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1. Grant of Compulsory License to Cable Systems with Appropriate Limitations
on its Scope
Consistent with the Consensus Agreement the Bill should grant to cable systems a compulsory license to retransmit all signals lawfully being carried by them prior to March 31, 1972 ("grandfathered" signals) and all local signals as defined by the FCC as well as such other additional or distant signals as would be consistent with the rules adopted by the FCC in February, 1972. With respect to signals subject to compulsory licensing, violation of exclusivity provisions established by the FCC should be a copyright infringement for which both the copyright owner and the broadcaster holding an exclusive license shall have a remedy under copyright law through court actions for injunctions and monetary relief.
The Consensus Agreement provides that the compulsory license shall be limited to "those distant signals defined and authorized under the FCC's initial package" (in addition to local and “grandfathered" signals). In general terms, the FCC's initial rules contemplate importation of usually two distant signals into the 35mile zones of larger markets (subject to certain exclusivity requirements), of enough distant signals to provide adequate program service within the 35-mile zones of smaller markets, and virtually unlimited distant signal carriage beyond the 35-mile zones of all markets. By incorporating by reference the pertinent provisions of the FCC's rules, the bill should adopt corresponding limitations on the scope of the compulsory license otherwise being given to cable systems. Thus, the retransmission by a cable system of distant signals beyond the compulsory license should be subject to full copyright protection. Further, as provided for in the Consensus Agreement the FCC would not “... be able to limit the scope of exclusivity agreements as applied to such signals beyond the limits applicable to over-the-air showings.”
These provisions dealing with limitations on and enforcement of the compulsory license which are called for by the Consensus, were vital to reaching any consensus and are essential for insertion into 8111 rather than to be left to regulation by the FCC. Such a compulsory license constitutes preferential treatment of CATV under copyright law at the expense of the program suppliers and broadcasters. Indeed, under the statutory compulsory license cable systems will not have to bargain with the copyright owners for the right to use their programs or for the amount of fees which they would have to pay for such use. In the light of these privileges granted to the cable industry, it would be completely unfair to allow a four member majority of the FCC to expand the scope of that compulsory license by simple administrative regulation as would be the case if the compulsory license were open-ended.
The limitation on the scope of the compulsory license is not a regulatory measure, nor is it a measure that unwisely ties the hands of the FCC. The FCC would retain full power to change its rules as it sees fit consistent with the public interest standards of the Communications Act. But the FCC would not be given, just as the FCC does not now have and should not have, the power to change the copyright law and thereby the power to take private property from one party and give it to another party simply through administrative fiat. 2. Basis for computation of fees
The present text of the bill imposes the percentage royalty on the gross amounts received from subscribers "for the basic service of providing secondary transmissions of primary broadcast transmitters.” § 111(d) (2) (A).
Spokesmen for the CATV industry, however, have publicly voiced their hope that income and profit from sources other than secondary transmissions will permit them in the future to reduce the fees they charge to their subscribers and may even enable them to eliminate subscribers' fees entirely.
Thus, at the argument before the Supreme Court of C.8. v. Midwest Video Corp. (decided in 406 U.S. 649; 1972) the following colloquy took place between the Chief Justice and the Deputy Solicitor General, Mr. Lawrence G. Wallace as reported in 40 L.W. 3509.
The Chief Justice: "Is there advertising on cable TV ?"
Mr. Wallace replied that it is authorized in cablecasting and furthermore, if the programs are picked up from the networks they are run as they are without deletions of advertisements.
The Chief Justice: “Does that mean that subscribers (of CATV] will be paying to have advertising?"
“Yes,” Mr. Wallace replied, "but to the extent that there is advertising, it will reduce the subscription rates." (italic supplied)
It is apparent that if said subscribers' fees should be reduced due to circumstances wholly unrelated to the use of programs and due solely to cable systems developing other sources of revenue, the copyright owner should not be deprived of his fair compensation. This is so especially since his property continues to be used by the CATV system which still retransmits its programs for promotional purposes in order to acquire and retain the subscribers to whom it sells other profitable services. Consequently, the statute should provide that in readjusting the fees, the Tribunal shall have broad powers to set and to adjust the fees both with respect to the manner and method in which it is to be computed and the base on which the fees are to be assessed. *
The granting of such broad powers to the Tribunal are necessary to prevent a manipulative restructuring of subscribers' fees in order to attract customers to operations of the cable system other than "the basic service of providing secondary transmission of primary broadcast transmitters."
