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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 11l'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 soon 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 major 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, FCC television station carriage rules and regulations protecting the in-market stations' programing serve to limit the diversity of broadcast television programs a cable system can provide, making it more difficult to attract subscribers in the percentages of acceptance enjoyed in the older cable communities.
Obviously, under these conditions—assuming the proposed fee schedule to be in effect-copyright fee payments as a percent of pre-tax income would, of course, become increasingly larger than the average of about 20 percent today, compounding annually the problem of borrowing for and building tomorrow's cable systems. Nothing could be more injurious to the expectations of the public, the cable system entrepreneur, or the copyright owner than to place upon the cable operator, at this particular moment of CATV's growth, an unreasonable demand upon his already strained financial resources.
Given the burden of high copyright fee payments, the cable operator would have no recourse but to pass the burden on to the subscribing public, which is already beset by rising prices for other goods and services. Higher subscriber services charges would serve no useful end for the cable operator or the copyright owner. Cancelled subscription and potential subscriber resistance to inflated subscriber fees would combine to stifle growth and reduce the revenue source from which the copyright owner anticipates his fee and from which the cable operator derives his livelihood.
The copyright owners-chief among which are the motion picture producerswould also have adversely affected their expectations for profit from pay television motion picture services. Reduced interest among potential subscribers to basic cable services reduces the base from which added-services income can be derived, while a slowdown in metropolitan cable construction delays the time at which these services can be introduced in the major markets.
The independent operator currently serving in excess of 3,500 subscribers and the independent owners of proposed systems of whatever size are as much financially threatened by the size of proposed copyright payments as is the multiple system operator. Thus it would seem prudent to reduce Section 111's initial fee schedule by perhaps 50% and permit the process of future abitration, as provided for in Chapter 8 of S. 1361, to exact greater fees should the facts so warrant.
Nevertheless, the CATV industry is willing to support the present schedule of copyright royalty fees, contained in Section 111 of S. 1361, if that is the fair judgment of the Congress.
We would, however, like to point out our best assessment of the distribution of 1971 gross income of $19.6 million from television station purchase of syndicated (not network) programs shows $49.9 to $53.9 million dollars profit to program owners or 25 to 30 percent profit margin. Since NCTA is not privy to broadcaster-program owner financial agreements, we base our assessment of $179.6 million on TV Station Annual Financial Reports for the year 1971 (FCC Form 325) as released by the Research Branch, Broadcast Bureau, Federal Communications Commission. The disbursement percentages of gross income are an accepted averaging of the typical disbursements of syndicated program income, as expressed by one of the nation's largest program producers/distributors of network and syndicated programs. Of this $179.6 million, $53.9 million to $71.8 million (30-40% of gross) went to the distributor and $18.0 million (10% of gross) went as direct costs of distributor as payment for such services as preparation of videotapes, promotional advertising, etc. : $89.8 million to $107.8 million (50-60% of gross) went to the owners of syndicated programs; of which an estimated 50% of the dollar amounts was disbured to talent (writers, directors, actors, etc.) in the form of residual fees : leaving $49.9 million to $53.9 million (25-30%) as profit to the program owners.
In addition to the income received by the owner of syndicated programming, each broadcast station televising the programs receives, through sale of commercial time, advertising income above the costs paid by the station for its syndicated programming—which provides additional profits (to the station) from the syndicated programming.
We now turn to other aspects of the Bill. Section 111(b) makes the secondary transmission of pay-television (STV) an act of infringement and fully subject to civil and criminal penalties. But the rules and regulations of the Federal Communications Commission require CATV systems to carry all television broadcast stations, if within a given geographical area set out before, regardless of whether the station is a commercial broadcaster or an STV station. Here again, the CATV system would be faced with violating the copyright law, or violating the rules of the Federal Communications Commission, paying whatever the program supplier or broadcaster asks to avoid litigation, or going out of business. Further, Section 111(b) has only regulatory overtones-not copyright. Prohibiting secondary transmissions of Pay-TV does not benefit the copyright owner nor the public, since the copyright owner would be paid by both the STV broadcaster and the CATV operator (under the statutory fee schedule) and the public could choose to watch that program if he chose to pay the STV operator for it. We suggest that this is a matter for regulation and not for the copyright law.
Section 111(a) (1) provides an exemption from copyright liability for master antenna systems. We submit that there is no rational distinction, in the eyes of the law, between MATV systems and CATV systems which receive only "local" signals. Each receives the same benefits from the copyrighted programs, and to be fair to copyright holders, each should pay royalties under the statutory fee schedule. Further, it would be unfair to subject CATV systems to payment of a copyright royalty if an apartment house owner in the same area was not required to pay. It seems more prudent public policy to leave these two reception and distribution facilities on an even competitive footing by striking Section 111(a) (1).
By the same token, Section 111(a) (4) exempts non-profit and government owned CATV systems from the requirement to pay fees. Here, again, it would seem more prudent public policy, in light of our national policy encouraging private enterprise, to leave these two reception and distribution facilities on an even competitive basis by striking Section 111(a) (4).
