10/30/97 Subcommittee on Courts and Intellectual Property

SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

U.S. HOUSE OF REPRESENTATIVES

OVERSIGHT HEARING ON

THE COPYRIGHT LICENSING REGIMES COVERING RETRANSMISSION OF BROADCAST SIGNALS

Thursday, October 30, 1997

Room 2237 Rayburn Building, 10:00 AM

Hewitt Testimony

EXECUTIVE SUMMARY

HARLES C. HEWITT SATELLITE BROADCASTING
AND COMMUNICATIONS ASSOCIATION

- The satellite compulsory license is critical to the ability of the Direct-To-Home

satellite industry to compete with its wireline competitors. It serves the dual

role of rewarding the creativity of program producers and encouraging the

dissemination of their works to the public. It works well to clear programming in

superstations and network signals in the absence of the creation of a

- The decision by the Librarian of Congress to approve a new satellite rate of

27 cents per subscriber/per month for superstations and distant network

signals, while cable pays 9.7 cents and 2.5 cents respectively for the same

signals, is an indication that the current process of determining copyright fees

by a Copyright Arbitration Rate Panel does not work.

- The Congress has specifically created policies in order to encourage

competition in the video marketplace between satellite providers and wireline

video technologies. Those policies are defeated if copyright fees for the

same broadcast signals are so vastly different between satellite and its

competitors. The new 27-cent rate is egregious, unfair, and disadvantages

satellite.

- Congress must make sure that satellite rates comport more realistically with

cable rates, in the same fashion as when they were originally set to be

comparable with cable rates in the Satellite Home Viewer Act of 1988.

- In order to reform satellite copyright licensing so consumers are served

properly and satellite providers have the ability to compete on equal terms

with cable, the SBCA urges the following measures be passed as a complete

package:

1. Make the satellite license permanent, as is the cable license;

2. Fix satellite rates in the statute comparable to cable rates;

3. Eliminate the 90-day wait for satellite subscribers to network

signals if they have been cable subscribers, and;

4. Authorize "local into local" retransmissions by satellite.

TESTIMONY OF
CHARLES C. HEWITT
PRESIDENT
SATELLITE BROADCASTING AND
COMMUNICATIONS ASSOCIATION

Before The
SUBCOMMITTEE ON COURTS
AND INTELLECTUAL PROPERTY
HOUSE COMMITTEE ON THE JUDICIARY

October 30, 1997

Mr. Chairman and members of the Subcommittee, I am Chuck Hewitt, President of the Satellite Broadcasting and Communications Association (SBCA). I am very pleased to be here today to give you the views of the Direct-To-Home satellite industry regarding the importance of the satellite copyright license which is contained in the Satellite Home Viewer Act (Section 119 of the Copyright Act).

The SBCA is the national trade association for the Direct-To Home satellite industry. The membership consists of the major companies comprising the various segments of the industry. They include the DBS service providers and satellite carriers who utilize the copyright license to deliver broadcast signals to satellite consumers; the leading programming networks and premium video services; manufacturers and distributors of DTH receiving equipment of all types; program packagers for C-Band services; and approximately 2,500 satellite dealers of all sizes who are the point of sale for consumers.

The breadth of the SBCA membership is a strong indication of just how important copyright licensing is to the industry as a whole. It is critical at this juncture that Congress comes to the assistance of the satellite industry, if, for no other reason than to protect from uncontrollable rate increase. As I will describe, the industry is here today to ask that Congress make the following changes in the SHVA:

1) Make the satellite license permanent.

2) Fix copyright rates in the statute to make them comparable to

cable once again.

3) Eliminate the 90-day waiting period for satellite subscribers to

network service if they have previously subscribed to cable.

4) Authorize the retransmission by satellite of local network

stations within their Dominant Market Areas (DMA's).

My testimony will give you a clearer picture as to why these changes are so necessary in order to correct the imbalance in the video marketplace which has been created by the impracticalities of the SHVA.

