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Before theLibrary of CongressCopyright OfficeWashington, D.C.

In the matter of:Section 109 Report to Congressocket No. RM-2007-1Matthew M. Polkahristopher C. Cinnam onPresident and C hief Executive Officermily A. DenneyAm erican Cable Associationcott C. FriedmanOne Parkway Centerinnamon MuellerSuite 21207 North Michigan AvenuePittsburgh, Pennsylvania 15220uite 1020(412) 922-8300hicago, Illinois 60601(312) 372-3930Ross J. LiebermanVice President of Go vernment A ffairst torneys for the Ame rican CableAmerican Cable Associationssociation4103 W Street, N.W., Suite 202Washington, DC 20007(202) 494-5661

June 29, 2007


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TABLE OF CONTENTSSUMMARYiI.NTRODUCTION1 1 .NALYSISA.he cable compulsory license remains an efficient means to clear copyrights on theretransmitted broadcast signals, but Congress must reform Section 111 to eliminateunnecessary burdens, unfairness and irrational disparities in payments.B .ongress should adop t four specific changes to rectify the problem s with Section 1111. Congress should eliminate the application of outdated FCC "market quota" rules so that allsignals permitted to be carried under FCC regulations are permitted under the compulsorylicense

2. Congress should eliminate the "phantom signal" problem by clarifying that a cable operatoris not obligated to pay royalties where a distant signal is not carried.03. Congress should align the cable and DBS compulsory licenses by eliminating royalties forretransmission of local signals34. Congress should align the cable and DBS compulsory license by replacing the Section111 definition of "network station" with the Section 119 definition of "network station".4C.ongress sho uld retain the sho rt-form, flat fee regime for smaller cable system s.5I I I .ONCLUSION6

TABLES, EXAMPLES, AND MAPSTable 1ermitted signals under the FCC's old market quota rulesExample 1oyalty calculations showing how application of the old FCC market quota rulesresult in a 285% disparity in royalty payments for identical cable systems.Map 1epiction of Exam ple 1 cable systemsTable 2xample 1 royalty calculationsExample 2oyalty calculations showing how the phantom single problem results in a cablesystem paying 58% of total royalties for the non-use of one phantom signal0Map 2epict ion of Exam ple 2 cable system and su bscriber groups1Table 3xample 2 royalty calculations2


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SUMMARYTen years ago, the Copyright Office reported to Congress that aspects of the cable

compulsory license were "bur densome," "unfair," and resulted in "an irrational and unjustifieddisparity in payments." The Copyright Office recommended reforms to address these problems.In the intervening 10 years, Congress has failed to act on these recommendations. The Section109 Report provides the Copyright Office with a singular opportunity to send a message loud andclear to Congress Fix the problems with Section 111. A regulatory regime that is unnecessarilyburdensome, unfair, and irrational, offends fundamental values and polices underlying our rule oflaw. Neither the Copyright Office nor Congress should tolerate this.

The Section 109 Report should recommend specific reforms to Section 111. Fourchanges would go far in rectifying the problems:

1. Congress should eliminate the use of the outdated FCC "market quota" rules for carriageof networks and independent stations.Almost three decades ago, the FCC rescinded its market quota rules. Yet the CopyrightOffice still bases royalty calculations on these rules. Example 1 on pages 7 9 showshow the old market quota rules result in one of two identical cable systems paying 285%more in copyright royalties solely because it is located 30 miles away from the othersystem. No rational basis exists for the disparity in payments.

2. Congress should eliminate the "phantom signal" problem so that a cable operator is notobligated to pay ro yalties on a distant signal wh ere that distant signal is not carried.The Copyright Office bases royalty calculations on the following interpretation of Section111: If a cable operator carries a distant signal on a cable system, it must pay royalties forall subscribers where that signal would be distant, even where the signal is notretransmitted. Example 2 on pages 10 --12 shows how 58% of a cable system's royaltiesresults from the non-use of just one distant signal. No theory of intellectual property rightssupports the payment of license fees for the non-use of a copyrighted work.

3. Congress should al ign the cable com pulsory l icense w ith the D B S com pulsory l icense byeliminating royalties for retransmission of local signals.