In the absence of a specific grant of such powers, the Tribunal might not be in a position to promulgate fee changes freely and flexibly as economic changes. and total fairness might require. Instead, it might be bound by the rigid limitations contained in the statute. It might not be able to take into consideration the requirements of a fast moving technological age. If the hands of the Tribunal were limited to a particular manner and method of setting the fees or if it had to utilize a particular base on which fees were to be assessed, the result may well be that the fees would be grossly or even shockingly inadequate. In such case, the parties would be compelled to seek legislative relief and the history of copyright law rerision abundantly demonstrates how difficult it is to achieve. statutory enactment in this field. 3. Guidelines for adjustment of fees
Another matter which causes great concern to the copyright owners, especially if the Congress should adopt a fixed fee schedule contrary to the joint recommendations of the parties contained in the Consensus Agreement and contrary to the arguments which I am presenting here today, is the wording of $ 801 (b) of S. 1361 which now provides that the Tribunal “shall make determinations concerning the adjustment of the copyright royalty rates specified by Section 111 ... so as to assure that such rates continue to be reasonable ..." (italie supplied). I urge that this language be changed to provide that the Tribunal "shall make determinations concerning the adjustment of the copyright royalty rates specified by $ 111 ... so as to assure that such rates are just and reasonable." Only thus will the Tribunal at the periodic review of the rates be able to proceed to an open and fair determination without any implication such as that contained in Section 801 as presently worded, that the royalty rates initially set in the statute were deemed “reasonable" when they were initially adopted. 4. Definition of Cable Systems
The degnition of cable systems as now contained in $ 111(f) (1) (C) is ambiguous and may be misinterpreted to fragment the revenue of a system for the purpose of computing royalties payable under a progressive rate such as that used in the fee schedule of $ 111 or such as may be adopted by arbitration. Thus the computation of royalties under the fee schedule of $ 111 of S. 1361 made in Appendix I attached hereto and referred to supra on p. 296 is based upon the “conventional" definition of a cable system employed, for example, by the TV Fact Book. On the other hand, the FCC embodied a definition of cable systems into its cable rules $ 76.5 (a)) which contained a note as follows:
"NOTE: In general, each separate and distinct community or municipal entity (including single, discrete, unincorporated areas) served by cable television system, constitutes a separate cable television system, even if there is a single headend and identical ownership of facilities extending into several communities. See, e.g., Telerama, Inc. 3 FCC 2d 585 (1966); Mission Cable TV, Inc., 4 FCC 2d 236 (1966),"
If the royalty computation of the Table, Appendix IV were to be based on the FCC's definition of cable systems, the revenues of individual cable systems would be fragmented to such an extent that they would pay an even lower rate of copyright fees until $ 111's sliding scale. The result would be that the average effective fee paid by cable systems would be reduced from 1.93% to perhaps as low as 1%.
*$ 111 subsection (d)(2) as proposed by CCO (Appendix V attached hereto), provides that the cable system in its periodic reports most indicate the gross amounts irrespec. tive of source received by it” and provides for determination of “just and reasonable comnulsory license fees" without limiting specifically the revenues which must serve as 'he base for computing the royalties.
Accordingly, the copyright owners urge that the following sentence be added to the definition of a "cable system” in § 111(f) (1) (C) of S. 1361 :
"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 the one headend shall be considered as one system.” 5. Exemption for small systems
Another point which I would like to bring to the attention of the Subcommittee is the exemption from copyright payments of presently existing independently owned cable systems having fewer than 3,500 subscribers as provided for in the Consensus Agreement. In this connection I share the opinion previously expressed by the Subcommittee that it is not desirable to exempt a commercial enterprise from the payment of copyright fees exclusively on the basis of size. Indeed, the copyright owners have given voice to this view in a letter to Mr. Thomas C. Brennan, Chief Counsel to the Subcommittee, dated February 28, 1969, in which they said that since even small systems pay substantial fees to municipalities for franchises and pay their suppliers of equipment and their utility bills without any exemptions or discounts, they should not be exempted from the payment of royalties for the program they use.
Thereafter, however, in an effort to reach agreement with the cable industry, we were persuaded that we should not oppose a reasonable exemption for small and independently owned systems.