Your decision to hold this hearing is very timely because, as you know, there are some very significant events which have recently occurred concerning the satellite copyright license which seriously call in to question how and on what basis satellite royalty rates are determined. That has become a very important matter in view of the Librarian's decision this week to uphold the CARP's recommended rate increase. It means that satellite providers will now be paying 27 cents per subscriber/per month for both superstations and distant network signals while cable pays 9.7 cents and 2.5 cents respectively for the same programming. Thus it has become highly opportune and appropriate that we discuss these issues today under the present circumstances.

Background

The recommendation of the Copyright Arbitration Rate Panel (CARP) to the Librarian of Congress on August 28th to raise DTH copyright fees across the board to 27 cents should be a signal that something is very wrong with the rate determination process espoused by the SHVA. That such a rate could have been arrived at in the first place is a serious matter which should be examined because of the vast ramifications which it has for our industry. While we are gratified that the Librarian saw fit to move the effective date of the fee increase to January 1, 1998, from the retroactive July 1, 1997, date recommended by the CARP, he upheld the 27-cent rate. In other words, the Librarian simply delayed the execution but didn't grant a pardon.

By way of background, this is the tenth year that I have served as SBCA president, dating back to 1987 when the Association was first formed. I participated actively in the negotiations leading to enactment of the SHVA of 1988 at a time when the DTH industry comprised about 2 million viewers, all of them using the larger C-band antennas. So at the time, it would be fair to characterize DTH service as having been a niche industry serving a relatively small base of subscribers primarily located in rural areas. Many of these viewers had no other way to watch the popular sports, news and entertainment programming which the rest of America either watched on cable or received for free off-air, and so they chose satellite as their preferred means of watching television.

That was the marketplace context in which the Section 119 license was first created. Many of the principals involved could not have foreseen that the DTH industry would be what it is today, serving almost 8 million subscribers and promising to be the principal competitor to cable.

But in 1988, the satellite license constituted a brave experiment in several respects. First, the license was made temporary and set to expire December 31, 1994. On the other hand, the cable license, established in Section 111 of the Copyright Act, is permanent. This is an important factor distinguishing the two licenses. For, as we shall see, the temporary nature of the satellite license makes our industry vulnerable to economic demands imposed by the copyright owners in return for extension of the license. The permanency of cable's license, however, insulates it, as a competitor to DTH, from any significant change which could affect the workings of program delivery.

Another unique aspect of the satellite license are the rates which were mandated by the SHVA to be paid into the Copyright Office royalty pool by the satellite carriers. They are computed on a per subscriber/per month basis - as they still are today. The cable rate was then, and still is, calculated as a statutory percentage of gross receipts.

Congress initially determined that satellite rates should equal the same average per subscriber/per month rate as the cable rate, which at the time was deemed to be 12› for superstations and 3› for distant network stations. The rationale for that decision is contained in House Report 100-887 which states that, "These fees approximate the same royalty fees paid by cable households for receipt of similar copyrighted signals and are modeled on those contained in the 1976 Copyright Act" (Part 2, page 22. Emphasis ours), i.e., Section 111 which delineates the statutory cable rates. So, from the start, Congress foresaw too, that DTH had a role in the video marketplace and decided to equate satellite copyright rates with existing cable rates.

But the SHVA also called for a rate negotiation between the copyright owners and the satellite carriers in 1992 in order to determine new fees. Should the negotiations fail (and they did), the parties were then directed by statute to submit to compulsory arbitration under the auspices of the now defunct Copyright Royalty Tribunal. This consisted another new feature attributable to the Section 119 license.

In determining the new fees, the arbitration panel was specifically directed by the statute to "consider the approximate average cost to a cable system for the right to secondarily transmit to the public a primary transmission made by a broadcast station. . . ." (Sec. 119(c)(3)(D) in determining the new satellite rate. The panel raised those fees to 14 cents or 17.5 cents for superstations, depending on their syndicated exclusivity status (i.e., whether they were nationally cleared or not), and doubled the network rate to 6 cents hardly in keeping with the guideline of considering "the approximate average cost to a cable system." And, as we all know now, the fees will go up again January 1st to 27 cents for all broadcast stations delivered to viewers under the terms of the SHVA license.

