[Federal Register Volume 72, Number 238 (Wednesday, December 12, 2007)]
[Proposed Rules]
[Pages 70529-70540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-24079]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. 2007-11]


Definition of Cable System

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of Inquiry.

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SUMMARY: The Copyright Office is seeking comment on issues associated 
with the definition of the term ``cable system'' under the Copyright 
Act and the Copyright Office's implementing rules. The Copyright Office 
is also seeking comment on the National Cable and Telecommunications 
Association's request for the creation of subscriber groups for the 
purposes of eliminating the ``phantom signal'' phenomenon. Further, the 
Copyright Office seeks comment on several other issues related to the 
existence of phantom signals on certain cable systems. The purpose of 
this Notice of Inquiry is to solicit input on, and address possible 
solutions to, the complex issues presented in this proceeding.

DATES: Written comments are due February 11, 2008. Reply comments are 
due March 26, 2008. December 12, 2007.

ADDRESSES: If hand delivered by a private party, an original and five 
copies of a comment or reply comment should be brought to the Library 
of Congress, U.S. Copyright Office, Public Information Office, 101 
Independence Avenue, SE, Washington, DC 22043, between 8:30 a.m. and 5 
p.m. The envelope should be addressed as follows: Office of the General 
Counsel, U.S. Copyright Office.
    If delivered by a commercial courier, an original and five copies 
of a comment or reply comment must be delivered to the Congressional 
Courier Acceptance Site (``CCAS'') located at 2nd and D Streets, NE, 
Washington, DC between 8:30 a.m. and 4 p.m. The envelope should be 
addressed as follows: Office of the General Counsel, U.S. Copyright 
Office, LM 430, James Madison Building, 101 Independence Avenue, SE, 
Washington, DC. Please note that CCAS will not accept delivery by means 
of overnight delivery services such as Federal Express, United Parcel 
Service or DHL.
    If sent by mail (including overnight delivery using U.S. Postal 
Service Express Mail), an original and five copies of a comment or 
reply comment should be addressed to U.S. Copyright Office, Copyright 
GC/I&R, P.O. Box 70400, Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Ben Golant, Assistant General Counsel, 
and Tanya M. Sandros, General Counsel, Copyright GC/I&R, P.O. Box 
70400, Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202) 
707-8366.

SUPPLEMENTARY INFORMATION: Section 111 of the Copyright Act (``Act''), 
title 17 of the United States Code (``Section 111''), provides cable 
systems with a statutory license to retransmit a performance or display 
of a work embodied in a primary transmission made by a television or 
radio station licensed by the Federal Communications Commission 
(``FCC''). Cable systems that retransmit broadcast signals in 
accordance with the provisions governing the statutory license set 
forth in Section 111 are required to pay royalty fees to the Copyright 
Office. Payments made under the cable statutory license are remitted 
semi-annually to the Copyright Office which invests the royalties in 
United States Treasury securities pending distribution of these funds 
to those copyright owners who are entitled to receive a share of the 
fees.

I. Background

    The National Cable and Telecommunications Association (``NCTA''), 
by its attorneys, has petitioned the Copyright Office to commence a 
rulemaking proceeding to address cable copyright royalty issues arising 
from the current definition of ``cable system'' found in Section 201.17 
of part 37 of the Code of Federal Regulations. The NCTA has proposed 
rule changes that it believes will better effectuate the cable 
statutory license under Section 111 of the Copyright Act. We initiate 
this Notice of Inquiry (``NOI'') to address the issues raised by NCTA 
and to seek comment on its proposed changes to Section 201.17 of the 
Copyright Office's rules and associated cable Statement of Account 
(``SOA'') forms. We also raise for comment several other issues 
pertinent to the discussion of the phantom signal phenomenom, as that 
concept is defined below.

A. Statutory and Regulatory Definitions

    Section 111(f) of the Copyright Act defines a ``cable system'' as:
     ``a facility, located in any State, Territory, Trust Territory, 
or Possession, that in whole or in part receives signals transmitted 
or programs broadcast by one or more television broadcast stations 
licensed by the Federal Communications Commission, and makes 
secondary transmissions of such signals or programs by wires, 
cables, microwave, or other communications channels to subscribing 
members of the public who pay for such service. For purposes of 
determining the royalty fee under subsection (d)(1)[of Section 111], 
two or more cable systems in contiguous communities under common 
ownership or control or operating from one headend shall be 
considered one system.'' 17 U.S.C. 111(f).\1\
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    \1\We note that the definition of ``cable system'' under the 
Communications Act of 1934 is different than the Copyright Act 
definition. See 47 U.S.C. 522(7) (``the term ``cable system'' means 
a facility, consisting of a set of closed transmission paths and 
associated signal generation, reception, and control equipment that 
is designed to provide cable service which includes video 
programming and which is provided to multiple subscribers within a 
community. . . .'').

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[[Page 70530]]

    In implementing the cable statutory license provisions of the 
Copyright Act, the Copyright Office adopted a definition of the term 
``cable system'' that replicated the statutory provision. The Copyright 
Office, however, separated the text of the provision into two parts in 
order to clarify that a cable system can be defined in two ways for the 
purpose of calculating royalty fees. Thus, the regulatory definition 
provides that ``two or more facilities are considered as one individual 
cable system if the facilities are either: (1) in contiguous 
communities under common ownership or control or (2) operating from one 
headend.'' 37 CFR 201.17(b)(2). The Copyright Office stated that its 
interpretation of the statutory ``cable system'' definition was 
consistent with Congress's goal of avoiding the ``artificial 
fragmentation'' of systems (a large system purposefully broken up into 
smaller systems) and the consequent reduction in royalty payments to 
copyright owners. See Compulsory License for Cable Systems, 43 FR 958 
(Jan. 5, 1978).
    The Copyright Office has, in the past, recognized certain practical 
problems associated with the definition when cable systems merge. For 
example, in 1997, the Copyright Office stated that ``[s]o long as there 
is a subsidy in the rates for the smaller cable systems, there will be 
an incentive for cable systems to structure themselves to qualify as a 
small system.'' See A Review of the Copyright Licensing Regimes 
Covering Retransmission of Broadcast Signals (``1997 Report'') (Aug. 1, 
1997) at 45. The Copyright Office further stated that although Section 
111(f) has worked well to avoid artificial fragmentation, ``it has had 
the result of raising the royalty rates some cable systems pay when 
they merge. This happens because, if the two systems have different 
distant signal offerings, then all the signals are being paid for based 
on the total number of subscribers of the two systems, even if some of 
those signals are not reaching all the subscribers.'' Id. at 46. The 
Copyright Office, echoing the NCTA's nomenclature, called this 
phenomenon the ``phantom signal'' problem. Id. In the 1997 Report, the 
Copyright Office recommended to Congress, as part of a broader effort 
to reform Section 111, that cable statutory royalties be based on 
``subscriber groups'' that actually receive the signal. The Copyright 
Office also recommended that systems under common ownership and control 
be considered as one system only when they are either in contiguous 
communities or use the same headend (i.e., two unrelated operators 
sharing a single headend would not be treated as one system). Id. at 
47. Believing that it lacked the authority to alter the definition of 
cable system as established in Section 111, the Copyright Office 
suggested that Congress amend the Copyright Act in accordance with its 
recommendations. Id at 46.

