FTC Staff Comment Before the Library of Congress In re Eligibility for Cable Compulsory License

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Before the
Copyright Office, Library of Congress
Washington, D. C.
In re )
Eligibility for the )
Cable Compulsory License )
Docket No. 96-2
COMMENTS OF THE STAFF OF THE
FEDERAL TRADE COMMISSION(1)
The staff of the Federal Trade Commission is pleased to respond to the Notice of Inquiry ("NOI") issued by the
Copyright Office of the Library of Congress.(2) The NOI solicits comments on whether, and to what extent, open
video systems ("OVSs") are eligible to use the cable compulsory license. OVS is a new distribution technology for
multichannel video programming,(3) which combines features of common carriers with those of cable systems.(4)
The cable compulsory license provides the legal framework through which cable systems distribute broadcast
signals.(5)
The Federal Trade Commission is responsible for maintaining competition and safeguarding the interests of
consumers. The staff of the FTC has wide experience in reviewing competition issues in the area of
telecommunications.(6) Our purpose in responding to the NOI is to identify the policy considerations that we believe
the Copyright Office should carefully consider. We express no view on the technical issues of statutory construction
raised by the NOI.
The cable compulsory license applies now to traditional cable systems, private cable systems, and wireless
distribution technologies, including MMDS and LMDS.(7) A separate satellite compulsory license applies to home
satellite dishes and direct broadcast satellite technologies.(8) Together, these two compulsory licenses provide the
legal framework under which all currently existing multichannel video programming distribution technologies carry
local and distant broadcast channels. OVS clearly does not qualify for the satellite compulsory license; this NOI
addresses whether it qualifies for the cable compulsory license.
One criticism directed at the cable compulsory license has been that it, like other prices that are set administratively
rather than by market forces, may allocate resources inefficiently.(9) Because the legal framework governing the
distribution of broadcast signals includes provisions in the communications statutes, FCC regulations, and the
copyright statutes, this comment's scope is limited to how consumer welfare can be maximized through alternatives
the Copyright Office has raised in the NOI. We do not comment here on the larger policy issues raised by the
existence of the compulsory license.
We believe that applying the cable compulsory license to OVS could benefit consumers, because it would lead to an
allocation of resources that better reflected the relative costs of different video distribution methods. It is likely that
extending compulsory licensing to OVS would reduce OVS's costs of acquiring programming and make its acquisition
costs comparable to that of other distribution technologies. Absent such an extension, the OVS would have to
negotiate a separate copyright license for each program on a broadcast channel. The transaction costs of acquiring
broadcast programming for OVS distribution would thus likely be higher than for the other, established distribution

