[Federal Register: December 12, 2007 (Volume 72, Number 238)]
[Proposed Rules]
[Page 70529-70540]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12de07-11]
-----------------------------------------------------------------------
LIBRARY OF CONGRESS
Copyright Office
37 CFR Part 201
[Docket No. 2007-11]
Definition of Cable System
AGENCY: Copyright Office, Library of Congress.
ACTION: Notice of Inquiry.
-----------------------------------------------------------------------
SUMMARY: The Copyright Office is seeking comment on issues associated
with the definition of the term ``cable system'' under the Copyright
Act and the Copyright Office's implementing rules. The Copyright Office
is also seeking comment on the National Cable and Telecommunications
Association's request for the creation of subscriber groups for the
purposes of eliminating the ``phantom signal'' phenomenon. Further, the
Copyright Office seeks comment on several other issues related to the
existence of phantom signals on certain cable systems. The purpose of
this Notice of Inquiry is to solicit input on, and address possible
solutions to, the complex issues presented in this proceeding.
DATES: Written comments are due February 11, 2008. Reply comments are
due March 26, 2008. December 12, 2007.
ADDRESSES: If hand delivered by a private party, an original and five
copies of a comment or reply comment should be brought to the Library
of Congress, U.S. Copyright Office, Public Information Office, 101
Independence Avenue, SE, Washington, DC 22043, between 8:30 a.m. and 5
p.m. The envelope should be addressed as follows: Office of the General
Counsel, U.S. Copyright Office.
If delivered by a commercial courier, an original and five copies
of a comment or reply comment must be delivered to the Congressional
Courier Acceptance Site (``CCAS'') located at 2nd and D Streets, NE,
Washington, DC between 8:30 a.m. and 4 p.m. The envelope should be
addressed as follows: Office of the General Counsel, U.S. Copyright
Office, LM 430, James Madison Building, 101 Independence Avenue, SE,
Washington, DC. Please note that CCAS will not accept delivery by means
of overnight delivery services such as Federal Express, United Parcel
Service or DHL.
If sent by mail (including overnight delivery using U.S. Postal
Service Express Mail), an original and five copies of a comment or
reply comment should be addressed to U.S. Copyright Office, Copyright
GC/I&R, P.O. Box 70400, Washington, DC 20024.
FOR FURTHER INFORMATION CONTACT: Ben Golant, Assistant General Counsel,
and Tanya M. Sandros, General Counsel, Copyright GC/I&R, P.O. Box
70400, Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202)
707-8366.
SUPPLEMENTARY INFORMATION: Section 111 of the Copyright Act (``Act''),
title 17 of the United States Code (``Section 111''), provides cable
systems with a statutory license to retransmit a performance or display
of a work embodied in a primary transmission made by a television or
radio station licensed by the Federal Communications Commission
(``FCC''). Cable systems that retransmit broadcast signals in
accordance with the provisions governing the statutory license set
forth in Section 111 are required to pay royalty fees to the Copyright
Office. Payments made under the cable statutory license are remitted
semi-annually to the Copyright Office which invests the royalties in
United States Treasury securities pending distribution of these funds
to those copyright owners who are entitled to receive a share of the
fees.
I. Background
The National Cable and Telecommunications Association (``NCTA''),
by its attorneys, has petitioned the Copyright Office to commence a
rulemaking proceeding to address cable copyright royalty issues arising
from the current definition of ``cable system'' found in Section 201.17
of part 37 of the Code of Federal Regulations. The NCTA has proposed
rule changes that it believes will better effectuate the cable
statutory license under Section 111 of the Copyright Act. We initiate
this Notice of Inquiry (``NOI'') to address the issues raised by NCTA
and to seek comment on its proposed changes to Section 201.17 of the
Copyright Office's rules and associated cable Statement of Account
(``SOA'') forms. We also raise for comment several other issues
pertinent to the discussion of the phantom signal phenomenom, as that
concept is defined below.
A. Statutory and Regulatory Definitions
Section 111(f) of the Copyright Act defines a ``cable system'' as:
``a facility, located in any State, Territory, Trust Territory,
or Possession, that in whole or in part receives signals transmitted
or programs broadcast by one or more television broadcast stations
licensed by the Federal Communications Commission, and makes
secondary transmissions of such signals or programs by wires,
cables, microwave, or other communications channels to subscribing
members of the public who pay for such service. For purposes of
determining the royalty fee under subsection (d)(1)[of Section 111],
two or more cable systems in contiguous communities under common
ownership or control or operating from one headend shall be
considered one system.'' 17 U.S.C. 111(f).\1\
---------------------------------------------------------------------------
\1\We note that the definition of ``cable system'' under the
Communications Act of 1934 is different than the Copyright Act
definition. See 47 U.S.C. 522(7) (``the term ``cable system'' means
a facility, consisting of a set of closed transmission paths and
associated signal generation, reception, and control equipment that
is designed to provide cable service which includes video
programming and which is provided to multiple subscribers within a
community. . . .'').
---------------------------------------------------------------------------
[[Page 70530]]
In implementing the cable statutory license provisions of the
Copyright Act, the Copyright Office adopted a definition of the term
``cable system'' that replicated the statutory provision. The Copyright
Office, however, separated the text of the provision into two parts in
order to clarify that a cable system can be defined in two ways for the
purpose of calculating royalty fees. Thus, the regulatory definition
provides that ``two or more facilities are considered as one individual
cable system if the facilities are either: (1) in contiguous
communities under common ownership or control or (2) operating from one
headend.'' 37 CFR 201.17(b)(2). The Copyright Office stated that its
interpretation of the statutory ``cable system'' definition was
consistent with Congress's goal of avoiding the ``artificial
fragmentation'' of systems (a large system purposefully broken up into
smaller systems) and the consequent reduction in royalty payments to
copyright owners. See Compulsory License for Cable Systems, 43 FR 958
(Jan. 5, 1978).
The Copyright Office has, in the past, recognized certain practical
problems associated with the definition when cable systems merge. For
example, in 1997, the Copyright Office stated that ``[s]o long as there
is a subsidy in the rates for the smaller cable systems, there will be
an incentive for cable systems to structure themselves to qualify as a
small system.'' See A Review of the Copyright Licensing Regimes
Covering Retransmission of Broadcast Signals (``1997 Report'') (Aug. 1,
1997) at 45. The Copyright Office further stated that although Section
111(f) has worked well to avoid artificial fragmentation, ``it has had
the result of raising the royalty rates some cable systems pay when
they merge. This happens because, if the two systems have different
distant signal offerings, then all the signals are being paid for based
on the total number of subscribers of the two systems, even if some of
those signals are not reaching all the subscribers.'' Id. at 46. The
Copyright Office, echoing the NCTA's nomenclature, called this
phenomenon the ``phantom signal'' problem. Id. In the 1997 Report, the
Copyright Office recommended to Congress, as part of a broader effort
to reform Section 111, that cable statutory royalties be based on
``subscriber groups'' that actually receive the signal. The Copyright
Office also recommended that systems under common ownership and control
be considered as one system only when they are either in contiguous
communities or use the same headend (i.e., two unrelated operators
sharing a single headend would not be treated as one system). Id. at
47. Believing that it lacked the authority to alter the definition of
cable system as established in Section 111, the Copyright Office
suggested that Congress amend the Copyright Act in accordance with its
recommendations. Id at 46.
