In the Matter of AMENDMENT OF PART 74, SUBPART K, OF THE COMMISSION'S RULES AND REGULATIONS RELATIVE TO COMMUNITY ANTENNNA TELEVISION SYSTEMS; AND INQUIRY INTO THE DEVELOPMENT OF COMMUNICATIONS TECHNOLOGY AND SERVICES TO FORMULATE REGULATORY POLICY AND RULEMAKING AND/OR LEGISLATIVE PROPOSALS
Docket No. 18397-A
FEDERAL COMMUNICATIONS COMMISSION
24 F.C.C.2d 580
RELEASE-NUMBER: FCC 70-676
July 1, 1970 Released
Adopted June 24, 1970
JUDGES:
BY THE COMMISSION: COMMISSIONERS BARTLEY AND COX DISSENTING AND ISSUING STATEMENTS; COMMISSIONERS ROBERT E. LEE AND JOHNSON CONCURRING AND ISSUING STATEMENTS; COMMISSIONER WELLS DISSENTING.
OPINION:
[*580] 1. On December 13, 1968, the Commission issued a Notice of Proposed Rule Making and Notice of Inquiry in Docket No. 18397, 15 FCC 2d 417, 33 Fed. Reg. 19028 (1968), wherein it inaugurated general inquiry into its appropriate regulatory posture vis-a-vis the emerging CATV industry. By design, this inquiry was intended to present in one proceeding the major CATV policy issues then confronting the Commission, and interested parties were advised that the Commission would mange the docket flexibility so that "further notices expanding or altering the scope of this Rule Making and Inquiry may subsequently be issued as necessary or appropriate," para. 3, supra. Since then, the Commission has head oral argument in this proceeding; n1 has issued interim procedures; n2 has reconsidered and clarified its action n3 and has taken some substantive actions. n4 With these steps taken, it seems appropriate to utilize the flexibility retained in the ordering of this proceeding to raise for present consideration matters which have occurred since inauguration of the proceeding. We therefore now propose further rule making to encompass an alternative to our outstanding proposals for distant signal operation, and to affect the existing relationships between the Commission and state (or local) authorities.
n1 Order in Docket No. 18397, FCC 69-54, -- FCC 2d -- (1969); Order in Docket No. 18397, FCC 69-4, -- FCC 2d -- (1969).
n2 Memorandum Opinion and Order in Docket No. 18397, FCC 69-515, 22 FCC 2d 589 (1969).
n3 Further Notice of Proposed Rule Making in Docket No. 18397, FCC 69-516, 22 FCC 2d 603 (1969).
n4 Public Notice Concerning CATV Reporting Forms (issued February 19, 1970), FCC 70-193; First Report and Order in Docket No. 18397, FCC 69-1170, 20 FCC 2d 201 (1969).
[*581] 2. The problem of CATV operation with distant signals in the major markets has been a difficult and complex one. It would serve no useful purpose to repeat the discussion in the Commission's Second Report and Order in Docket No. 14895, etc., 2 FCC 2d 725 (1966) or in the Notice of Proposed Rule Making in Docket No. 18397, pars. 32-54, 33 F.R. 18977, 19033-036. The essence of the Commission's proposal in 18397 is found in pars. 35, 36, and 38, and may be shortly stated as follows: The competition between the stations in these markets (particularly the new UHF) and the proposed large-scale CATV operations is unfair, because CATV presently stands outside the competitive TV program distribution market; the experience gained in the hearing process indicates that CATV operating with distant signals can achieve significant penetration in the major markets and therefore the unfair competition of CATV will be a significant factor in the development or healthy maintenance of UHF service; the simplest way to eliminate this element of unfair competition is by adopting a rule permitting importation of distant signal programming only when the CATV has obtained retransmission consent of the originating station (i.e., a rule paralleling Section 325(a) of the Act). The Commission invited some interim tests of its proposal; it also acknowledged the pendency of Congressional action on copyright and stated that it would not take action in this area "until an appropriate period is afforded to determine whether there will be Congressional resolution of this crucial issue of unfair competition, with indeed Congressional guidance in this whole field" (par. 40, Notice).
3. The Commission thus invited the CATV industry to engage in a test to determine the efficacy of CATV operation in a major market, providing excellent reception of local signals (particularly useful as to color and in some homes UHF), automatic services (e.g., news, time, weather, stock ticker), and programming procured by the CATV by entering the competitive TV programming market (either by outright origination or by retransmission consent). The industry has been uninterested in such a test. n5 It would appear to be the view -- and certainly the preference -- of the industry that expansion of cable within the core cities of major markets be based upon the availability of distant signals for carriage on the systems. Consequently, the industry has focused its efforts on reaching accord with the other interested groups, and failing that, on the passage of legislation which will make such signals available to it to a significant extent. In line with the representation in par. 40 of the Notice, the Commission also has not acted on its outstanding proposal but rather is waiting to see whether there will be legislative guidance in this area. We thus have not completed the analysis of the comments received in Docket No. 18397 on the retransmission proposal, and that proposal remains open.
n5 Retransmission consent has been supplied to CATV operators and approved by the Commission on a limited basis in two proceedings. Tri-Cities Cable TV, Inc., FCC 70-394, FCC 2d (1970); Top Vision Cable Company, FCC 69-895, 18 FCC 2d 1051 (1969).
4. The purpose of this Notice is to explore also an alternative proposal in this distant signal area -- one which is based upon a different approach and goal. The approach of the retransmission proposals is to "fence in" these markets against the unfair competition of ordinary CATV operation with distant signals. The approach protects the UHF [*582] station against this unfair competition, but it does not affirmatively promote the development of the UHF station. The question which we seek to explore in this further Notice is whether there is an approach to this distant signal problem which will affirmatively assist the elements of broadcasting most requiring aid -- the independent UHF station and the public broadcasting system (ETV), and will do so in a way which can be fair to the copyright owner and will not undermine the healthy operation of all other stations in these markets. We shall discuss the alternative and these facets below.
5. The essence of the proposal is that CATV systems in the top 100 markets, n6 in addition to local signals, may carry four distant independent signals, n7 but will be required to delete commercials from the independent distant stations they carry n8 and replace them with commercials provided by the local stations n9 as follows:
n6 We propose to use the definition set forth in the December 13th Notice -- 100 designated markets and the 35-mile zone. Parties are free to comment on other proposals (e.g., top 100 markets defined by ARB; top 100 SSMA's, as defined by the U.S. Census Bureau).
n7 In addition, we raise the question whether in markets which do not have 3 full network affiliates, CATV should be allowed to carry the "missing" affiliate from a distant market. The figure four is used tentatively for the rule making proposal. The principle will be to give the CATV sufficient distant independent signals to permit the success of its operation in the major markets, and at the same time take into account the matter of undue impact on the local stations not participating in the commercial substitution plan. Thus, any figure selected could be increased or decreased on the basis of later experience.
n8 It is contemplated that the CATV could bring in four non-network signals at one time, without regard to their nature (i.e., including the signals of network affiliated stations during their non-network periods). The above deletion thus extends to the non-network portion of any distant network affiliates carried. The plan does not affect network programming; the local network affiliate would continue to receive the important carriage and non-duplication protection.
n9 We request comment on the appropriate definition of the term, "local station" (e.g., the system is within the 35-mile zone of the community to which the station is licensed).
(a) If there are independent UHF stations in the market, the commercials provided by these stations will be substituted.
(b) If there are no independent UHF stations in an intermixed market, the commercials of the UHF network affiliates will be substituted.