Mr. Chairman, the concept of compulsory licensing is a very necessary tool given the complexities of clearing programming in broadcast signals with copyright owners. An objective of the SHVA was originally to facilitate a market- based approach to licensing. But almost 10 years following enactment of SHVA there is still no sign that such a result is possible. The copyright owners have given no indication whatsoever that they are interested in creating a copyright clearing house, so we must assume that it is more profitable for them to have a compulsory licensing arrangement and statutorily set fees than to clear the rights directly and sell them to the satellite carriers.

By the same token, the copyright owners are entitled to their full and fair share of royalties for the video products which they create. In fact, the studios represented by the MPAA command approximately 70 percent of the royalties contained in both the cable and satellite pools. So they receive the lion's share of the tens of millions of dollars which these video distribution industries pay into their respective royalty pools every year. In fact, the per subscriber fee applied to satellite by the SHVA provides for true incremental expansion of the pool as each new subscriber is added by satellite companies. The potential for the pool to grow is limited only by the ability of our industry to attract new viewers, and our members are working very hard to accomplish that goal.

In any event, it was the year 1994 which was truly pivotal for DTH. It marked the advent of DBS service which gives consumers a high quality, affordable receiving system, including a small receiving antenna (anywhere from one meter to 18 inches), subscription packages at prices at or below prevailing cable rates but with many more channels to choose from, and digitally transmitted video and audio. It was the promise and potential of DBS which led the Congress and the Federal Communications Commission to put into place new rules and regulations in the Cable Act of 1992 and the Telecommunication Act of 1996 to enhance competition in the video marketplace. In that regard, we are hopeful that early in 1998, barring any other rate mishaps, some of our DBS service providers will begin showing a profit. So we have been looking to the end of 1997 for some light at the end of the tunnel.

But 1994 also contained some ill winds for the satellite industry with the passage of the extension of the satellite copyright license through the SHVA of 1994. Its principal feature was to change the judgment criteria for the arbitration panel deciding on new satellite rates through December 31, 1999, when the current license is due to expire. That the criteria could be changed at all to the disadvantage of DTH satellite was due to the urgency of having to renew the then expiring license. Changing the criteria to suit more favorably the demands of the copyright owners was the price SBCA and its member companies had to pay in order to gain a legislative extension of the Section 119 license through the end of 1999. It is those criteria which resulted in the recent CARP deciding on a new fee of 27 cents for all broadcast signals. This finding, moreover, contrasts sharply with existing cable copyright fees which average 9.7 cents for superstations and 2.5 cents for distant network signals. The Librarian has now upheld the CARP, with the minor consolation of moving the effective date up to January 1, 1998, rather than July 1, 1997, as the CARP had recommended.

That such an egregious rate, and the accompanying wide differential with cable, could even by reached by a CARP is a clear indication that the license sunset and rate determination scheme in the 1988 SHVA does not work. It is time for major reconsideration of the impact of the satellite license as currently written and reshaping it to more closely conform to the workings of the cable license.

It is possible by utilizing rate examples at the extreme end of the spectrum to show that in some circumstances cable royalties for a selected system for certain distant signals could actually be higher than satellite's under a 27-cent copyright regime. Conversely, we have shown in the enclosed exhibit that using the same sort of rate extremes will show some cable operators paying an average of less than .03 cents per subscriber because of the number of subscribers they serve, and the number of broadcast signals against which they pay copyright. For the fact is that no matter how the differential is portrayed between satellite and cable, the real, average cable rate is still 9.7 cents for superstations, 2.5 cents for network signals, and zero for local broadcast signals. At a DTH rate of 27 cents, the satellite service providers will be paying 275 percent and 900 percent more respectively for the very same signals.