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Currently, when a cable operator delivers a package of local signals to one household,and a DBS provider delivers the identical package of local signals to the house next door,the cable operator must pay copyright royalties, while the DBS provider does not. Norational basis remains for this disparity in royalties for local signals.

4.ongress should align the Section 111 definition of "network station" with the section 119definition of "network station".The Copyright Office continues to express doubts over whether it can classify Fox stationsas "network" stations under the cable compulsory license, while it is clear the Fox stationsare "network stations" under the DBS license. Harmonizing the definitions will remove thisdoubt.

These changes would eliminate many of the administrative burdens and much of the unfairnessand irrationality of the current cable compulsory license.

In addition, the C opyright Office should recom me nd retaining the short-form, flat feeregime for sm aller cable systems. For a very sm all and shrinking segment of the industry, thisapproach continues to serve to reduce administrative burdens and help small rural systemsprovide broadcast signals to consumers.

B y m aking these recomm endations to Co ngress, the C opyright Off ice can advocate forlong overdue reform and help advance the core policies underlying the cable compulsory license.

American Cable Association. ACA represents nearly 1,100 small and m edium-sizedcable companies that serve about 8 mill ion cable subscribers, primarily in smaller markets andrural areas. ACA mem ber system s are located in all 50 states, and in virtually everycongressional district. The companies range from family-run cable businesses serving a singletown to mult iple system operators with small systems in small markets. Al l ACA mem bersretransmit broadcasts signals under the cable com pulsory license and have a ke en interest in thereform of Section 111.


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Before theLibrary of CongressCopyright OfficeWashington, D.C.

In the matter of:Section 109 Report to Congressocket No. RM-2007-1C O M MENTS

INTRODUCTIONNearly 10 years ago, the Copyright Office undertook a comprehensive study of

the cable compulsory license and issued to Congress a well-crafted and insightfulreport.' In the 1997 Report, the Copyright Office described aspects of the cablecompulsory license as "burdensome" and "unfair." 2Going further and citing commentsby asmall cable company, the 1997 Report concluded that problems with the cablecompulsory license resulted in "an irrational and unjustified disparity in payments."3 Inthe intervening 10 years, despite these conclusions by the Copyright Office, Congresshas failed to reform Section 111. This legislative inaction has perpetuated a regulatory

A Review of the Copyright Licensing Regimes Covering Retransmission of Broadcast Signals, A Reportof the Register of Copyrights (Aug. 1, 1997) ("1997 Report").2 Id. at 42 ("The administrative complexity of the current cable rates is burdensome, and in manyrespects, unfair. Many hours are spent by cable systems just to understand how much they owe and howto fill-out the forms (which often requires legal advice).").3 Id., citing Comments of St. Croix Cable (filed Apr. 26, 1997) ("St. Croix Comments") (emphasis added).

COMMENTS

1


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regime that the expert agency charged with oversight has described as burdensome,unfair, and irrational.

With that in mind, we turn to this proceeding.Concerning the cable compulsory license and its impact on small and medium-

sized cable companies, the Copyright Office must use the Section 109 Report tocommunicate the following messages to Congress:

The ca ble compulsory license remains the m ost efficientmechanism to clear copyrights on the retransmission of b roadcastsignals. As reported by the C opyright Office ten years ago, aspects of thecable com pulsory license remain "burdensom e," "unfair," and resultin "an irrational and unjustified disparity in paym ents." Theseattributes offend fundam ental policies and values that shape o urgovernment and laws administrative efficiency, fairness,rationality, and equ ality under the law. Congress m ust reform Section 111. A failure to do so willperpetuate unfairness, irrationality, and unnecessary administrativeburdens.

