PAGENO="0001" SUBSCRIPTION TELEVISION HEARINGS BEFORE THE SUBCOMMITTEE ON COMMUNICATIONS AND POWER OF TEE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HOUSE OF REPRESENTATIVES NINETIETH CONGRESS FIRST SESSION ON H.R. 12435 A BILL TO AMEND THE COMMUNIOATIONS AOT OF 1964 SO AS TO PROHIBIT THE GRANTING OF AUTHORITY TO BROADOAST PAY TELEVISION PROGRAMS OCTOBER 9, 10, 11, 12, 13, AND 16, 1967 Serial No. 90-15 Printed for the use of the Committee on Interstate and Foreign Commerce U~S. GOVERNMENT PRINTING OFFICE 86-3990 WASHINGTON: 1967 L\~Li I PAGENO="0002" COMMflIMIiE ON INThflSPA9~ AND I3'OIU~iIGN OO1~?1MERCE HARLEY 0. ST4GGERS, West Virginia; Chairman SAMUEL N. FRIEDEL, Maryland WILLIAM L. SPRINGER, Illinois TORBERT H MACDONALD Massachusetts SAMUEL L DEVINE Ohio JOHN JARMAN, Oklahoma ANCHER NELSEN, Minnesota JOHN E MOSS California HASTINGS KEITH Massachusetts JOHN D. DINOELL, Michigan GLENN CUNNINGHAM, Nebraska PAUL 0. ROGERS, Florida ~1AMES T. BROYHILL, North Carolina HORACE R. KORNEGAY, North Carolina JAMES HARVEY, Michigan LIONEL VAN DEERLIN California ALBERT W WATSON South Carolina J. J. PICKLE, Texas TIM LEE CARTER,: Kentucliy FRED B. ROONEY, Pennsylvania 0. ROBERT WATKINS, Pennsylvania JOHN M. MURPHY, New York DONALD G. BROTZMAN, Colorado DAVID B SATTERFIELD III Virginia CLARENCE J BROWN Ja Qbio DANIEL J. RONAN, Illinois DAN KUYKENDALL, Tennessee BROCK ADAMS, Washington JOE SKUBIPZ, Kansas RICHARD L. OTTINGER, New York RAY BLANTON, Tennessee W. S. (BILL) STUCKEY, JR., Georgia PETER N. KYROS, Maine W. B. WILLIAMsoN, Clerk KENNETH J. PAINTER, Assistant Clerk Professional Staff StrBooMMnvr~ ON OOMMTJNIOATIONS ANI~ Powna TORBERT H. MACDONALD, Massachusetts, Chairman HORACE R. KORNEGAY, North Carolina LIONEL VAN DEERLIN, California FRED B. ROONEY, Pennsylvania RICHARD L. OTTINGER, New York JAMES T. BROYHILL, North Carolina JAMES HARVEY, Michigan DONALD G. BROTZMAN, Colorado CLARENCE J. BROWN, Ja., Ohio ANDREW STEVENSON JAMES M. MENOER, Jr. WILLIAM J. DIXON ROBERr W. LISHMAN (II) PAGENO="0003" CONTENTS Hearings held on- Page October 9, 1967 1 October 10, 1967 197 October 11, 1967 237 October 12, 1967 375 October 13, 1967 415 October 16, 1967 619 Text of H.R. 12435 -- 2 Excerpt from FCC Public Notice 5317, August 25, 1967, on TV broadcast financial data-1966 387 Statement of- Adams, David, senior executive vice president, National Broadcasting Co 185 Anello, Douglas, counsel, National Association of Broadcasters 406 Banning, Thomas A., patent attorney, Chicago, Ill 646 Celler, Hon. Emanuel, a Representative in Congress from the State of New York 375 Dingell, Hon. John D., a Representative in Congress from the State of Michigan 197 Erlick, Everett H., vice president and general counsel, American Broadcasting Cos., Inc 392 Firestone, Martin E., counsel, All-Channel Television Society 619 Flake, Keigler E., general manager, WHCT-TV, Hartford, Conn. - - - 237 Gaynes, Martin J., counsel, National Association of Theatre Owners, and Joint Committee Against Toll TV 415 Goldberg, Henry, counsel, Association of Maximum Service Tele- casters, Inc 564 Goodman, Julian, president, National Broadcasting Co 185 Hall, Robert, representing Skiatron Electronics & Television Corp~. 626 Hyde, Hon. Rosel H., Chairman, Federal Communications Commis- sion 3 Lindow, Lester W., executive director, Association of Maximum Service Telecasters, Inc 564 McKinsey, W. Robert, president, WJRJ-TV, Atlanta, Ga 654 Monderer, Howard, Washington counsel, National Broadcasting Co - 185 Pierson, W Theodore, counsel, Zenith Radio Corp - 237 Preminger, Otto, New York, N~Y 221 Sagall, Solomon, president, Teleglobe Pay-TV System, Inc 601 Van Beek, Pieter E., president, Teco 237 Wasilewski, Vincent T., president, National Association of Broad- casters 407 Wright, Joseph S., president, Zenith Radio Corp 237 Additional material submitted for the record by- American Civil Liberties Union: Letter dated October 19, 1967, from Lawrence Speiser, director, Washington office 716 Supplemental comments of the American Civil Liberties Union, February 8, 1967, to FCC docket No. 11279 716 American Farm Bureau Federation, letter from John C. Lynn, legis- lative director 720 Americans for Democratic Action, statement of Sidney W. Dean, Jr., chairman, Communications Committee 642 (UI) PAGENO="0004" Iv~ Additional information submitted for the record by-Continued Association of Maximum Service Telecasters, Inc.: Further comments of the Association of Maximum Service Tele- Page casters in FCC docket No. 11279, September 15, 1967 565 Letter dated October 20, 1967, from Lester W. Lindow, executive director 682 Supplemental statement of Lester W. Lindow, executive director_ 683 Brown, Hon. Clarence J., Jr., UHF and VHF channels allocated, as of March 1966; operating and authorized, as of September 30, 1967 (table) 559 Celler, Hon. Emanuel: Network (ABC, NBC, CBS) pretax television profits, 1960-66 (table) 387 Colorado Translator Association: Comments of Colorado Translator Association in FCC docket No. 11279, September 27, 1967 718 Letter dated October 5, 1967, from A. K. Smith, president 718 Columbia Broadcasting System, Inc.: Comments of CBS in FCC docket No. 11279, October 7, 196& - - 669 Letter dated October 23, 1967, from Leon R. Brooks, vice presi- dent and general counsel 662 Statement (January 22, 1958) of Frank Stanton, president .1 664 Federal Communications Commission: Fourth Report and Order, proposed by FCC Subscription Tele- vision Committee 15-144 Letter dated October 26, 1967, updating FCC memorandum of law re Commission authority to authorize subscription televi- sion operations (with attachments) 149 Order setting oral argument and second further notice of proposed rulemaking 169 Subscription Television Committee report to Commission 8-14 International Telemeter Corp.: Comments of International Telemeter Corp. in FCC docket No. 11279, October 10, 1966 685 Letter dated October 9, 1967 684 Joint Committee Against Toll TV: Comments submitted by Joint Committee Against Toll TV, October 10, 1966 (FCC docket No. 11279) 423 Further comments submitted by Joint Committee Against Toll TV and National Association of Theatre Owners, September 15, 1967 (FCC docket No. 11279) 513 Letter dated October 18, 1967, responding to questions posed during hearing 562 Kaiser Broadcasting Corp., statement 661 MacDougall, Allan, Jr., Los Angeles, Calif., letter, with attachment - 721 National Association of Theatre Owners: Further comments submitted by Joint Committee Against Toll TV and National Association of Theatre Owners, September 15, 1967 (FCC docket No. 11279) 513 Letter dated October 18, 1967, responding to questions posed during hearing 562 National Grange, statement of Harry L. Graham, legislative repre- sentative 600 Setta, Samuel J., Easton, Md., letter 723 Skiatron Electronics & Television Corp.: Letter dated July 28, 1965, to FCC from Sylvester L. Weaver, Jr., president, Subscription Television, Inc 631 Taft Broadcasting Co., statement of Lawrence H. Rogers II, president.. 661 WGN Continental Broadcasting Co., letter from Ward L. Quaal, president 719 Zenith Radio Corp.: Excerpts from statement of International Telemeter Corp. in support of rulemaking petition for authorization of nationwide subscription television, May 25, 1967 (FCC docket No. 11279) setting forth facts concerning Etobicoke (Canada) experiment. 366 Joint comments of Zenith Radio Corp. and Teco, Inc., in support of petition for nationwide authorization of subscription tele- vision March 10, 1965 (FCC docket No. 11279) 241 PAGENO="0005" SUBSCRIPTION TELEVISION MONDAY, OCTOBER 9, 1967 HousE o~' REPRESENTATIVES, SUBC0MMIrrES ON COMMUNICATIONS AND POWER, CoMi~mTFiE ON INTERSTATE AND FOREIGN COMMERCE, TVa.~hington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2123, flayburn House Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) presiding. Mr. MACDONALD. Th~ hearing will come to order. The hearing this morning is on H.R. 12435 dealing with subscrip- tion television I thn~k that under the circumstances, because of some of the misapprehensions that I have heard circulated, perhaps at the outset I would like to briefly review the history of subscription tele- vision and our interest as a committee in it. As all of us know, the Federal Communications Commission first authorized experimentation with over-the-air subscription television in 1950. Early experiments were conducted in New York City, Chicago, and Los Angeles. Subsequently, a much broader experiment was undertaken beginning in 1962 in Hartford, Conn. I also know, although it is not here on the slip, that there was some experiment held in a suburb outside of Toronto, Canada, I believe, The experiment in Hartford has recently been concluded Since the conclusion of the Hartford experiment the Federal Communica tions Commission has proposed an order esta;blishing certain rules to regulate the operation of subscription television throughout the country. These hearings today are not concerned with the content of that proposed order and the regulations which the Commission now has under study. That proceeding involves the substance of `the form that subscription pay regulations should take We are not concerned with those in these hearings but what we are concerned with are more basic questions. Namely, should Congress authorize subscription television? Should Congress prohibit subscription television? Will subscription television serve the public interest? These hearings, therefore, are held for two basic purposes. First, Congress has delegated to this committee the responsibility to oversee the operations of certain independent regulatory agencies and to make certain that each is acting within the scope of its statutory authority. As we on the committee so well know and most of you in the room are well aware, those agencies were created by Congress and Congress (1) PAGENO="0006" 2 delegated to them power within prescribed limits to regulate certain industries. When it created these agencies Congress established certain criteria and standards which are to govern the activities of those agencies. In addition, Congress has from time to time established policies which are to be executed by those agencies. This committee regularly reviews the activities of the Federal Communications Commission to ascertain the manner in which this agency is carrying out its delegated responsibilities and whether its actions are within the scope of its statutory purview. Second, these hearings are intended as an initial step to thoroughly explore all the ramifications of subscription television. We want to learn specifically what subscription television encompasses2 what pur- poses it serves, what prdblems it can create, and whether it is indeed necessary. Then we must thoroughly explore the effects that the existence or nonexistence of subscription television will have upon existing UHF and VHF television. How is subscription television affected by and how will it affect community antenna television systems ~ As everyone in this room knows, only 2 weeks ago the House after passage by this committee, passed the Public Broadcasting Act of 1~6~ Therefore, we are now committed to the expenditure of significant sums of money for the promotion of high quality, locally oriented programs. How will the educational broadcasting system be affected by sub scription television Several of the witnesses I hope will be members of the Federal `Communications Commission, I want to assure them at the outset that this committee does not inte~id to interrogate them respecting the particulars of the rulemaking proceeding which is presently under consideration by the Commission We want among other things to inform ourselves of the basic reasons underlying the need, if any, for a subscription television syst~m, and whether the statutory authority for Commission a~tion in this field is adequate We should like to ascertain in these hearings the extent to whith authorization of subscription television on a nonexperimental basis will diminish the amount of spectrum space now available for other uses. We should also like to find out if any such diminution is necessary in the public in~tere~t. Congressman Dingell, a distinguished member of our full commit tee, has introduced a bill, H R 12435, to amend the Communications Act by providing that nothing therein shall be held to empower the Commission to authorize any person to engage in the broadcasting of pay television programs. (The bill, ILR. 12435, follows:) (R.R. 12485, 90th Cong., first sess.] A DILL To amend the Communications Act of 1984 so as to prohibit the granting of authorIty to broadcast pay television programs Be it enacted by the f~enate and Hou$e of Representatives of the United ~5tate~i of America in Congress a~em~bied, That section 3 of the Communications Act of PAGENO="0007" 3 1934 (47 U.S.C. 153) Is amended by adding at the end thereof the following new paragraph: "(hh) `Pay television program' means any television program Intended to be received by members of the public only upon the payment by such members of a charge, fee, or other form of direct compensation." Sno. 2. Section 303 of the Communications Act of 1934 (47 U.S.C. 303) is amended by adding at the end thereof the f~liowing: "Nothing in this Act shall be held to empower the Commission to authorize any person to engage In the broadcasting of pay television programs." Mr. MACDONALD. With that in mind we certainly welcome the Chair- man of the Federal Communications Commission, our first witness