(c) In all-VHF markets or all UHF markets, after a period of two years to permit applicants for the new UHF stations time to obtain permits, the commercials of all the local stations will be substituted.
(d) Any local station, upon special showing of a threat to its viability or its ability to adequately serve the public, will also be given the right to provide their commercials for substitution. The station need not wait for impact resulting from CATV to seek such relief, but may do so at any time, by the submission of an appropriate detailed showing.
Any procedure for commercial insertions in the distant signals will be satisfactory if agreed upon in writing by those local stations involved in supplying commercials for substitution. n10 Under the proposed, [*583] CATVs may carry any number of distant non-commercial educational stations if no objection is made by the local educational licensee or permittee at the time he is informed of the system's intention to carry the distant stations. Upon request of such licensee or permittee, the CATV would, at its own expense, delete appeals for funds on distant stations and substitute appeals provided by the local entity.
n10 In the absence of such agreement, the following procedure is proposed to make an equitable distribution: The number of distant signals will be divided equally among the eligible local stations in the market, with the local stations rotating the order of choosing distant signals each year; the first choice of any remaining distant signals will go first to the local station with first choice, second to local stations with second choice, etc. For example if local stations A, B and C are to divide four distant signals, in the first year A will choose the first signal, B the second, C the third, and A the fourth. In the second year, B will choose first, C second, etc., and in the third year, C will choose first, A second, etc. (If not enough distant signals are being brought in to provide a channel of commercial substitution for each UHF station, another equitable arrangement, such as rotation on a daily basis, may be employed.) The order of choice for the starting year will be determined by the highest 30 second time charge in the station's published rate card in effect on September 1 last -- the station with the lowest rate will have first choice, second lowest second choice, etc.
6. The latter, however, is not the real benefit which we foresee for ETV. As a condition for making use of the TV system in this fashion, the CATV system would make a contribution to public broadcasting. Specifically, we propose that CATVs importing any distant stations under the proposed plan, pay 5% of their subscription revenues quarterly to public broadcasting. This amounts to about $3.00 per year per subscriber or $30 million for every 10 million subscribers. It would thus contribute significantly to the growing needs of public broadcasting, and would complement the other Federal and non-Federal efforts in this vitally important area. n11 It should be noted, however, that the Commission does not consider these payments to be an alternative to or replacement of a permanent financing plan for public broadcasting.
n11 The 5% payment could go to the Corporation for Public Broadcasting which could in turn distribute one-half to the local ETV station, if there were one. We ask for comment on this. We also request comment on whether systems below a certain subscriber level (e.g., 2000 or 3000), even though located in the top 100 markets (the ETV-payment proposal is limited to systems in such markets), should nevertheless be exempted.
7. The proposal would thus clearly benefit ETV. It would also assist UHF stations, particularly independent UHF stations, which are presently handicapped in their competition with VHF and as a result cannot adequately serve their public. In CATV homes, under this proposal, not only does the local UHF station have equivalent tuning and reception with VHF, but, more important, it has the commercial time to sell on the independent distant stations being carried, thus more than offsetting the audience fractionalization due to competition of distant signal. n12 This should provide a significant boost to the UHF station at this critical juncture in its development. There is no unfairness to the distant stations being carried, since they are licensed to serve their own communities and not distant cities. Indeed, to the extent that local commercials are involved, commercials for advertisers located in the CATV's market would be more relevant for CATV subscribers than those of distant stations, and thus, the proposal both makes sense and serves the public interest in this respect.
n12 The commercials could be specifically designed for use on the CATV, and thus need not be the same as those presented over the UHF stations. There are a number of methods which could be followed by the UHF.
8. We have considered the possibility that the proposal will not really promote UHF broadcasting because the UHF licensee, benefiting from commercial substitutions, might concentrate on selling advertising on the distant stations' programs, pocket the additional income and maintain a minimum of programming on a low-power UHF station. We doubt that this will in fact occur under the plan, if it is implemented. The UHF must maintain a sales staff, and with proper use of the staff, he can obtain access to the very large non-CATV audience; we note that the CATV audience will be quite small in the beginning years, so that a UHF operator so proceeding would [*584] encounter serious financial difficulties during these years. Also, the selling costs and switching costs do limit the additional income from the CATV. See par. 10, infra. In any event, if experience shows that there is a problem in this respect, it can be remedied by a number of devices (e.g., requiring a high power, tall antenna UHF operation, etc., within a certain number of years as a condition of continuing the commercial substitution privilege; redistributing the commercial substitution privileges to other local stations in the market, etc.). Indeed, after the passage of time, the plan would of course be subject to reevaluation, and possibly the other local stations would be allowed some participation in the commercial substitution arrangement, if the UHF stations were then on a solid footing. However, we stress that our goal is the promotion of UHF (with similar protection for any VHF requiring special treatment).
9. This does not mean that we are indifferent to the healthy maintenance of the VHF broadcasting. We fully recognize the great benefits to the public from such operation. We make this proposal because it is our tentative judgment that it would not have an impact upon VHF broadcasting of such nature as to impair its ability fully to serve the public. There is, we believe, a correlation between revenues and that service; indeed, that is the premise of all our actions and proposals in this field. But the number of signals to be brought in is limited, and the CATV audience is also limited. From present experience, we believe that the VHF station in the larger markets can easily take in stride a reduction in audience, such as would be caused by the importation of the four signals. As one goes lower in the markets, a problem can arise as to some stations, in light of the financial data now before us; such stations can, however, be accommodated by being participants in the commercial substitution arrangement. Indeed, unless and until new UHF stations begin operations, the proposal would have little adverse impact on VHF stations in roughly half the top 100 markets, where there are now only three VHF stations operating; while their audience would be fractionalized, the commercials on the system would be theirs (see par. 5(c)).
10. One important purpose of this Notice is to explore the technical feasibility of the commercial substitution arrangements, their costs, and who should bear those costs. New technology may be particularly useful here. Thus, to facilitate substitution of commercials, an electronic code could be inserted by the distant television stations being carried, which would signal the interruption and the total number of seconds of such interruption. An automatic switching device could then substitute local commercials of total lengths equal to the interruption time. Once the demand for such automatic switches is created, manufacturers would, we believe, be eager to develop and produce them. As to costs, our present view is that the cost of the switching and related equipment should be borne by those stations which benefit from the commercial substitutions. n13 If so, we would expect that as new CATVs are constructed in major cities, the local stations would [*585] arrange for commercial substitution only when the subscriber count was high enough to warrant advertiser interest. (We note that up to that point there is no serious impact on local audiences). However, we specifically call for comment on whether the CATV system should not be called upon either to bear the costs or else to share them substantially. Further, we request comment on another important aspect -- the technical method, costs thereof, and allocation of costs, when the stations must deal with many systems in their area with different head-ends. Can the systems and the stations reach cooperative agreements, so that common signals and centralized switching (perhaps at the UHF station) can be utilized? If so, what are the techniques, the costs, and who should bear them in these circumstances?
n13 To the extent that coding on distant signals is involved, the costs clearly should be borne by the parties benefiting therefrom (the CATV and/or the stations substituting their commercials); we again request comments both on techniques, costs, and who should bear the costs.
