[Federal Register Volume 60, Number 207 (Thursday, October 26, 1995)]
[Rules and Regulations]
[Pages 54815-54817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26526]



-----------------------------------------------------------------------


FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76

[MM Docket Nos. 92-266, 93-215, FCC 95-343]


Rates for Cable Programming Service Tiers; External Costs

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This Twelfth Order on Reconsideration (``The Order'') amends 
the Commission's rules to eliminate the requirement that cable 
operators, when adding home shopping channels to cable programming 
service tiers, offset the per channel mark up with revenues received as 
sales commissions from such home shopping channels.

EFFECTIVE DATE: February 23, 1996.

FOR FURTHER INFORMATION CONTACT:
Paul Glenchur, Cable Services Bureau, (202) 416-1150.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's 
Twelfth Order on Reconsideration in MM Docket Nos. 92-266 and 93-215, 
FCC 95-343, adopted August 7, 1995 and released August 8, 1995. The 
complete text of this document is available for inspection and copying 
during normal business hours in the FCC Reference Center, 1919 M St. 
NW., Washington, DC, and also may be purchased from the Commission's 
copy contractor, International Transcription Service (ITS) at 2100 M 
St. NW., Washington, DC 20037, (202) 857-3800.

I. Introduction

    1. In the Sixth Order on Reconsideration, Fifth Report and Order, 
and Seventh Notice of Proposed Rulemaking (``Going Forward Order''), 59 
FR 62614 (December 6, 1994), the Commission adopted rules providing 
incentives for cable operators to add new channels to their cable 
programming service tiers. Those rules allow operators a per channel 
mark up of up to 20 cents. With respect to home shopping channels, 
however, operators are required to offset this mark up with sales 
commission revenues received from such channels. Several programming 
entities, including Home Shopping Network, Inc. (``HSN'') and QVC, Inc. 
(``QVC''), filed petitions for reconsideration of the sales commission 
offset requirement. In this Twelfth Order on Reconsideration, the 
Commission grants these petitions for reconsideration and eliminates 
the home shopping offset requirement.

II. Elimination of Offsets

A. Background

    2. Generally, an operator will pay a licensing fee to a programmer 
for the right to carry that programmer's service. This licensing fee, 
or program cost, is part of the overall cost that a programmer can 
recover as an ``external cost'' when rates are adjusted to account for 
the addition of a program service to an operator's channel lineup. In 
an effort to ensure that an operator's program cost reflects the actual 
cost of carrying a program service, the Commission, in the Report and 
Order and Further Notice of Proposed Rulemaking, 58 FR 29736 (May 21, 
1993), required that revenues received from a programmer, or shared by 
a programmer with an operator, be netted against programming costs when 
calculating net programming costs that can be recovered through 
regulated rates.
    3. In the Going Forward Order, the Commission established new rules 
governing the amount by which an operator can mark up its rates in 
addition to license fees to account for the addition of new channels to 
its CPST. These rules establish a mark up per channel of up to 20 cents 
subject to an overall cap of $1.20 for the first two years. Moreover, 
in that Order, the Commission applied the revenue offsetting 
requirement to the per channel mark up for channels added to Cable 
Programming Service Tiers (``CPSTs''). Specifically, the Going Forward 
Order provided that revenues received from programmers must be deducted 
from programming costs and, to the extent revenues remain, from the 
operator's mark up. Offsetting applies on a channel-by-channel basis. 
In addition, the Going Forward Order reaffirmed that commissions 
received by an operator from programmers will be treated as revenues 
received from programmers. Thus, commissions received by operators must 
first be netted against programming costs. Remaining commission 
revenues must be deducted from the per channel adjustment.

