A 2008 Copyright Office policy decision has resulted in cable operators getting charged copyright royalties for transmissions of broadcast content that do not actually take place — transmissions referred to as “phantom signals” since they eerily appear on copyright holders’ balance sheets, but not on a cable subscriber’s television screen. Now, this really starts to sting when you realize that the cost to cable operators of these rather spooky royalties charges necessarily get passed on to cable subscribing consumers for content they never actually receive!
This needless pricing anomaly results from the counterintuitive way in which copyright royalties are being calculated as a result of how cable service areas are statutorily defined. Charging royalties for these phantom signals — that is, for broadcast content not actually received by consumers — results from some confusion in the law that was cemented by the Copyright Office’s interpretation of the relevant statutory language. Fortunately, in reauthorizing the “Satellite Home Viewer Digital Television Act” (SHVERA), Congress has an opportunity to amend Section 111 of the Copyright Act and clarify that copyright law does not, and should not, require the payment of copyright royalties for broadcast signals not actually delivered to consumers.
In general, the areas in which cable operators provide service to subscribers are separated geographically into regions defined as “cable systems.” Smaller systems are historically charged lower copyright royalty rates for the content they transmit than are larger systems – the idea being that the larger systems do not require the additional cost protections provided to operators transmitting to smaller service areas.
As you can imagine, this results in an incentive for cable companies to “artificially fragment” their cable systems in order to qualify for the lower pay rate.
To counter this incentive, Section 111 of the Copyright Act defines a “cable system” somewhat broadly, such that neighboring communities – referred to as “subscriber groups” – are defined as being part of the same cable system so long as they are served by a single cable operator.
If all these communities or subscriber groups received identical distant signal offerings, and all consumers had the exact same programming demands, then there wouldn’t be such a problem here. However, in truth, cable operators provide neighboring communities with different distant broadcast signals in order to meet consumer demands and historical expectations.
So, for instance, one Texas community might receive WGN (Chicago) while a neighboring community subscribes to WWOR (New York) even though both are served by the same cable operator and, therefore, part of the same cable system.
The 2008 Copyright Office policy decision would have cable operators calculate (and pay) copyright royalties for distant signals offered in a given community as a function off the total number of subscribers across all the neighboring subscriber groups that make up that cable system even if the relevant content is not actually being offered to or enjoyed by the consumers in those other communities.
By charging royalties for these phantom signals, copyright owners are overcompensated by payments that do no not correlate with the performance of their work or with the number of subscribing consumers who actually get access to the relevant broadcast content.
The Consumer’s Interest
This pricing scheme results in an increase in royalty payments that the cable operator must pass on to subscribers in the form of higher rates for cable subscription with no value-added to existing service or which the operator must absorb itself, thereby reducing the resources available to provide other services to consumers. A third possibility is that phantom signal payments will simply deter operators from carrying diverse stations across the communities they serve, depriving consumers in those communities of programming that they desire with no greater revenues produced for copyright holders.
In each of these scenarios, the consumer’s interest is harmed.
The cable industry proposes that these royalty calculations be made on a community-by-community basis, which is, if you think about it, reasonable, balanced, and entirely practical. In fact, prior to the confusion created by the 2008 Copyright Office policy decision, this method of calculation was widely used to accurately reflect the amount of copyrighted broadcast content transmitted, resulting in no increased cost or loss of service for consumers.
Subscriber group calculations (as opposed to “cable system calculations”) neither deny rights holders compensation for performances of their work nor require cable operators to pass copyright royalty costs on to subscribers for content they do not receive.
To prevent overcompensation to copyright owners at the expense of the consumer interest, Section 111 should be amended in conjunction with the current SHVERA reauthorization. The law leading to this counterintuitive pricing scheme should be clarified and the sensible status quo of subscriber group calculation restored.