11. There is also the issue of fairness to the copyright owners. This, however, is not a matter which can be resolved by this Commission. Only the Congress can impose what it believes to be fair compensation in the circumstances. Our concern here is therefore the narrow issue whether the proposal is defective in that the copyright owner cannot be treated fairly thereunder. We have studied the question in that light, and have tentatively concluded that there is no bar in this respect. To be of assistance to interested parties, we have set forth in Appendix A a rough staff analysis of the matter. Since the issue is whether a formula can be devised to treat the copyright owner fairly -- and not the precise nature of that rough analysis are not critical; where revision is shown to be called for, the formula can be reworked to reflect those revisions. We recognize that in a number of respects, rough estimates must be made. That is usually the case in difficult, complex matters such as this. It appears to us that because precise predictions are not possible does not mean that all proposals or solution re ruled out. Action often must be taken on the best rough estimates or predictions possible, if the public interest is to be served. Further, there can be provision for subsequent periodic revisions, in light of experience gained (see, e.g., S. 543).
12. As stated, the matter is one for the Congress. If Congress so desired, there could be a small, flat payment for carriage of all local signals or a specified payment of a bed-rock group of signals (e.g., local and if missing, the three networks and a designated number of independents or one such independent -- see, e.g., the provision now in S. 543), with a charge for each additional distant signal carried (and appropriate exemption for the small system, not multiply owned). Parties are free to comment on the matter, and we shall take into account such comments in focusing on the narrow issue posed in the prior paragraph and also in formulating any views given Congress at its request. However, the arena for definitive resolution of the issue remains the Congress, not this agency.
13. This means that the proposal must dovetail with legislation. See par. 4, Appendix A. We believe that this is eminently desirable. As we have stated on several occasions, the matter is one of great importance in the communications field, warranting Congressional consideration. We welcome that consideration and guidance.
[*586] 14. Brief mention should be made of some other aspect of the proposal. The carriage and same day non-duplication requirements would continue. Some alternatives to presently outstanding proposals will be considered. As to leapfrogging, the alternative would be that of the four distant signals, at least two be in-State. In this way, the system will have complete flexibility as to two signals, while two in-State signals will have available political broadcasts (e.g., Governor, Senator), controversial issue programming, etc., of interest to the CATV community. We also raise the issue whether the commercial substitution arrangement could be appropriately employed instead of the proposed overlapping market concept (proposed 74.1107(c)) (e.g., commercials of higher grade signal substituted for those of lower grade signal, at the expense of station benefiting or the CATV system, or joint sharing of the costs). As to systems now operating in the top 100 markets, it is proposed that they be grandfathered in their present discrete areas (with copyright payments to be made as decreed by the Congress); if they expand trunk lines into new areas, they will fall within the above proposal as to such expanded operations.
15. In the markets below the top 100, CATV systems would not only be grandfathered, but they could expand with present signals. As stated, the question of the copyright payment and exemption for small systems is one for the Congress. We do raise the issue whether if systems in these small markets add new signals or commence operation in a new community, they should be permitted to bring in any missing network and a total of four distant signals, but with substitution of commercials on the independent signals (at the expense of either the system or the local station or stations, or a joint sharing of costs -- a matter on which we request comment -- cf. par. 10, supra). The alternative leapfrogging proposal in these markets would be that the network signals carried be in-State and at least two of the independent signals be in-State (if there are such signals).
16. We have been referring to the contribution which the proposal might make to the public interest through promotion of UHF and ETV. There is, of course, a third benefit -- the contribution of the CATV system itself. It provides excellent reception of local services. In some communities it will bring in a significant amount of programming not available; in others it can enable the viewing of some programming at times different and more convenient than available over the local channels. It will provide the diversity of a new channel of programming, in light of our local origination requirement in the First Report and Order in Docket No. 18397. Indeed, we raise the question whether the CATV system in the core city of one of these markets, when it reaches a specified size (e.g., 10,000 subscribers) should not be required to program this channel a designated minimum number of hours (e.g., 21 hours a week), with a specified percentage of this minimum to be of a local nature.
17. There are further benefits made possible by facilitating the expansion of CATV in these markets. In light of the effort which is now being undertaken to expand the availability of CATV service, we believe it appropriate also to begin to play a greater role in shaping CATV's future capacity to serve the public's interest. With this in [*587] view, the Commission has now accepted the principle that it must make an effort to insure the development of sufficient channel availability on all new CATV systems to serve specific recognized functions. These functions are, in addition to the local origination channel referred to above:
(a) Local government channel. At least one channel for use without charge by local governments and for free political broadcasts during primary and general elections.
(b) Local public access channels. In order to facilitate further presentation of views, cable systems will be required to make channel time available on one or more channels at no cost to local citizens and groups which are not engaged in programming for advertising revenue, but which desire to present views on matters of concern to them.
(c) Leased channels. Cable operators would make available to third parties, either permanently or on a one-shot basis, channels for commercial operation by the third parties. n14
n14 Where channels are used for "pay" programs (i.e., extra payment is made on a per program basis or for the entire pay channel service) the restrictions specified for over-the-air subscription TV (Subscription Television, 15 FCC 2d 466 (1968)) should be applicable, including that no commercials may be carried on these channels.
We wish to point out also that since an important goal is the availability of channels for leased purposes, the Commission would have to take all appropriate actions to insure such availability (e.g., that the rates charged in such channels are reasonable and non-discriminatory). Indeed, as the use of leased channels increases, there might well be need to reevaluate the role of the CATV system as an originator of programming, rather than the owner of distribution facilities. This, however, is a matter which we believe can best be assessed in light of developing experience and further study of the matter in Part V of the docket.
(d) Channels devoted to instructional uses (e.g., courses conducted for students either by or in coordination with public or private institutions; instruction by professional groups for their members (doctors, engineers, etc.); lectures). We ask for comment on the number of such channels (e.g., a specified number; a percentage of the system's capacity).
The Commission seeks to insure that channels can be made available for these functions and for other functions likely to develop in the future by requiring that new systems be constructed with specified minimum channel capacity. n15 However, we also request comment on whether it is appropriate to specify such uses of channels along the foregoing lines, in connection with the adoption of the proposal here under consideration. Thus, whatever the channel capacity of a system operating in one of these large markets, we propose that it be required to set aside a specific number of channels for each of the above purposes, cablecasting, and of course, the carriage of local signals; after fulfillment of these requirements, the system could then import distant signals and provide automatic services. A further proposal upon which we request comments is to require the 20-channel (and larger) system to provide no less than 50% of its channels (on a when demand basis) for the purposes specified in (a)-(d), above. These proposals are geared to initial systems in these large markets; there would of course be future standards under which operators would be required to install systems adequate to satisfy whatever the demand for channels might be. See Notice issued this day on technical standards.
n15 Although we are mentioning the matter of minimum channel capacity in this document in the interest of inclusiveness, we expect to dispose of it in connection with consideration of technical standards.
[*588] 18. We believe that we have sufficiently described the alternative proposal to permit useful comment thereon. We stress that it is just that -- a proposal which must pass the test of scrutiny and analysis in this rule making process. If feasible, it appears to hold great promise for the public interest, and therefore we are duty-bound to explore it. Since it is a proposal, we intend to continue our present processing procedures, pending the resolution of this proceeding (e.g., as to leapfrogging, proposed 74.1107(c), etc.). Finally, it may be that there are other alternatives which should be considered here. Thus, we raise for the parties' consideration the question whether it would be useful to employee an effective non-duplication requirement for non-network programming (perhaps with some exemption for programming shown in prime time over the distant signal but not locally or only to a minimal extent locally), or a system of payments to the UHF and ETV by the CATV system, or some combination thereof. We welcome the suggestions of the interested persons as to other alternatives. For, we seek to assure that our final action in this important matter will be one which best serves the public interest.