B. Cable System Ownership and Operations
To obtain economies of scale, multiple system cable operators
(``MSOs'') strategically acquire systems in close proximity to each
other. At the end of 2004, there were 118 clusters with approximately
51.5 million subscribers compared to 108 clusters and approximately
53.6 million subscribers at the end of 2003. During that same time
frame, there were 29 cable clusters in the United States with over
500,000 subscribers each.\2\ In 2006, the FCC approved the sale of
substantially all of the cable systems and assets of Adelphia
Communications Corporation to Time Warner Inc. and Comcast Corporation
as well as the exchange of certain cable systems and assets between
affiliates or subsidiaries of Time Warner and Comcast.\3\ The FCC has
determined that when Adelphia's systems are fully integrated with
either Time Warner's or Comcast's systems, the number and size of
clusters in the United States (including, but not limited to systems in
California, Ohio, Florida, Texas, and Pennsylvania) will increase
significantly.\4\ While not specifically mentioned in NCTA's petition,
which was filed in 2005, the merger of cable systems resulting from
these transactions likely has led to an increase in phantom signals.
---------------------------------------------------------------------------
\2\See Annual Assessment of the Status of Competition in the
Market for the Delivery of Video Programming, 21 FCC Rcd 2503 (2006)
at ]155.
\3\ See Applications for Consent to the Assignment and/or
Transfer of Control of Licenses from Adelphia Communications
Corporation, (and subsidiaries, debtors-in-possession), Assignors,
to Time Warner Cable Inc. (subsidiaries), Assignees; Adelphia
Communications Corporation, (and subsidiaries, debtors-in-
possession), Assignors and Transferors, to Comcast Corporation
(subsidiaries), Assignees and Transferees; Comcast Corporation,
Transferor, to Time Warner Inc., Transferee; Time Warner Inc.,
Transferor, to Comcast Corporation, Transferee, 21FCC Rcd 8203
(2006).
\4\See id. at ] 2. It has been reported that, due in part to the
Adelphia transactions, the 100 largest cable systems now serve over
54 million subscribers. See George Winslow, Big Deals, Changes for
Markets, Multichannel News, January 22, 2007.
---------------------------------------------------------------------------
II. NCTA Petition
A. The Phantom Signal Problem Explained
At the outset, it is necessary to discuss when and how the phantom
signal phenomena has arisen in the past. The circumstance usually has
occurred when two or more cable systems (large or small) merge and
where each of the former systems carried a unique set of distant
broadcast signals. Consequently, a portion of the newly merged cable
system's subscriber base may not receive certain distant signals for a
certain period of time. Based on our analysis of SOAs on file, we find
that there are three possible phantom signal scenarios: (1) when two
larger cable systems (those that use the Form 3 statement of account
form) with different channel line-ups merge; (2) when a larger cable
system and a smaller cable system (those that use the Form 1-2
Statement of Account form), with different channel line-ups, merge; and
(3) when a smaller cable system merges with another smaller cable
system, with different channel line-ups, resulting in a Form-3 cable
system.\5\ Phantom signals may arise because the systems are not yet
technically integrated and thus an operator is incapable of
retransmitting the distant signals to all subscribers it serves after a
merger. That is, the distant signals cannot be made available to
certain subscriber groups. However, if over time, the cable systems
become technically integrated, and the signals are apparently available
to all subscribers, then the phantom signal problem would disappear.
The new integrated system would be considered like any cable system
that decides to offer a complement of distant signals to one subscriber
group, but not another. In these circumstances, and under present
regulations, the operator would be required to pay a statutory royalty
based on the gross receipts of all subscribers served by the cable
system even if certain subscribers are not offered certain distant
signals.
---------------------------------------------------------------------------
\5\A description of Form 1, 2, and 3 cable systems under Section
111, is provided below.
---------------------------------------------------------------------------
In its Petition, NCTA describes the circumstances giving rise to
phantom signals in a different manner. It states that where two
independently built and operated systems subsequently come under common
ownership due to a corporate acquisition or merger, the Copyright
Office's rules require that the two systems be reported as one.
Similarly, where a system builds a line extension into an area
contiguous to another commonly-owned system, the
[[Page 70531]]
line extension can serve as a ``link'' in a chain that combines several
commonly-owned systems into one entity for copyright purposes. NCTA
asserts that, in either of these cases, phantom signals may be present
and an increased royalty obligation may result. The NCTA, however, does
not discuss whether there are any technological obstacles to providing
all distant broadcast signals carried by a cable system to all
subscribers served by that cable system.
B. History of the Phantom Signal Problem
NCTA states that, in 1983, it filed its first Petition asking the
Copyright Office to resolve royalty payment issues arising from the
definition of cable system. NCTA states that it argued that the
Copyright Office's interpretation of the cable system definition was
``unreasonable in practice'' in that it ``frequently result[ed] in the
unjustified combination of separate cable entities into one system.''
See NCTA 1983 Petition at 2-3. At that time, NCTA proposed that the
Copyright Office modify its regulatory definition so that two or more
systems would be treated as a single entity only if the system served
contiguous communities, were under common ownership or control, and
operated from a single headend. According to NCTA, the motivation
behind this proposed change was the fact that mergers were resulting in
a growing number of separate systems being treated as one because they
were under common ownership and contiguous, even though the system
facilities were not technically integrated.
NCTA notes that the Copyright Office formally recognized the
phantom signal issue in 1989, see Compulsory License for and Merger of
Cable Systems, 54 FR 38390,\6\ but did not discuss it again until 1997,
when it adopted an amendment to its rules to permit cable systems to
calculate the 3.75 fee on a ``partially permitted signal'' basis under
certain circumstances.\7\ Cable Compulsory License: Merger of Cable
Systems and Individual Pricing of Broadcast Signals, 62 FR 23360 (Apr.
30, 1997). NCTA notes that in the same proceeding, the Copyright Office
decided to terminate the pending ``phantom signals'' docket in light of
a study it was preparing for the Senate Judiciary Committee concerning
the functioning of Section 111 of the Copyright Act. Id. at 23361
(stating that the ``very issues of merger and acquisition of cable
systems involved in [the terminated proceeding] will likely be
discussed and analyzed [in the study], and the [Copyright Office] may
ultimately propose legislative solutions to solve the problems
addressed in this proceeding.''). As noted earlier, the Copyright
Office submitted recommendations to Congress in 1997 to address the
phantom signal phenomenom.
---------------------------------------------------------------------------
\6\We note that eleven parties filed comments, and three parties
filed reply comments, in response to the 1989 Notice of Inquiry in
Docket No. RM 89-2. Cable operators, at that time, proposed the
following options to resolve the phantom signal problem: (1) combine
gross revenues of commonly owned contiguous systems to determine
which royalty fee to apply, but otherwise allow them to report the
carriage of stations and gross receipts as if the merger had not
occurred; (2) combine gross receipts in the same manner as Option 1
and allow the calculation of royalties to be based on subscriber
groups; (3) combine gross receipts in the same manner as Options 1
and 2, but allow the calculation of the royalties to be based on
cable communities; (4) do not consider two contiguous systems to be
one system unless all subscribers are served from a single headend
and are under common ownership or control; (5) consider systems to
be contiguous only if they share a common border rather than within
bordering political subdivisions; and (6) allow a grace period for
cable systems that, because of a merger, find that they have created
contiguous cable systems. The Program Suppliers supported Option 1,
but the Joint Sports Claimants opposed any changes to the current
system.
\7\The 3.75% is discussed in more detail, infra.
---------------------------------------------------------------------------
Congress, however, did not act on the Copyright Office's
suggestions to fix Section 111(f). According to NCTA, the need to
resolve the treatment of contiguous systems has heightened dramatically
during the intervening years. Since 1998, an increasing number of cable
operators have merged and acquired systems in relatively close
proximity to each other. Similarly, there has been a trend of headend
consolidation for the past twelve years. NCTA states, for example, that
between Fall 1994 and June 2000, the number of cable headends has
declined by nearly 23% (from 11,620 to 8,971). See NCTA Petition at 9,
citing Nielsen Media Research, CODE database. NCTA also notes the trend
toward cable system clustering, as described above.