B. Cable System Ownership and Operations

    To obtain economies of scale, multiple system cable operators 
(``MSOs'') strategically acquire systems in close proximity to each 
other. At the end of 2004, there were 118 clusters with approximately 
51.5 million subscribers compared to 108 clusters and approximately 
53.6 million subscribers at the end of 2003. During that same time 
frame, there were 29 cable clusters in the United States with over 
500,000 subscribers each.\2\ In 2006, the FCC approved the sale of 
substantially all of the cable systems and assets of Adelphia 
Communications Corporation to Time Warner Inc. and Comcast Corporation 
as well as the exchange of certain cable systems and assets between 
affiliates or subsidiaries of Time Warner and Comcast.\3\ The FCC has 
determined that when Adelphia's systems are fully integrated with 
either Time Warner's or Comcast's systems, the number and size of 
clusters in the United States (including, but not limited to systems in 
California, Ohio, Florida, Texas, and Pennsylvania) will increase 
significantly.\4\ While not specifically mentioned in NCTA's petition, 
which was filed in 2005, the merger of cable systems resulting from 
these transactions likely has led to an increase in phantom signals.
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    \2\See Annual Assessment of the Status of Competition in the 
Market for the Delivery of Video Programming, 21 FCC Rcd 2503 (2006) 
at ]155.
    \3\ See Applications for Consent to the Assignment and/or 
Transfer of Control of Licenses from Adelphia Communications 
Corporation, (and subsidiaries, debtors-in-possession), Assignors, 
to Time Warner Cable Inc. (subsidiaries), Assignees; Adelphia 
Communications Corporation, (and subsidiaries, debtors-in-
possession), Assignors and Transferors, to Comcast Corporation 
(subsidiaries), Assignees and Transferees; Comcast Corporation, 
Transferor, to Time Warner Inc., Transferee; Time Warner Inc., 
Transferor, to Comcast Corporation, Transferee, 21FCC Rcd 8203 
(2006).
    \4\See id. at ] 2. It has been reported that, due in part to the 
Adelphia transactions, the 100 largest cable systems now serve over 
54 million subscribers. See George Winslow, Big Deals, Changes for 
Markets, Multichannel News, January 22, 2007.
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II. NCTA Petition

A. The Phantom Signal Problem Explained

    At the outset, it is necessary to discuss when and how the phantom 
signal phenomena has arisen in the past. The circumstance usually has 
occurred when two or more cable systems (large or small) merge and 
where each of the former systems carried a unique set of distant 
broadcast signals. Consequently, a portion of the newly merged cable 
system's subscriber base may not receive certain distant signals for a 
certain period of time. Based on our analysis of SOAs on file, we find 
that there are three possible phantom signal scenarios: (1) when two 
larger cable systems (those that use the Form 3 statement of account 
form) with different channel line-ups merge; (2) when a larger cable 
system and a smaller cable system (those that use the Form 1-2 
Statement of Account form), with different channel line-ups, merge; and 
(3) when a smaller cable system merges with another smaller cable 
system, with different channel line-ups, resulting in a Form-3 cable 
system.\5\ Phantom signals may arise because the systems are not yet 
technically integrated and thus an operator is incapable of 
retransmitting the distant signals to all subscribers it serves after a 
merger. That is, the distant signals cannot be made available to 
certain subscriber groups. However, if over time, the cable systems 
become technically integrated, and the signals are apparently available 
to all subscribers, then the phantom signal problem would disappear. 
The new integrated system would be considered like any cable system 
that decides to offer a complement of distant signals to one subscriber 
group, but not another. In these circumstances, and under present 
regulations, the operator would be required to pay a statutory royalty 
based on the gross receipts of all subscribers served by the cable 
system even if certain subscribers are not offered certain distant 
signals.
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    \5\A description of Form 1, 2, and 3 cable systems under Section 
111, is provided below.
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    In its Petition, NCTA describes the circumstances giving rise to 
phantom signals in a different manner. It states that where two 
independently built and operated systems subsequently come under common 
ownership due to a corporate acquisition or merger, the Copyright 
Office's rules require that the two systems be reported as one. 
Similarly, where a system builds a line extension into an area 
contiguous to another commonly-owned system, the

[[Page 70531]]

line extension can serve as a ``link'' in a chain that combines several 
commonly-owned systems into one entity for copyright purposes. NCTA 
asserts that, in either of these cases, phantom signals may be present 
and an increased royalty obligation may result. The NCTA, however, does 
not discuss whether there are any technological obstacles to providing 
all distant broadcast signals carried by a cable system to all 
subscribers served by that cable system.

B. History of the Phantom Signal Problem

    NCTA states that, in 1983, it filed its first Petition asking the 
Copyright Office to resolve royalty payment issues arising from the 
definition of cable system. NCTA states that it argued that the 
Copyright Office's interpretation of the cable system definition was 
``unreasonable in practice'' in that it ``frequently result[ed] in the 
unjustified combination of separate cable entities into one system.'' 
See NCTA 1983 Petition at 2-3. At that time, NCTA proposed that the 
Copyright Office modify its regulatory definition so that two or more 
systems would be treated as a single entity only if the system served 
contiguous communities, were under common ownership or control, and 
operated from a single headend. According to NCTA, the motivation 
behind this proposed change was the fact that mergers were resulting in 
a growing number of separate systems being treated as one because they 
were under common ownership and contiguous, even though the system 
facilities were not technically integrated.
    NCTA notes that the Copyright Office formally recognized the 
phantom signal issue in 1989, see Compulsory License for and Merger of 
Cable Systems, 54 FR 38390,\6\ but did not discuss it again until 1997, 
when it adopted an amendment to its rules to permit cable systems to 
calculate the 3.75 fee on a ``partially permitted signal'' basis under 
certain circumstances.\7\ Cable Compulsory License: Merger of Cable 
Systems and Individual Pricing of Broadcast Signals, 62 FR 23360 (Apr. 
30, 1997). NCTA notes that in the same proceeding, the Copyright Office 
decided to terminate the pending ``phantom signals'' docket in light of 
a study it was preparing for the Senate Judiciary Committee concerning 
the functioning of Section 111 of the Copyright Act. Id. at 23361 
(stating that the ``very issues of merger and acquisition of cable 
systems involved in [the terminated proceeding] will likely be 
discussed and analyzed [in the study], and the [Copyright Office] may 
ultimately propose legislative solutions to solve the problems 
addressed in this proceeding.''). As noted earlier, the Copyright 
Office submitted recommendations to Congress in 1997 to address the 
phantom signal phenomenom.
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    \6\We note that eleven parties filed comments, and three parties 
filed reply comments, in response to the 1989 Notice of Inquiry in 
Docket No. RM 89-2. Cable operators, at that time, proposed the 
following options to resolve the phantom signal problem: (1) combine 
gross revenues of commonly owned contiguous systems to determine 
which royalty fee to apply, but otherwise allow them to report the 
carriage of stations and gross receipts as if the merger had not 
occurred; (2) combine gross receipts in the same manner as Option 1 
and allow the calculation of royalties to be based on subscriber 
groups; (3) combine gross receipts in the same manner as Options 1 
and 2, but allow the calculation of the royalties to be based on 
cable communities; (4) do not consider two contiguous systems to be 
one system unless all subscribers are served from a single headend 
and are under common ownership or control; (5) consider systems to 
be contiguous only if they share a common border rather than within 
bordering political subdivisions; and (6) allow a grace period for 
cable systems that, because of a merger, find that they have created 
contiguous cable systems. The Program Suppliers supported Option 1, 
but the Joint Sports Claimants opposed any changes to the current 
system.
    \7\The 3.75% is discussed in more detail, infra.
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    Congress, however, did not act on the Copyright Office's 
suggestions to fix Section 111(f). According to NCTA, the need to 
resolve the treatment of contiguous systems has heightened dramatically 
during the intervening years. Since 1998, an increasing number of cable 
operators have merged and acquired systems in relatively close 
proximity to each other. Similarly, there has been a trend of headend 
consolidation for the past twelve years. NCTA states, for example, that 
between Fall 1994 and June 2000, the number of cable headends has 
declined by nearly 23% (from 11,620 to 8,971). See NCTA Petition at 9, 
citing Nielsen Media Research, CODE database. NCTA also notes the trend 
toward cable system clustering, as described above.