While we recommended that such an exemption be granted to independently owned systems having less than 1,500 subscribers, the Consensus Agreement ultimately provided for a much larger exemption and covered systems up to 3,500 subscribers. Our support for this provision, therefore, is intimately connected with the Consensus Agreement and our desire to reach agreement on a carefully balanced package." If that package is now disturbed, and one part of the Consensus Agreement essential to copyright owners repudiated by the cable industry-namely arbitration of the fee question-we would have no reason to continue to support the provision exempting systems with fewer than 3,500 subscribers which are “independently owned” and “now in existence.” Accordingly if the Committee determines to set fees in the bill we believe it should not insert therein an exemption for smaller systems since it has no rational basis or justification in the public interest. 6. Special music fund
Section 111(d) (3) (C) of S. 1361 provides that 15% of the royalties collected shall be maintained in a special fund and distributed to the copyright owners or their designated agents, of musical works. It is felt that the allocation of the funds distributable should not be predetermined by the statute. The amounts payable by cable systems should be set by the Copyright Royalty Tribunal, and its allocation to the various groups of copyright owners including owners of musical works, should be left to the Tribunal on the basis of the economic evidence before it. 7. The Overly-Broad Gorernmental and Nonprofit Organization Eremption
Section 111 would exempt completely from any copyright law provisions secondary transmissions when made at cost by either governmental bodies or nonprofit organizations. This exemption in its present form appeared in H.R. 2512, 90th Cong., 1st Sess. As explained in the report on that bill, H. Rept. 83, 70th Cong., 1st Sess. at 53–54, this provision was concerned with the operations 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 $ 325(a) of the Federal Communications Act.
However, the language of the exemption as formulated in § 111 would be equally applicable to cable systems which are operated by governmental bodies or nonprofit organizations. In order to limit the exemption to nonprofit translators and boosters and similar secondary transmitters, we propose to insert into the text for $ 111(a) (4) the words “... is not made by a cable system ..."
There are a large number of nonprofit organizations in the United States. Many of them operate big enterprises. Moreover, there are already in existence at least 15 municipally-owned CATV systems and there is an increasing drive across the country for municipal ownership of cable systems. (See David Foster: "Municipal Ownership Makes Precious Little Sense" in CATV Newsweekly, July 18, 1973, p. 41). The copyright owners are concerned that increasing governmental or non-profit ownership of cable systems may deprive them of license fees for the use of their product.
A free ride for these entities cannot be squared with the achievement of the public purpose which underlies the copyright system. That purpose is to promote the useful arts by granting compensation adequate to foster creativity. A legal requirement that copyrighted film programs be available to nonprofit and governmental users for free is no less repugnant to the purpose of the copyright system because the user does not intend to make a profit.
No matter how well governmentally sponsored and nonprofit enterprises function, no one would suggest that the law require that their suppliers of equipment, products and services furnish them free of charge. Likewise no one would suggest that the law require artists to donate their paintings to publicly owned art museums or authors to donate writings to publicly owned libraries. Nor should the law require that the suppliers of the film products used by CATV supply them to CATV free of charge merly because the CATV is operating on a nonprofit basis. None of these bodies obtain free of charge the products and services upon which their operation depends. CATV should be no different.
IV. THE NEED FOR ADEQUATE COPYRIGHT FEES 1. The adverse impact of CATV's importation of programs from distant stations
on the program producers' income from television licenses Frequency allocations and determinations by the FCC of a station's power, and of the height and location of its transmitting antenna, together with electrophysical limitations on television reception imposed by the horizon, lead to a limitation of the area which the station's signals can reach for effective reception and to the creation of definite geographical areas and commercial "markets" serviced by local stations.
Copyright owners grant licenses to a television station for the telecasting of programs in that station's market. These licenses usually are specifically limited to the licensee station's present power and antenna height in order to prevent programs from being received in other markets.
A station's revenue and hence one of the factors which will determine the price which it is able to pay to the copyright owner for a license to broadcast a copyrighted work, depends on the size of the audience within the station's market but not on any audience outside of that station's market. Each time a program is exhibited in a market, the audience potential for the next showing of the program in that market is diminished.