technologies.(10) This means that in some circumstances in which OVS is a superior distribution technology, a rival
technology may have lower apparent costs because of its low-priced access to programming. In such a circumstance,
consumers would face higher prices than if programming were available to all technologies under a compulsory
license. Conversely, if compulsory licensing were extended to OVS, differences in price among distribution
technologies would accurately reflect the relative costs of providing service by alternative means.
If the Copyright Office does conclude that the compulsory license applies to OVS, the question remains as to
precisely where copyright liability under the compulsory license should rest. Unlike a cable operator that programs its
entire system itself, the OVS operator will be only one of the programmers on its system.(11) In fact, a purpose of the
law is to foster competition among programmers on a single OVS.(12) We recommend that the OVS operator should
not be liable for the copyright costs for local and distant broadcast channels carried on the system by independent
programmers. In a competitive market, resources are allocated efficiently when each firm internalizes the costs of its
inputs. Here, as with cable systems, that would be accomplished by requiring the entity that selects the programming
to bear the program acquisition costs, including copyright obligations. The FCC recognizes this principle in its
determination that each OVS programmer, not the OVS operator, is responsible for obtaining retransmission consent
for local broadcast stations it chooses to carry.
In theory, assigning responsibility for obtaining consent to the OVS operator might also reach an efficient result, if the
OVS operator could then, by contract, allocate all copyright costs back to the programmers. But the statutory
language of the compulsory license, as it has been interpreted and applied, would make that allocation by contract
difficult, because the language precludes correlating the fee with the program source. A party's liability under the
compulsory license is based on the total revenue derived from all services that include any broadcast signals covered
by the license; it cannot be based only on revenue from subscribers who actually receive the programming for which
the fee is charged.(13) Assigning all copyright liability to the OVS operator could permit an independent OVS
programmer to obtain what is in effect a subsidy for its programming. For example, the independent programmer
might provide several distant broadcast signals with relatively high license fees, making the OVS operator liable for a
compulsory license fee based on the fiction that every subscriber to any programmer on the operator's system
receives those expensive distant signals. This mismatch would produce inefficient outcomes in programming
decisions. Assigning copyright liability under the compulsory license to the OVS programmer, rather than the OVS
operator, avoids this potential for distortion.
Accordingly, we recommend that the Copyright Office extend the cable compulsory license to OVS, and that
copyright liability rest with the firm providing the programming on the OVS.
1. This comment represents the views of the staff of the Federal Trade Commission, and does not necessarily reflect
the views of the Federal Trade Commission or any individual Commissioner. Inquiries regarding this comment should
be directed to John Wiegand (415-356-5270) of the FTC's San Francisco Regional Office or David Reiffen (202-326-
2027) of the Bureau of Economics.
2. 61 Fed. Reg. 20197 (1996).
3. 47 U.S.C. 571-73.
4. In re Open Video Systems, ___ FCC Rcd. ___, 1-3 (1996)(Second Report & Order).
5. 17 U.S.C. 111.
6. See, e.g., Comment of the Staff of the FTC and Antitrust Division of the Department of Justice, Open Video
Systems, FCC CS Dkt. 96-46 (1996); Comment of Staff of the FTC, Carriage of Television Broadcast Signals by
Cable Television Systems, FCC MM Dkt. 90-4 (1991); Comment of the Staff of the FTC, Reexamination of the
Effective Competition Standard for Regulation of Cable, FCC MM Dkt. 90-4 (1991); Comment of the Staff of the FTC,
Competition, Rate Deregulation and the Commission's Policy Relating to the Provision of Cable Television Service,

FCC MM Dkt. 89-600 (1990); Comment of the Staff of the FTC, Definition of Cable Systems, Copyright Office Dkt. 86-
7 (1986).
7. 17 U.S.C. 111 (f).
8. 17 U.S.C. 119.
9. Some have suggested that the license be repealed, so that cable operators and third party program packagers
would negotiate for copyright licenses to retransmit broadcast signals. See, e.g., Benson, Manning & Mitchell,
Copyright Liability for Cable Television: Compulsory Licensing and the Coase Theorem, 21 J.L. & Econ. 67 (1978);
Compulsory Copyright License for Cable Retransmission, 4 FCC Rcd. 6711, 6719-21 (1989) (Report). Others, citing
high transaction costs associated with both third party program packagers and the cable compulsory license, have
urged that the property rights in broadcast signals be reassigned to the receivers of the signals, restoring the
conditions that existed prior to 1976. See Teleprompter Corp. v. CBS, 415 U.S. 394 (1974) (finding no copyright
liability for cable operators carrying distant broadcast signals); Cablevision Systems Development Co. v. MPAA, 836
F.2d 599, 605 n.9 (D.C. Cir. 1988)(noting that viewership ratings that reflect the full distribution of broadcast signals
make the compulsory license "superfluous"); John Wiegand, Competitive Effects of Cable Copyright Law, 41 Antitrust
Bull. 61, 75-77 (1996).
10. A market for brokerage service might arise to negotiate universal licenses with programmers. These brokers
would enable OVSs to realize the benefits of the scale economies in negotiating broadcast licenses. Such brokerage
would reduce an OVS's acquisition cost relative to individual negotiation, but would likely still result in higher
transactions costs of acquiring programming than would exist under compulsory licensing. However, a brokerage
service market may not arise, since stand-alone demand for broadcast programming by OVSs may not be sufficient
to support the development of efficient, competitive programming brokers.
11. See 47 U.S.C. 573(b)(1).
12. Open Video Systems, ___ FCC Rcd.___ at 2 (CS Dkt. 94-46) (1996) (Second Report & Order).
13. See Cablevision Systems, 836 F.2d at 599; Cable Compulsory License: Merger of Cable Systems & Individual
Pricing of Broadcast Signals, 60 Fed. Reg. 2365 (1995) (Notice of Inquiry) (discussing requirement that copyright fee
be based on all subscribers to a system, not merely those subscribers who receive the programming for which the
charge is made).