CONCLUSION
19. Authority for the further rule making proposals set forth herein is contained in Sections 2, 3, 4 (i) and (j), 301, 303, 307, 308, 309 and 403 of the Communications Act. Parties are asked to comment on areas where they believe we lack authority to act, so that Congressional action would have to be sought.
20. All interested persons may file comments on the revised rule making proposals set forth above, on or before October 7, 1970, and reply comments on or before November 23, 1970. In reaching its decision in this matter, the Commission may also take into account any other relevant information before it, in addition to the comments invited by this Second Further Notice. In accordance with the provisions of Section 1.419 of the Commission's Rules and Regulations, an original and 14 copies of all comments, replies, pleadings, briefs and other documents filed in this proceeding shall be furnished to the Commission.
21. We have specified a 90-day period for comments and a 45-day period for reply comments. We believe that this provides a full and fair opportunity to comment on this important matter. We plan therefore to adhere to this timetable. Interested persons should not follow what has all too often been the practice in these complex rule making proceedings -- doing nothing for several months and then seeking extensions when the third month deadline looms upon them. The public interest calls for both fair and expeditious treatment of these matters. Finally, we have designated this proceeding as Docket 18397-A, in order to delineate this notice and its proposals from the other CATV proceedings. Interested persons should thus submit material which is directed to these proposals, rather than a catch-all pleading encompassing also the many other facets of the complex CATV field.
FEDERAL COMMUNICATIONS COMMISSION, BEN F. WAPLE, Secretary.
CONCURBY: LEE; JOHNSON
CONCUR:
CONCURRING STATEMENT OF COMMISSIONER ROBERT E. LEE
I concur in the Further Notice of Proposed Rule Making. The critical matter here is whether CATV can be made to promote UHF. My vote at this time means that I am willing to explore the possibility that the proposals in this rule making will promote the public interest which includes UHF. I remain committed to the view that the public interest is best served through rules which will promote healthy and continued growth of both off-the-air television reception and CATV.
CONCURRING STATEMENT OF COMMISSIONER NICHOLAS JOHNSON
I concur with the majority of the Commission in issuing this Notice of Proposed Rule Making for the Public Dividend Plan, the latest of several plans to allow cable television systems to import distant signals into their local markets. I am troubled by several of the provisions of this plan, but believe that there is no better way to confirm or allay my doubts than by getting information through a formal rulemaking proceeding. My questions about small markets, commercial substitutions, copyright alternatives, the levels of payment to public broadcasting, and so forth, will hopefully be addressed and resolved during this proceeding. We have long passed the time when further delay is justifiable, and therefore I am voting to put these proposals out for comment.
DISSENTBY: BARTLEY; COX
DISSENT:
[*590] DISSENTING STATEMENT OF COMMISSIONER ROBERT T. BARTLEY
I dissent to the issuance of this Further Notice of Proposed Rule Making.
For all practical purposes it is but another delay in providing overdue relief to the public in its demand for CATV service, since none of the benefits to CATV subscribers will be available until such time as Congress has enacted CATV copyright legislation.
Also, some of the proposals are, in my opinion, untenable. I find no sound justification for requiring CATV systems to pay a percentage of their gross to the Federal-tax-supported Corporation for Public Broadcasting. The same provision could be made applicable to VHF and UHF television stations -- or all commercial broadcasting stations -- requiring them, likewise, to subsidize the Corporation. All such proposals would, I believe, amount to improper taxation.
I find no sound justification, either, for the provisions as to deletion of commercials on distant station programs carried by a CATV system and substitution of commercials by local stations.
I believe that there is a better approach to regulation of CATV, which could be implemented forth with. I would propose that regulation be limited to requiring CATV systems to carry all grade B TV signals in their communities and give same day program exclusivity to the nearest stations. Provisions now applicable to broadcast stations with respect to equal time, fairness, and sponsorship identification, under Section 315 and 317 of the Communications Act, as well as other rules and regulations applicable to broadcasting, would also be applicable to CATV program originations. Meeting those basic requirements, the CATV system should be allowed to import any signals which it desired.
Additionally, I would be prepared to consider a requirement that each CATV system dedicate at least four channels for local public service, including program origination, use by local civic entities, and use as common carrier services.
With respect to claims of unfair practices because of copyright considerations, the Supreme Court has held in the Fortnightly case that the CATV's carriage of a station's signal is not a performance under the existing copyright law. When Congress does enact copyright legislation covering CATV, such claims of unfair practices would be resolved. Also, with respect to claims that a CATV system might put a UHF or small market station off the air, such claims could be brought before the Commission by petition for relief from CATV entry into the market upon an adequate showing by the petitioner.
With those basic regulations, I would permit CATV to develop in an atmosphere of free competition in the market place.
In brief, I believe that the Commission's action herein merely gets the CATV problem off its desk for another year, without any advance in service to CATV subscribers.
DISSENTING STATEMENT OF COMMISSIONER KENNETH A. COX
I have concurred in most of the actions with respect to CATV taken on June 24, 1970 -- as to technical standards, federal-state-local relationships, [*591] cross-ownership and multiple ownership, etc. -- but I am in total disagreement with the proposals contained in this Second Further Notice of Proposed Rule Making in Docket No. 18397-A and therefore wish to register the strongest possible dissent.
First, however, I want to make clear that I think that these proposals are well intentioned, though I believe them to be inappropriate and unworkable. I think those who have devised and pushed this very complicated scheme reason something as follows:
(a) They feel that it is desirable to develop cable technology, both because of its potential for extending and supplementing television service and because of the other services that an extensive broadband network may eventually make possible -- for example, meter reading, opinion polling, security surveillance, facsimile reproduction of newspapers, the checkless society, display and purchase of merchandise, access to computers, teaching machines, and libraries of printed, taped and filmed material. I agree with this.
(b) They seem to have come to the view that this can only come about if CATV systems become operable in our largest cities, and that such a development depends on the importation of distant signals. They note (Par. 3) that the Commission -- in its Notice of Proposed Rule Making in Docket No. 18397, December 13, 1968 -- had invited the CATV industry to test cable operation in a major market based on improved signal reception, automated time, weather, news and stock services, and programming procured in the competitive market, whether for origination on the cable or through acquisition of re-transmission rights to programs broadcast by distant stations. The majority acknowledge that "the industry has been uninterested in such a test" and that it prefers to expand into the hearts of the major markets on the basis of carriage of distant signals. I do not think that the cable industry's unwillingness seriously to test the approach spelled out by the Commission constitutes grounds for trying to provide it with an alternative tailored to its preferences -- especially since all our actions up to this point have been designed to protect over-the-air television from the unfair competition posed by distant signals for which no adequate copyright payment has been made. If cable can, indeed, offer the diversity of programming and the other services which its proponents claim for it, I should think it could grow and prosper on its merits and without disruption of the established program markets. When television began to compete with radio, it paid prices for its programming which were fixed in the market place. When pay television operations begin, the same thing will be true. And cable operators concede that they must pay for rights to filmed or taped programming they present on their origination channels. Dr. Leland L. Johnson, in a study by the Rand Corporation for the Ford Foundation (January 1970), concluded that CATV should be allowed to grow under liberal rules, "so long as full copyright payment is made by the cable operator for each signal he imports." (Emphasis supplied). I think that is the only fair way to encourage cable expansion [*592] since broadcasters, with whom each added cable channel on a local CATV system competes for the attention of the audience, have to pay for their programs in exactly this way. So I do not agree that the desirability of developing the technology of CATV necessitates or justifies resort to extreme departures from normal market patterns of the kind proposed here.