We are cognizant of, and completely agree with the Chairman of this Subcommittee when he stated on introduction of S. 1361, in remarks found at S5615 of the March 26, 1973, Congressional Record :
Section 111 of the legislation approved by the subcommittee contains a comprehensive resolution of the CATV question, including both regulatory and copyright matters. The subcommittee adopted such a comprehensive provision in response to the recommendations of the then Chairman of the Federal Communications Commission. When Mr. Dean Burch became Chairman of the FCC he consulted the subcommittee concerning the development of coordinated procedures by the Congress and the Commission to facilitate a resolution of the CATV issue, and to permit the orderly development of the cable industry. Under the effective leadership of Chairman Burch substantial progress has been achieved in creating a constructive cable television policy for this Nation. The regulations adopted by the Commission are generally consistent with the recommendations made by the subcommittee in section 111 of the copyright bill. It is therefore anticipated that when the subcommittee processes the revision bill, it will eliminate those provisions of a regulatory nature that were the subject of the recent FCC rule-making proceedings.
The subcommittee determined that the public interest justified, and practical realities required, the granting in certain circumstances of a compulsory license to perform copyrighted works. The subcommittee approved such licenses as part of the cable television, mechanical royalty, jukebox royalty, and performance royalty sections of the revision bill. With respect to each of those issues, the subcommittee decided that the Congress would determine the initial royalty rate, and that a Copyright Royalty Tribunal would be established for the purpose of making periodic review and adjustment of the rates.
It has been proposed that special treatment should be accorded the cable television royalty issue. The principal justification for this position is a private agreement developed by Dr. Clay T. Whitehead, Director of the Office of Telecommunications Policy. The Whitehead agreement has been generally interpretated as seeking to eliminate the Congress from any role in determining cable television royalty rates. Even though public law places copyright affairs exclusively in the legislative branch, neither the Copyright Office of the Library of Congress, nor the House or Senate subcommittees having jurisdiction in copyright matters, were represented at
Dr. Whitehead's meetings. We therefore urge that “provisions of a regulatory nature that were the subject of the recent FCC rulemaking proceedings ..." be eliminated in order that regulatory flexibility be maintained for now and in the future and in order to minimize the chance for conflict between requirements placed on CATV systems. If the Subcommittee so desires, we will be most pleased to supply recommended statutory langage ot accomplish that purpose.
We believe, however, that the Subcommittee has accomplished a well-researched, thorough, and fair resolution of strictly copyright matters. We do recommend that the provisions relating to a sports "blackout." (Section 111(c)(4) (c)) containing both anti-trust and communications policies, should also be eliminated for reasons which others will detail later in these hearings. For now, we suggest only that such matters be left to the Federal Communications Commission or other appropriate bodies where the benefits of flexibility can be maintained.
Subject to our previous comments on the amount of copyright royalty fees, we favor the adoption of Section 111(d) as written. We believe that the language of that subsection leaves regulatory matters properly in the hands of the administrative agency charged with the responsibility of regulating communications, with all of the advantages of administrative flexbility inherent in that approach. We also believe that it fully complies with the FCC's position on legislation contained in Chairman Burch's March 11, 1970, letter to Senator Pastore. Most importantly, we believe it to fully serve the public interest. We do suggest, however, that in order to allay the burden of copyright payments on small, family owned, single cable systems, systems of 3,500 subscribers or less be exempt from the payment of copyright royalty fees, and that an appropriate amendment be made to accomplish that purpose.
We also support the provisions of Section 111(e) as written, save for clerical adjustments to reflect the elimination of the regulatory aspects previously mentioned. Here again, the public interest will be served by allowing the Federal Communications Commission the latitude and flexibility to regulate an emerging and rapidly changing communications technology, yet giving all parties a forum to pursue whatever relief is deemed appropriate.
With respect to the definitions contained in Section 111(f) (1), we suggest changes in the definitions, deleting the present language and substituting therefor the following:
“(A) A "primary transmission” is an audio, video, or audio/video broadcast of a work subject to enforcement of the remedies provided by this Act, made to the public by a facility the signals of which are being received or further distributed by a cable system, regardless of where or when the performance or display was first transmitted.
(B) A "secondary transmission" is the further distribution of a "primary transmission" by a cable system simultaneously with the primary transmission.
(C) A “cable system" is any facility providing a cable service which in whole or in part receives signals transmitted by one or more broadcast stations licensed by the Federal Communications Commission and simultaneously distributes them by wire or cable or radio to subscribing members of the public within a political subdivision within which the facility operates."
With respect to the other definitions contained in Section 111(f) we believe them to be sufficiently precise, and in any event subject to review and change by the Federal Communications Commission.
In order to be fully consistent throughout the Act, we suggest that Section 110(5) be amended by adding:
"Or (C) The transmission is made consistent with the purposes of Section 111 of this Title.” We believe that this slight addition will clarify the relationship of secondary transmissions to the dissemination of educational television programs to the public in the event they wish to substitute the CATV reception and distribution service for an individual receiving antenna.
Finally, we submit that no limitation should be placed on the reception of programs by way of CATV which are not copyrighted or subject to copyright.
In conclusion, I wish to thank the members of this Subcommittee and its staff for providing the public with a Bill so well drafted that it requires, in our judgment, very little change from what has already been noted in the introductory remarks of the Chairman which I have previously quoted.
I believe this Bill, if enacted, will not be easy for the CATV industry to live with-but NCTA believes that it well protects the public's interest—and it is that interest which we must all strive to serve.
Thank you for your courtesy and consideration. If we may be of further service in providing additional information or suggested statutory language, we shall be most pleased to do so.