B. Petitions for Reconsideration

    4. A number of parties filed petitions for reconsideration in 
response to the Going Forward Order. Home shopping entities such as 
QVC, Inc. and Home Shopping Network, Inc. contend that requiring 
operators to offset the operator's mark up with sales commissions 
discriminates against home shopping services. They argue that other 
programming networks offer advertising availabilities to operators and 
the value represented by such advertising availabilities is not offset 
against programming costs or the channel adjustment. In their view, 
this establishes a regulatory disincentive to add home shopping while 
encouraging the addition of traditional programming. Moreover, QVC 
contends that mark ups for channels added to the CPST reflect ``network 
costs'' which, unlike programming costs, are not as susceptible to 
manipulation or artificial inflation. Consequently, QVC argues, a 
primary purpose for restricting external cost recovery to net operator 
cost is absent in the case of network cost recovery embodied in the 
operator's mark up. HSN and Jones Infomercial Network further contend 
that the regulatory complexity and burdens associated with the 
accounting and offset of commission revenues discourage operators from 
adding home shopping channels. Furthermore, Petitioner Black 
Entertainment Television (``BET'') argues that the elimination of the 
offset for sales commission revenues could benefit subscribers by 
allowing sales commission revenues to cover some of its channel's 
operating costs. In turn, BET asserts, operators would be less inclined 
to raise subscriber rates for the service. BET also contends that the 
offset rule discourages operators from carrying niche programming that 
may contain both a traditional programming component and a shopping 
service.
    5. Several parties, in response to petitions for reconsideration, 
have urged the Commission to retain the offset requirement for home 
shopping revenues. The Arts and Entertainment Network favors retention 
of the offset requirement. It argues that direct cash payments to 
operators in the form of commissions encourage operators to base 
programming choices on financial incentives offered by home shopping 
services rather than on the quality of a channel's programming. 
Lifetime TV argues that the offset requirement is needed to enable non-
shopping networks to compete for limited channel space on cable 
systems. According to Lifetime, traditional program networks 

[[Page 54816]]
cannot match the economic incentives of home shopping channels if 
carriage of such channels allows recovery of both a channel adjustment 
mark up and unrestricted revenue from sales commissions. With respect 
to advertising availabilities, a number of respondents challenge the 
petitioners' view that the absence of an offset for advertising 
availabilities discriminates against home shopping channels. 
Respondents argue that local advertising availabilities differ from 
commissions because they do not involve direct cash compensation and 
require operators to incur costs to produce advertisements and to 
acquire equipment necessary to air them. In addition, ESPN claims that 
home shopping channels are not disadvantaged in comparison to 
traditional programmers because home shopping channels can also provide 
advertising availabilities to local operators. Finally, the City of St. 
Joseph and Benton Charter Township (West Michigan Communities), in a 
petition for reconsideration, urge application of the revenue offset as 
a tier-based adjustment rather than an adjustment on a channel-by-
channel basis. In response to the West Michigan Communities Petition, 
QVC and Time Warner argue that governing statutes do not require tier-
based offsets and that Commission rules properly apply the offsets on a 
channel-by-channel basis.