(c) My colleagues of the majority implicitly recognize that the importation of four or more distant signals will reduce the audiences of broadcast television stations, and that this, in turn, will make them less attractive to advertisers, will reduce their revenues, and may impair the service they provide the public. I agree, and am glad that they acknowledge this problem of impact on our broadcast service. I approve of their effort to offset this impact but, for the reasons set out below, I do not believe that their commercial substitution proposal is desirable or workable. Consequently, I cannot go along with them in deferring -- and, I am afraid, perhaps abandoning -- the reasonable efforts we have thus far been making to regulate CATV operations so as to fit them into our existing -- and slowly expanding -- broadcasting system, thereby making available the potential of broadband communications for those who want it and are willing to pay for it -- but without injury to the functioning of our basic, over-the-air television service. Nor can I agree to their action in grafting onto this proposal measures designed to achieve the commendable, but quite collateral, goal of providing funding for educational television. More of this below.
In short, I think my colleagues are seeking a worthy objective, but that they overestimate the need for relief for, or promotion of, the cable industry, and have -- in order to avoid serious damage to broadcasting -- come up with a "gimmicky" proposal which simply cannot work.
They seem to have tried to put together a package with something in it for everyone. For the cable industry they offer four distant independent commercial signals plus any number of educational signals, together with a sharp limitation on the franchise fees to be charged by local governing bodies (originally a part of this proposal, but now embodied in Docket No. 18892 -- see my separate opinion there). I am sure these proposals will be very welcome. To the broadcaster -- or at least the independent UHF operator -- they offer an opportunity to substitute commercials for those carried in distant signal programming, while they propose to give the owners of copyrighted programs carried from distant stations some proportionate share of a fund derived from CATV payments at some apparently nominal rate to be fixed by Congress. These very obvious "parties in interest" are not likely, in my judgment, to regard the majority's scheme favorably -- for reasons set forth below, among others.
The largest percentage payment is to go to educational television in what seems to me to be a pure subsidy that is included simply because ETV is a worthy cause. It is not urged that this is done to offset impact on educational stations, though I think cable operations can impair ETV development. Rather, affected CATV systems are to pay 5% of [*593] their subscription revenues to public television simply because the latter needs money -- and the majority think the cable industry is so eager for distant signals that it will accept this exaction. That is precisely what I think it is -- an arbitrary "toll" levied because it will produce substantial funds for a good cause without too much opposition. I believe very strongly in the potential of public broadcasting and am eager to see it assured of ample private and public funding, insulated to protect its programming from pressure by private or political interests. But the public support should come from Congress and should, I think, be derived from a wide segment of the public. I know of no good reason why cable subscribers should bear a special burden for the support of educational broadcasting. While it is apparently expected that the educators will be delighted with this windfall and will therefore support the plan, I think they should consider the matter very carefully before taking such a position. I do not think their cause will really be advanced by their expressing a willingness to take money from any source, regardless of the logic or justice of the scheme of financing devised. The majority say that they do not consider these payments to be an alternative to a permanent plan for financing public broadcasting, but if this "tax" on CATV operations produces significant sums it may reduce the willingness of Congress to provide adequate funding. Or, on the other hand, Congress may take offense at the Commission's intrusion into this area. A number of plans for the long range financing of public television have been suggested to Congress -- and the Commission has submitted comments on them -- but so far as I know, no one has heretofore suggested that a major part of the burden of that financing should be placed upon the CATV industry and its customers.
My principal objections, however, run to the proposals for commercial substitution and for nominal, flat rate copyright payments. As to the former, the majority claim their plan will "assist" UHF stations, particularly independent UHF stations, which are presently handicapped in their competition with VHF n19 and as a result cannot adequately serve their public." They go on to say that their plan for allowing the UHF stations in the cable community to sell the commercial time on the distant stations imported for the system will more than offset fractionalization of the local stations' audiences due to competition of the distant signals. While this has a certain plausibility about it, I think the proposal is entirely speculative, ignores obvious problems, and will not work. And even if it would, I don't think it would serve the public interest.
n19 This being so, it seems strange to propose that these UHF licensees be subjected to the competition of four or more distant signals, which will normally be those of stations in larger cities, offering essentially the same kind of program service as the local UHF independent for whom the majority express concern. I recognize that my colleagues propose to offset this impact by means of their commercial substitution plan. However, I think that before they add to the competitive problems of UHF independents, they should be quite sure of the adequacy of the offsetting safeguards which they suggest. As pointed out below, I think they have no real basis for their complicated commercial proposal, that they are proceeding on unrealistic assumptions, and that the scheme will not work.
It seems to me that our objective thus far has been to encourage the development of as many over-the-air television stations in as many communities as possible. Furthermore, it is basic Commission policy -- though too often ignored in practice -- that these stations should provide, [*594] to a significant degree, a locally oriented program service. Even if the majority's commercial substitution plan would produce revenues at least equal to those lost through fractionalization of the local stations' audiences, n20 the net result would be to reduce audiences for local programming -- the essence of the service the local stations are supposed to provide. Even now, when stations do local programming -- particularly public affairs -- it often does not have the impact it should because audiences are diverted to entertainment fare available at the same time over the other local stations. Adding distant signals will simply magnify this, thereby reducing the effectiveness of the local stations as tools for helping in the resolution of community problems. n21 So even if the UHF independents in the major markets are held harmless financially, the usefulness of our broadcast service will have been diminished.
n20 If there are UHF independents in the market, they will get all revenues from commercial substitution. Obviously the other local stations -- VHF or UHF, affiliated or independent -- will also suffer audience fragmentation for which no offset is provided -- unless they make a "special showing" that their continued operation is threatened. They may still be profitable -- though 25 affiliates in the intermixed top 100 markets lost money in 1968, or earned less than $100,000. But their service to the community may be impaired as a result of the reduction in their audiences due to the importation of four distant independent signals. In some cases, this would more than double the number of commercial stations competing for the local audience. This impact would be greatest in the smaller among the top 100 markets.
n21 Another undesirable side effect, of course, is that reduction in audiences for, and the influence of, local programming will make local broadcasters even less willing than they now are to devote time, effort, and money to such programming.
My more basic objection, however, is that I do not believe that the majority's proposal will offset the inevitable loss of audience -- and income -- due to the competition of the imported signals. Many UHF independents already have unsold commercial time because of difficulty in attracting advertiser support. When CATV-imported signals cut into their audiences, these difficulties will clearly be increased. Presumably existing advertisers will expect reductions in rates in proportion to the decline in audiences -- though this may be very difficult for the stations to absorb since their present rates do not cover their operating costs. If they do not cut rates they will lose advertisers and incur greater losses; if they do cut rates they will retain their roster of advertisers but will still incur greater losses. To make up for this worsening of their situation -- and, indeed, to "provide a significant boost" to these stations -- the majority propose that they be permitted to delete the commercials on the distant signals and substitute commercials of their own. If this scheme is to work and actually increase the incomes of UHF independents significantly, then all of the following must be true: (1) It must be technically possible to effect the substitution of commercials without disruption of the programming in which they are to appear; (2) it must be possible as a business matter for the UHF independents to sell significant numbers of commercials for insertion into the imported programming; and (3) the revenues to be derived from the commercials substituted for those broadcast by the distant stations must substantially exceed the sum of (a) the loss of revenues caused by the distant signals' fractionalization of the local station's audiences, (b) the costs of installing, operating, and maintaining the equipment required to carry out the substitution, and (c) the costs of producing and selling the additional commercials to be inserted. [*595] I don't think my colleagues, in adopting their proposal, had any basis for concluding that any one of these will prove to be true, and I am afraid that all of them may be found to be based on erroneous assumptions.