of the morning, Chairman Rosel H. Hyde. Will you please come before us, Mr. Chairman ~ It is very nice to see you again. STATEMENT OP HON. ROSEL IL HYDE, CHAIRMAN, PFADERAL COMMUNICATIONS COMMISSION Mr. HYDE. Good morning. It is a pleasure to be here. As Chairman of the Federal Communications Commission I appear today in response to the committee's invitation to discuss the back~ ground and current status of the Commission's subscription televi- sion proceeding, docket No. 11279. Beginning in 1952, petitions were filed with the Commission request ing authorization to initiate subscription television. In February 1955, the Commission instituted a rulemaking proceeding inviting comments on whether the Commission should authorize television stations to transmit programs paid for directly on a subscription basis and re- lated questions of law, fact, and p~iblic interest considerations asso- ciated with such a proposal. Copies of the notice instituting that proceeding and all other docu- ments mentioned in my statement which reflect action taken by the Commission are available for inclusion in the record at appropriate points should you so desire. I will ask members of the staft' to show the various documents to committee counsel. Among those filing comments were the three television networks; the National Association of Broadcasters; the Joint Committee on Toll TV (a group of motion picture theater interests opposed to subscrip- tion television); Jerrold Electronics Corp.; Zenith Radio Corp. and Teco, Inc.; Skiatron Electronics & Television Corp. `and Skiatron TV, Inc.; and International Telemeter Corp. Comments were also filed by UHF and VHF stations, educational institutions, and various organizations. Over 25,000 members of the public submitted letters pro and con. After reviewing the comments filed, the Commission issued a notice of further proceedings in which it stated "that the Commission has the statutory authority to authorize the use of television broadcast fre- quencies for subscription television operations if it finds that it would be in the public interest to do so." The notice also pointed out that although the comments were use- ful, they did not provide an adequate record upon which a decision could be reached as to whether the proposal to authorize subscription television should be either granted or denied. PAGENO="0008" 4 The Commission found that trial operations would be indispensable in arriving at soundly based decisions and invited comments on a series of 11 questions designed to aid it in deciding the conditions under which trial operations should take place. Appropriate congressional committees were kept fully apprised of all these developments. Congressman Harris, then chairman of the House Interstate and Foreign Commerce Committee, requested and we supplied him with a memorandum of law with respect to the Com- mission's jurisdiction to authorize subscription television operations. In October 195'T, the Commission issued its first report announcing the conditions under which it would consider applications for trial subscription television authorizations. Among the conditions to be imposed on any trial operations au- thorized were: (1) Any system could be tested in up to three markets. (2) More than one system could be tried out in a single market. (3) Trials were limited to stations in cities with at least four commercial television services (including the applicant's station). (4) Trial authorizations were to be for 3 years with the possi- bility of renewal. - The first report also stated that, when sufficient data was available from the trials, the Commission would conduct a public hearing on such data and on the `ether outstanding issues. It indicated that be- cause of the need for careful review of all aspects of the applications for trial operations, it would not be practicable to act on them before March 1958. In January 1958, the House Interstate and Foreign Commerce Com- mittee conducted 6 days of hearings on the subject. On February 6, 1958, that committee adopted a resolution expressing the sense of the committee that the FCC should not grant authorizations for subscrip- tion television operations as contemplated in the first report unless and until the Communications Act of 1934 is amended so as to specifi- cally empower the Commission to grant such authorizations. A number of bills were also introduced in both Houses of Congress which would restrict or prohibit authorization by the Commission of the broadcast of programs for which a direct charge is imposed on the viewers. In these circumstances, and in order to give the Congress oppor- tunity to act, the Commission announced iii a second report of Febru- ary 26, 1958, that action on applications for authorizations to conduct trial subscription television operations would be deferred until at least thirty days following the adjournment of the 85th Congress. After further consultation with Chairman Harris, the Commission deferred the processing of such applications until the adjournment of the first session of the 86th Congress. No congressional hearings were held on the bills `then pending or on similar bills to prohibit subscription television which have been intro- duced in each Congress since 1958. In a third report of March 23, 1959, the Commission made three changes in the conditions for trial operations: PAGENO="0009" (1) Instead of permitting the trial of a particular subscription television system in up to three markets, it permitted a system to be tried in only one market. (2) Only one system could be tried in a single market. (3) Whereas the first report had left open the question of whether any receiving equipment might be sold to participating members of the public, the third report announced that the public should not be called upon to buy equipment for trial operations that was not needed for the reception of "free" broadcasts. The House Interstate and Foreign Commerce Committee then adopted another resolution, stating that its February 6, 1958, resolution should not preclude subscription television trial opera- tions as contemplated by the third report. On March 26, 1959, on the floor of the House, Chairman Harris summarized the reasons for the committee resolution. He stated that it would be unwise to prevent trial operations of subscription tele- vision as long as they were conducted so as to preclude the virtual establishment of a new service, and as long as they did not involve financial risk for subscribers. He emphasized that promoters of subscription television were on notice that the Congress reserved the right to determine whether to enact legislation to amend the Communications Act to empower the Commission to grant, and to prescribe the conditions' under wh'ich the Commission would have the power to grant, authorization for ex- tended or permanent operations. He further emphasized that: Under no èircumstances could the action of the Federal Communications Commission and the action of the Committee on Interstate and Foreign Commerce be construed as placing a stamp of approval on subscription television as a permanent service. After 5 days of hearings `before the Commission, the first application filed under he terms of the third report was granted It authorized RKO General Phonevision Co (a subsidiary of RKO General, mc), licensee of UHF station WHCT, Hartford, Conn, to engage in a 3 year `trial operation of subscription television over WHCT. The Commission's grant of this authorization was challenged in the U.S. Court of Appeals which upheld the Commission's jurisdiction and authority to order such trial operations (Connecticut Coimmittee Again&t Pay TV v. FCC, 301 F. 2d 835 (C.A.D.C., 1958), cert. denied, 371 U.S. 816 (1962)). The Hartford `trial operation commenced on June 29, 1962. On May 21, 1965, the authorization was extended for a period of 3 years or until such earlier time as the Commission might terminate the rulemaking proceeding. Only two other applications for authorization were filed One was denied because it did not meet the conditions of the third report. The other `was granted bnt the operation never commenced, and the au- thorization was relinquished on May 1, 1964. In March 1965, Zenith and Teco, which supplied the equipment used in the Hartford trial operation, filed a joint petition requesting authorization of nationwide subscription television. The pleading PAGENO="0010" 6 contained exhaustive information concerning the first 2 years of the Hartford trial. In response to the Zeni'th-Teco petition, the Commission on March 24, 1966, issued a further notice of proposed rulemaking and notice of inquiry which included the following matters: (1) A finding that the Commission has jurisdiction to authorize subscription television on a permanent basis. (2) A recogmtion of the interest of Congress in the subject and provision of time for Congress to act if it so desired before the pro- ceeding is terminated. (3) A decision that subscription television is broadcasting. (4) An expansion of its proceeding to include an inq~uiry into the appropriate role, if any, of the Federal Government with regard to the establishment and manner of operation of wire or cable subserip tion television, and how that role should be effected. (5) `Statements that "although we have reached no finalconclusion thereon, it appears that it may well be. in the public interest to au- thorize [subscription television] operations on a permanent nation- wide basis" and "that subscription television on a nationwide scale can be effectively integrated into a total TV system, with advantages to the viewing audience, appears to be a reasonably sound conclusion at this point." (6) An indication that the concern of the Commission was with the overall public interest, and that the competition between subscription and conventional television for audience and program material might result in improved and more varied fare for viewers of both services. However, the Commission emphasized that it regarded the preserva tion of conventional television service and the continued availability of good program material to the free service as vital considerations. (7) A statement that commercials would not be allowed on sub- scription operations. (8) An invitation to comment on the general issue of whether subscription television should be authorized on a permanent basis, and on 15 specific pertinent issues that would have to be decided if it is so authorized, and on specific proposed rules to govern subscription teie vision if it is authorized on a permanent `basis. Comments were duly filed and, after a thorough study of the record, the Subscription Television Committee, which the Commission had established in 1963, submitted a written report on July 3, 1967, and a draft of a fourth report and order which the Committee recommended for adoption by the full Commission. These documents were made public on July 14, 1967. The committee recommended the establishment of an over-the-air subscription service and the adoption of rules governing that service. The committee's report and the proposed fourth report are being submitted for the record. (See p. 8.) Upon receipt of the fourth report, the full Commission determined that its study and resolution of the matter would be aided by oral argument, and that such argument would be most useful if addressed to the report. Oral argument was just heard on October 2 and 3. PAGENO="0011" 7 In sum, this proceeding has been formally pending for more than 12 years. Each stage of it has been carefully considered and all actions taken by the Commission in this area have been announced in normal fashion and widely distributed and discussed within the communica- tions industries. The Commission, of course, welcomes any guidance the Congress may want to give in this important area. We have reached the stage where we apparently have before us sufficient data to make a determi- nation, in the discharge of our statutory responsibilities, as to whether, and under what conditions, authorizing subscription television is in the public interest. I want to stress that the Commission has reached no decision on this question. In fact, Commissioner Wadsworth, the chairman of our Subscription Television Committee, in signing the report to the Commission, appended a statement as follows: I agree that this matter should be brought to the attention of the full Commis- sion at this time flowever I wish to make my position clear In agreeing to submission of this document to the full Commission, I do not mean to imply that I endorse adoption of it. Nonetheless, in view of the history of this proceeding, I believe that the public and all parties to it are entitled to an early Commission decision on the basic question presented. In reaching its determination, the Commission will, of course, fully consider the views presented in the docketed proceeding, and the oral arguments presented to the Commission during the past week, as well as the hearings now being held by this committee. In conclusion, may I emphasize again that there has been no resolu- tion of the issues which have just been argued so extensively before us. Since the entire matter is still under study, we are not in a position to express the Commission's conclusions on the substantive issues. That concludes my written statement, Mr. Chairman. (The Subscription Television Committee's report and proposed Fourth Report and Order, referred to above, follow:) PAGENO="0012" 8 Before the FCC 67-819 FEDERAL COMMUNICATIONS COMMISSION 2819 Washington, D. C. 20554 In the Matter of ) Amendment of Part 73 of the ) Commission's Rules and Regulations ) Docket No. 11279 (Radio Broadcast Services) to provide for Subscription Television ) Service ) ORDER Adopted July 12, 1967 ; Released July 14, 1967 By the Commission: Commissiot~ers Bartley, Cox and Loevinger absent The Commission has before it the report of its Subscription Television Committee, dated July 3, 1967, transmitting a proposed Fourth Report and Order and a Second Further Notice of Proposed Rule Making. The Commission believes that its study and resolution of this important matter would be aided by oral argument, and further that such argument would be most useful, if addressed to the report. Accordingly, it is releasing the report at this time, and will specify by subsequent order a date for oral argument to be held in early fall. Parties may also submit written comments or outlines of their arguments, not to exceed 50 pages, on or before September 15, 1967. An original and 14 copies should be filed. (See Section 1.419 of the Commissionts rules.) IT IS ORDERED, That, the interested parties may file written comments or outlines of oral arguments, not to exceed 50 pages, on or before September 15, 1967. FEDERAL COMMUNICATIONS COMMISSION Ben F. Waple Secretary Attachment PAGENO="0013" 9 FEDERAL COMMUNICATIONS COMMISSION Washington, D. c. REPORT TO TIlE FEDERAL COMMUNICATIONS COMMISSION BY ITS SUBSCRIPTION TELEVISION COMMITTEE (July 3, 1967) James J. Wadsworth, Chairman Robert E. Lee Kenneth A. Cox 1. The Subscription Television Committee of the Commission hereby reports to the Commission that, having carefully studied the record in the subscription television proceeding, Docket No. 11279, it has prepared two documents--a Fourth Report and Order (Attachment A), and a Second Further Notice of Proposed Rule Making (Attachment B)- - for the consideration of the Commission. 