The Section 109 Report can build upon this foundation and recommend specific reformsto Section 111. Four changes would go far in rectifying the problems:

1. Eliminate the use of the outdated FCC "market quota" rules for carriage ofnetworks and independent stations.2. Eliminate the "phantom signal" problem by clarifying that a cable operatoris not obligated to pay royalties on a distant signal where that distantsignal is not carried.3. Align the cable compulsory license with the DB S com pulsory license by

eliminating royalties for retransmission of local signals.4 . Align the Section 111 definition of "network station" with the Section 119definition of "network station."In addition, the Copyright Office should recommend retaining the short-form, flat


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fee regime for smaller cable systems. For a shrinking segment of the industry, thisapproach continues to serve to reduce administrative burdens and help small ruralsystems provide broadcast signals to consumers.I LNALYSISA.he cable compulsory license remains an efficient means to clearcopyrights on the retransmitted broadcast signals, but Congressmust reform Section 111 to eliminate unnecessary burdens,unfairness and irrational disparities in payments.The NOI asks if the circumstances warranting the creation of the cablecompulsory license in 1976 continue to exist.4 From the perspective of small andmedium-sized cable companies, the answer is unequivocal yes.

Negotiating separate copyright licenses for each copyrighted work in eachbroadcast signal would overwhelm small and medium-sized cable companies. ACAmembers report that negotiating satellite programming and retransmission consentcontracts alone impose major administrative burdens on their limited resources. Unlikesatellite program contracts, however, a retransmission consent agreement does notconvey a license to retransmit most of the copyrighted works in a broadcast signal.Similarly, carriage under must carry conveys no rights to copyrighted works in abroadcast signal. As a result, for the typical small or medium-sized cable systemcarrying between seven and twelve broadcast stations, without a compulsory license,each cable operator would have to negotiate literally hundreds of separate licenseagreements.

In comparison to 1976, due to the growth of commercial broadcasting and cable

4 Section 109 Report to Congress, Notice of inquiry, 72 Fed. Reg. 19039, 19050 (Apr. 16, 2007) ("Nor).3


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carriage of broadcast signals, the burden that negotiating se parate rights agreementswould impose has actually increased geom etrically. Consequently, the o riginal policiesand economic rationale underlying the cable compulsory license apply today with evenmore force, especially for small and m edium-sized cable com panies. In the Section 109Report, the Copyright Off ice should recomm end retaining the cable compulsory l icenseas the m ost eff icient means to clear copyrights and com pensate rights holders forretransmission of broadcast signals on cable systems.

While Section 111 continues to serve its overall intended purpose, reform of thecompulsory license is sorely overdue. Te n years ago, the Cop yright Office, the veryagency charged with adm inistering Section 111, stated "[T]he adm inistrative com plexityof the current cable rates is burdensome, and in many respects, unfair," resulting in "anirrational and u njustified disparity in paym ents." 5 In the decade between then and now ,nothing has cha nged. The Section 109 Rep ort provides a critical opportunity for theCopyright Office to sen d the following me ssage to C ongress w ith force: Fix theproblems w ith Section 111.

For many A CA m embers, much of cable copyright's unnecessary burdens,unfairness and irrationality are rooted in two distinct aspects of the current application ofSection 111 the use of outdated FCC "market quota" rules and the "phantom signal"problem. Con gress should also up date Section 111 to align it with two aspects of theDB S com pulsory license: ( i) update the definit ion of "network station" in Section 111;and (ii) harmonize the paymen t obligations for local signal carriage a nd eliminate cableroyalties for systems that carry only local signals.

5 1997 Report at 42 (emphasis added).


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In the next section, we explain in more detail these four problems and thestraightforward solutions the Copyright Office should recommend to Congress.

B.ongress should adopt four specific changes to rectify the problemswith Section 111.

The NOI asks if Section 111 should be amended to reflect "the currentmarketplace" and the FCC's "existing regulatory framework." 6 The answer is manifest yes. In reforming Section 111, Congress must address the unfairness, irrationaldisparities in payments, and unnecessary administrative burdens. The specific reformsdescribed below would go far in addressing these problems. The Copyright Officeshould advocate for them in the Section 109 Report.

1.ongress should eliminate the application of outdated FCC"market quota" rules so that all signals permitted to be carriedunder FCC regulations are permitted under the compulsorylicense.The Copyright Office continues to base distant signal royalty calculations on oldFCC "market quota" rules. ? These regulations governed and restricted cable carriage ofbroadcast signals in the late 1970s. The carriage restrictions in the market quota ruleshave long been relegated to the waste bin of obsolete proscriptions. The FCCrescinded the regulations 27 years ago.8

The old market quota rules limited the number of broadcast signals that cablesystems could carry based on the size of the broadcast market sewed by the cable

6 NOI at 19052.7 37 C.F.R. 201.17(h)(5)(ii)(B).8 In the Matter of Cable Television Syndicated Program Exclusivity Rules, Report and Order, 79 FCC.2d663 (1980).