The majority do, at least, raise the question of technical feasibility -- and who should bear the costs of the devices required for the substitution of commercials (Par. 10). First, they note that a device -- or probably a number of devices -- to impress an electronic code on its transmissions will have to be installed at every station whose signal is to be carried on a cable system anywhere with local commercials substituted. No indication is given as to what this will cost. I am sure it is technically feasible, but would imagine that the cost of installing and maintaining such equipment nationwide would be substantial. And I think it is anomalous to require the distant station to install equipment to delete the commercials it has sold in order to facilitate the use of its programs -- for which it has had to bid competitively in the market -- by cable systems who are to get a blanket license to any programming they want for a very nominal flat fee.
But I think the problems -- of feasibility and cost -- will arise at the other end. The majority say that "an automatic switching device" can substitute local commercials to fit the time slots signaled by the device at the distant station. They say nothing about costs, simply stating that "once demand for such automatic switches is created, manufacturers would, we believe, be eager to develop and produce them." n22 An earlier document was more specific. It called the switching device "a small computer-switcher" and said that the CATV system would need, in addition, three or more helical scan tape recorders. It estimated that the switcher would cost about $50,000 and each recorder approximately $20,000. I don't know how accurate these figures are, but I suspect the devices will be rather expensive since they must be very sophisticated and accurate if the system is to function without clipping program content, overlapping commercials, and otherwise reducing the distant program service to a shambles. With all the wonders of modern electronics, I am afraid that the split-second timing the majority expect may be very difficult to achieve. In addition to other problems noted below, I don't think local advertisers will spend money for commercials if their substitution on the distant signals disrupts programming and creates viewer ill will.
n22 This will, of course, require time after the proposed rule is adopted -- if it is. This may require substantial lead time -- as well as substantial start-up costs which will have to be borne by the local stations and/or the CATV systems importing distant signals.
And how many devices will be needed, and where will they be located? The first concept was, apparently, that a full set of equipment would be installed at each CATV system's head end. But there are likely to be dozens of systems within 35 miles of the reference point for a top 100 market, so the majority now raise the question (Par. 10) whether the stations and systems can agree to centralization of the switching operation at the respective UHF stations. Let's consider Philadelphia, which has three HUF independents: WIBF, WKBS and WPHL. Let's assume that most CATV systems in the 35 mile zone will import the New York City independents, WNEW, WOR, and WPIX. [*596] But most will want to bring in a fourth independent, and some may choose WTTG, or WDCA, or WFAN in Washington, some WPGH in Pittsburgh, some WMET in Baltimore, and some enterprising systems might even import independents from Boston, Chicago, Cleveland, Detroit or Atlanta. And the majority suggest (Par. 14) that perhaps the commercial substitution arrangement could be employed as to the signals of overlapping major markets instead of our proposed Section 74.1107(c). If this approach is adopted -- which I regard as highly undesirable because of the additional audience fragmentation it would involve -- some of the cable systems [44] in the Philadelphia 35 mile zone will be entitled, perhaps indeed required, to carry the network affiliated stations in the New York City, Scranton-Wilkes-Barre, Harrisburg-Lancaster-Lebanon-York, Washington, and Baltimore markets. How many equipment packages will be required at each of the three Philadelphia affiliated stations to service all these stations? Presumably the advertiser who is expected to buy commercials to be inserted into distant signals will want to know what he is getting for his money. He will want to know which station he is buying, and perhaps even which program. This will add to the complexity of the process, making it necessary for the Philadelphia stations to know what commercial slots will be available on each of the distant stations to be carried on cable systems in the Philadelphia 35 mile zone. It is not at all clear to me that one package can handle more than one out-of-market station since there is a real likelihood that WNEW, WOR, WPIX and all the rest may be presenting commercials at so nearly the same time that different switchers and related tape machines may be necessary for each signal. This would add greatly to the cost of the commercial substitution process. And even if the Philadelphia stations can work out arrangements for centralization of the whole operation, they will have to arrange -- and someone will have to pay -- for microwave facilities to relay the out-of-market signals to each and every cable system involved. All of this will require substantial additions to their technical staffs to maintain and operate this elaborate system. I think the total costs will be very high.
This increases, of course, the likelihood that the Philadelphia stations will not be able to sell enough commercials at high enough rates to cover all these costs and return the profits the majority look for to more than offset the expected fractionalization of their audiences. In addition, the majority expect (see Footnote 12) that the substituted commercials will not be the same as those presented by the local stations over the air. This means, of course, that there will be additional costs in producing these commercials, and that these will also have to be recovered. And the same will be true of the costs involved in selling the new commercials produced simply for cable carriage.
What is the likelihood that Philadelphia -- and each of the other top-100 markets in which the plan is supposed to operate -- will generate enough additional commercial expenditures to cover all of these costs and achieve the hoped for boost for UHF operations? It seems to me the majority simply assume -- without any supporting studies, or even any very serious discussion -- that they will. I doubt it very much.
[*597] As noted above, most of these UHF stations already have unsold commercial availabilities. In other words, despite their best efforts they have been unable to find enough local, regional, or national advertisers to fill all the time they would like to sell -- even at their present audience levels. However, the majority expects them to accept fragmentation of their present audiences in return for the privilege of trying to sell commercials to fit into the programming of distant stations. CATV operators cannot serve rural areas and are unlikely to attract all those living in urbanized areas -- the record in the San Diego case suggested that cable systems there might attract 50% of television homes. Therefore the potential reach of the distant signals via cable will be less than that of the UHF stations -- even allowing for the fact that there are still substantial numbers of homes with VHF-only receivers. This means that if WIBF gets to insert signals into WNEW's programming, if WKBS draws WOR, and WPHL is to sell spots on WPIX, each will probably have to sell these substitute commercials at less than their present rates. It may be that there are advertisers who would like to reach the Philadelphia audience -- or at least that portion eventually served by CATV -- who cannot afford the stations' present rates but would be attracted by lower ones, even though they would achieve less reach in the process. But this is entirely speculative, and it seems to me likely that the number of such advertisers and the sums they will be prepared to put into such advertising are likely to be too small to cover the costs discussed above.