2. The attached proposed Fourth Report and Order would establish an over-the-air subscription television (STy) service and adopt rules govern- ing that service. The principal topics with which it deals appear in the table of contents. Using that table as a guide, this memorandum sketches the contents of that document. 3. The introduction contains a very brief history of this proceeding from the time of its inception in 1955 to the issuance of the Further Notice of Proposed Rule Making and Notice of Inquiry in March 1966-- the last-issued document in this proceeding, and the one that elicited comments on which the Fourth Report and Order is largely based. (The Further Notice invited comments on whether over-the-air STV should be authorized on a permanent basis, on fifteen specific issues ~f it were so a~~thorized, and on specific proposed rules.) PAGENO="0014" 10 -2- 6. As to preliminary matters (pp. 2-5), the document reasserts the Com- mission's prior finding that it has jurisdiction to authorize an over-the- air STV service, and that such STV is broadcasting. It states that Congress has not acted on STV, that Congressional guidance in this area would be welcome, but that the Commission has a present duty to establish an over- *the-air STy service if it finds this to be in the public interest, and that it so finds. Finally, it says that an oral hearing prior to establishing such an STV service would serve no useful purpose. 5. On the question of whether over-the-air STV should be authorized on a permanent basis, the document conclu~des that it should. It discusses in detail the four broad areas mentioned on page 1 of the tabl~ and finds the following: a. STV could provide a beneficial supplement to conventional TV programming. This might consist mostly of current feature films, and of sports events not generally available on conventional TV. (pp. 7-20) b. Absolute proof of viability need not precede the establishment of a new service, so that although there can presently only be speculation about whether the public will accept and sup- port STy, and although the projections about STV service based on Hartford trial data are not without some uncertainties, there is enough of a basis on which to found the new service (pp. 20-26) c. As to the impact of STV on conventional TV, diversion of audience (j~g, attracting those who would have been viewing free TV at a particular time to view STV instead) can be expected to be minimal. Pre-empting of time ~ broadcasting STV programs over a station that would otherwise have been broadcasting free TV programs) could occur to a degree contrary to the public interest. For example, in a one-station market, if the station commenced to broadcast STV programs during all of its prime time, the community would receive no free pro- grams from it during those hours. Some program siphoning (Lm,, diversion of programs from free TV to STV) that would be contrary to the public interest might occur. It is in the public interest to establish STV with regulatory safeguards directed at program siphoning and pre-empting of time. Although the preservation of conventional TV service and the continued availability of adequate quantities of free programs are important considerations, competition between STV and free TV could result in improved and more varied programming for both aervices. The safeguarding rules do not competely prevent siphoning, but strike a desirable balance between STV and free TV. (pp. 26-40) d. Pages 40-47, "other information," set forth material which is discussed in connection with the fifteen regulatory issues listed on page 2 of the table. PAGENO="0015" 11 -3- 6. The fifteen regulatory issues are discussed (pp. 47-99), and conclu- sions are reached thereon which lead to the adoption of specific rules (except for technical rules, discussed later herein) to govern the new service. A brief paraphrase of the main points of each rule, as related to the fifteen issues in the order in which they are listed on page 2 of the table, appears below. For convenience, each paraphrase is followed by the pages discussing it and by the section number of the pertinent rule which appears in Appendix D to the Fourth Report and Order. a. STV authorizations will be granted only for a station the principal community of which is located within the Grade A contours of five or more commercial TV stations (including the station of the applicant). The five or more stations need not be licensed to serve the community in which the STY operation is proposed. At least four of the stations, not counting the station of the applicant, must be in opera- tion. (pp. 47-52; §73.642(a)) b. Stations engaging in STY operations must, in addition to STV programs, broadcast at least the minimum hours of non-subscription programming required by Section 73.651. There are no require- ments about a minimum or maximum number of hours of STY pro- gramming that a station may broadcast, or about the time of day that it may broadcast STY programs. (pp. 53-56; §73.643(c)) c. STY is permitted over both UHF and VHF stations. (pp. 56-57; §73.642(a)) d. Only one STV authorization will be granted in a community. (This rule, coupled with the rule mentioned in "a" above, is designed to protect against undue pre-empting of time from free TV.) (pp. 57-58; §73.642(a)) a. Any technical, STV system (meeting general standards to be adopted later) may be used, j,~,, STY will not be required to use one particular system. (pp. 58-63; §73.644) f. No STV authorization will be granted to a party having any contract, arrangement, or understanding, express or implied, which prevents or hinders it from rejecting any STY program which it believes tO be unsuitable or contrary to the public interest, or substituting an STY or conventional program which it believes to be of greater local or national importance; which delegates to another person the right to schedule hours of broadcast of STY programs; which prevents or hinders it from making a free choice of STY programs, whatever their source; or which deprives it of the right of ultimate decision concerning the maximum amount of any STY program charge or fee. In spite of the foregoing, however, subject to Commission approval, STY operators may enter into arrangements whereby they agree to schedule a specific STY program at a specific time, or to schedule PAGENO="0016" 12 -4- a specific number of hours of STV programs during the broad- cast day or week; and whereby they agree to obtain all, or a specified part of, their STV programming from one or more sources. (pp. 63-72; §73.642(e)) g. Charges, terms, and conditions of service must be applied uniformly, but subscribers may be divided into reasonable classifications approved by the Commission. For good cause ~ for poor credit risks) deposits to assure payment may be required, and other steps may be taken. (Other than as specified in the rule, the Commission will not regulate the rates to be charged.) (pp. 73-76; §73.642(f)(2) h. Unless a satisfactory signal is unavailable at the location where service is desired, STV service must be provided to all persons desiring it within the Grade A contour of the conven- tional TV service of the stations engaging in STV operations. For good cause, service may be terminated. (pp. 76-79; §73.642fsas i. STV decoders attached to sets of subscribers must be leased and not sold to subscribers. (pp. 79-8].; §73.642(f)(3)) j. Concerning making STV available to all eligible stations, no rule is adopted on this specific matter since other rules sub- sume the issue. (pp. 81.82) k. Feature films may not be broadcast which received first run showing on a non-reserved seat basis anywhere in the United States more than two years before proposed STV showing (pp. 86- 87). However, a limited number (as many as 12) of feature films more than 10 years old may be shown each year (p. 87). Sports events may not be broadcast on SW which were regularly tele- vised in the community within the two years preceding proposed SW broadcast (pp. 87-94). No series type of program with interconnected plot or substantially the same cast shall be broadcast over STV(p. 95). (The foregoing rules are designed to prevent siphoning. Since, generally, free TV cannot obtain current feature films, the films which STy shows will not be siphoned from free TV. Since it is expected that about 85% of the programming of STV will consist of current films, the rule does not harm SW. The rule on sports will clearly prevent siphoning, and the rule on series-type programs will prevent siphoning of a type of programming which constitutes a large part of free TV programming. Some siphoning, ~ of programs that are not series, could occur.) Ir~ addition to the foregoing limitations, no commercials will be permitted on STV (p. 95). Also, not more than 90% of the programming of an STV station may consist of feature films and sports events combined (p. 94). (This is to assure that at least a minimum amount of cultural and educational programming will be presented, such as oper4, ballet, etc.) (pp. 82-96; §73.643(a) and (b)) PAGENO="0017" 13 -5. 1. Except as otherwise waived by the Commission in STV authori- zations which it issues, the rules and policies applicable to conventional TV stations are applicable to StV operations. (pp. 96-99; ~73.643(d)) In addition to the foregoing, a few other rules appear in Appendix 0 of the Fourth Report and Order. Among these is a rule that an STV authorization may not be issued for a period longer than that of the regular license period of the TV station. 7. The rules also contain a NOTE (to Section 73.642(b)) stating that no applications for STV authorizations will be accepted for filing until rules concerning equipment and system performance capability have been adopted. Attached hereto is a Second Further Notice of Proposed Rule Making which invites comment~on technical rules on this subject. It is quite brief and is not summarized here. 8. Concerning applications for STV authorizations, financial requirements ~ a requirement to make a showing of capacity to sustain STV operations for at least a year, similar to the requirement for applicants for CP's for conventional TV stations), fees, and reports, see paragraphs 288-289 on page 100 of the Fourth Report and Order. 9. The rules adopted concern only commercial television stations. As to the~ relationship between STV and educational television stations, see paragraphs 290-294 on pages 101-102 o~ the document. 