When a cable system imports a program from a distant station, it scoops up part of the potential audience for that program in the market where the cable system operates with the result that the local station will pay only a reduced license fee, if it is willing to take a license at all, for a program which has already been shown in its market. CATV importations of these programs into other markets, in effect, deprives the copyright owners of their right to grant exclusive licenses in such other markets and thereby diminishes their ability to collect license fees in those markets. The FCC's non-duplication rules prevent such invasion of the station's markets only to a very limited extent and are applicable neither outside of the top 100 television markets nor to systems located more than 35 miles distant from reference points within any market. 2. The claim of "double payment" is economically contrary to commonsense
CATV spokesmen have claimed at times that copyright owners seek "double payment” for the same performance, i.e., first from the broadcasters and then from the cable system, and that in any event they should seek to make up their losses by charging additional fees to their licensee television stations whose programs the CATV systems retransmit. Since most of these stations are also the victims of CATV's competition and diversion of income in their own markets, such claims adds insult to injury. Moreover, the originating station will be unwilling to increase its fees because most advertisers will not pay additional rates for having their commercials carried to distant markets.
The net economic result of permitting the importation of programs from distant stations has been well described by Dr. Leland Johnson of the Rand Corporation in his study Cable Television and the Question of Protecting Local Broadcasting, 1970, p. 21 (prepared under a grant from the Ford Foundation) :
"Because local audience is generally more valuable [to advertisers] than is the more distant audience, the financial costs of audience lost to the local station are likely to outweigh the gains to the distant station-implying a net reduction in financial resources available for programming. Under these circumstances . . the benefit of cable growth might well lie largely in providing the public with more channels of worse stuff.”
See also Mayer, About Television, New York, 1972, pp. 375, 376.
These facts of economic life in the program distribution industry have been recognized by the Court of Appeals in the CBS v. Teleprompter case, where the Court said in its footnote 2:
"Teleprompter has argued that the copyright holder can demand a greater fee from the broadcast station in the larger market in light of the greater audience that will now view the programs as a result of CATV. However, appellants have responded, and we must agree, that the amount that a broadcast station is willing to pay for the privilege of exhibiting a copyrighted program is economia cally tied more to the fees that advertisers are willing to pay to sponsor the program than to some projected audience size. No evidence was presented in the court below to show that regional or local advertisers would be willing to pay greater fees because the sponsored program 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. Indeed, economics and common sense would impel one to an opposite conclusion. 3. The Addition of a New Source of Income to Program Producers is in the Public
Interest Multiple uses of copyrighted works have traditionally led to the payment of separate royalties for each income producing use. Thus, as Dr. Leland Johnson explains in The Future of Cable Television (1970), another indepth economic study prepared by the aforecited distinguished economist for the Rand Corporation under a Ford Foundation grant (p. 27):
“... the fact that a movie is produced primarily for the theatre market and supported by paid admissions does not suggest that television stations supported by advertising revenues should have free access to those movies. Nor does the proa duction of programming primarily for the advertiser supported broadcast market suggest that cable systems supported by subscribers should have free access to that programming."
The history of the motion picture industry illustrates this point well. The sources of the industry's income have varied over the years. In pre-television days, motion picture income came primarily from exhibition in theatres. When television became a commercial fact, the feature films produced by the motion picture companies and already shown in threatres were licensed under copyright law to television stations and networks for broadcasting into the nation's homes and additional fees were paid for the separate broadcasting use. Fees for television network use did not include the right to use the films for non-network broadcasting. The subsequent showing of films in local stations (called "syndication" in the trade) provided an additional source of income for the program producers.
The same pattern of separate payments for different uses was applied when films made for television (as distinct from theatrical exhibition) began to come into widespread use. Thus original films made for television were licensed to television networks and then to local stations. These licenses did not permit use of the TV films by CATV, a use reserved to the licensor as a future source of income.
These patterns of different rentals for different uses are the patterns not only of the past years in which the motion picture industry grew, but still prevail today. The various sources of income from different uses of the same film provide money to pay the creative people who make the films.
The production and distribution of both feature films and television program series are characterized by a high degree of financial risk with large capital expenditure. Even where a motion picture is produced for initial exhibition in theatres, the great majority of these films would not break even, let alone make a profit, without revenue from television showings. Indeed, most feature films would not be produced at all were it not for the anticipated revenue from television,
Even more risky are the development, production and distribution of programs specifically designed for television. Producers of television series must ini. tiate, with a substantial investment, a broad range of program development projects to insure a continuous flow of product. Fewer than one in five "development projects" (all of which require some cash risk) progress to the point of