TABLE 5.-FCC SURVEY OF FRANCHISING AND OTHER STATE LAW AND REGULATION PERTAINING TO CABLE TELEVISION-CODED SUMMARY

1 Specific local bills must be adopted.

2 Cable television is defined not as a public utility by AG opinion, State case or statute. Except townships.

• Parishes are the equivalent of counties.

County has no unincorporated areas or little area outside of incorporated municipalities.
Only home rule counties; all others governed by statute.

7 Only charter cities; all others governed by statute.

KEY TO SYMBOLS

Basis of franchising authority: AP-alternative proposal accepted by the FCC; C(B)-broad constitutional authorization; CJ-claim of jurisdiction unchallenged: no specific statute; CL-case law; jurisdictional issue taken to court and upheld; N-no franchising authority for cable television; P-partial regulation of cable television; Q-authority questionable intrastate; S(R)-broad statutory authority for franchising; statute not specifically directed toward cable t levision; S(S)-specific statutory authority for franchising of cable television systems.

Attorney General opinion: O-official published opinion by the State Attorney General; N--none; U-unofficial comment or letter from a State Attorney General's office.

State regulatory authority: CC-independent cable commission; PU-public utility-type regulation (PUC, PSC, PSB); N-none.

Nonfranchise statutes: N-no statute adopted on cable television in areas other than franchising, if any; Y-statute(s) cther than or in addition to franchising adopted on cable television.

Source: Sharon A. Briley, Cable TV-State Regulation: A Survey of Franchising and Other State Law and Regulation on Cable Television, Federal Communications Commission, Cable Television Bureau, May 5, 1975, revised, Dec. 17, 1975.

Whatever its goals, the FCC's pre-1972 freeze on distant signals in the top 100 markets had the effect of protecting the profits of big city VHF network-affiliated television stations at the expense of cable television operators, UHF and independent stations, and the viewing public. The post-1972 rules have roughly the same effect, but are less draconian, since they allow some distant signals to be imported.

THE IMPACT OF CABLE REGULATION

There have been a number of studies of the effect of various proposed. FCC rules on the growth of cable systems, the profitability of TV stations, and the welfare of viewers. These studies focus on the impact of varying the number and type of distant signals allowed under some assumptions about copyright liability.

Distant signals in big cities are probably necessary for cable tobe economically viable. They increase demand for the system's services at relatively low cost, and this may allow the operator to achieve suffi-cient penetration of the market to make other services profitable, notably pay-TV channels containing movies. More exotic and specialized services, such as alarm systems, meter reading, and electronic shopping, are much talked-about. It is argued that these exotic services cannot be offered until cable systems have a high penetration, and that distant signals are a necessary preliminary step. The evidence in some studies suggests that distant signals may be just enough to make cable systems marginally profitable in large cities with good over-the-air signals.32 The amount of copyright payment and the casts of services. required by regulators may make the difference. Thus, while none of the parties deny the necessity for copyright liability, it has taken many years to settle on the particular formula contained in the Copyright Act of 1976.

Similarly, there is debate over the extent of exclusivity (geographical and temporal) that copyright owners may grant to stations that buy their programs.

The issue of copyright liability for distant signals is a complex one, because it involves what can only be guesses about transactions costs under various policies, the elasticity of program supply, and possible changes in patterns of television advertising. One straightforward approach is to have no copyright liability at all. Cable operators would import unlimited distant signals, paying only the cost of physically transmitting the signals. The distant stations being imported would gain additional audiences, additional advertising revenue, and in the end would pay more money to program suppliers.