10. The end of the document (pp. 102-108) deals with the inquiry into wire or cable STV which the Commission instituted in the Further Notice of Proposed Rule Making and Notice of Inquiry. The inquiry invited comments on what the role of the Federal Government should be, if any, with regard to this type of STV. Such STV falls into three categories: (1) STV systems, like the now defunct system that operated in Los Angeles and San Francisco, in which pro- grams travel entirely by cable from studio to sets of subscribers.. (2) CATV systems which, in addition to their traditional function of receiving and retransmitting conventional TV signals, also originate STV programs that travel by cable to sets of subscribers. (3) CATV systems which, in addition to traditional functions, transmit over-the-air STV programs which they have picked up either off the air or by microwave. To the best of our information, there are presently no STV operations in the United States in any of the three categories. The document says that with regard to the first two categories the Commission makes no decisions because it wishes to study the matter further. As to the third cacagory, it states that the CATV carriage and non-duplication rules will apply to the conventional programming which the STV stations will be required to carry CATVs will not be required to carry STV programming. An STV station, may, however, subject to Commission approval, make arrangements with C~TV systems within its Grade B contour for the CATV to carry its SW programming. No such arrangements may be made with C~TVs outside the Grade B 56-399 0 - 67 - 2 PAGENO="0018" 14 -6- contour. The question of carriage of STY programs of an STV station by ~ATYs so situated is reserved for further study. Li. For the reasons stated therein, it is recommended that the attached Fourth Report and Order, and the Second Further Notice of Proposed Kule Making be adopted. Subscription Television Committee ,~7L~4 /91 ~ n~ (/iames J. ~Jadsworth, Chairman* Robert H. Lee Kenneth A. Cox Attachments agree that this matter should be brought to the attention of the full Commission at this time. However, I wjsh to make my position clear: In agreeing to submission of this document to the full Commission, I do not mean to imply that I endorse adoption of it. Nonethele..s, in view of the history of this proceeding, I belie~!=e that the public and all parties to it ar~ entitled to an early Commission d~ciaion on the basic question presented. PAGENO="0019" 15 Attachment A Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of Amendment of Part 73 of the ) Commission's Rules and Regulations ) Docket No. 11279 (Radio Broadcast Services) to provide for Subscription Television Service. ) FOURTH REPORT AND ORDER TABLE OF CONTENTS Page No. Introduction ,. 1 OVER-THE.AIR SUBSCRIPTION TELEVISION Preliminary Matters 2 Jurisdiction 2 Congressional Guidance 3 STV is Broadcasting 4 Oral Presentation 4 Parties Filing 5 Should STV be Authorized on a Permanent Basis' 5 Would STV Provide a Beneficial Supplement to Free TV? 7 Hartford Programming 7 Etobicoke Programming 9 Views of STV Opponents on Programming 10 Views of STV Proponents on Programming 12 Conclusions 16 Would STV Provide an Increased Financial Base for Broadcasting. and Would it be Accepted an~ Supported by the PublLc?.,..,. 20 Business Projections Based on Bartford Trial 21 STV Penetration 21 Channel Allocations and Station Growth 22 Necessary Showing for Establishment of New Service 22 Conclusions 23 Impact of STV on Free TV, and Problem of Siphoning 26 Comments of STV Proponents 28 Comments of STV Opponents 31 Reply Comments of STV Proponents 34 Reply Comments of STV Opponents 35 Conclusions 35 Other Information: Modus Operandi; Technical 1'~rformance of STV Systems; Methods to be Employed; Role of Station Licensee; Possible Monopolistic Features of STV 40 Modus Operandi; Methods to be Employed; Licensee's Role..., 40 Technical Performance of STV Systems 42 Possible Monopolistic Features of ST~J 43 Conclusions 47 PAGENO="0020" 16 Fifteen Regulatory Issues. 47 Should STV be Permitted in all Communities?... 47 Conclusions 50 Requirements about STV and Free. TV Hours of Operation 53 Conclusions 55 Should STV be Permitted on Both VHF and UHF Stations? 56 Conclusions 57 Should STV be Permitted on More Than One Station in a Community? 57 Conclusions 58 Single or Multiple Technical Systems? 58 Conclusions 62 Programming Activities of Various Parties 63 Licensee Control 63 Arrangements Among Parties 63 Conclusions 68 Technical Rules :72 Charges, Terms, and Conditions of STV Service 73 Conclusions 175 Must STV Station Serve All Persons in Area? 76 Conclusions 77 Protection Against Obsolescence of STV Equipment 79 Conclusions 80 Should STy be Available to All Eligible Stations? 81 Conclusions 81 Should the Type of Programming Broadcast Over STV Be Limited?. 82 Conclusions 84 Should Present 8roadcast Rules and Policies Apply to STV? 96 Conclusions 99 STV Rules Adopted Herein 99 Applications, Financial Requirements, Reports 109 Educational Television and STV 101 WIEE ORCABLE SUBSCRIPTION TELEVISION Preliminary Statement 102 Jurisdiction 103 How CATV Systems Can Pick Up Scrambled STV Signals 104 Application of CATV Rules on Carriage of Local Stations 105 Will CATV Turn Into STV? 105 Conclusions 106 Carriage of Local STV Stations by CATVs 106 Program Origination by CATV Systems, arid cable SW Not Related to CATV 108 OIU~ERS Rules Adopted; Proceeding Kept Open 108 PAGENO="0021" 17 Before the FEDERAL COMMUNIC~.TIONS COMMISSION Washington, D.C. 20554 In the Matter of Amendment of Part 73 of the ) Docket No. 11279 Commission's Rules and Regulations (Radio Broadcast Services) to provide for Subscription Television Service. FOURTH REPORT AND ORDER Adopted: ; Released: By the Commission: 1. The Commission has before it for consideration the Further Notice of Proposed Rule Making and Notice of Inquiry released in this docket on March 24, 1966, 1/ and comments, reply comments, and technical submis- sions filed in response thereto. 2. Briefly, the course of events in this proceeding which led to the issuance of that document is as follows: In 1955 the Commission adopted a Notice of Proposed Rule Making ~/ inviting comments to help it decide whether it would be in the public interest to adopt rules authorizing tele- vision broadcast stations to transmit programs paid for on a subscription basis. A Notice of Further Proceedings, ~/ released in 1957, announced that although the comments responding to the 1955 Notice had been useful, they did not provide a fully adequate basis for arriving at final decisions on the matter, and that trial demonstrations would be necessary to mid in arriving at conclusions thereon. Later in 1957, the First Report ~/ announced the conditions under which applications for trial operations would be accepted. The Second Report (1958) ~/ gave notice that any such applications filed would not be processed until after the adjournment of the 85th Congress because of the interest ~nd activity of that Congress with regard to subscription television (hereinafter called STy), the delay being for the purpose of affording the Congress an opportunity to consider public policy questions which the subject raised. The Third Report (1959) ~/ made some amendments to the First Report, otherwise readopted and affirmed it, and stated that the Commission was ready to give consideration to applications for trial operations~ 1/ FCC 66-268; 31 F.R. 5136, March 30, 1966, 7 Pike & Fischer, R.R. 2d 1501. ~/ FCC 55-165; 20 F.R. 988, February 16, 1955. ~/ FCC 57-530; 22 F.R. 3758, May 29, 1957. 4/ 23 F.C.C. 532, 16 Pike & Fischer, R.R. 1509. 5/ FCC 58-182, 16 Pike & Fischer,R.R. 1539. 6/ 26 F.C.C. 265, 16 Pike & Fischer, R.R. 154a. PAGENO="0022" 18 -2- 3. Three applications for trial authorizations were filed. One was denied, one was granted but operation never commenced and the authori- zation was later relinquished, and the cnird was mranted'and operation be- gan in the summer of l96~ over UHF station WHCF, Hartford, Connecticut. 7/ The last-mentioned grant was affirmed by the U. S. Court of Appeals. ~/ The Hartford trial uses Phonevis ion equipment of which Zenith Radio Corpora- tion is the manufacturer and patent holder. Teco, Inc. is the patent licen- see of Zenith. 4. In 1965 Zenith and Teco jointly filed a petition for further rule making to authorize nation-wide STV on a permanent basis. The petition was based on data derived from the Hartford trial. The first part of the Further Notice of Proposed Rule Making and Notice of Inquiry (hereinafter called Further Notice) mentioned at the outset is responsive to the Zenith- Teco petition. It contains a discussion of over-the-air STV ~/ and invites comments on proposed rules for such a service. In the second part, the Com- mission, on its own motion, instituted an inquiry into what the appropriate Federal role, if any, should be with respect to the establishment and manner of operation of wire or cable Sly. This type of STV was previously outside the scope of this proceeding, and was made a matter of inquiry because of the change of conditions since 1955 when the proceeding began. We shall first consider the over-the-air rule making, and then turn our attention to the inquiry. OVER-Tag-AIR SUBSQUPTION TELEVISIQN Preliminary Matters 5. The Commission is of the opinion that it is in the public interest to authorize over-the-air STV on a nation-wide basis to the extent described in the following discussion and crystallized in the rules adopted today (Appendix D). Jurisdiction 6. The Notice of Further Proceedings announced the Commission's conclusion that it has statutory authority to authorize over-the-air STV opera- tions. The First Report affirmed that conclusion and presented in detail (in .2/30 F.C.C. 301, 20 Pike & Fischer, R.R. 754. The authorization was for a period of three years and was subsequently extended for a period of three years or (if it occurs sooner) until such time as the Commission terminates the pre- sent proceeding and enters an order with respect to the authorization. .~/ Connecticut Committee Aaainst Pav~TV v. ~Q, 301 F. 2d 835 (C.A.D.C., 1958), 23 Pike & Fischer, R.R. 2001, ~ denied, 371 U.S. .816. .Q/ In over-the-air subscription television, usually both the audio and video signals are transmitted over the air in `scrambled" form by television stations and may be viewed intelligibly only by those having "unscrambling' devices attached to their sets. Some systems scramble only the video an~ not the audio. PAGENO="0023" 19 -3- paras. 20-40) the reasons underlying it. The Third Report readopted and affirmed those paragraphs of trie First Report. In the further Notice (para. 19) we adverted to our views expressed in the First Report and also observed that the Circuit Court, in affirming our grant of the Hartford authotization, sup- ported our jurisdictional conclusion. Some parties opposing STV now raise the jurisdictional issue once more. Since the arguments raised have pre- viously been given thorough consideration, and since we are still of the opinion that statutory authority exists for the action which we take, it would serve no useful purpose to evaluate them here. ~pgressional Guid~ice 7. Various opponents of STV uz~ge that the Commission should not act in this area without Congressional guidance. In support thereof, many arguments are presented, some of which are: (1) STV is a basic modification of the American system of broadcasting- -a modificatiOn which should originate with Congress and not the Commission. (2) The jurisdiction or the Commission to act is questionable, so guidance should be sought from Congress. (3) The Commerce Committees of both houses of Congress have expressed their views either questioning the jurisdiction Qf the Commission to license STV~ opera- tions or stating that such operations should not be authorized by the Commis- sion without specific authorization by law. jQ/ (4) If STV is established, its rates should be regulated to protect the public, but, if it is broadcasting as the Commission has found, there is no authority in the Act to regulate rates *thereof and the Commission should go to Congress for guidance. 8. The question of seeking Congressional guidance was raised in pleadings considered prior to issuance of the Further Notice. In that document, after having expressed our belief that we possess adequate statutory authority to authorize STV on a permanent basis, we said that we could not at that time determine whether amendments to the Act were needed to serve as guidelines for. STV service. We also said that if STV service were ultimately established we would on the basis of information then before us in this proceeding decide whether amendments were needed and, if so, what recommendatiohS should be made to Congress. We allowed a lengthy period for filing comments in this complex proceeding and announced in so doing that such a period would afford the Congress time to act with regard to STV before this proceeding is terminated if it so desired. 9. The Congress has not acted on the matter. We welcome any guid- ance it may wish to give, but believe that it is our present duty to establish an STV service if it is found to be in the public interest, for we have found that we have jurisdiction to do so, and Section 303(g) of the Act requires us "to encourage the larger and more effective use of radio in the public interest." At the present time, we do not believe that any amendments to the Act are necessary to serve as guidelines for the new service. In this connection, j&/These views appear in the Second Report, ~ note 5. PAGENO="0024" 20 -4- we note that whether the Commission has statutory authority to regulate rates for the new service- -a broadcast service- - is open to question. Since we do not believe that such regulation is necessary (see paras. 220-222) the matter need not now be analyzed. ~1owever, we shall carefully observe all aspects of the new service in operation, and if amendments are indiøated shall make appropriate recommendations concerning rate regulation or other matters. ~ is Brpadcastir~g 10. In the. Further Notice we concluded that STV is broadcasting within the meaning of Section 3(o) of the Act, and set forth in detail our views on the subject (paras. 22-29). As stated there, we regard intent to provide a radio or television program service without discrimination to as many members of the general public as can be interested in the programs as of primary importance in our determination. We further said that intent may be inferred from the circumstances under which the programs are transmitted and that the number of actual or potential viewers is not signiftcant. 