C. Proposed Solutions to the Phantom Signal Problem

    NCTA has proposed a three part remedy to rectify the phantom signal 
problem as it sees it. First, it urges the Copyright Office to change 
its cable system regulatory definition. Second, it requests that the 
Copyright Office adopt a new rule permitting cable operators that 
operate a cable system serving multiple communities with varying 
complements of distant broadcast signals to use a community-by-
community approach when determining the royalties due from that system, 
seemingly without regard to whether a phantom signal problem exists. 
NCTA, in short, advocates the creation of ``subscriber groups'' for 
cable royalty purposes where the operator pays royalties only where 
distant signals are actually received by a particular household. 
Finally, NCTA urges the Copyright Office to announce that it would not 
challenge Statements of Account on which the cable operator has used a 
community-by-community approach for determining Section 111 royalties.
    It appears that NCTA's proposals are not limited only to those 
situations where two or more systems have recently merged. Rather, its 
expansive proposals likely cover any situation where a cable operator 
provides a different set of distant signals to different subscriber 
groups served by the same cable system.\8\ This regulatory proposal is 
much different from the matter the Copyright Office raised and 
addressed in its 1989 and 1997 rulemaking proceedings on cable system 
mergers and acquisitions. We seek comment on our interpretation of 
NCTA's proposals. On the other hand, NCTA does not discuss the issue of 
whether phantom signals may be present when two or more different cable 
operators share a common headend. We seek comment on whether phantom 
signals may arise in this instance. If so, is this a problem we should 
address in this proceeding?
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    \8\We note that our rules permit cable operators to create 
subscriber groups based on television signals that are partially-
distant or partially-permitted (i.e., distant or permitted in only a 
portion of the communities served by the cable system). NCTA's 
proposal extends further and proposes the creation of new subscriber 
groups based on the ``partial carriage'' of distant broadcast 
signals within a cable system.
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1. Cable System Definition

    NCTA proposes that Section 201.17(b)(2) of the Copyright Office's 
rules be amended so that the last sentence reads as follows: ``For 
these purposes, two or more cable facilities are considered as one 
individual cable system if the facilities are in contiguous 
communities, under common ownership or control, and operating from one 
headend.'' Stated another way, under NCTA's proposed rule change, cable 
facilities serving multiple communities would be treated as a single 
system for statutory license purposes only when three distinct 
conditions are satisfied: (1) the facilities are in contiguous 
communities; (2) the facilities are under common ownership or control; 
and (3) the facilities are operating from the same headend. The

[[Page 70532]]

significant change NCTA suggests is that the word ``or'' be replaced by 
the word ``and'' before the clause ``operating from one headend.'' NCTA 
asserts that this regulatory change would help resolve the phantom 
signal issue because it would base royalty payments on signals that are 
carried throughout the cable system and made available to all 
subscribers. According to NCTA, a cable operator would still be 
deterred from ``artificially fragmenting'' its facility under this 
approach because any operator who attempts to do so would lose the 
operational efficiencies concomitant with a single headend. NCTA also 
states that while its proposed definition is narrower than the existing 
definition, it would ensure that facilities, which were truly 
technically and managerially distinct from one another, would not be 
artificially joined together for purposes of the statutory license.
    NCTA's proposed rule change, however, raises significant statutory 
interpretation issues. We recognize that the United States Court of 
Appeals for the D.C. Circuit has found that the Copyright Office has 
the authority to interpret the Act so long as it is not inconsistent 
with the statute or Congressional intent. The D.C. Circuit stated that 
``Congress recognizes that it can only legislate, not administer, so it 
necessarily relies on agency action to make `common sense` responses to 
problems that arise during implementation, so long as those responses 
are not inconsistent with congressional intent.'' Cablevision Systems 
Development Co. v. Motion Picture Association of America, 836 F.2d 599, 
612 (D.C. Cir. 1988), cert. denied, 487 U.S.1235 (1988). NCTA argues 
that the Copyright Office has the authority to adopt a new cable system 
definition. On this point, we note that the regulatory definition of 
the term ``cable system'' is virtually identical to the definition 
found in Section 111(f) of the Copyright Act. As such, we do not 
believe that we have the authority to adopt a regulatory definition 
that fundamentally alters the statute, even though the language of 
Section 111 may be one of the root causes of the phantom signal 
problem. See 1997 Report at 46. Nevertheless, we seek comment on NCTA's 
proposal to change the regulatory definition of cable system.

2. Subscriber Groups

    In addition to arguing for a change in the Copyright Office's cable 
system definition, NCTA also advocates the adoption of a new paragraph 
(g) in Section 201.17 of the Copyright Office's rules. NCTA's proposed 
rule amendment would create subscriber groups, based on cable 
communities and partial carriage, for the purpose of calculating 
royalties in a manner that would eliminate phantom signals. 
Specifically, the NCTA proposes that: (1) ``A cable system serving 
multiple communities shall use the system's total gross receipts from 
the basic service of providing secondary transmissions of primary 
broadcast transmitters to determine which of the Statement of Account 
forms identified in paragraph (d)(2) is applicable to the system;'' and 
(2) ``Where the complement of distant stations actually available for 
viewing by subscribers to a cable system is not identical in all of the 
communities served, the royalties due for the system may be computed on 
a community-by-community basis by multiplying the total distant signal 
equivalents derived from signals actually available for viewing by 
subscribers in a community by the gross receipts from secondary 
transmissions from subscribers in that community.''\9\ NCTA adds that 
the total copyright royalty fee for a system to which this rule would 
apply must be equal to the larger of (1) the sum of the royalties 
computed for the system on a community-by-community basis or (2) 1.013 
percent of the systems` gross receipts from all subscribers\10\ (which 
is the current minimum royalty fee payment for SA-3 systems beginning 
with the July 1-December 31, 2005, accounting period). We seek comment 
on the overall structure and formulation of NCTA's ``combined revenues/
community-specific royalty determination'' proposal.
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    \9\ This proposed rule was not part of NCTA's August 2005 
Petition, but was later submitted by letter to the Copyright Office. 
See letter to Tanya M. Sandros, Associate General Counsel, U.S. 
Copyright Office, from Daniel Brenner, Senior Vice President, Law & 
Regulatory Policy, NCTA (dated October 10, 2006), at Appendix A 
(proposing a new paragraph (g) to be added to Section 201.17). 
NCTA's proposed rule will be made available at the Copyright 
Office's website (www.copyright.gov).
    \10\See id.
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    NCTA states that the Copyright Act does not prohibit the 
computation of royalties on a community-by-community basis. It believes 
that the Copyright Act sanctions this approach because it incorporates 
the FCC's community-specific signal carriage rules as the basis for 
determining a signal's copyright status. See NCTA Petition at 13, 
citing NCTA 1989 Comments at 10-12. NCTA also asserts that allowing 
cable operators to compute royalties on a community-by-community basis 
would fairly compensate copyright owners for the use of their works. 
Id.
    Referencing comments filed with the Copyright Office seventeen 
years ago, NCTA states that the importance of actual signal carriage is 
further underscored by the legislative history accompanying the 
Copyright Act. It notes that the House Report states that distant 
signal equivalents ``are determined by adding together the values 
assigned to the actual number of distant television stations carried by 
the cable system.... Pursuant to the foregoing formula, copyright 
payments as a percentage of gross receipts increase as the number of 
distant television signals carried by a cable system increases.'' NCTA 
Petition at 14, citing Joint Comments of Cable Operators in Docket No. 
RM 89-2 (filed Dec. 2, 1989, and citing H.R. Rep. No. 94-1476, 94th 
Cong. 2d Sess. at 96 (1976)).
    We seek comment on many aspects of NCTA's proposal. First, does the 
Act's legislative history support NCTA's proposed rule change? In this 
instance, we note that the passage cited above does not explicitly 
support NCTA's suggestions nor is it obvious how this language is 
relevant to the subscriber group proposal outlined above.\11\ Second, 
assuming that subscriber groups are legally permissible under Section 
111 of the Act, how would the adoption of NCTA's methodology for the 
carriage of stations affect the royalties collected on behalf of the 
copyright owners? Would NCTA's proposed solution avoid the concern over 
the artificial fragmentation of cable systems? Lastly, noting that we 
recently sought comment on changes to the definition of ``community'' 
as that term is used in Section 201.17 of the Copyright Office's 
rules,\12\ we ask how any changes to the ``community'' definition would 
affect the changes proposed by NCTA here.
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    \11\ We recognize that NCTA has cited to this passage to support 
its stance that the Office has the authority to address the phantom 
signal problem, but then it conflates this argument with the 
proposition that ``the entire statutory scheme established by 
Congress contemplated that copyright fees were to be calculated 
based upon distant signals that were actually carried on a cable 
system and made available to subscribers.'' See NCTA's Petition at 
14, 15.
    \12\See Cable Compulsory License Reporting Practices, 71 FR 
45749 (Aug. 10, 2006) (seeking comment on the suggestion proposed by 
the MPAA and others that a cable community for Section 111 purposes 
should be co-extensive with the political boundary of the area for 
which a cable system has been granted a franchise to operate).
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    On a separate but related subject, NCTA notes that in the past, it 
has urged the Copyright Office to announce that it would not challenge 
Statement of Account forms (``SOAs'') on which the cable operator has 
used a subscriber group approach for determining the