On the other hand it may be necessary to have copyright liability for distant signals because otherwise, in the long run, the market for programs would not be able to operate effectively. Program suppliers rent their products to TV stations and networks for "runs" that include geographical and temporal exclusivity provisions; this presumably increases the value of the program to the station (because most of the local audience will not have seen the program before) and therefore increases the revenue that the program supplier can expect. If cable systems had a right to import any distant signals

a2 See Mitchell and Smiley (1974); Noll, Peck and McGowan (1973).

without copyright liability, the program suppliers might not be able to sell the program to more than a few powerful independent VHF stations, because the program would be relatively unproductive to local stations. But distant local audiences are worth less to the imported station than to the local station in advertising revenue. The result might be a decrease in the revenues of program suppliers, who are highly competitive. The absence of copyright liability with widespread distant signal importation might thus result in a decline in the supply of program material, depending on the amount of economic rents in program supply. Ideally, one would want cable systems to bargain with distant stations over the fees to be paid for importation. However, stations do not themselves hold copyright to the programs, just an exhibition license. Direct bargaining between cable systems and program suppliers is not possible because of excessive transactions costs. Giving cable systems a compulsory license to import signals subject to freely negotiated "reasonable" copyright fees might work if stations wishing to be imported were to compete with each other. Then program producers would be able to charge imported stations a price which reflected the royalty payments made to the station by cable systems. There may even be a problem with this approach, however, if the physical transmission costs of importation are insufficient to overcome the tendency of competing distant stations to bid down the royalty rate charged to the systems they are serving. The copyright issue was settled for the time being with the passage of the General Revision of the Copyright Law in 1976.33 The act makes retransmissions by cable companies of broadcast programming subject to copyright law. It provides for compulsory licenses for all unaltered retransmissions authorized by the FCC provided that proper statements of identity and accounts are filed and that royalty. fees are paid. No royalties need be paid on signals of stations within the local viewing area, but all large cable systems must pay a royalty fee of 0.675 of one percent of gross revenues which gives them the right to import such distant signals as the FCC allows.34 The royalties are accumulated by the Copyright Office and distributed once a year by a newly created Copyright Royalty Tribunal to copyright owners whose programs were retransmitted as distant signals. No claim can be made for local retransmissions or for network programs.

Since Congress has resolved the copyright issue, and the courts have resolved the pay-TV issue, the FCC remains faced only with the questions of distant signal importation and exclusivity regulation.

ECONOMIC EFFECTS

The following summarizes what is known about the economics of distant signals and pay-TV: most of the studies deal with the question, what would happen if there were unlimited distant signal importation? 35

33 17 U.S.C. 111.

For large systems the haste fee is 675 of 1 percent of gross receipts (excluding receipts from pay TV and installation charges). This can be offset against royalty fees on signals actually imported. The fee for the first distant signal is 0.675 of 1 percent of gross receipts. It is 0.425 of 1 percent each for the second, third, and fourth signals Imported, and 0.2 of 1 percent for each additional signal imported. Smaller cable systems (less than $160.000 gross receipts semi-annually) pay lower royalty fees calculated without regard to the number of distant signals carried.

All of the major studies of cable television were done prior to the passage of the Copyright Act of 1976 and the Home Box Office decision.

Impact on cable

All of the econometric studies agree on one point: imported distant signals increase cable penetration.36 They disagree on the magnitude of the effect, but these disagreements do not appear to be statistically significant. Moreover, such disagreement as does exist centers on predictions of regulatory policy.37 Unlimited distant signal importation would make cable initially viable in some markets where it is not now. For instance, cable appears to be profitable in cities as large as San Diego, which has a large "grandfathered" cable system, and which ranks about 50th in size among TV markets. The studies do not permit more accurate predictions because the existing data are conditioned by the FCC's present and past restrictive rules, discussed above.38 Unlimited importation is likely to bring cable to many, perhaps a majority of the top 100 markets. But in the very largest markets, cable growth probably depends on pay programing as much as more free signals, because these markets already have three clear network signals and several independent stations. Of course, the situation in individual markets will vary according to local conditions, such as terrain, the number of local signals, and whether many local stations are UHF.

It is important to point out that we are dealing with a threshold effect. In many of the top 100 markets, distant signals will provide the initial incentive to investment and construction of systems which will later be able to add riskier penetration-increasing services, such as pay-TV. Full deregulation of distant signals is probably a necessary but not sufficient condition for the creation of a truly national television service over the next decade.