11. In our discussion we cited the Functional Music case fl/ and the ~ case )~I. Both involved the use of special equipment attached to the receivers of subscribers in order to receive the service. ABC, urging that STV cannot be classified as broadcasting, cites early decisions of the Commission j~/ that certain activities over broadcast stations constituted point-to-point communications rather than broadcasting and argues that the interpretations in those decisions are worthy of more weight than the j~~j.ç case. Motorola questions whether Functional Music is authority Lor the pro- position that STV is broadcasting. We should note that. we cited Muzak, as well as Functional Music, merely to illustrate that payment of a charge by subscribers for a special type of service is not in itself determinative of the question of intent that the programs be received by the public. Oral. Presentation 12. In the Further Notice (para. 21) we said that after a study of the written comments responsive thereto "we shall take whatever steps appear appropriate at that time, including an oral presentation if it is indicated, as may well be the case." Several parties suggest that if, in spite of their arguments to the contrary, the Commission should now decide to establish a permanent STV service, at the very least it should not do so without holding an oral evidentiary hearing first. ~j1 functional Music.. Inc. v. ~ 274 F. 24 543 (C.A.D.C., 1958), ~ denied, 361 U.S. 813. 12/ Muzak CorporatiOn, 8 F.C.C. 581 (1941). .U/ Scroagin & Co. Bank, 1 F.C.C. 194 (1935); Standard ~hifl ,co.~ Inc., 1 F.C.C. 227 (1935); Bremer.Broadcastina ComDanv, 2 F.C.C. 79 (1935); Adelaide Lillian Catreil, 7 F.C.C. 219 (1939). PAGENO="0025" 21 -5- 13. A voluminous record has been established in this proceedingand has furnished information which we believe sufficient in arriving at a decision. How- ever, as indicated below, it has failed to provide all that we could desire, and there are thus certain aspects of STV about which we continue to be con- cerned. Were there an oral presentation, it would be limited to those aspects. Because we are adopting rules which provide safeguards in the areas of concern, because we believe that STV operation under these rules will provide factual information about those areas that will serve as a guide for future Commission STV decisions, and because we believe that oral presentation at this time could only supply arguments devoid of such factual aid- -elaborations of views already expressed in the written comments- -we cannot find that an oral hearing would serve any useful purpose. Parties Filing 14. Parties filing comments, reply comments, and technical discrip- lions of STV systems are listed in Appendix A. Those opposing permanent STV are the three networks (ABC, CBS, NBC), the National Association of Broadcasters (NAB), the Association of Maximum Service Telecasters, Inc. (AMST), the Joint Committee Against Toll TV (Joint Committee), Motorola, Inc. (Motorola), and the Colorado Translator Association. All other parties favor permanent STV (some with qualifications). These parties include proponents of various STV technical systems, licensees of television broadcast stations who contemplate entering into STV operations i~ nation-wide over-the-air STV is authorized, and other groups, such as the American Civil Liberties Union. All parties mentioned in this document hereinafter are referred to by short designations. Those of proponents, as well as those of opponents mentioned parenthetically above, appear in parentheses ~iollowing the names of the parties in Appendix A. Should STV be Authorized ~n a Permanent Basis? 15. Paragraph 45(a) of the Further Notice invited comments on whether STV should be authorized on a permanent basis. Paragraph 45(b) re~ quested comments on fifteen specific matters of concern to the Commission in regulating STV if it is so authorized. We shall first deal with the fundamental problem of 45(a) and then treat the issues in 45(b). 16. In the First Report (paras. 47, 65, 56, 66) j~/ the Commission mentioned what sort of information it hoped to obtain from trial operations to help it make public interest determinations. This information included the following: j~/ These paragraphs were affirmed by the Third Report. PAGENO="0026" 22 -6- a. Whether STy would provide a beneficial supplement 15/ to the program choices now available to the public. b. Whether STY would provide an increase in financial resources which would facilitate significant increases in the numbers of ser- vices available to the public under the present system. c. The degree of acceptance and support which STY might be able to obtain from members of the public in a position to make a free choice. d. Whether STY would seriously impair the capacity of the present system to continue to provide advertiser-financed programming of the present or foreseeable quantity and quality, free of direct charge to the public. This is closely related to the question of whether STY would result in significant audience diversion from con- ventional television and siphoning of programs and talent away from free television into STY service. e. Other information, such as (1) modus operandi of the service; (2) the technical performance of the systems; (3) the nature of the programs offered; (4) the methods to be emp1oyed~ (5) the role of partLcipating broadcast station licensies; (6) pos- sible monopolistic features of STY. Comments on the question of whether STY should be authorized on a permanent basis generally fall into categories a, b, c, d and e above. 15/ The term "beneficial supplement" merely means STY programming that is not duplicative of the programming of free TY and that is desired or needed by at least a portion of the viewing public. It has no connotation of lack of impact upon free TY, whicl~ is a separate question. PAGENO="0027" 23 -7- Whether STV Would Provide a Beneficial Su~olement to the Program Choices now Available to the Public. 17. Hartford Programmina. In joint comments filed March 10, 1965, in support of their petition for further rule making (prior, to the issuance *of the Further Notice) Zen.ith and Teco set forth in detail the STV programming offered by WHCT during the first two years of the Har1~ford trial. Their comments j~/ filed in response to the Further Notice supply no additional data but incorporate by reference the March 10 material. As we pointed out in the Further Notice (para. 12), that information showed `an average of about 1500 hours of STV programming, consisting of about 300 separate programs, .were presented each year. JjI The programs were not available on free television either in Hartford or elsewhere in the United States. The breakdown of the programs is as follows: Av. Number Percentage Approx. Number Approx. Number of Showings of Total Category of Programs of Showinas per Program Showings Feature Films 216 768 3.55 86.57. Sports 40 40 1.0 4.57. Special Entertainment 18 49 2.7 5.57. Educational ..A~.., Totals 300 889 2.96 100.07. Of the 216 feature films shown during each year, one was a first run U.S. film, 58 (277.) were first st~bsequent run U. S. films which were shown, several weeks after the first theater run (which corresponds to the time when pictures are released to neighborhood theaters), about 149 (697.) were U.S. films of over 6 months in theater release, and 9 (47.) were foreign language films with English titles or dialogue dubbed in. The sports programs were live broadcasts of events not carried on conventional television, such as championship 1~oxing, high school, college, and professional basketball, college football, and professional `hockey. The special entertainment included plays, oper4 and ballet, toncerts and recitals, variety, and nightclub programs. Educational features included, among other programs, three for doctors only. )~/ To avoid needless repetition, RKO--which conducted the Hartford trial-- filed brief comments stating that it fully agreed with the recommendations `and conclusions of Zenith and Teco. 12/ During the same period WBC1' averaged about 1812 hours of conventional programming per year. PAGENO="0028" 24 -8- 18, Zenith and Taco state that when the Hartford trial was auth. orized various theater owner organizations tried to induce picture producers and distributors not to supply films for the trial, but that a number of in. dependent and most major producers nevertheless did supply films. However, we are told, two major producers were unwilling to do so. In March 1964, RK0.~ filed an antitrust action against them which was settled out of court in June 1964, and at the end of the second year of the trial those companies were supplying both first subsequent run and older films for the trial. 19. Although producers and distributors have been unwilling to supply films on a first run basis (only one such film has been broadcast since the trial began), Zenith and Teco state that this is mainly because the operation is on a trial basis. They express the opinion that if nation- wide STV were authorized, first run films could be made available, if it were considered important, on the date of their release to first run theaters. 20. Concerning sports programs, Zenith and Teco mention that heavyweight championship boxing matches, which consisted of about 0.37. of the total STV programming during the first two years of the trial, were the most popular of all SW programs since, on the average, they had audience ratings of about 63% of all subscribers. They observe that before the Hartford trial there had been no such fights on television for more than ten years because promoters of such events found it much more profitable to show them by way of closed circuit theater outlets. They also point out the savings to the public that can accrue from viewing such events on STy. As an example, they cite the following figures for one of the Liston-Clay fights: An average of nine persons per tuned.in subscribing set watched the fight at a Cost of $3.00 for all of them as compared to a cost of $5.00 a head (or a total of $45) at several local theaters which showed the fight on closed circuit. 21. As to college sports, they state that none of the football games shown on STV could have been broadcast over free TV under the restric- tions of the National Collegiate Athletic Association (NCAA), These restric- tions, they point out, were designed to protect college football teams from loss of gate receipts (similar rules prevail for college basketball)., They limit the number of games that may be viewed in any part of the country to one game per week. As a result, viewers in the Midwest, for example, may be de- prived of viewing a conference title game between two Sig Ten teams because the game of the week is between teams from another part of the country. Zenith and Teco argue that SD.! would protect gate receipts and thereby make it possible to show local and regional games in which there might. be great interest so that viewers would not be limited to the NCAA "game of the week." 22. They also mention that in both the American and Natidnal Foot- ball Leagues home games are blacked out and that home games of many major league baseball teams are either blacked out or their number is restricted in many cities. They state that the Chicago Sears and the Detroit Liot~s have permitted closed circuit theater operators to carry home games because the stadium seats are usually sold out. Zenith ar*~i Teco express the opinion that PAGENO="0029" 25 -9- theater television of ho~e games of professional football teams will increase in the next few years and say that STV could provide a beneficial supplement to free TV by carrying such games to a larger audience than that of the theaters. 23. As to special entertainment, the programs shown during the two~ year period are discussed. They claim that the economic limitations of the trial prohibited a steady supply of Broadway plays, but that with a broader economic base that nation-wide STV would provide these difficulties would not exist. 24. We are told that there were difficulties in obtaining programs of box-office caliber in the educational and instructional category, and that the audience ratings for such programs were low. It is stated that possibly the primary use of STV operations in the future in this programming area would be the use of commercial STV facilities by educational groups for the broadcast of educational programs for a fee. Especial reference is made to programs available only to doctors. Three such programs were shown in the two- year period and since then more have been shown. The programs were designed to aid doctors in keeping abreast of medical advances within the confines of their busy schedule, were supervised by a noted physician, and had considerable professional support. 25. Etobicoke Program~j~pg. Telemeter's comments incorporate by reference all material in previous submissions (June 5, 1955, May 25, 1965, and June 17, 1965) to the extent that it does not vary from its present comments. We note that in its May 1965 filing, in setting forth information about the five-year Etobicoke (a suburb of Toronto, Canada) cable STV experimental operation, it stated that "the prime pillars of programming were motion pic- tures and `blacked out' sports," which is consistent with the experience of the over-the-air trial at Hartford. Special entertainment productions were also shown. Telemeter's experience in obtaining feature films for its ex- periment supplements the Hartford information. 