I do not raise this issue because our industry does not believe that copyright owners should not receive fair recompense for their programming. They do from the copyright royalty pools, superstation fees, and higher ad revenues. We do object, however, to any type of math that so twists the facts so as to provide a distorted picture of what both satellite providers and subscribing consumers will have to contend with from the CARP's recommendation. In fact, some Members of Congress have taken the satellite industry to task for supposedly not providing sufficient competition to cable operators whose rates have been rising steadily. Yet, some copyright owners seem perfectly content to allow rates to rise without constraint because it is apparently in their interest to fatten the copyright royalty pools. This approach is extremely short-sighted.

As SBCA stated in its comments to the Copyright Office as part of that body's review of compulsory licensing, it is important that the satellite license be reformed so that there is competitive neutrality between the satellite and cable licensing regimes. I have described for you the significant competitive disadvantages which the SHVA imposes on the DTH industry, and I would now like to recommend to you how they can be fixed. The features of a revised SHVA are delineated below and should be considered as an overall package if they are to be effective. I have saved for last my discussion of the "white area" issue because that deserves special treatment in view of the many factors surrounding the delivery of distant network signals to eligible DTH households.

What we have shown so far is that, first, the royalty rates that DTH pays for the retransmission of broadcast signals are significantly higher than what cable pays for the same programming, even at the rates in existence before the CARP made its recommendation. Furthermore, the current process through which new satellite rates are determined - namely by CARP proceeding coupled with the criteria it is instructed to utilize to determine new rates - virtually guarantees that rates will continue to rise unchecked.

The temporary nature of the satellite license, the ensuing lack of control which the industry has over the automatic sunset, and the process by which rates are established all result in great business uncertainty on the part of the satellite carriers. For example, the CARP recommended on August 28th that the 27-cent rate be effective, retroactive to July 1, 1997. Thankfully the Librarian saw fit to push the effective date back to January 1, 1998. However the 60-day lag between the CARP's recommendation and the Librarian's affirmation of the new rate created sufficient uncertainty among some smaller satellite program packagers (particularly in the C-Band) that they had no choice but to start raising consumer subscription fees immediately.

That some packagers had to react so quickly was due to the fact that if they had not passed on these new costs right away, they would have been forced to absorb them in order to pay into the royalty pool whatever amounts would have been due in arrears. But even with the new effective date, satellite companies will still have to absorb the fees for those annual subscriptions which are not due to be re-upped until some time in 1998. Such uncertainty, particularly for smaller businesses, does not bode well for an industry which is striving to make its mark in a highly competitive marketplace, and simply creates confusion both within the industry and among the consumers our industry serves.

A. The Satellite License Should Be Permanent.

To the extent that satellite's chief competitor, the cable industry, has a permanent license, then so, too, should the Section 119 license be permanent so as to put both video delivery technologies on an equal footing. It is the temporary nature of the satellite license which has been the root of many of the problems which I have raised today, and, as I have stated, it places the DTH industry at a competitive and political disadvantage.

The satellite carriers paid dearly in 1994 for an extension of the Section 119 license. Literally held hostage by the copyright owners, we were forced to accept new arbitration criteria which directed the CARP to consider "fair market value" as the principal factor in determining new satellite copyright rates. Cable, on the other hand, has no criteria at all in guiding any of its rate reviews, and its rates have changed little since 1976.

The recent CARP recommendation to raise DTH fees to 27 cents was based, in the judge's minds, solely on the "fair market value" approach insisted upon by the copyright holders. They ignored any other factors such as the price for similar signals in other video distribution marketplaces. Consequently they arrived at a dramatic and substantial increase in the copyright fee. To add insult to injury, the same rate was applied to all signals, including distant networks, when the cable license continues to value them at one-quarter Distant Signal Equivalent (DSE). So we attribute the current situation in which we find ourselves directly related to any real political and economic marketplace factors which we must forego in order to gain a license extension in exchange.

B. Satellite Royalty Rates Should Be Set In The Statute.

The existing compulsory licensing regime hardly provides an appropriate copyright framework if its net result is the implementation of two vastly different rates for virtually the same programming between two competing technologies. Furthermore, it serves no useful purpose in the video marketplace if it also promotes such high comparative fees as the 27 cents and the subsequent increase of consumer subscription rates. Thus by 1999, satellite royalty rates will have increased over the original rates by anywhere from 125 to 900 percent. This is well over the rate of inflation for that time period. We do not believe that this is what the Congress had in mind when it enacted the SHVA.