The econometric studies (which generally attempt to relate existing cable penetration to the number and type of signals available) vary in their methodology and assumptions. Generally, they predict that unlimited distant signal importation would increase the number of cable subscribers by between four and eleven million in the top 100 markets, compared to present policies. Table 6 shows the range of estimated increases in subscribing households predicted by two of the studies under various assumptions. A middle estimate would be 7 million. There are presently between four and six million subscribers in the top 100 markets, so this would be a significant increase. Curiously, the studies show that imported duplicate network signals have as much or more impact as imported independent stations. This may be due to the value of non-network syndicated programing (outside prime time) on network stations.

Most of the proposals for deregulation of distant signals assume that all local stations will be carried, and that all local stations would be protected from simultaneous duplication of their programing by blacking out identical programing on imported signals. This does viewers little or no harm, and protects the local stations' audiences.

36 See Park (Bell Journal. 1972), Crandall and Frey (1974), Charles River Associates (1973), Noll, Park and McGowan (1973), FCC (Staff memo, n.d.), Mitchell and Smiley (1974). Park (June 1972). Comanor and Mitchell (1971). Paul MacAvoy (1976) provides a critical review of these studies.

37 That is, it appears that after differences in assumptions about future regulatory policy are taken account of, the various econometric predictions are probably about the

-same.

Cable systems with a given number of imported signals now are not necessarily imsporting the most profitable signals, because of the leapfrogging rules.

Impact on broadcasters

Measurement of cable impact on broadcast station profits is hampered by the absence of accurate data. The "official" FCC reports of station financial data simply are not credible. For instance, these data show drastic changes from year to year and from (similarly situated) station to station in individual line items. Moreover, the accounts purport to show the continued existence over twenty years of stations which make consistent accounting losses, and which nevertheless change hands at positive prices. There is no uniform system of accounts, and conglomerate ownership makes accounting artifice a distinct possibility.

Nevertheless, the studies would seem to support the following statements.39 Cable penetration in the top 100 markets (serving 87% of the population of the country) will not cause stations to go off the air. It will necessarily, however, reduce the revenues of VHF network affiliates.

TABLE 6.-INCREASE IN CABLE HOUSEHOLDS IN TOP 100 MARKETS DUE TO 2 MORE INDEPENDENT IMPORTED SIGNALS PLUS 0, 1, 2, AND 3 DUPLICATE NETWORK SIGNALS [Based on 57,100,000 television households in top 100 markets]

Source: Unpublished compilations by V. Sardella from studies by Park (1972) and Charles River Associates (1973).

Generally, since independent UHF stations are helped by cable, and since both UHF and VHF network affiliates are quite profitable to begin with, the only stations likely to suffer any danger of going off the air as a result of cable growth are small-market independent VHF's. There are only eleven such stations below the top hundred markets. Thus the total number of "endangered" stations is a very small fraction of all TV stations, and the effected viewing population is probably less than 1% of the total poulation. The reduction in revenues to stations due to increased competition will reduce the stations' ability to pay high prices to talent for local programing. Except for news, such programming is already de minimus, and in any event is apparently not of much value to consumers (audiences are very small). These effects will take place because (and only if) viewers in fact prefer the alternative programing provided by cable.

In the smaller markets, it is possible that a very few stations may be driven off the air by cable. Again, this will happen because (and only if) viewers prefer to watch the imported material. To the extent that significant numbers of consumers do not have access to cable, it

20 See Noll, Peck and McGowan (1973, Park (J.L.E., 1972) FCC Staff memo, n.d.). Fisher and Ferrall (1966), Crandall (1974), Statistical Research (1970). MacAvoy (1976) points out that these studies generally fail to take account of the reaction of broadcasters to increased cable competition (e.g., in programming decisions), and that they collectively fail to "prove" that broadcasters will not be seriously harmed by cable.