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(except the few superstations), carriage und er retransm ission consent rem ains the onlypermissible means of carriage.

D espite this, the current app lication of Section 111 continues to keep th e longdeceased m arket quota rules on regulatory life support. This ha s a m ajor im pa ct onroyalty calculations, especially for smaller market cable systems. Example 1 belowdemonstrates this, comparing two identical cable systems separated by only 30 miles.7

System description. Here we consider two hypothetical small cable systems inSoutheast Missouri, System A and System B. 1 2 The systems are nearly identical. Eachsystem serves 5,000 subscribers and ch arges $34/m onth for basic cable. E ach cablesystem carries the local broadcast stations from its DMA, in this example, the Paducah-Cap e G irardeau-Ha rrisburg D M A. Each system also carries tw o distant signals W G N,the satellite-delivered superstation from Chicago, and K V TJ , a religious station fromJonesboro. Stations like KVTJ are often popular in smaller markets, and the systemsare close enough to Jonesboro to pick up th e signa l either off- air, rem otely or via a fiberconnection. For copyright p urposes, W G N and K V TJ are considered d istantindependent stations on these cable systems.

Th e only d ifference betw een the systems is a sm all a m ount of geograph y.System A serves com m unities in B utler County a nd w estern Stodd ard County. SystemB's service area begins about 30 miles to the northeast. Map 1 depicts the service

1 2 The hypothetical cable systems described here reflect typical attributes of actual ACA member systemsserving rural areas and smaller markets throughout the U.S.


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areas.Map 1 - Depiction of Exam ple 1 cable systems

Under the Copyright Office's application of the old ma rket quota rules, a fewmiles can m ake an eco nom ically excruciating difference. For copyright purposes,System A is in the Poplar B luff broadcast market, a smaller market where the old rulespermitted a cable system to carry only one independe nt station. System B is in theCape G irardeau broadcast m arket, a bottom 50 broadca st market, where a cablesystem could carry up to four independ ent stations.

Royalty calculations 285% disparity between identical systems. Thefollowing table summ arizes the system information and royalty calculations.


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broadcast signal carried in compliance with FCC regulations is permitted, and notsubject to additional "non-permitted" fees.

2.ongress should eliminate the "phantom signal" problem byclarifying that a cable operator is not obligated to pay royaltieswhere a distant signal is not carried.The "phantom signal" problem leads to an even stranger outcome than the old

market quota rules. Under the Copyright Office's interpretation of Section 111, cableoperators in certain situations are obligated to pay royalties on distant signals based onrevenues from subscribers who do not receive those distant signals. Put another way,cable operators must pay for a license for the non-use of copyrighted works. No theoryof intellectual property rights supports an obligation to pay for a license for works notused.

The p hantom signal problem results from the following interpretation of S ection111 b y the Co pyright Office: If a cable operator retransmits a distant signal anywhereon a cable system, royalties must be paid for all portions of the cable system w here thesignal is distant, even where the signal is not carried. 1 4 In short, a royalty obligation fornon-use. As the following e xamp le illustrates, the phantom signal problem ca n lead toan inexplicable result - a cable system paying more royalties for distant signals notcarried than for distant signals actua lly carried.

For this example, we return to the two systems in Example 1 and change thefacts slightly. First, System A does not carry KVTJ, one of the two distant independent

1 4 1997 Report at 45-46.


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stations carried by the system in Example 1. Then the own er of System B purchasesSystem A , connects the systems with f iber optics, and eliminates System A's headend.For copyright purposes, the formerly separate systems now become one cable system.

The copyright situation become s slightly m ore com plicated be cause it isnecessary to divide the subscriber base into subscriber groups. In our case we willhave two subscriber groups, Subscriber Group A, located in B utler County/StoddardCounty (west), and Subscriber Group B , located in Scott County/Stoddard County(northeast). The m ap below d epicts this.