C. Proposed Solutions to the Phantom Signal Problem
NCTA has proposed a three part remedy to rectify the phantom signal
problem as it sees it. First, it urges the Copyright Office to change
its cable system regulatory definition. Second, it requests that the
Copyright Office adopt a new rule permitting cable operators that
operate a cable system serving multiple communities with varying
complements of distant broadcast signals to use a community-by-
community approach when determining the royalties due from that system,
seemingly without regard to whether a phantom signal problem exists.
NCTA, in short, advocates the creation of ``subscriber groups'' for
cable royalty purposes where the operator pays royalties only where
distant signals are actually received by a particular household.
Finally, NCTA urges the Copyright Office to announce that it would not
challenge Statements of Account on which the cable operator has used a
community-by-community approach for determining Section 111 royalties.
It appears that NCTA's proposals are not limited only to those
situations where two or more systems have recently merged. Rather, its
expansive proposals likely cover any situation where a cable operator
provides a different set of distant signals to different subscriber
groups served by the same cable system.\8\ This regulatory proposal is
much different from the matter the Copyright Office raised and
addressed in its 1989 and 1997 rulemaking proceedings on cable system
mergers and acquisitions. We seek comment on our interpretation of
NCTA's proposals. On the other hand, NCTA does not discuss the issue of
whether phantom signals may be present when two or more different cable
operators share a common headend. We seek comment on whether phantom
signals may arise in this instance. If so, is this a problem we should
address in this proceeding?
---------------------------------------------------------------------------
\8\We note that our rules permit cable operators to create
subscriber groups based on television signals that are partially-
distant or partially-permitted (i.e., distant or permitted in only a
portion of the communities served by the cable system). NCTA's
proposal extends further and proposes the creation of new subscriber
groups based on the ``partial carriage'' of distant broadcast
signals within a cable system.
---------------------------------------------------------------------------
1. Cable System Definition
NCTA proposes that Section 201.17(b)(2) of the Copyright Office's
rules be amended so that the last sentence reads as follows: ``For
these purposes, two or more cable facilities are considered as one
individual cable system if the facilities are in contiguous
communities, under common ownership or control, and operating from one
headend.'' Stated another way, under NCTA's proposed rule change, cable
facilities serving multiple communities would be treated as a single
system for statutory license purposes only when three distinct
conditions are satisfied: (1) the facilities are in contiguous
communities; (2) the facilities are under common ownership or control;
and (3) the facilities are operating from the same headend. The
[[Page 70532]]
significant change NCTA suggests is that the word ``or'' be replaced by
the word ``and'' before the clause ``operating from one headend.'' NCTA
asserts that this regulatory change would help resolve the phantom
signal issue because it would base royalty payments on signals that are
carried throughout the cable system and made available to all
subscribers. According to NCTA, a cable operator would still be
deterred from ``artificially fragmenting'' its facility under this
approach because any operator who attempts to do so would lose the
operational efficiencies concomitant with a single headend. NCTA also
states that while its proposed definition is narrower than the existing
definition, it would ensure that facilities, which were truly
technically and managerially distinct from one another, would not be
artificially joined together for purposes of the statutory license.
NCTA's proposed rule change, however, raises significant statutory
interpretation issues. We recognize that the United States Court of
Appeals for the D.C. Circuit has found that the Copyright Office has
the authority to interpret the Act so long as it is not inconsistent
with the statute or Congressional intent. The D.C. Circuit stated that
``Congress recognizes that it can only legislate, not administer, so it
necessarily relies on agency action to make `common sense` responses to
problems that arise during implementation, so long as those responses
are not inconsistent with congressional intent.'' Cablevision Systems
Development Co. v. Motion Picture Association of America, 836 F.2d 599,
612 (D.C. Cir. 1988), cert. denied, 487 U.S.1235 (1988). NCTA argues
that the Copyright Office has the authority to adopt a new cable system
definition. On this point, we note that the regulatory definition of
the term ``cable system'' is virtually identical to the definition
found in Section 111(f) of the Copyright Act. As such, we do not
believe that we have the authority to adopt a regulatory definition
that fundamentally alters the statute, even though the language of
Section 111 may be one of the root causes of the phantom signal
problem. See 1997 Report at 46. Nevertheless, we seek comment on NCTA's
proposal to change the regulatory definition of cable system.
2. Subscriber Groups
In addition to arguing for a change in the Copyright Office's cable
system definition, NCTA also advocates the adoption of a new paragraph
(g) in Section 201.17 of the Copyright Office's rules. NCTA's proposed
rule amendment would create subscriber groups, based on cable
communities and partial carriage, for the purpose of calculating
royalties in a manner that would eliminate phantom signals.
Specifically, the NCTA proposes that: (1) ``A cable system serving
multiple communities shall use the system's total gross receipts from
the basic service of providing secondary transmissions of primary
broadcast transmitters to determine which of the Statement of Account
forms identified in paragraph (d)(2) is applicable to the system;'' and
(2) ``Where the complement of distant stations actually available for
viewing by subscribers to a cable system is not identical in all of the
communities served, the royalties due for the system may be computed on
a community-by-community basis by multiplying the total distant signal
equivalents derived from signals actually available for viewing by
subscribers in a community by the gross receipts from secondary
transmissions from subscribers in that community.''\9\ NCTA adds that
the total copyright royalty fee for a system to which this rule would
apply must be equal to the larger of (1) the sum of the royalties
computed for the system on a community-by-community basis or (2) 1.013
percent of the systems` gross receipts from all subscribers\10\ (which
is the current minimum royalty fee payment for SA-3 systems beginning
with the July 1-December 31, 2005, accounting period). We seek comment
on the overall structure and formulation of NCTA's ``combined revenues/
community-specific royalty determination'' proposal.
---------------------------------------------------------------------------
\9\ This proposed rule was not part of NCTA's August 2005
Petition, but was later submitted by letter to the Copyright Office.
See letter to Tanya M. Sandros, Associate General Counsel, U.S.
Copyright Office, from Daniel Brenner, Senior Vice President, Law &
Regulatory Policy, NCTA (dated October 10, 2006), at Appendix A
(proposing a new paragraph (g) to be added to Section 201.17).
NCTA's proposed rule will be made available at the Copyright
Office's website (http://www.copyright.gov).
\10\See id.
---------------------------------------------------------------------------
NCTA states that the Copyright Act does not prohibit the
computation of royalties on a community-by-community basis. It believes
that the Copyright Act sanctions this approach because it incorporates
the FCC's community-specific signal carriage rules as the basis for
determining a signal's copyright status. See NCTA Petition at 13,
citing NCTA 1989 Comments at 10-12. NCTA also asserts that allowing
cable operators to compute royalties on a community-by-community basis
would fairly compensate copyright owners for the use of their works.
Id.
Referencing comments filed with the Copyright Office seventeen
years ago, NCTA states that the importance of actual signal carriage is
further underscored by the legislative history accompanying the
Copyright Act. It notes that the House Report states that distant
signal equivalents ``are determined by adding together the values
assigned to the actual number of distant television stations carried by
the cable system.... Pursuant to the foregoing formula, copyright
payments as a percentage of gross receipts increase as the number of
distant television signals carried by a cable system increases.'' NCTA
Petition at 14, citing Joint Comments of Cable Operators in Docket No.
RM 89-2 (filed Dec. 2, 1989, and citing H.R. Rep. No. 94-1476, 94th
Cong. 2d Sess. at 96 (1976)).