[[Page 70533]]

royalties due to the retransmission of particular signals. Under such 
an approach, the SOA filed by a cable operator serving multiple 
communities from a single headend would reflect any differences in the 
signal complement delivered to each community. See NCTA Petition at 11-
12. We cannot adopt NCTA's approach to examining SOAs. We are bound by 
our existing rules regarding examination procedures. Thus, we will 
continue to question an operator if it appears that there is an error, 
anomaly, or omission in the SOA form in accordance with our 
regulations. If, however, the regulations are amended as a result of 
this proceeding, our practices will be adjusted to accommodate those 
changes.

D. Application of NCTA's Proposals

    Background. At this point, it is useful to illustrate how the 
royalties are currently calculated under Section 111 and our 
regulations and how we believe royalties would be calculated under 
NCTA's proposals. We also raise some issues of concern that require 
close scrutiny from the stakeholders in this proceeding.
    To understand how the statutory royalties are derived, it is 
necessary to describe the statutory methodology used to segregate cable 
systems. Cable operators pay royalties based on mathematical criteria 
established in Section 111(d)(1)(B), (C), and (D) of the Copyright Act. 
Section 111 splits cable systems into three separate categories 
according to the amount of revenue, or ``gross receipts,''\13\ a cable 
system receives from subscribers for the retransmission of broadcast 
signals. These categories are: (1) systems with gross receipts between 
$0-$263,800 (under Section 111(d)(1)(C)); (2) systems with gross 
receipts more than $263,800 but less than $527,600 (under Section 
111(d)(1)(D)); and (3) systems with gross receipts of $527,600 and 
above (under Section 111(d)(1)(B)).\14\
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    \13\ For purposes of calculating the royalty fee cable operators 
must pay under Section 111, gross receipts include the full amount 
of monthly (or other periodic) service fees for any and all services 
(or tiers) which include one or more secondary transmissions of 
television or radio broadcast stations, for additional set fees, and 
for converter (``set top box'') fees. Gross receipts are not defined 
in Section 111, but are defined in the Copyright Office's rules. See 
37 CFR 201.17(b)(1).
    \14\The numerical figures found in the statute are different 
from those delineated above due to inflation adjustments adopted by 
the old Copyright Royalty Tribunal and the Copyright Arbitration 
Royalty Panel.
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    As is common knowledge to those familiar with Section 111, the 
Copyright Office's SOA forms must be submitted by cable operators on a 
semi-annual basis for the purpose of paying statutory royalties under 
Section 111. There are two types of cable system SOAs currently in use. 
The SA1-2 Short Form is used for cable systems whose semi-annual gross 
receipts are less than $527,600.00. There are three levels of royalty 
fees for cable operators using the SA1-2 Short Form: (1) a system with 
gross receipts of $137,000 or less pays a flat fee of $52.00 for the 
retransmission of all broadcast station signals; (2) a system with 
gross receipts greater than $137,000.00 and equal to or less than 
$263,800.00, pays between $52.00 to $1,319.00; and (3) a system 
grossing more than $263,800.00, but less than $527,600.00 pays between 
$1,319.00 to $3,957.00. Cable systems falling under the latter two 
categories pay royalties based upon a fixed percentage of gross 
receipts. The SA-3 Long Form is used by larger cable systems grossing 
$527,600.00 or more semi-annually. These systems must pay at least a 
``minimum fee'' that is calculated at 1.013% of aggregate gross 
receipts (e.g., $527,600.00 x 1.013%). The minimum fee is paid by 
operators for the privilege of retransmitting distant broadcast signals 
even if none are carried. The vast majority of SA-3 systems pay more 
than the minimum fee because they carry distant television signals.
    Alternatively, a cable system would pay a ``base rate fee'' if it 
carries any distant television stations regardless of whether or not 
the system is located in an FCC-defined television market area SA-3 
systems calculate base rate fees according to the number of permitted 
distant signal equivalents (``DSEs'') carried: (1) 1st DSE =1.013% of 
gross receipts; (2) 2nd, 3rd & 4th DSE= .668% of gross receipts; and 
(3) 5th, etc., DSE .314% of gross receipts. Form SA-3 cable systems 
that carry only local broadcast signals do not pay the base rate fee, 
but do pay the minimum fee. Cable systems carrying distant television 
signals after June 24, 1981, that would not have been permitted under 
the FCC's former rules in effect on that date, must also pay a royalty 
fee of 3.75% of gross receipts using a formula based on the number of 
relevant DSEs. The cable operator would pay either the sum of the base 
rate fee and the 3.75% fee, or the minimum fee, whichever is higher. In 
addition, cable systems located in whole or in part within a major 
television market (as defined by the FCC), must calculate a syndicated 
exclusivity surcharge (``SES'') for the carriage of any commercial VHF 
station that places a Grade B contour, in whole or in part, over the 
cable system which would have been subject to the FCC's syndicated 
exclusivity rules in effect on June 24, 1981. If any signals are 
subject to the SES surcharge, an SES fee is added to the foregoing 
larger amount to determine the system's total royalty fee.\15\
---------------------------------------------------------------------------

    \15\ The above gross receipts threshold levels, royalty fees, 
and rates are effective for accounting periods beginning July 1, 
2005.
---------------------------------------------------------------------------

    Royalty Calculations Under NCTA's Proposals. We have developed a 
series of scenarios, based on actual SOA filings, to illustrate the 
practical consequences of adopting NCTA's proposals. The examples show 
how cable royalties are calculated under our current regulations and 
how they likely would be calculated under the NCTA's proposals where 
subscriber groups have been created. The following sets and scenarios 
are found in the Appendix to this NOI.
    Set 1 illustrates the merger of SA-2 and SA-3 cable systems. 
Scenario 1 depicts the royalties generated by two separate cable 
systems before a merger and under current Copyright Office regulations. 
Scenario 2 shows the royalties generated by one cable system after a 
merger of the two systems depicted in Scenario 1 and under current 
Copyright Office regulations. Scenario 3 depicts the royalties 
generated by one system after a merger, under current Copyright Office 
regulations, where differing sets of signals are received by 
subscribers. Scenario 4 shows the royalties generated by one cable 
system after a merger, but under the NCTA's proposed regulations 
(reflecting the former two separate systems in Scenario 1). Scenario 5 
shows one system after a merger and the royalties generated under the 
NCTA's proposed regulations (with signals being carried in only 
portions of the merged system).
    Set 2 illustrates the merger of two SA-3 cable systems. Scenario 1 
shows the royalties generated by two separate SA-3 cable systems before 
a merger and under current Copyright Office regulations. Scenario 2 
depicts the royalties collected by one system after a merger and under 
current Copyright Office regulations. Finally, Scenario 3 shows the 
royalties generated by one system after a merger, but under NCTA's 
subscriber group proposal.
    Set 3 depicts scenarios involving SA-3 system mergers where 
partially-distant signals are being carried. Scenario 1 shows the 
royalties generated by two separate SA-3 systems before a merger, with 
one partially distant signal that is carried on only one system, under 
current Copyright Office