Map 2 Depiction of Example 2 cable system and subscriber groups

B y dropping one distant independent station from the Subscriber Group A, onewo uld expec t royalt ies related to that station w ould also go aw ay. Not so. KVTJ inSubsc riber Group A beco mes a "pha ntom signal." Under the current application of thecompulsory license, if a cable operator carries a distant signal on a system, it must pay


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royalties for all subscriber groups where that signal is distant, even if not carried. Asthe following table summarizes, 58%of the system's copyright royalties result from thenon-use of KVTJ in Subscriber Group A.

Table 3 Example 2 royalty calculations

System location:Subscriber Group Aest Missouri - B utler County/Stoddard Co untySubscriber Group Bortheast Missouri - Scott County/Stoddard CountyDM Aaducah - Cape Girardeau - HarrisburgBroadcast market/size:Subscriber Group Aoplar B luff/smaller marketSubscriber Group Bape Girardeau/ bottom 50 marketSubscribers:Subscriber Group A,000Subscriber Group B,000Basic rate:Subscriber Group A34/monthSubscriber Group B34/monthSemi annual gross revenues:Subscriber Group A1,020,000Subscriber Group B1,020,000Distant signals carried:Subscriber Group AGNSubscriber Group BGN KVTRoyalties for Subscriber Group B :B ase rate17,1463.75 fee$0oyalties for Subscriber Group A:B ase rate10,3323.75 fee (due to phantom signal)38250Total royalties65,729Percentage of royalties from8%phanomgna

As Example 2 demonstrates, the phantom signal problem results in payments ofsharply increased royalties based on subscriber groups where the signal is notdistributed. Royalty payments for phantom signals epitomize the unfairness andirrationality of the current application of the compulsory license. While we maintain thatSection 111 does not mandate this result, the Co p yright Office apparently feels bound


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by this interpretation of the statute.15The Se ction 109 Report should ma ke the strongest possible recomm endation to

Congress to f ix this problem. Con gress should am end S ection 111 to clarify that acable operator is only obligated to pay royalties on revenue s derived from the actualretransmission of a signal to subscribers. For any given distant signal, revenues fromsubscriber groups that do no t receive a distant signal should be excluded from royaltycalculations.

3.ongress should align the cable and DBS compulsorylicenses by eliminating royalties for retransmission of localsignals.The Se ction 109 R eport should include a comparison of the cable and DB S

compulsory licenses and an analysis of whether differences are justif ied." Concerningroyalty calculations, the Copyright Office should address at least one key disparitybetween Section 111 and Sections 199 and 122 cable operators must pay royaltieseven if they retransmit only local signals, while D B S p roviders pay no royalties for thesam e local signals. If there ever w ere a b asis for this disparity, it has long sinceevaporated in the heat of intense comp etition between cable and DB S.

This difference in cable and DBS compulsory licenses leads to an unsupportableresult. Consider two neighboring households, one receiving cable service, the otherreceiving DBS. Both households subscribe to the same package of local broadcaststations. Neither service includes any distant broadcast signals. In this case, a

1 5 1997 Report at 46 ([T]he O ffice has previously stated that [fixing the phantom signal issue] could notbe accom plished a dministratively becau se the O ffice lacked the authority to alter the structure of thecable rates as they are establ ished in Section 111 .").1 6 NOI at 19040.


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common one in many broadcast markets, the cable operator filing an SA-3 must pay aminimum fee of about 1% of gross revenues of the basic tier. At the same time, theDBS operator delivering the same broadcast signals to the house next door paysnothing.

No rational basis exists for this disparity. As Section 122 demonstrates,Congress has co ncluded that owners of copyrighted wo rks on broadcast signals aresufficiently compensated for local retransmission of their signals without compulsorylicense paym ents. The same analysis applies to cable retransmission.

In the Section 109 Report, the Copyright Office should highlight this disparity andrecomm end elimination of the minimum fee for cable systems that do not carry distantsignals.