We seek comment on many aspects of NCTA's proposal. First, does the
Act's legislative history support NCTA's proposed rule change? In this
instance, we note that the passage cited above does not explicitly
support NCTA's suggestions nor is it obvious how this language is
relevant to the subscriber group proposal outlined above.\11\ Second,
assuming that subscriber groups are legally permissible under Section
111 of the Act, how would the adoption of NCTA's methodology for the
carriage of stations affect the royalties collected on behalf of the
copyright owners? Would NCTA's proposed solution avoid the concern over
the artificial fragmentation of cable systems? Lastly, noting that we
recently sought comment on changes to the definition of ``community''
as that term is used in Section 201.17 of the Copyright Office's
rules,\12\ we ask how any changes to the ``community'' definition would
affect the changes proposed by NCTA here.
---------------------------------------------------------------------------
\11\ We recognize that NCTA has cited to this passage to support
its stance that the Office has the authority to address the phantom
signal problem, but then it conflates this argument with the
proposition that ``the entire statutory scheme established by
Congress contemplated that copyright fees were to be calculated
based upon distant signals that were actually carried on a cable
system and made available to subscribers.'' See NCTA's Petition at
14, 15.
\12\See Cable Compulsory License Reporting Practices, 71 FR
45749 (Aug. 10, 2006) (seeking comment on the suggestion proposed by
the MPAA and others that a cable community for Section 111 purposes
should be co-extensive with the political boundary of the area for
which a cable system has been granted a franchise to operate).
---------------------------------------------------------------------------
On a separate but related subject, NCTA notes that in the past, it
has urged the Copyright Office to announce that it would not challenge
Statement of Account forms (``SOAs'') on which the cable operator has
used a subscriber group approach for determining the
[[Page 70533]]
royalties due to the retransmission of particular signals. Under such
an approach, the SOA filed by a cable operator serving multiple
communities from a single headend would reflect any differences in the
signal complement delivered to each community. See NCTA Petition at 11-
12. We cannot adopt NCTA's approach to examining SOAs. We are bound by
our existing rules regarding examination procedures. Thus, we will
continue to question an operator if it appears that there is an error,
anomaly, or omission in the SOA form in accordance with our
regulations. If, however, the regulations are amended as a result of
this proceeding, our practices will be adjusted to accommodate those
changes.
D. Application of NCTA's Proposals
Background. At this point, it is useful to illustrate how the
royalties are currently calculated under Section 111 and our
regulations and how we believe royalties would be calculated under
NCTA's proposals. We also raise some issues of concern that require
close scrutiny from the stakeholders in this proceeding.
To understand how the statutory royalties are derived, it is
necessary to describe the statutory methodology used to segregate cable
systems. Cable operators pay royalties based on mathematical criteria
established in Section 111(d)(1)(B), (C), and (D) of the Copyright Act.
Section 111 splits cable systems into three separate categories
according to the amount of revenue, or ``gross receipts,''\13\ a cable
system receives from subscribers for the retransmission of broadcast
signals. These categories are: (1) systems with gross receipts between
$0-$263,800 (under Section 111(d)(1)(C)); (2) systems with gross
receipts more than $263,800 but less than $527,600 (under Section
111(d)(1)(D)); and (3) systems with gross receipts of $527,600 and
above (under Section 111(d)(1)(B)).\14\
---------------------------------------------------------------------------
\13\ For purposes of calculating the royalty fee cable operators
must pay under Section 111, gross receipts include the full amount
of monthly (or other periodic) service fees for any and all services
(or tiers) which include one or more secondary transmissions of
television or radio broadcast stations, for additional set fees, and
for converter (``set top box'') fees. Gross receipts are not defined
in Section 111, but are defined in the Copyright Office's rules. See
37 CFR 201.17(b)(1).
\14\The numerical figures found in the statute are different
from those delineated above due to inflation adjustments adopted by
the old Copyright Royalty Tribunal and the Copyright Arbitration
Royalty Panel.
---------------------------------------------------------------------------
As is common knowledge to those familiar with Section 111, the
Copyright Office's SOA forms must be submitted by cable operators on a
semi-annual basis for the purpose of paying statutory royalties under
Section 111. There are two types of cable system SOAs currently in use.
The SA1-2 Short Form is used for cable systems whose semi-annual gross
receipts are less than $527,600.00. There are three levels of royalty
fees for cable operators using the SA1-2 Short Form: (1) a system with
gross receipts of $137,000 or less pays a flat fee of $52.00 for the
retransmission of all broadcast station signals; (2) a system with
gross receipts greater than $137,000.00 and equal to or less than
$263,800.00, pays between $52.00 to $1,319.00; and (3) a system
grossing more than $263,800.00, but less than $527,600.00 pays between
$1,319.00 to $3,957.00. Cable systems falling under the latter two
categories pay royalties based upon a fixed percentage of gross
receipts. The SA-3 Long Form is used by larger cable systems grossing
$527,600.00 or more semi-annually. These systems must pay at least a
``minimum fee'' that is calculated at 1.013% of aggregate gross
receipts (e.g., $527,600.00 x 1.013%). The minimum fee is paid by
operators for the privilege of retransmitting distant broadcast signals
even if none are carried. The vast majority of SA-3 systems pay more
than the minimum fee because they carry distant television signals.
Alternatively, a cable system would pay a ``base rate fee'' if it
carries any distant television stations regardless of whether or not
the system is located in an FCC-defined television market area SA-3
systems calculate base rate fees according to the number of permitted
distant signal equivalents (``DSEs'') carried: (1) 1st DSE =1.013% of
gross receipts; (2) 2nd, 3rd & 4th DSE= .668% of gross receipts; and
(3) 5th, etc., DSE .314% of gross receipts. Form SA-3 cable systems
that carry only local broadcast signals do not pay the base rate fee,
but do pay the minimum fee. Cable systems carrying distant television
signals after June 24, 1981, that would not have been permitted under
the FCC's former rules in effect on that date, must also pay a royalty
fee of 3.75% of gross receipts using a formula based on the number of
relevant DSEs. The cable operator would pay either the sum of the base
rate fee and the 3.75% fee, or the minimum fee, whichever is higher. In
addition, cable systems located in whole or in part within a major
television market (as defined by the FCC), must calculate a syndicated
exclusivity surcharge (``SES'') for the carriage of any commercial VHF
station that places a Grade B contour, in whole or in part, over the
cable system which would have been subject to the FCC's syndicated
exclusivity rules in effect on June 24, 1981. If any signals are
subject to the SES surcharge, an SES fee is added to the foregoing
larger amount to determine the system's total royalty fee.\15\
---------------------------------------------------------------------------
\15\ The above gross receipts threshold levels, royalty fees,
and rates are effective for accounting periods beginning July 1,
2005.
---------------------------------------------------------------------------
Royalty Calculations Under NCTA's Proposals. We have developed a
series of scenarios, based on actual SOA filings, to illustrate the
practical consequences of adopting NCTA's proposals. The examples show
how cable royalties are calculated under our current regulations and
how they likely would be calculated under the NCTA's proposals where
subscriber groups have been created. The following sets and scenarios
are found in the Appendix to this NOI.
Set 1 illustrates the merger of SA-2 and SA-3 cable systems.
Scenario 1 depicts the royalties generated by two separate cable
systems before a merger and under current Copyright Office regulations.
Scenario 2 shows the royalties generated by one cable system after a
merger of the two systems depicted in Scenario 1 and under current
Copyright Office regulations. Scenario 3 depicts the royalties
generated by one system after a merger, under current Copyright Office
regulations, where differing sets of signals are received by
subscribers. Scenario 4 shows the royalties generated by one cable
system after a merger, but under the NCTA's proposed regulations
(reflecting the former two separate systems in Scenario 1). Scenario 5
shows one system after a merger and the royalties generated under the
NCTA's proposed regulations (with signals being carried in only
portions of the merged system).