[[Page 70534]]

regulations. Scenario 2 depicts the royalties generated by one system 
after a merger, under current Copyright Office regulations, where one 
partially distant signal is being carried. Lastly, Scenario 3 shows the 
royalties collected by one system after a merger under NCTA's 
subscriber group proposal and reflects the carriage of a partially 
distant signal.
    As would be expected, the scenarios show there would be a change in 
cable royalties under NCTA's proposed regulations, with some of the 
examples illustrating a large decrease in royalties. Are there other 
fact patterns that involve phantom signals? If so, we ask commenters to 
submit such examples so that we may be able to determine if NCTA's 
proposed rule changes offer a workable solution to the phantom signal 
problem in all situations, from the perspectives of cable operators and 
copyright owners alike.
    SES Royalty Fee Payments. The syndicated exclusivity surcharge is 
another longstanding cable royalty policy that may be affected by 
NCTA's proposals. For example, some SA-3 cable systems that would use 
subscriber groups may have a total calculated royalty less than the 
statutory minimum fee. In these cases, the minimum fee would apply. In 
addition, there are some distant signals, however limited in number, 
that are subject to the SES. When a SES is calculated, it must always 
be added to the minimum fee to arrive at the total royalty fee given 
the foregoing scenario.
    This matter, illustrated in the table below, was not addressed by 
NCTA in its petition.


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subgroup 1 ($550,000 gross receipts)                                                             Subgroup 2 ($325,000 gross receipts)
No distant signals                                                                               1 permitted distant signal (1.00 DSE)
                                                                                                 Base Rate Fee = $3,292.25
                                                                                                 SES = $1,946.75
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    The minimum fee for the whole system would equal $8,863.75 
($550,000 + $325,000 x 1.013%). The total royalty fee would equal 
$10,810.50 (minimum fee=$8,863.75 + SES=$1946.75). It is important to 
note here that instead of adding the calculated base rate and SES in 
Subgroup 2 to arrive at Subgroup 2's fee, the SES must be added on top 
of the entire system's minimum fee. In other words, when the calculated 
base rate fee ($325,000.00 x 1 DSE x .01013 [for first DSE]=$3,292.25) 
is compared against the minimum fee ($8,863.75), the greater amount is 
then added to the SES ($325,000 x 1 DSE x .00599 [for first DSE in top 
50 market]=$1,946.75). The statutory royalty fee then equals 
$10,810.50. We point out that if subgroup 1 carried 1 DSE (whether the 
same or a different signal), then the base rate fee would at least 
equal the minimum fee because the minimum fee is total gross receipts x 
1 DSE x .01013. Hence, the total royalty fee would still be at least 
$10,810.50 (minimum fee =$8,863.75 + SES =$1,946.75). This scenario 
illustrates the complexities of determining royalty calculations under 
NCTA's proposals. We anticipate some possible accounting issues 
associated with the SES and minimum fee calculations if NCTA's 
proposals were adopted. We seek comment on whether our supposition is 
valid in this context.
    Minimum Fee.  The minimum fee paid by cable operators could also be 
affected by NCTA's proposals. For example, would a Form 1 system 
merging with a Form 3 system pay less than the $52 minimum fee if gross 
revenues are less than $5,133 (assuming that the Form 1 system carries 
no DSEs)? That is, a former Form 1 system grossing $3,000 would apply 
the 1.013% minimum royalty rate for Form 3 systems, resulting in a 
possible royalty fee of $30.39. According to our records, there are 
about 500 cable systems with gross revenues less than $5,133 that filed 
for the 2006/1 accounting period.
    Single Filers/Shared Headends. SOA filing and royalty payment 
issues emerge as well under NCTA's proposal. For example, systems A and 
B merge, but both have been filing a single SOA because they operated 
from a shared single headend. After their merger, the systems would 
still file a single SOA. However, since they were under separate 
ownership, should they be allowed to compute their royalties separately 
under NCTA's proposed definition as if they were separate systems? Are 
there any other processing and procedural issues, similar to this one, 
that may arise under NCTA's approach, but that we have not yet 
identified?

E. The Market Quota Rules

    The FCC does not currently restrict the kind and quantity of 
distant signals a cable operator may retransmit. Nevertheless, the 
FCC's former market quota rules, which did limit the number of distant 
station signals carried and were part of the FCC's local and distant 
broadcast carriage rules in 1976, are still relevant for Section 111 
purposes. These rules are integral in determining: (1) whether 
broadcast signals are permitted or non-permitted; (2) the applicable 
royalty fee category; and (3) a station's local or distant status for 
copyright purposes. Broadcast station signals retransmitted pursuant to 
the former market quota rules are considered permitted stations and are 
not subject to a higher royalty rate.
    To put these rules in context, a cable system in a smaller 
television market (as defined by the FCC) was permitted to carry only 
one independent television station signal under the FCC's former market 
quota rules. Currently, a cable system in a smaller market is permitted 
to retransmit one independent station signal for copyright purposes. A 
cable system located in the top 50 television market or second 50 
market (as defined by the FCC) was permitted to carry more independent 
stations under the former market quota rules. The former market quota 
rules did not apply to cable systems located ``outside of all markets'' 
and these systems under Section 111 are currently permitted to 
retransmit an unlimited number of television stations without incurring 
the 3.75% fee (although these systems still pay at least a minimum 
copyright fee or base rate fee for those stations).
    There are other bases of permitted carriage under the current 
copyright scheme that are tied to the FCC's former carriage 
requirements. They include: (1) specialty stations; (2) grandfathered 
stations; (3) commercial UHF stations placing a Grade B contour over a 
cable system; (4) noncommercial educational stations; (5) part time or 
substitute carriage; and (6) a station carried pursuant to an 
individual waiver of FCC rules. If none of these permitted bases of 
carriage are applicable, then the cable system pays a relatively higher 
royalty fee for the retransmission of that station.
    NCTA does not seem to address the fact that all of the FCC's old 
rules and regulations would be applicable when reporting information 
and determining the permitted basis of carriage of partially carried 
stations (i.e. subscriber groups) on the SA-3 Form. In our view, when 
two cable systems located in a top-50 major television market (as 
defined by FCC regulations) merge and

[[Page 70535]]

the operator then creates subscriber groups based on differing signal 
carriage complements, the merged system's allotment of independent 
market quota stations would not increase or change. That is, if each of 
the former systems had two distant independent stations as their market 
quota, the newly merged system's market quota remains two distant 
independent stations, regardless of whether those two stations were 
identical or different. Suppose, for example, that System A previously 
reported on its SOA that WGN and WSBK were its distant independent 
market quota signals while System B previously reported WPIX and WWOR 
were its distant independent market quota signals. Under the subscriber 
group approach, and based on the FCC rules in existence in 1976, the 
new merged system would still have a market quota of two distant 
independent signals. Hence, two of the signals above would be subject 
to the 3.75% fee unless another basis of permitted carriage is 
applicable. See supra. We seek comment on whether this would be the 
appropriate application of the market quota rules under NCTA's 
subscriber group proposal.