The DTH industry will suffer competitively if the present rate of royalty increases continues, especially when our competitors who are covered by the benefits of the Section 111 license enjoy stable rates. It is clear that the process for setting satellite rates which Congress envisioned in 1988 is not working and must be revised. No marketplace approach to rate determination has emerged, as the Congress hoped for in 1988. The voluntary negotiations which the parties have undergone under the provisions of the SHVA have not produced the desired objective, largely for reasons beyond the control of the satellite service providers.

The arbitration process which serves as the back-up to voluntary negotiations is extremely costly and time consuming. The recommendations which have emerged from the arbitration panels of 1992 and 1997 bore little relation to the competitive concerns of the Congress to develop a video marketplace where consumers have diversity and choice. As SBCA stated in its comments to the Copyright Office, it appears that while the overarching goals of the 1988 SHVA were set with all good intentions, both the Congress and the interested parties to the satellite license vastly underestimated the difficulties of developing such a system.

The SBCA urges the Congress to replace the current royalty rate determination scheme under Section 119 with a regime that more closely resembles that contained in Section 111 - the license which applies to all wireline competitors of DTH satellite. The two-step process of negotiations followed by compulsory arbitration for satellite providers should be scrapped. In its place, Congress should set the satellite rate in the statute at a realistic and competitive level, and subject the rate to periodic review based on criteria which are no greater or less than those to which DTH competitors are subject.

A.The 90-Day Restriction on Network Subscriptions Should Be
Repealed.

The SHVA restricts reception of distant network signals to those households which cannot receive an off-air signal of Grade B intensity ("white areas") and have not subscribed to cable in the 90 days preceding. This peculiar provision was inserted to protect local broadcasters from the importation of distant network signals by satellite consumers if the latter qualified as "white area" households but were also able to receive cable. This section of the SHVA unfairly penalizes their decision to subscribe to satellite by inadvertently setting an "industrial policy" which favors one distribution technology over another. It is anti-competitive and should be repealed.

The SHVA already prohibits satellite households from subscribing to distant network signals if they can receive local signals over-the-air. On the other hand, if potential DTH subscribers are unable to receive a network signal of a Grade B intensity, they should not be forced to wait 90 days after dropping cable service. The restriction directly encourages DTH households not to drop cable service and thus favors the incumbent technology.

Denying network service to consumers under these circumstances is an undue deterrent to potential DTH subscribers by directly promoting a competing technology. Moreover, it subjects satellite consumers to a burdensome restriction not imposed on any other multichannel video technology. For these reasons, it is vital that the provision be repealed.

D. Local Retransmission of Broadcast Signals

A competitive difference between cable and satellite is the ability of the former to provide local broadcast signals to its subscribers. Our member companies have been utilizing or examining various approaches to this issue, including the development of state-of-the-art, off-air antennas, studying the potential effect of digital broadcasting, or even suggesting basic cable service to satellite subscribers.

Some companies believe that in certain markets the best answer will be "local into local" retransmissions of these signals. There have been a number of proposals for implementing "local into local," including that made by the now defunct AskyB, and more recently by both Echostar and a broadcast enterprise, Capitol Broadcasting/Local TV. While the technological and financial aspects of this satellite concept have yet to be determined, we support the ability of satellite providers and others to have the same market access rights as the competition. Therefore we urge that, as part of the overall revision of the Satellite Home Viewer Act, local-into-local be included as part of the entire legislative effort.

The implementation of "local into local" also raises some interesting regulatory issues, particularly regarding "must-carry." While some satellite companies have shown an interest in offering "local into local" on a limited basis, the mechanics of how "must-carry" should be applied needs further study. For example, consideration must be given to the differences between cable as a local distribution medium and satellite which is a national service.