Set 2 illustrates the merger of two SA-3 cable systems. Scenario 1
shows the royalties generated by two separate SA-3 cable systems before
a merger and under current Copyright Office regulations. Scenario 2
depicts the royalties collected by one system after a merger and under
current Copyright Office regulations. Finally, Scenario 3 shows the
royalties generated by one system after a merger, but under NCTA's
subscriber group proposal.
Set 3 depicts scenarios involving SA-3 system mergers where
partially-distant signals are being carried. Scenario 1 shows the
royalties generated by two separate SA-3 systems before a merger, with
one partially distant signal that is carried on only one system, under
current Copyright Office
[[Page 70534]]
regulations. Scenario 2 depicts the royalties generated by one system
after a merger, under current Copyright Office regulations, where one
partially distant signal is being carried. Lastly, Scenario 3 shows the
royalties collected by one system after a merger under NCTA's
subscriber group proposal and reflects the carriage of a partially
distant signal.
As would be expected, the scenarios show there would be a change in
cable royalties under NCTA's proposed regulations, with some of the
examples illustrating a large decrease in royalties. Are there other
fact patterns that involve phantom signals? If so, we ask commenters to
submit such examples so that we may be able to determine if NCTA's
proposed rule changes offer a workable solution to the phantom signal
problem in all situations, from the perspectives of cable operators and
copyright owners alike.
SES Royalty Fee Payments. The syndicated exclusivity surcharge is
another longstanding cable royalty policy that may be affected by
NCTA's proposals. For example, some SA-3 cable systems that would use
subscriber groups may have a total calculated royalty less than the
statutory minimum fee. In these cases, the minimum fee would apply. In
addition, there are some distant signals, however limited in number,
that are subject to the SES. When a SES is calculated, it must always
be added to the minimum fee to arrive at the total royalty fee given
the foregoing scenario.
This matter, illustrated in the table below, was not addressed by
NCTA in its petition.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subgroup 1 ($550,000 gross receipts) Subgroup 2 ($325,000 gross receipts)
No distant signals 1 permitted distant signal (1.00 DSE)
Base Rate Fee = $3,292.25
SES = $1,946.75
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The minimum fee for the whole system would equal $8,863.75
($550,000 + $325,000 x 1.013%). The total royalty fee would equal
$10,810.50 (minimum fee=$8,863.75 + SES=$1946.75). It is important to
note here that instead of adding the calculated base rate and SES in
Subgroup 2 to arrive at Subgroup 2's fee, the SES must be added on top
of the entire system's minimum fee. In other words, when the calculated
base rate fee ($325,000.00 x 1 DSE x .01013 [for first DSE]=$3,292.25)
is compared against the minimum fee ($8,863.75), the greater amount is
then added to the SES ($325,000 x 1 DSE x .00599 [for first DSE in top
50 market]=$1,946.75). The statutory royalty fee then equals
$10,810.50. We point out that if subgroup 1 carried 1 DSE (whether the
same or a different signal), then the base rate fee would at least
equal the minimum fee because the minimum fee is total gross receipts x
1 DSE x .01013. Hence, the total royalty fee would still be at least
$10,810.50 (minimum fee =$8,863.75 + SES =$1,946.75). This scenario
illustrates the complexities of determining royalty calculations under
NCTA's proposals. We anticipate some possible accounting issues
associated with the SES and minimum fee calculations if NCTA's
proposals were adopted. We seek comment on whether our supposition is
valid in this context.
Minimum Fee. The minimum fee paid by cable operators could also be
affected by NCTA's proposals. For example, would a Form 1 system
merging with a Form 3 system pay less than the $52 minimum fee if gross
revenues are less than $5,133 (assuming that the Form 1 system carries
no DSEs)? That is, a former Form 1 system grossing $3,000 would apply
the 1.013% minimum royalty rate for Form 3 systems, resulting in a
possible royalty fee of $30.39. According to our records, there are
about 500 cable systems with gross revenues less than $5,133 that filed
for the 2006/1 accounting period.
Single Filers/Shared Headends. SOA filing and royalty payment
issues emerge as well under NCTA's proposal. For example, systems A and
B merge, but both have been filing a single SOA because they operated
from a shared single headend. After their merger, the systems would
still file a single SOA. However, since they were under separate
ownership, should they be allowed to compute their royalties separately
under NCTA's proposed definition as if they were separate systems? Are
there any other processing and procedural issues, similar to this one,
that may arise under NCTA's approach, but that we have not yet
identified?
E. The Market Quota Rules
The FCC does not currently restrict the kind and quantity of
distant signals a cable operator may retransmit. Nevertheless, the
FCC's former market quota rules, which did limit the number of distant
station signals carried and were part of the FCC's local and distant
broadcast carriage rules in 1976, are still relevant for Section 111
purposes. These rules are integral in determining: (1) whether
broadcast signals are permitted or non-permitted; (2) the applicable
royalty fee category; and (3) a station's local or distant status for
copyright purposes. Broadcast station signals retransmitted pursuant to
the former market quota rules are considered permitted stations and are
not subject to a higher royalty rate.
To put these rules in context, a cable system in a smaller
television market (as defined by the FCC) was permitted to carry only
one independent television station signal under the FCC's former market
quota rules. Currently, a cable system in a smaller market is permitted
to retransmit one independent station signal for copyright purposes. A
cable system located in the top 50 television market or second 50
market (as defined by the FCC) was permitted to carry more independent
stations under the former market quota rules. The former market quota
rules did not apply to cable systems located ``outside of all markets''
and these systems under Section 111 are currently permitted to
retransmit an unlimited number of television stations without incurring
the 3.75% fee (although these systems still pay at least a minimum
copyright fee or base rate fee for those stations).
There are other bases of permitted carriage under the current
copyright scheme that are tied to the FCC's former carriage
requirements. They include: (1) specialty stations; (2) grandfathered
stations; (3) commercial UHF stations placing a Grade B contour over a
cable system; (4) noncommercial educational stations; (5) part time or
substitute carriage; and (6) a station carried pursuant to an
individual waiver of FCC rules. If none of these permitted bases of
carriage are applicable, then the cable system pays a relatively higher
royalty fee for the retransmission of that station.
NCTA does not seem to address the fact that all of the FCC's old
rules and regulations would be applicable when reporting information
and determining the permitted basis of carriage of partially carried
stations (i.e. subscriber groups) on the SA-3 Form. In our view, when
two cable systems located in a top-50 major television market (as
defined by FCC regulations) merge and
[[Page 70535]]
the operator then creates subscriber groups based on differing signal
carriage complements, the merged system's allotment of independent
market quota stations would not increase or change. That is, if each of
the former systems had two distant independent stations as their market
quota, the newly merged system's market quota remains two distant
independent stations, regardless of whether those two stations were
identical or different. Suppose, for example, that System A previously
reported on its SOA that WGN and WSBK were its distant independent
market quota signals while System B previously reported WPIX and WWOR
were its distant independent market quota signals. Under the subscriber
group approach, and based on the FCC rules in existence in 1976, the
new merged system would still have a market quota of two distant
independent signals. Hence, two of the signals above would be subject
to the 3.75% fee unless another basis of permitted carriage is
applicable. See supra. We seek comment on whether this would be the
appropriate application of the market quota rules under NCTA's
subscriber group proposal.