F. The 3.75% Fee and Phantom Signals

    Issue. In addition to the market quota issue described above, there 
is an additional outstanding question regarding the permitted versus 
non-permitted treatment of phantom signals. The Copyright Office has 
historically accepted the retransmission of phantom signals at the 
permitted rate (``base rate fee''). However, some cable operators have 
raised concern that the Copyright Office might find, at some point in 
the future, that the retransmission of a phantom signal should be 
treated as if it were actually carried and thus subject to the 3.75% 
fee as a non-permitted signal. In the absence of a clear policy 
statement on this matter, the Copyright Office has not stipulated 
payment of the 3.75% fee and has left the decision as to which rate 
applies to the operator's discretion.
    Historical Context. In 1982, the Copyright Royalty Tribunal made 
two types of royalty rate adjustments in response to FCC deregulatory 
actions at that time. One adjustment was the surcharge on certain 
distant signals to compensate copyright owners for the carriage of 
syndicated programming formerly prohibited by the FCC's syndicated 
exclusivity rules in effect on June, 24, 1981 (former 47 CFR 76.151 et 
seq.). The second adjustment raised the royalty rate to 3.75% of gross 
receipts per additional distant signal equivalent resulting from 
carriage of distant signals not generally permitted to be carried under 
the FCC's distant signal rules prior to June 25, 1981.
    In late 1982 and early 1983, the Copyright Office received numerous 
requests from cable operators for advice or interpretive rulings 
regarding the application of the 3.75% fee in specific instances. The 
Copyright Office initiated a proceeding (Docket RM 83-3) by publishing 
a Notice of Inquiry, 48 FR 6372 (Feb. 11, 1983), in which it summarized 
the issues presented for guidance and requested public comment on four 
general issues: (1) substitution of nonspecialty independent stations 
for specialty stations; (2) carriage of the same signal in expanded 
geographic areas; (3) expanded temporal carriage of signals carried on 
a part-time or substitute basis under the former FCC rules before June 
25, 1981; and (4) signals for which waivers were pending with the FCC 
on June 24, 1981, and later dismissed as mooted by FCC deregulation.
    Under the former FCC rules, some cable systems were permitted to 
carry specified distant signals only within certain communities of the 
system. For example, under paragraph (a) of the FCC's former Section 
76.55, a community unit was generally not required to delete any 
television broadcast signal which it was authorized to carry or was 
lawfully carrying prior to March 31, 1972 (``grandfathered'' signals). 
The system was generally not permitted, however, to expand the 
grandfathered signals into other communities within the system. Also, 
under the former rules, a cable system located partly within a market 
and partly outside of all markets was allowed to transmit an unlimited 
number of distant signals, but the system would not have been permitted 
to transmit all of those signals to subscriber groups located in a 
smaller or top 100 television market if the number of signals exceeded 
the applicable FCC carriage restrictions.
    In applying the 3.75% rate, the following questions arose: (1) if 
the cable system after FCC deregulation expanded the geographic 
coverage of a ``grandfathered'' signal into previously restricted 
communities within the same system, does the 3.75% fee apply to the new 
subscriber groups, and (2) if a cable system that is located partly 
without and partly within a television market expanded the geographic 
coverage of a signal previously permitted only in the area outside of 
all television markets, does the 3.75% rate apply to part or all of the 
subscribers to the system? See Compulsory License for Cable Systems, 49 
FR 14944 (Apr. 16, 1984).
    The Copyright Office's interpretation of the Copyright Act in these 
instances in the early 1980s had been that, unless the signal is partly 
distant only to some subscribers, copyright royalty fees for distant 
signals carried to any part of a cable system as defined in the 
Copyright Act must be computed on the basis of total, aggregated gross 
receipts from all subscribers to the system. This position, at the 
time, was based upon the lack of any express provision allowing 
allocation of gross receipts, except for partially distant-partially 
local signals. Id.
    The Copyright Office had stated that the different communications 
and copyright law definitions of the term ``cable system'' had meant 
that the Copyright Act requires payment of copyright fees even though 
not all subscribers of the cable system were eligible to receive a 
particular distant signal because of FCC restrictions. To the extent 
the Copyright Office was aware that a cable system failed to report 
total gross receipts from all subscribers, the Licensing Division 
questioned the correctness of the Statement of Account and attempted to 
obtain an amended filing and additional payment of copyright fees. In 
an unknown number of cases, the Copyright Office was not made aware of 
under-reporting of gross receipts. Some cable systems accepted the 
Copyright Office's interpretation and paid copyright fees accordingly. 
In other cases, cable systems refused to accept the Copyright Office's 
interpretation of the Act and made an allocation of gross receipts to 
reflect only those subscribers who actually received the signal. Id.
    In 1984, the Copyright Office agreed with those cable systems 
asserting that the 3.75% rate does not apply to carriage of the same 
signal on an expanded geographic basis. The Copyright Office stated 
that the Copyright Royalty Tribunal did not have the authority or the 
intention to apply the 3.75% rate in any case where additional distant 
signal equivalents do not result from the FCC deregulation, and no 
additional DSE's accrue from expanded geographic coverage of the same 
signal. The Copyright Office held that since no additional DSE's 
accrued, the fact that the FCC's rules formerly restricted carriage to 
certain communities within the system was irrelevant. Id.
    In 1989, the Copyright Office reiterated and clarified its position 
regarding the expanded geographic carriage rule. The Copyright Office 
stated that cable systems may pay the

[[Page 70536]]

non-3.75% rate in some cases where expanded geographic carriage of 
certain signals occurs. The Office clarified that Section 201.17(h) of 
the Copyright Office's rules was specifically limited to the situation 
in which a signal was actually carried in only part of a system due to 
the pre-June 25, 1981, FCC carriage restrictions. In adopting that 
regulation as part of the implementation of the CRT's 1982 rate 
adjustment, the Office stated that the ``expanded geographic carriage'' 
which resulted directly from the FCC's 1980 deregulation order does not 
represent any ``additional DSE'' because before deregulation the system 
had to pay royalties system-wide for FCC restricted signals. See 49 FR 
14944 (Apr. 16, 1984) and 49 FR 26722 (June 29, 1984). The Copyright 
Office commented that, in 1984, it addressed issues relating to the 
CRT's 1982 rate adjustment, and it did not have before it any evidence 
or comment regarding merger or acquisition of cable systems. The 
Copyright Office stated that the regulation therefore only applied to 
the expansion of signal coverage within a system resulting from the 
FCC's 1980 deregulation. It did not cover situations where expanded 
carriage of a signal results from the creation of a new system through 
merger or acquisition, which operates in contiguous communities. See 
Compulsory License for and Merger of Cable Systems, 54 FR 38390 (Sept. 
18, 1989).
    In 1997, the Copyright Office further clarified its position 
regarding the imposition of the 3.75% fee. At that time, the Copyright 
Office amended its rules with respect to the application of the CRT's 
3.75% fee decision to partially permitted/partially non-permitted 
distant signals. When the Copyright Office first adopted regulations in 
1984 to implement the 3.75% fee, the proper treatment of signals that 
were partially permitted/non-permitted was raised, and the Copyright 
Office deferred giving guidance. Compulsory License for Cable Systems, 
49 FR 26722, 26726 (June 29, 1984). As a result, some cable systems had 
reported those signals as entirely permitted and have paid the current 
base rates. Others had reported those signals as entirely non-permitted 
and have paid the 3.75% fee. After much consideration, the Copyright 
Office decided that where a signal is partially permitted/partially 
non-permitted, the current base rates would apply to those subscribers 
in communities where the signal would have been permitted on or before 
June 24, 1981, and the 3.75% fee would apply to those subscribers in 
communities where the signal would not have been permitted before 1981. 
The effect of the Copyright Office's 1997 decision was that cable 
systems would no longer be able to elect whether to consider the signal 
entirely permitted or entirely non-permitted. See Cable Compulsory 
License: Merger of Cable Systems and Individual Pricing of Broadcast 
Signals, 62 FR 23360 (Apr. 30, 1997).
    Questions. The extended discussion of the history of the 3.75% fee, 
above, reveals that while most questions involving its application have 
been resolved, the Copyright Office has never directly addressed and 
discussed its application to phantom signals. On one hand, the 3.75% 
fee could be applied to non-permitted phantom signals because there is 
no specific statutory provision, copyright policy, or Copyright Office 
regulation exempting such payment. On the other hand, the cable 
industry generally has, for nearly three decades, reported and paid 
royalties under the assumption that the 3.75% fee would not be applied 
to non-permitted phantom signals. To wit, our review of the statements 
of account indicate that most cable systems have paid either the Base 
Rate Fee or no fee for phantom signals while very few cable systems 
have paid the 3.75% fee for these signals. We seek comment on the 
appropriate policyin this context. Should a cable operator pay a 3.75% 
fee for the retransmission of phantom signals? If so, what are the 
policy rationales for adopting such a policy? If not, what factors 
weigh against the levy of such a fee on phantom signals? If we adopted 
NCTA's subscriber group approach, would this controversy be rendered 
moot? If so, why?
    Forms 1 and 2 Cable System Issues. The NCTA's Petition for 
Rulemaking, and the discussion herein, has, so far, focused on matters 
related to Form 3 cable systems. However, to provide a comprehensive 
analysis of NCTA's proposals, we find it necessary to examine royalty 
issues related to small cable systems that file Form 1 and Form 2 
statements of accounts. We note that the Form 1, 2, and 3 
classifications have been the preferred way of categorizing cable 
systems for royalty purposes over the last thirty years, but the forms 
are only administrative implementations of the law, and not the law 
itself. In fact, cable operators pay royalties based on their gross 
receipts under mathematical formulas established in Section 
111(d)(1)(B), (C), and (D) of the Act. Form 1 is actually only half of 
Section 111(d)(1)(C). Form 2 is actually the other half of Section 
111(d)(1)(C) and all of Section 111(d)(1)(D). Form 3 is Section 
111(d)(1)(B). Stated otherwise, Form 1 is for cable systems with gross 
receipts of $0-$137,100, Form 2 is for cable systems with gross 
receipts of more than $137,100 but less than $527,600 and Form 3 is for 
cable systems with gross receipts of $527,600 and above. Under the 
statute (and based on adjusted gross receipt threshold levels), 
however, Section 111(d)(1)(C) targets cable systems with gross receipts 
of $0-$263,800, Section 111(d)(1)(D) is directed at cable systems with 
gross receipts of more than $263,800 but less than $527,600, and 
Section 111(d)(1)(B) is meant for cable systems with gross receipts of 
$527,600 and above.
    We seek comment on the effect, if any, of NCTA's subscriber group 
proposal on smaller cable systems that use the Form 1 and 2 SOAs. We 
specifically ask how royalty rates would be affected and how NCTA's 
proposal may eliminate or alleviate the phantom signal problem. Based 
on NCTA's submissions, it appears that its proposals would not have any 
net effect because two smaller operators (that have merged and have 
previously filed Form 1 or Form 2 SOAs) would pay the same royalties, 
with or without phantom signals, if they still fall below the $527,600 
threshold, as delineated above. It also appears, based on the 
information before us, that NCTA's proposals would not provide any type 
of regulatory relief for smaller systems that file Forms 1 and 2 
because those elements of the statute that lend to the creation of 
phantom signals under Section 111(e.g., DSEs, permitted and non-
permitted signals, market quotas and other intricacies pertinent to 
larger cable systems) are inapplicable. We seek comment on these 
conclusions and whether our interpretations of NCTA's proposals are 
accurate.