There are really a lot of questions about this proposal for commercial substitution which the majority do not address. If local advertisers will buy time in the programming of distant stations, will they prefer one such station over another and will they insist on placement in, or adjacent to, particular programs? If these questions are answered in the affirmative, the problem of effecting substitution will be immensely more complicated. Will the rating services be able to tell what portion of the total audience is watching each channel on each cable system, or can they develop a reliable market-wide CATV sample? The first would appear to be prohibitively costly, and even the second will add substantially to the expense of the whole operation -- and it must be noted that the rating services have not done very well in reflecting the influence of cable viewing in their general reports. But how can advertisers be persuaded to spend money on sports to be carried on distant signals if they cannot be shown that this novel procedure actually gets them an audience which can be justified in normal advertising cost terms? What will be the effect on the volume of advertising available for the commercial substitution process and on the rates which can be charged therefore of the fact that the cable systems themselves will probably be selling advertising on the local origination channels they will be programming -- and that eventually they may lease channels to others who will also sell commercial time? Certainly there are some limits to the additional funds which can be attracted to television -- especially in the smaller markets where the impact of audience fragmentation will be most serious and the chances of recouping the costs of commercial substitution will be the slimmest [*598]. n23 And it seems unlikely that local advertisers will pay much more for time on distant signals than they would have to pay for exposure on the local origination channel. Yet many people -- including myself -- believe that the rates charged for such local channels are likely to be more competitive with radio stations in the area than with television. This may put a rather low ceiling on the rates which can be charged for the commercials inserted in distant signals, unless adequate ratings techniques can be developed and they indicate substantially greater audiences for the distant station programming. And, finally and very basically, is it sound policy to require a UHF station to compete with itself. I feel very strongly that it is not. I think the managers of the UHF independents in Philadelphia -- and elsewhere -- have a difficult enough job in competing with the local VHF stations. I think their best chance to grow and establish themselves as sound and important local broadcast outlets lies in building the best possible service on their allocated channels and devoting their full sales efforts to developing commercial support for their operations. If they divert sales effort to trying to realize something from the distant signals, this would seem likely to divide their resources and weaken their present station operation. It is my understanding that many AM-FM combinations find difficulty in selling two stations with a single sales staff, and some people believe that jointly owned radio stations do not compete aggressively with their television counterparts. It appears to me that efforts to make something of the majority's plan will blur and weaken the local UHF independent's efforts to build a strong, separately viable service. I just do not believe that good broadcasting can be built by this kind of division of attention and responsibility. In short, I think the majority's commercial substitution proposal while novel -- some may call it imaginative -- has not been well thought out, is inherently defective, and is unlikely to work as hoped. Despite the majority's expectations, I think UHF stations will oppose it, and that sounder thinkers in the cable industry itself will find it fatally flawed. So I think it represents a fruitless diversion which will waste time and effort to no avail.
n23 Consider the situation in Chattanooga, Tennessee, the 91st market. It has three VHF stations, each affiliated with one of the national networks. If cable systems import four distant independent signals from much larger cities into this area, the impact on the local stations' audiences could be substantial. Under the majority's proposal the Chattanooga stations could do nothing for two years -- to allow new applications for UHF channels -- and each would then face the task of selling substitute commercials on one distant channel and one-third of another. This would seem likely to put quite a strain on local advertising revenues -- yet the costs of substitution could be nearly as high as in much larger markets. In Terre Haute, Indiana, the 100th market, there are two VHF stations, so that each would eventually have two distant signals for which to try to find advertisers. In Augusta, Georgia, the 99th market, there are two VHF and one UHF stations. The latter would have to try to sell commercials on all four distant channels, a virtually impossible task.
While achieving fair treatment for copyright owners is not a primary responsibility of the FCC, I do not think we can overlook their position in this whole matter. Both out of fairness and the need to assure the continued availability of programming for television, we should pursue policies which will afford those who control program rights a reasonable chance to derive additional revenue from those cable systems which use their property. I think the best way to do this is by imposing full copyright liability on CATV use of programming, at least in the major markets. The majority seem to concede this in [*599] Paragraph 2, where they say (in summarizing our proposals in Docket No. 18397) that "the simplest way to eliminate this element of unfair competition is by adopting a rule permitting importation of distant signal programming only when the CATV has obtained retransmission consent of the originating station." But they apparently believe that this poses problems for the cable industry, though to my knowledge no hearings as to the detailed economics of the television-CATV program market have ever been held. They therefore propose an alternative system.
They do address the question of fairness to the copyright owners in Paragraph 11 and in a brief staff analysis which is attached in Appendix A. However, they really relegate the matter to Congress, which, of course, has the sole right to pass the legislation necessary to deal with the CATV-TV program problem. They recommend that Congress fix a cable system's copyright liability in terms of a percentage of subscription revenue per distant station carried and suggest a figure of.7 of 1% per signal -- and the same figure for all ETV signals collectively. It is claimed that this will not only replace revenues lost to program suppliers because of fractionalization of stations' audiences and loss of their exclusive rights to programming due to importation of distant signals, but in addition will compensate the copyright owners for the use of their programs for the cable system's profit at the same rate as television stations do.
This all sounds very plausible, but it troubles me. I am no statistician, but the staff's use of averages seems to me unsound. It is conceded that stations in the largest markets spend more per television home than those in smaller markets -- but this all gets washed out in the effort to find a magic figure which will be applied to all cable systems, regardless of the size of the markets in which they operate. I would assume that the problem with importing four independent signals wholesale throughout the Philadelphia market is that this will undercut the sale of feature film and syndicated programming to the stations there. The six commercial stations there now compete in a free market, bidding against each other for the available programs in terms of the different uses they intend to make of them and the revenues they hope to derive therefrom -- except that the UHF stations must get programming even if they have to bid more for it than they can expect to recoup in the near future. All of this is based on exclusivity, which permits a station to plan its use of the programs over fairly extended periods and to advertise its first or fifth run of a particular show or series, as the case may be. And, of course, the prices paid are influenced by the fact that in the heart of the market there is no real competition from other stations. If CATV brings in four distant independents under the majority's proposal, the Philadelphia stations may still bargain for exclusivity as against each other, but can get no assurance that the programs they buy will not be broadcast on one of the distant stations before they are prepared to present them. I think this will make it very difficult for them to plan and promote their program schedules, and to give local advertisers the assurance of audience appeal necessary to attract commercial support on anything like present scales. Furthermore, the distant signals will divert audience [*600] from the local stations. Both of these will seriously reduce the prices the Philadelphia stations can afford to pay for program rights. The majority do not propose that cable operators in the Philadelphia market make up this deficit to the program suppliers. Rather, they estimate that use of their proposed flat rate in all of the 100 top markets will produce enough CATV contributions to a program rights pool to compensate the copyright owners fairly. I think this involves multiple assumptions, each of which is far from clear to me.
Furthermore, as I understand the calculations our staff has made, they have included nothing to reflect the costs of the local programming of the distant stations which will also be imported. Perhaps WNEW, WOR, WPIX and others which may be expected to be carried on multiple cable systems will want no compensation for this -- many such programs are not copyrighted now because of their one-time use and the fact that they thus have built-in exclusivity. But faced with this complicated scheme to tinker with our broadcast structure, it seems to me that stations will want the cable industry to pay for anything they use. This would substantially increase the sums to be paid.
It is my understanding that nearly all new programs produced for network exhibition fail to return their costs on their first run, and certainly many feature films require years to make a profit -- if they ever do. It appears that the majority are proposing a system in which the only real, dependable exclusivity will be that accorded network programming by virtue of our same-day non-duplication rule. n24 I think this is too drastic a change in basic program marketing to be proposed without study, as an ancillary to efforts to deal with another problem. Perhaps those who produce programs will continue to do so for what networks will pay for initial exposure, plus some portion of 2.8% of the revenues of cable systems in the top 100 rarmakets, n25 plus whatever television stations will be willing to pay for programs without exclusivity protection. On the other hand, perhaps they cannot do business on that basis. I certainly hope that program producers and copyright owners will address themselves to these matters. It is my understanding that the Commission plans to release, for comment, an expanded staff paper on the impact of CATV on stations and copyright owners, which will go further into the calculations involved in Appendix A. This represents a valuable effort on the part of our staff, but so far as I know it has been subjected to no outside examination or [*601] verification. I hope that interested parties will have their experts give it careful and searching analysis, and will reveal enough about their present methods of doing business and the changes the majority's proposal would entail to permit the Commission to make sound judgments.
n24 For example, it appears to me that the three members of the majority who recently voted for our prime time access rule in Docket No. 12782 are seriously undercutting it here. The assumption underlying that action was that if additional prime time is opened up on network affiliated stations in the top 50 markets, independent producers will offer new, first-run syndicated programming to fill that time. But such programming will be sold market by market, for broadcast at different times. If stations are to pay the prices needed to finance such programming -- and justified by the audiences available in these periods -- they must be assured of real first-run exclusivity. They will be able to get it as against other broadcasters, but under the majority's proposal, no matter what they are willing to pay for a program, they will have no assurance that it will not be carried on a distant signal before or simultaneously with their own broadcast of it.
n25 I think the method of distribution of these revenues proposed in Paragraph 4 of Appendix A has flaws. It would parcel out the sums paid in by CATV operators in proportion to the total volume of sales by each copyright owner to all TV stations, except the networks. In fact, the specific properties principally carried on cable systems would be those which had been licensed to the independent stations in New York City, Los Angeles, Chicago, Philadelphia, Boston, San Francisco, Cleveland, and other markets with multiple independents. If those who own the copyright to these programs are compensated only in proportion to their overall national sales, they are likely to be seriously underpaid.