18/ Telemeter states that "many-- but not all--major film distributors as well as other leading companies were reasonably cooperative in supplying some of their current product fo.r subscrip- tion TV use. However, except for three `road-show attractions', which were exhibited on Telemeter during their general release to theatres, none of the other so-called `road-shows' produced in the past five years or earlier were made available and, since not all major distributors permitted current feature pictures to be shown on the cable system, Telemeter subscribers had no access in their homes to a large number of desirable pictures released to theatres." (For meaning of "road-show" and"gen~eral reléase~," see note 45., ~ 26. The sports programming at Etobicoke constituted only a small portion of the total SW offerings, but was the most consistently favored. Among other things, it included away-from-home games of the Toronto Maple Leafs ice hockey team. Such games had not previously, been available to L~/ The May 1965 fi1in~ was a "Statement of International Telemeter Corporation in Support of /Zenith-Tec~/ Rule MakingPetition for Authorization of Nation- Wide Subscription Television." Although the Etobicoke operation was a 3-char~el ca~1e rather than an over-the-air operation and therefore dissimilar in many respects to the Hartford trial, in terms of programming experience it can shed light on SW operations generally. PAGENO="0030" 26 - 10- Etobicoke. It also showed blacked-out home games of the Toronto Argonauts professional football team, as well as some professional championship boxing. bouts not carried on free TV in Canada or the United States. 27. çpnventional TV Programming. Opponents of STV devote many, pages of their comments to the argument that the STV programming of the Hartford station did not provide a beneficial supplement since it was of the same general type as that shown on conventional television, j,~, motion pic- tures, sporting events, special entertainment, and educational presentations. Illustrative of the mass of data submitted to document the argument is the material in the immediately following paragraphs. 28. Feature Films. Of the 73½ hours of network programming between the hours of 7:30 and 11:00 p.m. each week over the three networks combined, 10 hours are feature films (CBS-2 films, NBC-2, ABC~l). Such films are avail- able five nights per week. In addition, local stations also offer feature films in prime time. Viewers in some cities, ~ Los Angeles, can see as many as 35 films per week during prime time. No figures are given for the number of films shown by free television stations in the Hartford market per week during the first two years of the Hartford trial, but it is said that the networks offered 160 HIms to their affiliates during that period. More- over,* we are told that although it is true that when this proceeding began motion picture producers were selling pictures of relatively minor caliber to free television, the number of major feature films released to free TV increased rapidly during the late 1950's and continues to increase today, so that pre- sently there are over 1200 films available for conventional television. During the 1966-67 season, 120 films of high caliber were scheduled by the networks alone. Examples of such films include "The Bridge on the River Kwai" (1957) which is said to have been viewed by more than 60,000,000 people, "Lilies of the Field" (1963), and "Breakfast at Tiffany's" (1961). 29. As to recency of films shown on free TV, it is stated that the bulk of those shown by the networks five nights a week are "relatively" current and that not only have producers released more major pictures to free TV since the proceeding commenced, but also they have been releasing more recent films. Cited as evidence are purchases announced in September 1966 by ABC and CBS whereby the two networks acquired the right to show, over a period of five years, more than 112 feature films, including some that had enjoyed record box-office grosses. Of the films acquired by CBS, at least 14, we are informed, were films released to theaters in 1965 and 1966. It is stated that the trend toward showing more recent films on free TV will continue because the heavy demand is drying up the source of supply. Indeed, because of this, feature films are now being produced specifically for conventional television. 30. It is pointed out by STV opponents that of the 432 films shown during the first two years of the trial at Hartford, only 116 (2,U were first subsequent run, and the remaining 297 were over six months old, the average release date of those films having been 1960. We are told, moreover, that of the films shown during that period in the Hartford trial, over 60~ have al- ready been made availa1~]e to free TV, sOme as soon as five months after their PAGENO="0031" 27 -11- showing on STy, the average being less than two years after STy showing. Of the remaining ones, many have already been purchased or are under option. 31. SPQrtS. Opponents of STV state that there is virtually no major sports attraction that is not presently being broadcast on free TV. They list in overwhelming detail the kinds of sports and sports programs that free TV carries, and we shall not here repeat them. They state that the quantity and quality of sports programs exceeds all expectations of about ten years ago when this proceeding began. They concede what cannot be. denied-- that STV at Hartford carried heavyweight championship boxing matches, a type of program that in recent years has not generally been carried by free TV; and they would appear to admit that other sports events carried by WHQ~ were not otherwise available in the market. 32. ~eciaL Entertainment and Educ~p±on~l Prog~a~ms. As with sports, opponents describe at length the great variety and quality of special entertainment programming carried by free TV to show that it is of the same type that STV offered at Hartford, and mention that since the issuance of the First Report such programs have expanded in number and quality. Mention is also made of the growth of educational television service in this country which provides educational and cultural programming, the programming of National Educational Television (NET), the fact that since this proceeding started the number of educational television stations has increased from 23 to over 100, j~/ and the fact that recent developments suggest that there may be new financing available in the near future for programming in the educational television service which would further improve its already excellent offerings. In addi- tion, the Oxtoby-Smith `Study of Consumer Response to Pay Television" is quoted to the effect that "the ratings for educational and cultural programs and ~even for available stage plays have been low.. . ,The operation of a ready market for `cultural' programming has not materialized," Along the same line, they advert to the very limited viewing of such programming by Hartford subscribers (average of only 22 subscribers viewing educational programs). 33. As mentioned above, STV opponents, in connection with the foregoing data submitted by.them, make the argument that the Hartford trial did not provide a beneficial supplement because programming of the same general type appears on free TV. With regard to feature films, the only possible ad- vantage of STV, we are told, is that of reducing the time lag between theater release and TV viewings. At least one party says that STV will not allow viewers to see films "at a significantly earlier time." Several admit that it is possible that STV can provide films "somewhat earlier" or that STV "can somewhat accelerate" their presentation to the public. However, it is argued, because conventional television is getting more and more recent films of high quality, the difference in time of presentation over STV and free TV would be less and less important. This time differential, it is said, does not justify the use of scarce channels for STV. Opponents say that representations were j~/ Since the filing of the comments, the number has increased to 125. PAGENO="0032" 28 -12.. originally made to the Commission that SW would show first run films, but that such films have not been made available to STV nor is there anything to indi- cate that if SW t~ere authorized on a nation-wide basis they would be. As a matter of fact, they state, only first subsequent run films and films six months or more old have been made available, and only 27Z of the Hartford films were first subsequent run. 34. It is also contended as follows: The promise of SW was that it would provide viewing for members of the public interested in the fine arts, opera, educational and informative programming, and similar programming, ~ programming for minority tastes and not for mass appeal, but Hartford has not satisfied that promise: its programming was mostly of a mass appeal type, directed at those who watch free W the most. Its own research firm reported that it should be directed at that audience, which is less demanding in it~ expectations than the minority who expect more from STy. The Oxtoby-Sajeb study shows that there is no ready market for cultural programming. Therefore, if STV became a national service, it would be un- reasonable to assume that it would do other than show the mass appeal type of programming as Hartford did, for that is where the profits would be. Thus, Hartford (allegedly because of the limitations of a one-city trial) did not provide the diversity of programming that SW promised, and national SW would not either. Whatever the facts may have beet in 1955, the broadcasting environment has since changed and today, conventional commercial television, the all-channel bill, syndication,and the networks all provide a great diver- sity and the trend is toward greater diversity so that SW would merely be duplicative of free W. 35. Other ar~un,ents offered are Chat SW promised quality programs and that most of the films shown at Hartford were run-of.the.mill films; that SW would deter the formation of a fourth national W network; that the game of the week and "black-out" restrictions imposed by college and professional sports are a reasonable accommodation of conflicting economic and social interests, and to the extent that SW would derogate from these policies it would undermine amateur and professional sports; and that Zenith and Teco should have given information about the more recent programming of the Hartford trial in their comments since the information of the first two years of the trial may be out of date. 36. In their reply comments, Zenith, Teco and Telemeter take issue with the contentions of the opponents of STy. Zenith and Teco say that the opponents have ~ompared the programming of a single SW experimental operation with that of the combined networks with nearly 700 million dollars to spend for programming and that it would be more realistic to have compared the pro- gramming of the networks in l94S- - the second year of their operation when the weekly schedule of all four networks during the hours of 7 to 11 p.m. consisted of about 40% ünprogrammed hours and 23% boxing and wrestling, with only four one- hour dramatic productions, and a feature film library of about 50 titles. They aver that given twenty years, STV may also make strides. Telemeter offers a similar argument, stating that during the formative years of TV broadcasting PAGENO="0033" 86-399 ~ - 67 - 3 PAGENO="0034" 30 14.. 40. Zenith and Teco, responding to the assertion that only 277. of the films shown at Hartford in the first two years of the trial were first subsequent run and that the remainder were 6 months old or more, advert to RICO's previous programming difficulties (see para. 18), characterizing them as water over the dam, and state that during the one-year period of October 1, 1965 to September 30 1966 707~ of the 174 feature films shown were first subsequent run The other 3O7~ were shown within the first year of theater release, with a few exceptions which included"Bambi" and "Mary Poppins" which were roadshowed on a hard-ticket basis for over a year before they were given general release in theaters 41. With respect to the argument that of the 432 films shown in the first two years of the Bartfsrd trial 273 have since been released to free TV, Zenith and Teco point out that they never represented that sueh files would not some day reach that medium, but, rather, that they would be shown at an earlier date on STy. 42. They further state that the feature films which the opponents of STV seem to indicate are so important on network and local station programming could not be made available to free TV without support from box-off ice receipts. In the same vein, Telemeter says that current films..-which are available on STV at the same time that they are being shown in local theaters--are not now and, under the economics of motion picture production and commercial TV broad- casting, never will be available on free TV while they are in current release in theaters. The reason given is that the films must first recoup their "negative cost" and at least some portion of their box-office potential prior to being made available to free TV. Numerous examples are cited. Thus, "The Bridge on the River Kwai," frequently referred to by the STV opponents as an example of free TV film fare, cost ABC $2,000,000 eight years after its release to theaters. Its negative cost was about $6,000,000 on top of which were publicity, promotion, and distribution costs, so that the amount that ABC was able to pay for the film under the economics of commerdial television would not have paid a third of the total costs of the film, let alone absorb a part of its potentialtheater box~.off ice gross of $17,000,000. 