd, 3rd and 4th DSE's. The Copyright Office interpretation applies to all revenue The "Extreme" opposite approach would apply each DSE separately The "Moderate" approach requires cable operators to pay based FURTHER ISSUES LEFT UNRESOLVED 1. Amendment to the "May Carry" Definition in the Copyright Act (17 U.S.C. $111(f). It was proposed during the hearings that cable systems be allowed to carry, without copyright liability, the signals of all the television stations licensed to the "Area of Dominant Influence (ADI) in which the cable system is located. Such an arrangement would not alter the FCC's current mandatory carriage rules, but would allow many cable systems to carry, free of charge, signals which are now subject to distant signal copyright rates. Such an amendment was contained in the omnibus copyright reform bill, but has been deleted from H.R. 5878. The amendment is supported by independent television systems. It is opposed by sports, the movie industry, and broadcasters. One important issue not covered by the draft omnibus bill is that of "substitutability" This issue, however, promises to take on greater importance during the coming months. The esoteric and complicated nature of the issue should not combine to disguise the significance of the substitutability issue. Section 801(b)(2)(B) currently provides, in relevant part, that any adjustments in royalty rates paid by cable operators (this principally relates to the so-called 3.75% rate adjustment) will not apply to "(i) carriage of any signal permitted under the rules and regulations of the Federal Communications Commission in effect on April 15, 1976, or the carriage of a signal of the same type (that is, independent, network, or noncommercial educational) substituted for such permitted signal" (emphasis added). The FCC regulations in effect on April 15, 1976, are found at 47 CFR 76.65 (entitled "grandfather"). This provision was repealed by the FCC regulation of the distant signal markets in 1981. The purpose of this discussion is not to reiterate the facts and law that led to the Copyright Office's recent "interim regulations" relating to substitutability or the recommendation of the Copyright Royalty Tribunal to the Copyright Office, which were incorporated in the interim regulations. Lengthy background materials may be found in Volume 49, Number 74 of the Federal Register for Monday, April 16, 1984 (pp. 14944-14954). Rather, the purpose of this discussion is to set forth the substance of the Copyright Office's ruling and to discuss the chronology of events that led to the ruling. THE INTERIM REGULATIONS OF THE COPYRIGHT OFFICE Background: On April 16, 1984, the Copyright Office issued "interim regulations" designed to implement section 111 of the Copyright Act of 1976, title 17 of the United States Code. The purpose of the interim regulations was to implement the Copyright Royalty Tribunal's fee-hike decision of November 19, 1982, by notifying cable systems of revised forms and procedures and by providing guidance to cable systems regarding payment of royalties. The Copyright Office did not hold public hearings prior to issuance of its interim regulations. The Office did, however, request public comments and did consult, as is required by law, with the Copyright Royalty Tribunal (see 17 U.S.c. 111(d)(2)). In fact, the Copyright Office did totally defer to the feelings of the CRT that any substituted signal by a cable system would have had to be legally substitutable on or before the FCC deregulation in 1981. Prior to that time, the only way that substitution could occur was by express FCC waiver. Thereafter, the FCC decided to get out of the business of granting waivers. Therefore, the net result of the decision is to make the law "signal specific." For cable operators, this translates to a ban against substitution without incurring major new liability (additional 3.75% copyright royalty fees for importation of distant signals). Chronology of Events August 11, 1981 -- rate adjustment proceeding commenced before the CRT by petition of NCTA. CRT requests public comments on the issues raised by NCTA October 24, 1981 -- CRT approves the commencement of a cable television October 20, 1982 -- CRT, at a public meeting, adopts final rule relating to November 19, 1982 -- CRT publishes text of its ruling in Federal Register. December 1982 1983 - February 11, 1983 - Copyright Office commences proceeding that led to decision on substitutability. March 1983 -- Copyright Office consults with CRT (probably informally). March 23, 1983 -- Copyright Office requests views of CRT. H.R. 5878 does not tackle the substitutability issue. However, an amendment to do so is supported by cable television interests. CABLE COPYRIGHT REFORM HON. MIKE SYNAR OF OKLAHOMA IN THE HOUSE OF REPRESENTATIVES Wednesday, May 4, 1983 Mr. SYNAR. Mr. Speaker, today I am introducing legislation to rectify a discrimination among cable televis.on systems caused by an extraordinary rate increase imposed by the Copy. right Royalty Tribunal earlier this year. The new rate both increases certain copyright royalty payments by rural and other cable systems by 400 to 1,600 percent and collides head on with recent deregulation rulings by the Federal Communications Commission. In 1972, when cable television was in its infancy, the FCC restricted the number of distant signals-television stations imported from outside the local service area-which any cable system could carry. The reason for this restriction was the perceived threat to the viability of local television stations. Since it was thought that this threat was more acute in rural areas where there are fewer stations, the FCC limited the number of distant signals carried by cable sys tems based on their location. Cable systems in the so-called top 50 televi. sion markets were permitted to carry up to three distant independent-that is. nonnetwork-television those in markets 51-100 were permitted up to two distant independent tele signals: vision signals; and those in so-called smaller markets-defined as any town with at least one television station that is not in the top 100 marketswere permitted only one independent television station. After cable's explosive growth during the 1970's, the FCC and undertock exhaustive economic studies extending for several years to determine if there was a continued need for these distant signal restrictions. In 1980 the FCC finally decided no justification exists and repealed them. The anticipated problems had not materialized. The Commission reported: (We were unable to establish theoretically or empirically that cable television reduces the quality of local programming. Competition from distant signals may actually, in some circumstances, increase the quality of programming broadcast by local stations. Paralleling the FCC's deregulation of cable television, Congress enacted a new Copyright Act in 1976 which gave cable systems a compulsory license to carry any television signal permitted by the FCC's rules upon payment of copyright royalties in amounts fixed by the act. The Copyright Royalty Tribunal was created by the new Copyright Act for the purpose of distributing and adjusting royalties. The act gave the Tribuna! authority to adjust royalties for additional distant television signals permitted to be carried by cable systems due to changes in the FCC's rules. Thus, when the FCC repealed its distant signal limitations, the Tribunal initiat ed proceedings to determine an appropriate royalty rate for the new distant signals. While the rate before the FCC action was no more than .675 percent of gross receipts for each signal-with additional signals scheduled for lower rates-the new rate which took effect on March 15, 1983, is 3.75 percent gross receipts for each distant signal. This increase is between 400 and 1,600 percent for various systems and many have decided to drop distant signals subject to this rate rather than pay it. The 3.75 percent rate tracks the former FCC rules-and thus discriminates among cable systems based on market location-even though that discrimination was found to be unjustified. A cable system located in a large market might be able to import three distant signals without being subject to the 3.75-percent rate, while a cable system in a smaller market importing the same three distant signals might have to pay 7.5 percent of its gross receipts to carry two of those television stations. By comparison, the large market cable system would have to pay only 1 percent of its gross receipts for the same two signals- 503 percent each. My legislation would permit all cable systems, regardless of market location, to carry at least three distant independent television signals without being subject to the prohibitive 3.75percent rate, and thus eliminates the very discrimination among cable sys. tems which the FCC attempted to eliminate when the distant signal rule limitations were repealed. |