4.ongress should align the cable and DBS compulsory licenseby replacing the Section 111 definition of "network station"with the Section 119 definition of "network station".Reform of Section 111 should also include an update to the definition of "networkstation" to align the Section 111 definition with the Section 119 definition. 1 7 At issue ishow to classify Fox stations for cable copyright purposes. As the NOI indicates, theCopyright Office remains uncertain whether it should classify Fox stations as networkstations or independent stations when calculating royalties.18 While we believe theCopyright Office has ample basis to conclude that Fox is a network station whenretransmitted by a cable system, amending Section 111 by adding the Section 119

17 See 17 U.S.C. 111(f), 119(d)(2).1 8 NOI at 19049 ("Fox, for example, is considered a network station for Section 119 purposes, but it isunclear whether it can be considered a network station for Section 111 purposes.").


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definition of "network station" would remove doubts that apparently linger.The Copyright Office's uncertainty over classification of Fox stations under

Section 111 involves more than sem antics. In cases where a Fox station is a distantsignal, base rate roya lties attributable to the station increase 400% if it is classified asan independent rather than a network station. 1 9 A F ox station me ets all tests forclassif ication as a network signal under FC C regulations, and Congress should a mendSection 111 to reflect that.

B y adopting the four straightforward reforms de scribed above, Congress w ouldeliminate many of the adm inistrative burdens and m uch of the unfairness andirrationality in the cable com pulsory license. The Section 109 Rep ort shouldrecomm end them with force.

C.ongress should retain the short-form, flat fee regime for smallercable systems.The NOl asks if Congress should change the royalty structure for smaller cablesystems using the SA1-2. 2 0 For ACA members, the answer is unequivocally no. To thecontrary, the Copyright Office should strongly recommend retention of the SA1-2 ratestructure and simplified filing protocol. The modest relief provided by the SA1-2 benefitsa small and shrinking segment of the industry serving primarily rural areas, in manycases areas served by few or no local broadcasters. As small rural cable systems areinterconnected, or in some cases, shut down, the scope of SA1-2 relief continues to

1 9 When calculating royalties, each distant network signal adds a multiplier of .25, while each independentadds a multiplier of 1.0, hence a 400% increase when a station is considered an independent instead of anetwork. See 37 C.F.R. 201.17.20 NOI at 19052-53.


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dwindle. The impact on the royalty pool has always been small and is increasingly deminimis. As described in the NOI, a very real possibility exists that any changes thatsignificantly increase royalty payments could lead to a loss of broadcast service for ruralcable subscribers.21

The small system relief continues to serve its intended purposes for a shrinkingsegment of the industry, and the Section 109 Report should recommend maintaining thecurrent SA1-2 filing regime and rate structure.I I I .ONCLUSION

The Section 109 Report provides the Copyright Office with a singular opportunityto advocate for badly needed reform to Section 111. As described in these comments,four specific reforms would go far in addressing the unnecessary administrativeburdens, and rectify unfairness and irrational disparity in payments in the current cablecompulsory license.

1. Eliminate the use of the outdated FCC "market quota" rules.2. Eliminate the "phantom signal" problem by clarifying that a cable operatoris not obligated to pay royalties on a distant signal where that distantsignal is not carried.3. Align the cable compulsory license with the DBS compulsory license byeliminating royalties for retransmission of local signals.4. Align the Section 111 definition of "network station" with the Section 119definition of "network station."

The Copyright Office should recommend that Congress enact these amendments withdispatch.

2 1 Id. at 19052 ("Small cable operators may experience a significant increase in royalty payments under aflat fee system. This increase in turn could lead to a loss of broadcast service for rural cable subscribersthat lack the variety of broadcast stations found in the top 100 television markets.").


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The Copyright Office should also recommend that no changes be made to theSA1-2 regime for very small cable systems. This regime provides a measure of relieffor an increasingly small segment of the cable industry.

Respectfully submitted,

Matthew M. PolkaPresident and Chief Executive OfficerAmerican Cable AssociationOne Parkway CenterSuite 212Pittsburgh, Pennsylvania 15220(412) 922-8300Ross J. LiebermanVice President of Government AffairsAmerican Cable Association4103 W Street, N.W., Suite 202Washington, DC 20007(202) 494-5661

June 29, 2007

Christopher C. CinnamonEmily A. DenneyScott C. FriedmanCinnamon Mueller307 North Michigan AvenueSuite 1020Chicago, Illinois 60601(312) 372-3930Attorneys for the American CableAssociation

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