C. Discussion

    6. Based on the petitions for reconsideration and other comments in 
the record, we have determined that requiring operators to offset the 
mark up with home shopping sales commissions creates a disincentive for 
operators to carry home shopping services. Accordingly, in this Order, 
we eliminate this requirement.
    7. We agree with petitioners that requiring operators to offset the 
per channel mark up with home shopping sales commissions creates a 
disincentive for operators to add home shopping services. As we 
explained in the Going Forward Order, the twenty-cent per channel 
operator mark up falls within the historical range of rate increases 
imposed by operators who add new channels and adjust their rates 
accordingly in competitive environments. The allowance of this mark up 
is independent of the type of programming or the program licensing fee 
associated with adding the channel. Requiring operators to offset this 
mark up with revenues derived from sales commissions effectively 
eliminates the mark up in any case where commission revenues exceed 
program costs to the operator (usually zero in the case of home 
shopping channels) and the otherwise allowable mark up. Although we 
presume that cash payments to the operator in the form of commissions 
represent significant value to the operator, the partial or complete 
elimination of the mark up for adding a home shopping channel is a 
disincentive for an operator to add such a service. At the same time, 
we recognize that other programming networks may offer local 
advertising availabilities to operators for carriage of their services 
without putting the mark up at risk. By reducing or eliminating the 
operator mark up when home shopping channels raise sales commission 
revenue for operators, the offset requirement effectively penalizes the 
operator, and home shopping channels indirectly, by taking away the 
mark up simply because many customers in the operator's territory 
purchase products from the home shopping service. Consequently, the 
offset requirement has the effect of disfavoring carriage of home 
shopping services while favoring the carriage of traditional 
programming services that can provide incentives to operators in the 
form of advertising availabilities not subject to the revenue offset 
rule.
    8. As indicated above, some commenters argue that the Commission 
does not have to treat offsets against sales commission revenues and 
advertising availabilities in the same way to promote neutral 
incentives to add channels. For example, it has been argued that 
availabilities are different because operators may incur production and 
equipment costs when utilizing the availabilities. Although advertising 
availabilities may entail some production costs, as suggested by ESPN 
and Lifetime Television, we believe that operators, as a general 
matter, limit their utilization of availabilities to instances where 
the net gain from such use exceeds the associated costs. Therefore, we 
do not think commissions are so different from availabilities to 
warrant granting different offset treatment. Finally, we are 
unpersuaded by suggestions that, because home shopping services 
theoretically could offer advertising availabilities, exempting the 
value of advertising availabilities from the offset requirement does 
not provide a comparative advantage to traditional networks. Generally, 
home shopping channels, unlike traditional program networks, are not 
developed or designed to attract commercial advertisers to air 
advertising time as is traditionally the case with other programmers. 
Consequently, advertising availabilities do not appear to be a viable 
alternative for home shopping channels. Exempting the revenue offset 
requirement for advertising availabilities creates an inherent 
disparity between home shopping services and channels that have been 
developed with the objective of becoming attractive advertising 
vehicles.
    9. The offset requirement for home shopping sales commissions also 
creates administrative and practical difficulties. Although the channel 
adjustment factor remains available to the operator if revenues from an 
added shopping service fail to match the 20-cent markup, the operator 
is still obligated to incur accounting costs and burdens, and some 
degree of regulatory scrutiny, to ensure compliance with the revenue 
offset rule. This burden may be sufficient to discourage an operator 
from adding to the CPST an innovative shopping service or a hybrid 
channel containing both additional programming and shopping services. 
As a regulatory matter, the revenues derived from sales commissions can 
vary with each reporting period which renders difficult the 
incorporation of these fluctuations into the ratemaking process. 
Indeed, the Commission has not applied the offset requirement to 
advertising availabilities in part because of similar administrative 
burdens. Recently, the Court of Appeals upheld as reasonable the 
Commission's decision to forgo an offset requirement for advertising 
revenues.
    10. We recognize respondents' concerns that allowing operators the 
ability to recover the 20-cent mark up regardless of the success of an 
added shopping service enhances the economic attractiveness of adding 
such channels. We reaffirm our belief, however, that Commission 
regulations should not influence the operator's decision for or against 
such services by making standard cost recovery available for carriage 
of one type of program service but not another. The decision to add a 
shopping service or a traditional programming service should be left to 
the operator's business judgment. Similarly, we will not discourage 
``traditional'' services from adding a shopping component or providing 
advertising availabilities, with concomitant revenue incentives for 
operators, to their program offerings. By eliminating the revenue 
offset requirement as it applies to the operator's mark up, we 
neutralize availability of the mark up as a factor in the operator's 
decision to determine what kinds of program services should be added to 
the CPST.
    11. This Order does not affect our requirement that revenue from 
shopping 

[[Page 54817]]
commissions must be applied as an offset against program costs. We 
remain concerned that a programmer's definition of program cost can be 
manipulated to raise such costs artificially. Accordingly, we limit the 
scope of this Order to the revenue offset requirement for home shopping 
sales commissions as it applies to the per channel mark up only.