G. Section 109 Report

    On December 8, 2004, the President signed the Satellite Home Viewer 
Extension and Reauthorization Act of 2004, a part of the Consolidated 
Appropriations Act of 2004. See Pub. L. No. 108-447, 118 Stat. 3394 
(2004) (hereinafter SHVERA). Section 109 of the SHVERA requires the 
Copyright Office to examine and compare the statutory licensing systems 
for the cable and satellite television industries under Sections 111, 
119, and 122 of the Copyright Act and recommend any necessary 
legislative changes no later that June 30, 2008. Under Section 109, 
Congress indicated that the report shall include, inter alia, an 
analysis of whether the licenses under such sections are still 
justified by the bases upon which they were originally

[[Page 70537]]

created. A Notice of Inquiry expansively addressing the statutory 
licenses was recently published in the Federal Register. See 72 FR 
19039 (Apr. 16, 2007) (``Section 109 NOI''). We understand our 
responsibilities under SHVERA to closely examine the continued 
relevancy of Section 111 and its many provisions, and in fact, the 
phantom signal issue was one of the issues raised for comment in the 
Section 109 NOI.\16\ However, we believe the matters raised herein 
deserve consideration, sooner rather than later. Therefore, we shall 
continue the rulemaking process in this docket while working on 
recommendations to Congress on the Section 109 Report.
---------------------------------------------------------------------------

    \16\ Several parties commented on phantom signals in response to 
the Section 109NOI. See, e.g., ACA comments at 10-13, NCTA comments 
at 18-19, Joint Sports reply comments at 11, NAB comments at 11, and 
Program Suppliers comments at 6.
---------------------------------------------------------------------------

III. Conclusion

    We hereby seek comment from the public on issues associated with 
the definition of a cable system and the creation of subscriber groups 
(based on the carriage of distant television signals) under Section 111 
of the Act and Section 201.17 of the Copyright Office's rules. If there 
are any other issues relevant to the phantom signal problem not raised 
or identified in this NOI, interested parties are encouraged to bring 
those matters to the attention of the Copyright Office.

    Dated: November 19, 2007
Marybeth Peters,
Register of Copyrights


                                                    APPENDIX
                                  SET 1 - MERGER OF SA-2 AND SA-3 CABLE SYSTEMS
 Scenario 1: Two separate systems before a merger under current Copyright Office regulations. System 1 is a Form
                                        SA3 and System 2 is a Form SA1-2.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
System 1                                                                             System 2
 
$550,000.00 gross receipts                                                           $325,000.00 gross receipts
 
Top 50 Major Market                                                                  2 permitted distant
                                                                                      independent signals (A and
                                                                                      B)
1 non-permitted distant independent signal (C)
                                                                                      Minimum fee =$5,571.50 or
 Base rate = $9,245.50+                                                              ...........................
 3.75% fee = $20,625.00
                                                                                     ...........................
Royalty fee = $29,870.50                                                             Royalty fee = $1,931.00
----------------------------------------------------------------------------------------------------------------
Table 1a: Two separate systems before a merger using current CO regulations.


 
  Scenario 2: One system after a merger under current Copyright Office
   regulations. All subscribers are receiving the same set of signals.
------------------------------------------------------------------------
 
------------------------------------------------------------------------
$875,000.00 gross receipts                             .................
2 permitted signals (A & B)                            .................
1 non-permitted signal (C)                             .................
 
 Minimum fee = $8,863.75 or                            .................
 Base rate fee = $14,708.75+
 3.75% fee = $32,812.50
Royalty fee = $47,521.25
------------------------------------------------------------------------
Table 1b: One system after a merger using current CO regulations (all
  subscribers are receiving the same signals).
 


 
   Scenario 3: One system after a merger reflecting differing sets of
    signals received by subscribers applying current Copyright Office
 regulations. Former SA1-2 system in scenario 1 above (System 2) carried
 a different independent signal and network signal (D and E below) which
      are carried in only a portion of this new merged SA-3 system.
------------------------------------------------------------------------
 
------------------------------------------------------------------------
$875,000.00 gross receipts
                                                       .................
2 permitted independent distant signals (A & B)        .................
1 permitted distant network signal (E)                 .................
2 non-permitted distant independent signals (C & D)
                                                       .................
 Minimum fee = $8,863.75 or                            .................
 Base rate fee = $16,170.00+                           .................
 3.75% fee = $65,625.00                                .................
 
Royalty Fee = $81,795.00
------------------------------------------------------------------------
Table 1c: One system after a merger reflecting differing sets of signals
  to subscribers using current Copyright Office regulations.


[[Page 70538]]


 
 Scenario 4: One system after a merger under the NCTA's proposal and reflecting the former two separate systems
   in scenario 1 - All subscribers are treated as receiving the same set of signals as before the merger. Both
 former systems would use the rates of a Form SA-3 system. Former System 2 below (the former SA1-2 system) would
 likely pay the ``minimum fee'' rate with the presumption that no DSEs would apply to the former SA1-2 system's
                                                 gross receipts.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Former System 1                                                                      Former System 2
 
Same as System 1 under scenario 1                                                     Minimum fee = $3,292.25
                                                                                      ($325,000 x 1.013%)
 
Royalty fee =$29,870.50                                                              Royalty Fee = $3,292.25
 
Combined Royalty Fee $33,162.75
----------------------------------------------------------------------------------------------------------------
Table 1d: One system after a merger under the NCTA's proposal to use subscriber groups to reflect the former two
  separate systems.