F. The 3.75% Fee and Phantom Signals
Issue. In addition to the market quota issue described above, there
is an additional outstanding question regarding the permitted versus
non-permitted treatment of phantom signals. The Copyright Office has
historically accepted the retransmission of phantom signals at the
permitted rate (``base rate fee''). However, some cable operators have
raised concern that the Copyright Office might find, at some point in
the future, that the retransmission of a phantom signal should be
treated as if it were actually carried and thus subject to the 3.75%
fee as a non-permitted signal. In the absence of a clear policy
statement on this matter, the Copyright Office has not stipulated
payment of the 3.75% fee and has left the decision as to which rate
applies to the operator's discretion.
Historical Context. In 1982, the Copyright Royalty Tribunal made
two types of royalty rate adjustments in response to FCC deregulatory
actions at that time. One adjustment was the surcharge on certain
distant signals to compensate copyright owners for the carriage of
syndicated programming formerly prohibited by the FCC's syndicated
exclusivity rules in effect on June, 24, 1981 (former 47 CFR 76.151 et
seq.). The second adjustment raised the royalty rate to 3.75% of gross
receipts per additional distant signal equivalent resulting from
carriage of distant signals not generally permitted to be carried under
the FCC's distant signal rules prior to June 25, 1981.
In late 1982 and early 1983, the Copyright Office received numerous
requests from cable operators for advice or interpretive rulings
regarding the application of the 3.75% fee in specific instances. The
Copyright Office initiated a proceeding (Docket RM 83-3) by publishing
a Notice of Inquiry, 48 FR 6372 (Feb. 11, 1983), in which it summarized
the issues presented for guidance and requested public comment on four
general issues: (1) substitution of nonspecialty independent stations
for specialty stations; (2) carriage of the same signal in expanded
geographic areas; (3) expanded temporal carriage of signals carried on
a part-time or substitute basis under the former FCC rules before June
25, 1981; and (4) signals for which waivers were pending with the FCC
on June 24, 1981, and later dismissed as mooted by FCC deregulation.
Under the former FCC rules, some cable systems were permitted to
carry specified distant signals only within certain communities of the
system. For example, under paragraph (a) of the FCC's former Section
76.55, a community unit was generally not required to delete any
television broadcast signal which it was authorized to carry or was
lawfully carrying prior to March 31, 1972 (``grandfathered'' signals).
The system was generally not permitted, however, to expand the
grandfathered signals into other communities within the system. Also,
under the former rules, a cable system located partly within a market
and partly outside of all markets was allowed to transmit an unlimited
number of distant signals, but the system would not have been permitted
to transmit all of those signals to subscriber groups located in a
smaller or top 100 television market if the number of signals exceeded
the applicable FCC carriage restrictions.
In applying the 3.75% rate, the following questions arose: (1) if
the cable system after FCC deregulation expanded the geographic
coverage of a ``grandfathered'' signal into previously restricted
communities within the same system, does the 3.75% fee apply to the new
subscriber groups, and (2) if a cable system that is located partly
without and partly within a television market expanded the geographic
coverage of a signal previously permitted only in the area outside of
all television markets, does the 3.75% rate apply to part or all of the
subscribers to the system? See Compulsory License for Cable Systems, 49
FR 14944 (Apr. 16, 1984).
The Copyright Office's interpretation of the Copyright Act in these
instances in the early 1980s had been that, unless the signal is partly
distant only to some subscribers, copyright royalty fees for distant
signals carried to any part of a cable system as defined in the
Copyright Act must be computed on the basis of total, aggregated gross
receipts from all subscribers to the system. This position, at the
time, was based upon the lack of any express provision allowing
allocation of gross receipts, except for partially distant-partially
local signals. Id.
The Copyright Office had stated that the different communications
and copyright law definitions of the term ``cable system'' had meant
that the Copyright Act requires payment of copyright fees even though
not all subscribers of the cable system were eligible to receive a
particular distant signal because of FCC restrictions. To the extent
the Copyright Office was aware that a cable system failed to report
total gross receipts from all subscribers, the Licensing Division
questioned the correctness of the Statement of Account and attempted to
obtain an amended filing and additional payment of copyright fees. In
an unknown number of cases, the Copyright Office was not made aware of
under-reporting of gross receipts. Some cable systems accepted the
Copyright Office's interpretation and paid copyright fees accordingly.
In other cases, cable systems refused to accept the Copyright Office's
interpretation of the Act and made an allocation of gross receipts to
reflect only those subscribers who actually received the signal. Id.
In 1984, the Copyright Office agreed with those cable systems
asserting that the 3.75% rate does not apply to carriage of the same
signal on an expanded geographic basis. The Copyright Office stated
that the Copyright Royalty Tribunal did not have the authority or the
intention to apply the 3.75% rate in any case where additional distant
signal equivalents do not result from the FCC deregulation, and no
additional DSE's accrue from expanded geographic coverage of the same
signal. The Copyright Office held that since no additional DSE's
accrued, the fact that the FCC's rules formerly restricted carriage to
certain communities within the system was irrelevant. Id.
In 1989, the Copyright Office reiterated and clarified its position
regarding the expanded geographic carriage rule. The Copyright Office
stated that cable systems may pay the
[[Page 70536]]
non-3.75% rate in some cases where expanded geographic carriage of
certain signals occurs. The Office clarified that Section 201.17(h) of
the Copyright Office's rules was specifically limited to the situation
in which a signal was actually carried in only part of a system due to
the pre-June 25, 1981, FCC carriage restrictions. In adopting that
regulation as part of the implementation of the CRT's 1982 rate
adjustment, the Office stated that the ``expanded geographic carriage''
which resulted directly from the FCC's 1980 deregulation order does not
represent any ``additional DSE'' because before deregulation the system
had to pay royalties system-wide for FCC restricted signals. See 49 FR
14944 (Apr. 16, 1984) and 49 FR 26722 (June 29, 1984). The Copyright
Office commented that, in 1984, it addressed issues relating to the
CRT's 1982 rate adjustment, and it did not have before it any evidence
or comment regarding merger or acquisition of cable systems. The
Copyright Office stated that the regulation therefore only applied to
the expansion of signal coverage within a system resulting from the
FCC's 1980 deregulation. It did not cover situations where expanded
carriage of a signal results from the creation of a new system through
merger or acquisition, which operates in contiguous communities. See
Compulsory License for and Merger of Cable Systems, 54 FR 38390 (Sept.
18, 1989).
In 1997, the Copyright Office further clarified its position
regarding the imposition of the 3.75% fee. At that time, the Copyright
Office amended its rules with respect to the application of the CRT's
3.75% fee decision to partially permitted/partially non-permitted
distant signals. When the Copyright Office first adopted regulations in
1984 to implement the 3.75% fee, the proper treatment of signals that
were partially permitted/non-permitted was raised, and the Copyright
Office deferred giving guidance. Compulsory License for Cable Systems,
49 FR 26722, 26726 (June 29, 1984). As a result, some cable systems had
reported those signals as entirely permitted and have paid the current
base rates. Others had reported those signals as entirely non-permitted
and have paid the 3.75% fee. After much consideration, the Copyright
Office decided that where a signal is partially permitted/partially
non-permitted, the current base rates would apply to those subscribers
in communities where the signal would have been permitted on or before
June 24, 1981, and the 3.75% fee would apply to those subscribers in
communities where the signal would not have been permitted before 1981.
The effect of the Copyright Office's 1997 decision was that cable
systems would no longer be able to elect whether to consider the signal
entirely permitted or entirely non-permitted. See Cable Compulsory
License: Merger of Cable Systems and Individual Pricing of Broadcast
Signals, 62 FR 23360 (Apr. 30, 1997).