43. Telemeter goes on to say that, according to industry sources, the average motion picture is seen by only 57. of the population. A major picture is viewed by only 87. or, in rare cases, l0~i of the population. Many who would like to see the current movie do not do so because of inconvenience or cost. A Broadway show in a 1200-seat theater that runs a year with every performance sold out is seen by 499,200 persons. Many of the nine and a half million residents of Ne~ York or the millions of persons in the rest of the country would like to see the show but cannot because of distance or cost. STV, Telemeter states,would aid the box-office potential of a motion picture. or a Broadway play by showing it to an additional audience at a price, whereas free TV would impair the box-office potential. Thus,it is argued, STV may well stimulate additional quantity and quality of films, Broadway plays, operas, add the like. Additional programs so stimulated by STY would redound PAGENO="0035" 31 - 15- to the ultimate benefit of free TV. 20/ 44. Telemeter states that there are thus three levels of viewing films: (1) the theater, (2) STy, and (3) free TV. The public, it urges, should be entitled to choose at which level it wishes to view. It says that, after having been viewed in theaters or over STy, there will still be large audiences waiting to see them on free TV 3 to 5 years later and they will no doubt make for sizeable ratings for sponsoring advertisers just as they do now. 45, Telemeter, Zenith and Teco all make a further contention that films shown on free TV are cut and edited to fit appropriate time segments, and are often interrupted by commercials which, it is said, distort and destroy the artistic continuity of the films. j~/ In STV, the full feature is shown without cutting and without commercials, Moreover, another advantage of SW is said to be that the films may be shown more than once so that viewers may see them at their convenience. 46. Finally, concerning sports, special entertainment, and educa- tional programming, Telemeter avers that SW will considerably expand the sports events available--events that are not now and in the foreseeable future will not appear on free TV. It is stated that although opponents belittle the fact that an average of only 17 doctors viewed each of the three medical programs at Hartford, it must be remembered that there were not more than 5,000 subscribers. If STV were nation-wide, Telemeter says, there would be millions of subscribers. As an example, it assumes 10,000,000 subscribers which is less than 20 percent of the totai TV homes Wjth such penetration, 17 viewing doctors at Hartford would translate into 34,000 viewing doctors nationally. This is, Telemeter says, 12 percent of all doctors in the United States, who would be furnished a not inconsiderable and unique service by SW. Similarly, with regard to cultural programs, Telemeter states that opponents play down their import and play up the fact that these programs achieved very lpw ratings. Thus, NAS points out that The Consul had an average rating of only 35% at Hartford. However, if SW had millions of subscribers, even with such small ratings enough revenues would be generated to reward the producer of the opera. On the other hand, it is argued, such programs are viewed as "deadly" by commercial TV and get short shrift even in non-prime time, so that the minority audiences that would be interested in seeing them do not have the opportunity to do so. 20/ With regard to films, for example, Zenith and Teco mention that the in- creased use of films by the networks is making such product more scarce, and, citing figures, they say that except for second and third reruns free TV wilt not be able to show the quantity of first-commercial-TV run film that it has in the past. They state that if SW were to generate an increase in film production, this would not only aid STV, but would aid free TV as well. 21/ Telemeter cites two instances in which producers of films brought legal actions in efforts to prevent this sort of distortion on the part of free TV. PAGENO="0036" 32 - 16- 47. Conclus~ona. One of the most important single issues in this proceeding is whether STV would provide a beneficial supplement to the offerings of free TV. ~2J If it would, even its opponents agree that doubts about other public interest aspects of STV might possibly be re- solved in its favor. However, if the programming of STV is merely dupli- cative of types of programs now appearing on free TV in quantity, opponents urge, and we would be inclined to agree, that it would not appear that other public interest considerations could justify the authorization of STV using broadcast channels. We believe, for the reasons given below, that STV will provide a beneficial supplement to free TV. 48. Of course, the programming of a single over-the-air trial operation at Hartford and an experimental cable operation at Etobicoke cannot form the basis for completely certain predictions about the programming that would be shown if nation-wide STV were authorized. However, programming different from free TV programming ~g.g available for the STV trials, and no arguments have been made that convince us that such programming would not continue to be available for STV if it becomes a nation-wide service. If anything, it seems that nation-wide activity would strengthen the position of STV in obtaining such programming, or even better programming. Proponents suggest that nation-wide STV would follow the pattern of the trials and that the major portion of its programming would consist of feature films and sports (91% of Hartford programming). This appears to be a reasonable forecast, and the rules which we adopt herein take cognizance of it. Should STV programming change as it develops, and should the change require amendments of our rules in the public interest, we, of course, stand ready to make them. 49. It may be useful first to analyze STV programming on the basis of the Hartford trial. We begth with sports. Opponents of STV urge that because a cascade of sports events is shown on free TV, sporting events shown on STV would be duplicative because they would be of the same type. This is unrealistic. It is elementary that if a man wishes to view a heavyweight championship fight he will not be satisfied with viewing a tennis match, a football game, or a motorcycle race instead. Such fights have generally not been carried on free TV in recent years. To let him see the fight on STV is clearly to supplement present sport-events programming on free TV. The same is true with respect to blacked -uut home games of amateur or professional teams. If one wishes to view on TV the local teams in which he has a strong interest, it is at best a poor substitute to let him view teams in other parts of the country. It is a fact of life that just as heavyweight title fights are noC now generallyshown on free TV, home~ games are blacked out. The promoters and team owners do net permit them to be shown on free TV for fear of a/The question of impact of STV on free TV, discussed hereinafter, is also of great importance. PAGENO="0037" 33 -17- harming box office revenues. Opponents speak of the present situation as "a reasonable accommodation of conflicting economic and social interests. This may be so, but it is not the only possible accommodation. If the teams which now protect their box otf ice revenues by blacking out home games find that they can permit the games to be shown locally on STV and still benefit financially, perhaps a new balance of economic and social interests will be strucK. It is argued that other factors than "protecting the gate" are involved. Thus, we are told that the Commissioner of the National Football League has said that he "does not want to follow the path of professional boxing- -with teams playing in comparatively empty arenas with national television audiences." If the league believes that this would happen, there is nothing to force it to allow its football games to be shown on STy. They can only be shown if the league consents. The record suggests that at least in some cities where the pro football stadia are completely sold out and people cannot obtain tickets, STV might provide a beneficialsupplement ~nd the arenas would not be empty. 50. Another benefit to the public that should not be overlooked is the fact that many viewers may see a sports event over a single STV sub- scriber's set for a relatively modest per-capita cost. Thus, for example, a Hartford survey showed that during one heavyweight title fight an average of nine viewers was watching each STV set that was tuned in, and the cost for all nine was $3.00. The same fight on closed circuit TV at theaters in Hartford cost $5.00 per person. 51. Turning now~to feature films, we observe that generally speaking, people like to see fresh, new films. That is one reason that theaters shcwing first run films can charge more than those with later showings. The fact that there are some exceptions to this observation, such as "blockbusters" that are not recent films, does not destroy its general validity. Although the opponents of STV attempt to minimize the importance of recency, at ~he same time they attempt to show that current films are being presented on free television. Just as a person wishing a heavyweight fight will not be satisfied with a tennis match, the chances are that generally a person wishing to ~ee a widely-advertised,, favorably-reviewed, new movie will not be satisfied with four-year-old film on free TV. They are both entertainment of the same type, j,g~, "films," but there j~ a difference. And we agree with the propo- nents of STV who state that under the cost-per-thousand economics of conven- tional television, current films, such as first subsequent run films, cannot be shown on that service, because free TV cannot pay enough to cover produc- tion costs and potential box-office revenues that would be lost because of the free TV showing. On the other hand, Zenith and Teco report that after difficulties in program procurement were ironed out, 70Z of the films exhibited in the Hartford trial in a recent year were first subsequent run. It may also be recalled that although only 277, of the films in the first two years of the trial were first subsequent run, the rest were, on the average, shown two years after theater release. PAGENO="0038" 34 18- 52. The opponents make an effort to show how recent the films on free TV are, but there can be no doubt from the data they submit, or from a perusal of TV program schedules, that the average age of the films on free TV is far above the Hartford average. As an example, we refer to the list of film~ to be shown by networks in prime time during the 1966-67 season which ABC compiled from the July 27, 1966, Variety. Except for two films made expressly for original run on free TV, it consists of 26 films that will, on the average, be shown 3l~ years after theater release. Moreover, the complete Variety list `of films to be shown by networks during the `1966-67 season from which the ABC list was selected, reveals that 60Z.of the films are from 4 to 15 years old. ~ , 53. A final point should be mentioned with regard to feature films. Opponents suggest that, in pleadings filed about twelve yearsago in this proceeding, the Commission was led to believe that STV would supply first run feature films, but that it has only furnished first subsequent run pictures. Zenith and Teco state that although first run films have generally not been made available for STV, if the service were authorized on a nation-wide basis they could no doubt be obtained if desired. We would point out that, as in- dicated in paragraphs 56-58 below, the Commission was of the opinion that claims of both proponents and opponents might not be free of exaggeration and the very purpose of trial operations was to aid in ascertaining where reality lay. The Hartford trial has shown that, at the least, first subsequen~ run films are available. Whether first run features would be similarly at hand if STV is authorized on a national scale is not controlling at this juncture, since we are convinced that even without their availability, the films to be shown on STV constitute a beneficial supplement. This supplement permits the public to have three methods of viewing motion pictures: (1) first or later runs in theaters, (2) first subsequent or later runs on STV, and (3) later runs on conventional television. - If first run films should be made available to STV the same three methods of viewing would still prevail with STV being even more of a beneficial supplement. 