III. Regulatory Flexibility Act Analysis

    12. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. 
601-12, the Commission's final analysis with respect to the Twelfth 
Order on Reconsideration is as follows:
    13. Need for and purpose of this action. The Commission, in 
compliance with section 3 of the Cable Television Consumer Protection 
and Competition Act of 1992, 47 U.S.C. 543 (1992), pertaining to rate 
regulation, adopts revised rules intended to ensure that cable services 
are offered at reasonable rates with minimum regulatory and 
administrative burdens on cable entities.
    14. Summary of issues raised by the public in response to the 
Initial Regulatory Flexibility Analysis. Comments were filed in 
response to the Initial Regulatory Flexibility Analysis. HSN and Jones 
Informercial Network explain that operators face significantly less 
complexity when deciding to carry traditional advertiser-supported 
channels rather than home shopping services. They argue that 
advertising availabilities represent value to operators and that such 
value, unlike shopping commission revenue, need not be offset against 
the channel adjustment mark up, rendering less burdensome the addition 
of non-shopping channels.
    15. Significant alternatives considered and rejected. In the course 
of this proceeding, home shopping channels and other programming 
entities submitted requests to delete shopping commission revenue from 
the offset rule. This was the only proposal advanced by petitioners and 
the only alternative to current rules considered in connection with 
this specific action. In this Order, the Commission is providing relief 
to certain programmers seeking the elimination of regulatory burdens 
associated with the carriage of their channels.

IV. Paperwork Reduction Act

    16. The requirements adopted herein have been analyzed with respect 
to the Paperwork Reduction Act of 1980 and have been found to impose 
new or modified information collection requirements on the public. 
Implementation of any new or modified requirement will be subject to 
approval by the Office of Management and Budget as prescribed by the 
Act.

V. Ordering Clauses

    17. Accordingly, it is ordered that, pursuant to sections 4(i), 
4(j), 303(r), 612 and 623 of the Communications Act of 1934, as 
amended, 47 U.S.C. sections 154(i), 154(j), 303(r), 532, 542(c) and 
543, the rules, requirements and policies discussed in this Order are 
adopted and part 76 of the Commission's rules, 47 CFR part 76, is 
amended as set forth below.
    18. It is further ordered that the petitions for reconsideration 
filed by QVC, Inc. and Home Shopping Network, Inc. are granted 
consistent with this Order. The Petition for Reconsideration filed by 
the West Michigan Communities is denied.
    19. It is further ordered that the regulations established in this 
Order shall become effective February 23, 1996.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Amendatory Text

    Title 47, Part 76 of the Code of Federal Regulations is amended as 
follows:

PART 76--CABLE TELEVISION SERVICE

    1. The authority citation for part 76 continues to read as follows:

    Authority: 47 U.S.C. 543(c).

    2. Section 76.922 is amended by revising paragraph (e)(3)(ii) to 
read as follows:


Sec. 76.922  Rates for the basic service tier and cable programming 
services tiers.

* * * * *
    (e) * * *
    (3) * * *
    (ii) Per Channel Adjustment. Operators may increase rates by a per 
channel adjustment of up to 20 cents per subscriber per month, 
exclusive of programming costs, for each channel added to a CPST 
between May 15, 1994, and December 31, 1997, except that an operator 
may take the per channel adjustment only for channel additions that 
result in an increase in the highest number of channels offered on all 
CPSTs as compared to May 14, 1994, and each date thereafter. Any 
revenues received from a programmer, or shared by a programmer and an 
operator in connection with the addition of a channel to a CPST shall 
first be deducted from programming costs for that channel pursuant to 
paragraph (d)(3)(x) of this section and then, to the extent revenues 
received from the programmer are greater than the programming costs, 
shall be deducted from the per channel adjustment. This deduction will 
apply on a channel by channel basis. With respect to the per channel 
adjustment only, this deduction shall not apply to revenues received by 
an operator from a programmer as commissions on sales of products or 
services offered through home shopping services.
* * * * *
[FR Doc. 95-26526 Filed 10-25-95; 8:45 am]
BILLING CODE 6712-01-M