Questions. The extended discussion of the history of the 3.75% fee,
above, reveals that while most questions involving its application have
been resolved, the Copyright Office has never directly addressed and
discussed its application to phantom signals. On one hand, the 3.75%
fee could be applied to non-permitted phantom signals because there is
no specific statutory provision, copyright policy, or Copyright Office
regulation exempting such payment. On the other hand, the cable
industry generally has, for nearly three decades, reported and paid
royalties under the assumption that the 3.75% fee would not be applied
to non-permitted phantom signals. To wit, our review of the statements
of account indicate that most cable systems have paid either the Base
Rate Fee or no fee for phantom signals while very few cable systems
have paid the 3.75% fee for these signals. We seek comment on the
appropriate policyin this context. Should a cable operator pay a 3.75%
fee for the retransmission of phantom signals? If so, what are the
policy rationales for adopting such a policy? If not, what factors
weigh against the levy of such a fee on phantom signals? If we adopted
NCTA's subscriber group approach, would this controversy be rendered
moot? If so, why?
Forms 1 and 2 Cable System Issues. The NCTA's Petition for
Rulemaking, and the discussion herein, has, so far, focused on matters
related to Form 3 cable systems. However, to provide a comprehensive
analysis of NCTA's proposals, we find it necessary to examine royalty
issues related to small cable systems that file Form 1 and Form 2
statements of accounts. We note that the Form 1, 2, and 3
classifications have been the preferred way of categorizing cable
systems for royalty purposes over the last thirty years, but the forms
are only administrative implementations of the law, and not the law
itself. In fact, cable operators pay royalties based on their gross
receipts under mathematical formulas established in Section
111(d)(1)(B), (C), and (D) of the Act. Form 1 is actually only half of
Section 111(d)(1)(C). Form 2 is actually the other half of Section
111(d)(1)(C) and all of Section 111(d)(1)(D). Form 3 is Section
111(d)(1)(B). Stated otherwise, Form 1 is for cable systems with gross
receipts of $0-$137,100, Form 2 is for cable systems with gross
receipts of more than $137,100 but less than $527,600 and Form 3 is for
cable systems with gross receipts of $527,600 and above. Under the
statute (and based on adjusted gross receipt threshold levels),
however, Section 111(d)(1)(C) targets cable systems with gross receipts
of $0-$263,800, Section 111(d)(1)(D) is directed at cable systems with
gross receipts of more than $263,800 but less than $527,600, and
Section 111(d)(1)(B) is meant for cable systems with gross receipts of
$527,600 and above.
We seek comment on the effect, if any, of NCTA's subscriber group
proposal on smaller cable systems that use the Form 1 and 2 SOAs. We
specifically ask how royalty rates would be affected and how NCTA's
proposal may eliminate or alleviate the phantom signal problem. Based
on NCTA's submissions, it appears that its proposals would not have any
net effect because two smaller operators (that have merged and have
previously filed Form 1 or Form 2 SOAs) would pay the same royalties,
with or without phantom signals, if they still fall below the $527,600
threshold, as delineated above. It also appears, based on the
information before us, that NCTA's proposals would not provide any type
of regulatory relief for smaller systems that file Forms 1 and 2
because those elements of the statute that lend to the creation of
phantom signals under Section 111(e.g., DSEs, permitted and non-
permitted signals, market quotas and other intricacies pertinent to
larger cable systems) are inapplicable. We seek comment on these
conclusions and whether our interpretations of NCTA's proposals are
accurate.
G. Section 109 Report
On December 8, 2004, the President signed the Satellite Home Viewer
Extension and Reauthorization Act of 2004, a part of the Consolidated
Appropriations Act of 2004. See Pub. L. No. 108-447, 118 Stat. 3394
(2004) (hereinafter SHVERA). Section 109 of the SHVERA requires the
Copyright Office to examine and compare the statutory licensing systems
for the cable and satellite television industries under Sections 111,
119, and 122 of the Copyright Act and recommend any necessary
legislative changes no later that June 30, 2008. Under Section 109,
Congress indicated that the report shall include, inter alia, an
analysis of whether the licenses under such sections are still
justified by the bases upon which they were originally
[[Page 70537]]
created. A Notice of Inquiry expansively addressing the statutory
licenses was recently published in the Federal Register. See 72 FR
19039 (Apr. 16, 2007) (``Section 109 NOI''). We understand our
responsibilities under SHVERA to closely examine the continued
relevancy of Section 111 and its many provisions, and in fact, the
phantom signal issue was one of the issues raised for comment in the
Section 109 NOI.\16\ However, we believe the matters raised herein
deserve consideration, sooner rather than later. Therefore, we shall
continue the rulemaking process in this docket while working on
recommendations to Congress on the Section 109 Report.
---------------------------------------------------------------------------
\16\ Several parties commented on phantom signals in response to
the Section 109NOI. See, e.g., ACA comments at 10-13, NCTA comments
at 18-19, Joint Sports reply comments at 11, NAB comments at 11, and
Program Suppliers comments at 6.
---------------------------------------------------------------------------
III. Conclusion
We hereby seek comment from the public on issues associated with
the definition of a cable system and the creation of subscriber groups
(based on the carriage of distant television signals) under Section 111
of the Act and Section 201.17 of the Copyright Office's rules. If there
are any other issues relevant to the phantom signal problem not raised
or identified in this NOI, interested parties are encouraged to bring
those matters to the attention of the Copyright Office.
Dated: November 19, 2007
Marybeth Peters,
Register of Copyrights
APPENDIX
SET 1 - MERGER OF SA-2 AND SA-3 CABLE SYSTEMS
Scenario 1: Two separate systems before a merger under current Copyright Office regulations. System 1 is a Form
SA3 and System 2 is a Form SA1-2.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
System 1 System 2
$550,000.00 gross receipts $325,000.00 gross receipts
Top 50 Major Market 2 permitted distant
independent signals (A and
B)
1 non-permitted distant independent signal (C)
Minimum fee =$5,571.50 or
Base rate = $9,245.50+ ...........................
3.75% fee = $20,625.00
...........................
Royalty fee = $29,870.50 Royalty fee = $1,931.00
----------------------------------------------------------------------------------------------------------------
Table 1a: Two separate systems before a merger using current CO regulations.
Scenario 2: One system after a merger under current Copyright Office
regulations. All subscribers are receiving the same set of signals.
------------------------------------------------------------------------
------------------------------------------------------------------------
$875,000.00 gross receipts .................
2 permitted signals (A & B) .................
1 non-permitted signal (C) .................
Minimum fee = $8,863.75 or .................
Base rate fee = $14,708.75+
3.75% fee = $32,812.50
Royalty fee = $47,521.25
------------------------------------------------------------------------
Table 1b: One system after a merger using current CO regulations (all
subscribers are receiving the same signals).
Scenario 3: One system after a merger reflecting differing sets of
signals received by subscribers applying current Copyright Office
regulations. Former SA1-2 system in scenario 1 above (System 2) carried
a different independent signal and network signal (D and E below) which
are carried in only a portion of this new merged SA-3 system.
------------------------------------------------------------------------
------------------------------------------------------------------------
$875,000.00 gross receipts
.................
2 permitted independent distant signals (A & B) .................
1 permitted distant network signal (E) .................
2 non-permitted distant independent signals (C & D)
.................
Minimum fee = $8,863.75 or .................
Base rate fee = $16,170.00+ .................
3.75% fee = $65,625.00 .................
Royalty Fee = $81,795.00
------------------------------------------------------------------------
Table 1c: One system after a merger reflecting differing sets of signals
to subscribers using current Copyright Office regulations.