To make "local into local" a reality, however, will require some change to the SHVA in order to authorize the distribution of local signals under the satellite license, as well as establish a copyright rate of zero cents similar to cable. In that regard, we urge you to write "local into local" into the statute so as to enable the initiation of that service by those companies which have shown the willingness and have the satellite capacity to do so.

White Areas

I have saved for the end a discussion of the "white area" situation because it is such a highly contentious and volatile issue. The concept was written into the 1988 SHVA to ensure that households which could not receive a local network signal at a Grade B intensity could do so by satellite. Its purpose was to preserve the marketing area and audience viewing base of the local broadcaster. As a consequence, satellite reception of network signals was limited to what the statute refers to as "unserved households."

While seemingly practical on paper, administering the "white area" concept has proved to be a nightmare for broadcasters, satellite carriers, and most of all for the consumers for whom the rule was intended to benefit. Indeed, as we have learned the hard way, the approach has been flawed from the very start and since has resulted in extreme controversy and dispute on both sides.

In the first place, the Grade B field strength criterion seemed reasonable enough, given the local interest of the broadcaster, even though it is really a predictive rather than a definitive measure. (The layman's definition is a field strength providing 90 percent of the households with an adequate signal 50 percent of the time.) Unfortunately, a DTH consumer has no effective way, short of paying for an expensive engineering measurement, of knowing whether or not the signal at the rooftop antenna is of Grade B quality. Thus the test, in reality, became a consumer interpretation of picture quality how good is the signal at the premises?

The process by which a DTH subscriber's eligibility is determined is also fraught with pitfalls and only serves to add to consumer confusion. The consumer and satellite carrier must make an initial determination of that subscriber's eligibility for network service as an "unserved household." The network is subsequently notified and in turn supplies its affiliates with lists of new DTH network subscribers in their areas. Each affiliate then makes its own determination as to subscriber eligibility and has the right to challenge any household which it believes is in violation of the SHVA "white area" rule, i.e., is able to receive a Grade B strength signal with a conventional rooftop antenna.

This entire sequence of events can often take from 6-8 months. If a consumer is notified by a local affiliate that he or she is ineligible for DTH network service, then the satellite carrier must "turn off" that subscriber to comply with the law. So there is pain on both sides. Consumers become confused and angry if their network service is terminated, and broadcasters certainly don't enjoy the role of "enforcer" within the communities they are trying to serve.

Important and hopefully fruitful negotiations have been taking place between some of the satellite carriers and broadcast affiliates with the goal of arriving at a mutually acceptable working arrangement regarding the selection of "white area" eligible consumer households. The plan under consideration entails the creation of "red light/green light" zones, determined by topographical maps and broadcast transmission plots within each DMA. The zones would demarcate areas of subscriber eligibility on a "bright line" basis. We have encouraged any of our member companies who are interested in the approach to work with the broadcasters in finding common ground to the resolution of this thorny problem.

Conclusion

_____In conclusion, there is no doubt that compulsory licensing is the most efficient way to bring broadcast signals to both the cable and satellite video marketplace, while at the same time affording a fair return to copyright holders in the programming those signals carry. Barring the establishment of an organized clearinghouse by the copyright community for clearing those signals - and the program owners have shown little initiative in that regard - the license will be the sole means in the future if consumers are to continue enjoying superstation and distant network signal programming.

However there is also an obligation to create a system of competitive neutrality so no one video competitor gains a more favorable copyright rate over another simply by virtue of unwieldy or impractical licensing regimes. As I have stated, we believe that a neutral environment can be created by,

1) Making the satellite license permanent;

2) Making satellite rates comparable to cable by statute;

3) Eliminating the 90-day waiting period for satellite subscribers to

network service; and,

4) Authorizing "local into local" retransmissions.

Such a framework does not exist under today's satellite licensing scheme, and consequently fosters a competitive environment which continues to favor satellite's competitors. It is our fervent plea that this Subcommittee will take it upon itself to help create a more practical copyright system which not only evens the marketplace but also offers consumers the competitive video choices they deserve at subscription rates they can afford.

Thank you for the opportunity to present our views.