It is my understanding that the majority do not propose to go ahead with this whole plan unless Congress enacts copyright legislation which fits in with it. Presumably the Commission will comment on any legislative proposal. This increases the importance of full consideration of the copyright aspects of the plan in this proceeding, as well as before the Congressional committees which may be called upon to deal with it.
I think there are other defects in the majority's proposal, but time does not permit discussion of them.
Since I am so thoroughly in disagreement with this proposal, I would like to state very briefly what I think we should be doing instead of embarking upon this diversion. I think we should have our staff analyze the comments in Docket No. 18397 and then proceed to dispose of as many of the proposals therein as possible. I think we should expand the 35 mile protected zone to 50 miles to give HUF licensees incentives to improve their coverage and to more nearly insure protection of the heart of the market. I would finalize the proposal as to overlapping markets (proposed Section 74.1107(c)) because otherwise many major markets will be inundated with signals from adjoining markets. I would adopt the proposed anti-leapfrogging rule in order to improve the prospects of stations in nearby communities with similar interests and to minimize the impact of imported signals. And I would ask Congress to impose full copyright liability on the cable industry. If it concurred, then most of the above approaches could be abandoned because the requirement that CATV systems bid for programs they wish to use to their profit would eliminate the unfair competition otherwise involved in use of out-of-market signals and would put market-imposed ceilings on their use of programming. n26 But unless this is done, I think we will continue to need our distant signal policies as a basis for our regulatory approach, in order to prevent undue adverse impact on the free service the public is now receiving.
n26 I understand that the All Channel Television Society may propose that the Congress -- if it goes along with the Commission's copyright analysis -- should also authorize UHF stations to carry their pick of the programs broadcast by distant stations upon payment of.7 of 1% of their revenues. Certainly the Commission has made the promotion of HUF broadcasting a cornerstone of its policy. Certainly the public would be benefited if struggling UHF stations could be converted into financially strong operations by means of this reduction in their expenses. Perhaps such a policy would lead to the building of many more UHF stations, so that the need for CATV systems to provide additional channels of programming would be reduced. The only difficulty I can see is that, like the majority's plan, it would be unfair to other broadcasters who have paid for programs, would be unfair to copyright owners, and would, perhaps, destroy incentives for the further production of television programming.
I think that is where we should end up, in order to permit over-the-air broadcasting and cable distribution of programming to grow side by side, with each paying for the programs it needs to conduct its business. I think the majority's present proposal, while well intentioned and novel in its approach, is unsound and would undercut the entire basis of our television system. The latter has many faults, but [*602] they should be corrected by aggressive regulation rather than by setting out to create a new system which will cost the public more, will probably perform no better, and may seriously impair the present system on which the public and business rely so heavily. This is an unwise diversion of time and effort which will produce no benefits for the public -- or even for its intended beneficiaries. I therefore dissent.
APPENDIX:
APPENDIX A
STAFF ANALYSIS
1. We explore here, in the context of the narrow issue posed in par. 11, whether the proposal is defective because it inherently cannot be fair to the copyright owner. First, we note that the total spent by all TV stations for syndicated programs ($157.5 million), outside news services ($13.7 million), music license fees ($37.2 million) and other rights ($12.3 million) was $220.7 million in 1968). n16 This amounts to $3.84 per TV home. n17 For those stations in markets ranked 4 through 100, where CATV may be expected to expand and carry distant signals, the corresponding annual expenditures amounted to $3.28 per TV home or $.93 per TV home per TV station in the market. In other words, the copyright owners now obtain an average of approximately $.93 per TV home per year from each TV station in markets ranked 4 through 100; and for each of these markets an average of $3.28 annually per TV home.
n16 Source: Annual financial reports (FCC Form 324) from TV stations for 1968.
n17 ARB reports 57.5 million TV homes on January 1, 1969.
2. CATVs carrying distant independent stations will often carry a specific program before the local station or a syndicated series simultaneously, thus negating the local station's broadcast exclusive for that program or series in CATV homes. For purposes of rough calculation, it is anticipated that this would happen for about half the programs. It is estimated that a second syndicated run averages in price about 40% less than the first syndicated run in the market. Thus, on the basis of these rough estimates, the loss of exclusive due to CATV would cost the program suppliers about $.66 per average market per TV subscriber ($3.28 X 50% X 40%), and their market revenues in subscriber homes reduced to $2.62 per home (compared to $3.28 in non-subscriber TV homes). Furthermore the fractionalization of the local stations' audience during non-network programming would result in approximately a 40% loss in CATV homes. However, in about half the markets (3 VHF), at least for some time to come, it would appear that all the local stations will receive the benefit of commercial substitution so this 40% loss would not apply. Using again a rough estimate of an average of 20% loss for all markets, the program supplier would expect his average market revenues to decrease to $2.10 per subscriber ($2.62 X 80%). Thus, in CATV homes, the program supplier will suffer an average loss of $1.18 ($3.28 - $2.10) due to fractionalization and loss of market exclusives.
3. If CATVs are required to simply make up the loss to copyright owners, they would thus pay about $1.18 per subscriber. However Congress might wish to legislate higher payments on the basis that since the additional use of the programs by CATV makes money for the CATV system, copyright owners should be further reimbursed. As to the fair additional payment, the CATV could be considered as a TV station for this purpose n18 and be required to pay the same $.93 per home as does an average station. The total payments for copyrights would then be $2.11 per subscriber ($1.18 +.93). This additional $2.11 CATV copyright fee amounts to 3.5% of the $60 average annual subscription fee; for carrying five distant stations (four independents and one ETV), this would amount to 0.7% of the annual subscription revenue per distant station carried. We would recommend that whatever copyright figures Congress decides upon, it be in the form of a percentage of subscription revenue per distant station. This will discourage carrying more stations than needed to obtain subscribers; it will also automatically be adjusted to the current value of the dollar as expressed by subscription fees.
n18 Although the CATV may carry 4 independent stations, it will average about 25% saturation for a substantial time period, so that there is some justification for considering it as equivalent in this respect to one average TV station.
4. All copyright payments by CATVs could be paid quarterly to the U.S. Copyright Office where distribution would be made in proportion to total volume of business done by each copyright owner with all the TV stations (not networks) in the U.S. In return for copyright payments, CATV systems would receive a compulsory copyright license which would override market exclusivity in CATV homes, except that coverage of sporting events on the distant stations would have to conform to arrangements worked out pursuant to Public Law 87-331 (i.e., a sports "black out" would have to be observed by cable systems).