[[Page 70538]]
Scenario 4: One system after a merger under the NCTA's proposal and reflecting the former two separate systems
in scenario 1 - All subscribers are treated as receiving the same set of signals as before the merger. Both
former systems would use the rates of a Form SA-3 system. Former System 2 below (the former SA1-2 system) would
likely pay the ``minimum fee'' rate with the presumption that no DSEs would apply to the former SA1-2 system's
gross receipts.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Former System 1 Former System 2
Same as System 1 under scenario 1 Minimum fee = $3,292.25
($325,000 x 1.013%)
Royalty fee =$29,870.50 Royalty Fee = $3,292.25
Combined Royalty Fee $33,162.75
----------------------------------------------------------------------------------------------------------------
Table 1d: One system after a merger under the NCTA's proposal to use subscriber groups to reflect the former two
separate systems.
Scenario 5: One system after a merger under the NCTA's subscriber group proposal- signals being carried in only
portions of the merged system. All subscribers are not receiving the same set of signals. This scenario presumes
that DSEs would apply to the gross receipts of the former SA1-2 system.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Former System 1 Former System 2
$550,000.00 gross receipts $325,000.00 gross receipts
Top 50 Major Market Top 50 Major Market
2 permitted distant independent signals (A/B) 1 Permitted distant network
signal (E)
1 non-permitted distant independent signal (C) 1 permitted distant indep.
signal (D)
Minimum fee = $5,571.50 or Minimum fee = $3,292.25
Base rate = $9,245.50+ Base rate = $3,835.00
3.75% fee = $20,625.00 ...........................
Royalty fee = $29,870.50 Royalty fee = $3,835.00
Combined Royalty fee = $33,705.50
----------------------------------------------------------------------------------------------------------------
Table 1e: system after a merger under the NCTA's subscriber group proposal.
As illustrated above, the cable system's total royalty fee
obligation would be considerably less under the NCTA subscriber group
proposal (Table 1e) when compared with the Copyright Office's existing
methodology (Table 1c) which does not currently permit calculations
based on subscriber groups and partial carriage.
The following examples concern situations where a cable system
straddles two television markets. Like the examples illustrated above,
there is a difference in royalty fee amounts if the NCTA's subscriber
group proposal were in effect.
SET 2 - MERGER OF TWO SA-3 SYSTEMS
Scenario 1: Two separate SA-3 systems before a merger under current Copyright Office regulations. Each system is
retransmitting different distant signals.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
System 1 System 2
Top 50 major market; $550,000.00 gross receipts Second 50 major market;
$550,000.00 gross receipts
3 distant independent signals (A, B, & C) 3 distant independent
signals (D, E, & F)
2 permitted signals (A & B) 2 permitted signals (D & E)
1 non-permitted signal (C) 1 non-permitted signal (F)
Minimum fee = $5,571.50 Minimum fee = $5,571.50
Base rate fee= $9,245.50 Base rate fee= $9,245.50
3.75 % fee= $20,625.00 3.75 % fee= $20,625.00
Royalty fee = $29,870.50 Royalty fee = $29,870.50
----------------------------------------------------------------------------------------------------------------
Table 2a: Two separate SA-3 systems before a merger under current Copyright Office regulations.
[[Page 70539]]
Scenario 2: One system after a merger under current Copyright Office
regulations.
------------------------------------------------------------------------
------------------------------------------------------------------------
Top 50 major market and second 50 major
market
..........................
$1,100,000.00 gross receipts
..........................
3 wholly permitted independent signals (A, ..........................
B, & D)
3 non-permitted independent signals (C, E, &
F)
..........................
Minimum fee =$11,143.00 ..........................
Base rate fee =$25,839.00 ..........................
3.75% fee =$123,750.00 ..........................
Royalty Fee = $149,589.00
------------------------------------------------------------------------
Table 2b: One system after a merger under Copyright Office regulations.
Scenario 3: One system after a merger under NCTA's subscriber group proposal. All signals carried in the former
separate SA-3 systems in scenario 1 above are not carried throughout the new merged cable system. This merged
scenario reflects two (or more) subscriber groups patterned after the differing pre-merger signal carriage line-
ups (see scenario 1, above).
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Royalty fee same as combined amount in Scenario 1 above $59,741.00
......................
Hence, if two subscriber groups are used, calculation of the royalty fee
results in the same royalty fee as above in scenario 1 when they were still
separate systems (all else being equal). Other offshoot scenarios arising from
the merger include permutations of the number and makeup of subgroups to
reflect partial carriage of certain stations to some subscribers.
Notwithstanding such, the royalty fee would still be less than the CO
calculated fee in scenario 2 above.
----------------------------------------------------------------------------------------------------------------
Table 2c: One system after a merger using NCTA's approach of subscriber groups for phantom signals.
SET 3 -SA-3 SYSTEM MERGER AND PARTIALLY-DISTANT SIGNALS
Scenario 1: Two separate SA-3 systems before a merger with one partially
distant signal that is carried in only one system under current
Copyright Office regulations.
------------------------------------------------------------------------
------------------------------------------------------------------------
System 1: 1 partially distant independent
permitted signal (A).
......................
Group I Group II
Top 50 major market Top 50 major market
Gross receipts = $550,000.00 Gross receipts =
$550,000.00
No distant signals 1 permitted distant
independent signal
(A)
Base rate fee =
$5,571.50
Minimum fee = $11,143.00
......................
Royalty fee = $11,143.00
System 2: ......................
Group I
Top 50 major market
Gross receipts $1,800,000.00 ......................
2 distant independent permitted signals (B & C) ......................
Minimum fee = $18,234.00 or ......................
Base rate fee = $30,258.00
......................
Royalty fee = $30,258.00
------------------------------------------------------------------------
Table 3a: Two separate SA-3 systems before a merger with one partially-
distant signal.
[[Page 70540]]
Scenario 2: One system after a merger under current Copyright Office regulations with one partially distant
signal. Former system 1 above now pays for two additional permitted signals (B and C) in the merged system that
it did not previously carry. Former system 2 above now pays for an additional permitted signal (A) in the merged
system that it did not previously carry.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
System gross receipts = $2,900,000.00 .............................
Minimum fee = $29,377.00
.............................
For purposes of calculating the base rate fee, the merged system has two
subgroups because of the partially distant signal (A) which is local in Group I.
.............................
Group I Group II
Gross receipts = $550,000.00 Gross receipts =
$2,350,000.00
2 distant independent permitted signals (B & C) 3 distant independent
permitted signals (A, B, C)
Base rate fee = $9,245.50 Base rate = $55,201.50
Royalty Fee = $64,447.00
----------------------------------------------------------------------------------------------------------------
Table 3b: One system after a merger under current Copyright Office regulations with a partially-distant signal.
Scenario 3: One system after a merger under NCTA's subscriber group proposal to reflect the carriage of a
partially distant signal (A). There would apparently be three subscriber groups rather than two subgroups based
on the partially-distant scenario involved above in scenario 2. Signal A is local in Group I, distant in Group
II, and not carried in Group III. Signals B and C are not carried in Groups I and II.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
System Gross Receipts =
$2,900,000.00
...................................................... .....................
Minimum Fee = $29,377.00
...................................................... .....................
Group I Group II Group III
$550,000.00 gross receipts $550,000.00 gross receipts $1,800,000.00 gross
rec.
1 distant indep. permitted signal (A) 2 distant indep.
permitted signals (B
and C)
Base Rate = $5,571.50 Base Rate =
$30,258.00
Royalty fee =$35,829.50
----------------------------------------------------------------------------------------------------------------
Table 3c: One system after a merger under NCTA's subscriber group proposal to reflect the carriage of a
partially-distant signal.
Similar to the scenarios illustrated in Sets 1 and 2, the above
royalty fee under the NCTA's subscriber group proposal in Table 3c is
less than under the Copyright Office's current methodology.
[FR Doc. E7-24079 Filed 12-11-07; 8:45 am]
BILLING CODE 1410-30-S