 
 Scenario 5: One system after a merger under the NCTA's subscriber group proposal- signals being carried in only
portions of the merged system. All subscribers are not receiving the same set of signals. This scenario presumes
                     that DSEs would apply to the gross receipts of the former SA1-2 system.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Former System 1                                                                      Former System 2
 
$550,000.00 gross receipts                                                           $325,000.00 gross receipts
Top 50 Major Market                                                                  Top 50 Major Market
2 permitted distant independent signals (A/B)                                        1 Permitted distant network
                                                                                      signal (E)
1 non-permitted distant independent signal (C)                                       1 permitted distant indep.
                                                                                      signal (D)
 
 Minimum fee = $5,571.50 or                                                           Minimum fee = $3,292.25
 Base rate = $9,245.50+                                                               Base rate = $3,835.00
 3.75% fee = $20,625.00                                                              ...........................
 
Royalty fee = $29,870.50                                                             Royalty fee = $3,835.00
 
Combined Royalty fee = $33,705.50
----------------------------------------------------------------------------------------------------------------
Table 1e: system after a merger under the NCTA's subscriber group proposal.

    As illustrated above, the cable system's total royalty fee 
obligation would be considerably less under the NCTA subscriber group 
proposal (Table 1e) when compared with the Copyright Office's existing 
methodology (Table 1c) which does not currently permit calculations 
based on subscriber groups and partial carriage.
    The following examples concern situations where a cable system 
straddles two television markets. Like the examples illustrated above, 
there is a difference in royalty fee amounts if the NCTA's subscriber 
group proposal were in effect.

                                       SET 2 - MERGER OF TWO SA-3 SYSTEMS
Scenario 1: Two separate SA-3 systems before a merger under current Copyright Office regulations. Each system is
                                    retransmitting different distant signals.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
System 1                                                                             System 2
 
Top 50 major market; $550,000.00 gross receipts                                      Second 50 major market;
                                                                                      $550,000.00 gross receipts
3 distant independent signals (A, B, & C)                                            3 distant independent
                                                                                      signals (D, E, & F)
2 permitted signals (A & B)                                                          2 permitted signals (D & E)
1 non-permitted signal (C)                                                           1 non-permitted signal (F)
 
 Minimum fee = $5,571.50                                                              Minimum fee = $5,571.50
 Base rate fee= $9,245.50                                                             Base rate fee= $9,245.50
 3.75 % fee= $20,625.00                                                               3.75 % fee= $20,625.00
 
Royalty fee = $29,870.50                                                             Royalty fee = $29,870.50
----------------------------------------------------------------------------------------------------------------
Table 2a: Two separate SA-3 systems before a merger under current Copyright Office regulations.


[[Page 70539]]


 
  Scenario 2: One system after a merger under current Copyright Office
                              regulations.
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Top 50 major market and second 50 major
 market
                                              ..........................
$1,100,000.00 gross receipts
                                              ..........................
3 wholly permitted independent signals (A,    ..........................
 B, & D)
3 non-permitted independent signals (C, E, &
 F)
                                              ..........................
 Minimum fee =$11,143.00                      ..........................
 Base rate fee =$25,839.00                    ..........................
 3.75% fee =$123,750.00                       ..........................
 
Royalty Fee = $149,589.00
------------------------------------------------------------------------
Table 2b: One system after a merger under Copyright Office regulations.


 
 Scenario 3: One system after a merger under NCTA's subscriber group proposal. All signals carried in the former
  separate SA-3 systems in scenario 1 above are not carried throughout the new merged cable system. This merged
scenario reflects two (or more) subscriber groups patterned after the differing pre-merger signal carriage line-
                                          ups (see scenario 1, above).
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Royalty fee same as combined amount in Scenario 1 above $59,741.00
                                                                                          ......................
         Hence, if two subscriber groups are used, calculation of the royalty fee
         results in the same royalty fee as above in scenario 1 when they were still
         separate systems (all else being equal). Other offshoot scenarios arising from
         the merger include permutations of the number and makeup of subgroups to
         reflect partial carriage of certain stations to some subscribers.
         Notwithstanding such, the royalty fee would still be less than the CO
         calculated fee in scenario 2 above.
----------------------------------------------------------------------------------------------------------------
Table 2c: One system after a merger using NCTA's approach of subscriber groups for phantom signals.


         SET 3 -SA-3 SYSTEM MERGER AND PARTIALLY-DISTANT SIGNALS
Scenario 1: Two separate SA-3 systems before a merger with one partially
     distant signal that is carried in only one system under current
                      Copyright Office regulations.
------------------------------------------------------------------------
 
------------------------------------------------------------------------
System 1: 1 partially distant independent
 permitted signal (A).
                                                  ......................
 
Group I                                           Group II
 
Top 50 major market                               Top 50 major market
Gross receipts = $550,000.00                      Gross receipts =
                                                   $550,000.00
No distant signals                                1 permitted distant
                                                   independent signal
                                                   (A)
                                                  Base rate fee =
                                                   $5,571.50
 
 
 Minimum fee = $11,143.00
                                                  ......................
Royalty fee = $11,143.00
 
 
System 2:                                         ......................
 
 Group I
 
 Top 50 major market
 Gross receipts $1,800,000.00                     ......................
 2 distant independent permitted signals (B & C)  ......................
 
 Minimum fee = $18,234.00 or                      ......................
 Base rate fee = $30,258.00
                                                  ......................
Royalty fee = $30,258.00
------------------------------------------------------------------------
Table 3a: Two separate SA-3 systems before a merger with one partially-
  distant signal.


[[Page 70540]]


 
   Scenario 2: One system after a merger under current Copyright Office regulations with one partially distant
 signal. Former system 1 above now pays for two additional permitted signals (B and C) in the merged system that
it did not previously carry. Former system 2 above now pays for an additional permitted signal (A) in the merged
                                    system that it did not previously carry.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
System gross receipts = $2,900,000.00                                              .............................
 
Minimum fee = $29,377.00
                                                                                   .............................
For purposes of calculating the base rate fee, the merged system has two
 subgroups because of the partially distant signal (A) which is local in Group I.
                                                                                   .............................
Group I                                                                            Group II
Gross receipts = $550,000.00                                                       Gross receipts =
                                                                                    $2,350,000.00
2 distant independent permitted signals (B & C)                                    3 distant independent
                                                                                    permitted signals (A, B, C)
 
Base rate fee = $9,245.50                                                          Base rate = $55,201.50
 
Royalty Fee = $64,447.00
----------------------------------------------------------------------------------------------------------------
Table 3b: One system after a merger under current Copyright Office regulations with a partially-distant signal.


 
    Scenario 3: One system after a merger under NCTA's subscriber group proposal to reflect the carriage of a
 partially distant signal (A). There would apparently be three subscriber groups rather than two subgroups based
 on the partially-distant scenario involved above in scenario 2. Signal A is local in Group I, distant in Group
              II, and not carried in Group III. Signals B and C are not carried in Groups I and II.
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
System Gross Receipts =
 $2,900,000.00
                                   ......................................................  .....................
Minimum Fee = $29,377.00
 
                                   ......................................................  .....................
Group I                            Group II                                                Group III
$550,000.00 gross receipts         $550,000.00 gross receipts                              $1,800,000.00 gross
                                                                                            rec.
                                   1 distant indep. permitted signal (A)                   2 distant indep.
                                                                                            permitted signals (B
                                                                                            and C)
 
                                   Base Rate = $5,571.50                                   Base Rate =
                                                                                            $30,258.00
 
Royalty fee =$35,829.50
----------------------------------------------------------------------------------------------------------------
Table 3c: One system after a merger under NCTA's subscriber group proposal to reflect the carriage of a
  partially-distant signal.

     Similar to the scenarios illustrated in Sets 1 and 2, the above 
royalty fee under the NCTA's subscriber group proposal in Table 3c is 
less than under the Copyright Office's current methodology.
[FR Doc. E7-24079 Filed 12-11-07; 8:45 am]
BILLING CODE 1410-30-S