54. Several opponents have stated that the Hartford trial has shown that STV has disproved the proponents' statements that STV would diversify television, programming. They quote from paragraph 48 of the First Report to the effect that proponents "allege that subscriber financed broadcasts could and would provide a wider choice to members of the public interested in the fine arts, operas, educational and informative material and other similar kinds 23/ What the situation on conventional TV will be in years to come is a matter of conjecture, Both opponents and proponents agree that the source of supply of films is drying up. ABC says that because of this, feature films are now being produced specifically for conventional TV exhibition and that such films may ultimately become a network staple. Others say that the viewing public is not satisfied with such films and prefers films made for theater release. Zenith and Teco question, in view of the diminishing supply, what free TV will do in the future other than resort to showing more and more reruns. (See note 20, .E2E~-~ PAGENO="0039" 35 - 19- of programs.' Instead of diversity, it is argued, Hartford has shown that most of the programming will be that which appeals to a mass audience- - films and sports. Therefore, since it will not provide the diversity pro- mised STV should not be authorized. 55. This argument overlooks the context in which the quoted statement was made. Therefore we quote in full paragraphs 48, 49, and 51 of the First Report: 48. Insofar as a judgment can be made on the present record the Commission believes that in some respects the claims of proponents and opponents alike are not free from exaggeration. Proponents, for example, have tended to stress the capacity of subscriptjon television to bring to the public new kinds of programming hitherto unavailable or available on a very limited basis. In support of this argument proponents refer to the incentive to the advertiser to concentrate his support on programs of wide general interest. They allege that subscriber financed broadcasts could and would provide a wider choice to members of the public interested in the fine arts, operas, educational and informative material and other similar kinds of programs. 49. As against this picture of greatly enhanced variety of programs, the opponents insist that the incentive to of fer programs of the widest popular appeal would be if anything greater in subscription television. Time avail- abilities, it is claimed, which could yield substantially greater returns for programs of wider popular appeal would not be sacrificed to any appreciable extent for the transmission of programs which may be expected to attract such smaller audiences. * * * * 51. It is not possible, however, without a demonstration of the service in operation, to determine reliably where the practical realities lie - - in the glowing prospects pictured by proponents, with the alarms raised by the opponents, or somewhere between these extremes. Comments of proponents filed in 1955, and paragraph 50 of the First I~eport not quoted here, make it clear that proponents not only stated that SW would provide wider diversity, but that it might offer sports events not shown on free TV,as well as movies. 56. In view of the foregoing, it may be seen that we expressed an inability to determine where the realities of the matter lay without help from trial operations. We now have the results of the Hartford trial, as well as some information concerning Etobicoke. It would appear, at least at present, that the reality is that the major Dart of the programming, as opponents had PAGENO="0040" 36 -20- argued, will be of a kind that would appeal to a mass audience. To say this, however, is not to say that it would not be in the public interest to author- ize STV for, as indicated above, we believe that such programming does provide a beneficial supplement to present television faz~, albeit the diversity pro- mised may not be fully achieved. 57. It is difficult at this stage to arrive at any definite con- clusions about the cultural or educational type of programming that was to make for diversification. Hartford did offer some, So did Etobicoke. Audience response was not great, but there was a response. On a national scale, total audiences would be greater. Zenith and Teco state that the limitations of the trial prevented more such programming. Larger audiences might permit it. The Joint Committee says that RICO promised the Commission that it was prepared to lose up to $10,000,000 on the trial. It lost money, but not that much. The Joint Committee argues that had it spent and lost more, as it promised it was willing to do, it might have provided the Com- mission with more information about such programming. This is obviously an area where we know little. In any event, the rules we adopt today adjust to the reality of the situation- -the expected predominance of films and sports-- but provide assurance of programming for other tastes as well by estab- lishing a maximum percentage of STV hours on the air that may be devoted to films and sports. Whether STV Would Provide an Increase, in Financial ~sources Which Would Facilitiate Significant Increases in the Numbers QfSerVices~AVaflpklet9 the Public Under the Present System The Degree of Acceptance and Support Which STV Might be Ableto Obtain FromMembers of the Public ma Position to Make a Free Choice 58. These two categories are discussed together because they are so closely intertwined. Zenith and Teco give business'projections based on the Hartford experience which indicate that an over-the-air STV operation would break even with 20,000 subscribers. They then assume what they characterize as a conservative estimate that 10% of the TV households in a community would subscribe to STV. Under these assumptions, the top 91 markets would have sufficient TV homes to support viable STV operations. From this they argue that STV has a reasonable potential of supporting 91 more stations in addition to those already in operation, and that, depending on the market place, it might do even more than that. Thus STV would facilitiate increases in the number of services to the public. Whether STV could provide an increase in financial resources depends, of course, not only on the validtty of the assumptions that went into the preparation of the business projections that suggest a 20,000 subscriber break-even point, but also on whether public support would be such as to produce more than 20,000 subscribers in various communities. We turn first to the business projectiqns. PAGENO="0041" PAGENO="0042" 38 -22- 65. In addition, it is argued that the revenues of the projection include not only program charges of $65 per year per subscriber, but weekly decoder rental charges of 75C that come to $39 per year, for a total of about $105 per year. According to the most recent Department of Labor statistics, the average family spends only $27.67 per year on all spectator admissions, yet Zenith and Teco expect them to quadruple that amount for box office admis- sions and spend the entire amount on STV. There is no empirical basis in fact, we are told, for expecting this to happen, and the trial results show that only 0.757~ might do so, which is a far cry from IOZ. Thus the revenues are overstated insofar as they purport to be based on the Hartford data. 66. Channel Allocations and Station Growth. Zenith and Teco pre- sent their projections and penetration material against a background of information concerning channel allocations and station growth in order to show that STV would provide an increase in financial and program resources for the nation's competitive television system. They briefly mention the activity of the Commission in allocating television channels throughout the cowtry on the basis of priorities designed to provide the setting for a national competitive television system. But they emphasize that establishing stations using the allocated channels is the province of private enterprise. Figures are presented to show the number of television broadcast licensees and the number of permittees as of January 1, 1964 (shortly before they filed their joint petition for further rule mfking), and the number of idle channels. In addition, informationis given about television stations that went off the air and construction permits for TV stations that were surrendered or cancelled between the lifting of the freeze in 1952 and January 1, 1964. Zenith and Teco also point to the Commission's sponsorship of the all-channel law as another example of what the Commission has done to develop the television system. They then conclude that the Commission has perhaps done all it can to achieve a nation-wide television system and foster UHF except for promoting economic support and program sources through the authorization of STy. 67. Responsive to the foregoing, the Joint Committee points out that the Zenith-Teco figures stop at January 1, 1964, but that between that date and September 29, 1966, the number of commercial UHF stations increased from 88 to 115 and the number of VHF stations, from 476 to 490. Also, during that period, the number of UHF construction permits increased from 61 to 139. This UHF growth, it is suggested, was brought about by the fact that the UHF problem was caused by the lack of set conversion, a situation that was cor- rected by the all-channel law without the aid of STV. 68. Necessary Showina for Establishment of New Service. In their reply comments, Zenith and Teco place principal stress on the question of what sort of showing is necessary in order for the Commission to establish a new service. They say that opponents hold that the Hartford trial did not supply enough information to permit valid projections of viability of STy, and that without absolute proof the Commission cannot establish a new service or otherwise encourage the larger and more effective use of radio because it would result in waste o~ spectrum space. Nothing in the Act, they state, in- dicates that establishment of a new service must be preceded by absolute proof PAGENO="0043" 39 -23. that it will be viable. Nor was such proof made when the Commission made allocations for UHF in 1952, when it reserved channels for educational TV in 1952, or in other situations. The Hartford trial, they state, provided useful information on which to make projections. Citing American Airlines, Inc. v. Civil Aeronautics Board, 192 F. 2d 417 (C.A.D.C. 1951), they argue that the Commission, in encouraging and developing new broadcast service in the public interest, should consider not only present facts but estimates of the future. Along the same line, in response to the argument that the 10% penetration figure is too optimistic, Telemeter states in its reply comments that one of the opponents of STV (NAB) misjudged the future of commercial television when it was beginning, but that service grew from 8500 TV homes to 947. of all homes in the nation. 69. Conclusions. We agree with the views of Zenith and Teco ex- pressed in the preceding paragraph. We observe that the results of a single trial cannot be projected into the future to indicate with complete accuracy the nature of a new service. However, a trial can, and the Hartford trial did, supply us with information that does afford a projective basis with some attachment to reality as opposed to m~rP conjecture that existed before. We recognize that there are some weaknesses in the assumptions underlying the hartford business projections, but do not consider tftem as overriding~ For example, the estimated $65 figure~for program revenue per year per subscriber is slightly higher than the Hartford experience. However, ~ii making the projections Zenith and Teco stated that it only approximates the average program expenditure of the Hartford subscriber. They also pointed out that with nation-wide STV more, and in some respects better, program product might be available and it is not unreasonable to expect that subscribers might spend more on programs because of this. In any event, even if the $65 figure were shaved by a few dollars to make it correspond exactly to the average Hartford expenditure, it would only result in a relatively minor change in the projections. 70. Nor, for example, do we gainsay the validity of the fact that the projections assumed a revenue of about $105 per year per subscriber for STV alone, whereas the average family spends only $27.67 per year on all spectator admissions. However, the fact remains that the average subscriber at Hartford did spend close to $65 per year for programs and, with discounts, did pay a weekly decoder rental fee. To say that the average family spends $27.67 is not to say that no families spend more than that amount, for it is the nature of an average that many lie above it and many below. Unfortunately, we ha~e not been told what percentage of American families spend far above the average. Nor do we have information about the possibility that expenditures for STV might come out of a non-recreational part of the budget as has apparently been the case with amounts paid for purchase of television sets. 71. Concerning the argument that the estimate of payments of $300,000 to $400,000 per year for use of station time for broadcasting of STV programs is too low, we would point out that even in the largest markets some TV stations charge rates comparable to those of the larger radio stations in the area. This indicates that the figure of $300,000 to $400,000 ii not unreasonable. PAGENO="0044" 40 24- 72. As to the argument that the high turnover rate shows public dissatisfaction with SW and that the public will not support it, we con- elude that not enough is now known about the causes of turnover to permit drawing valid conclusions. We agree that, based on the experience of ide. phone companies, Zenith and Teco assume too low a turnover rate. However, we have no reason at this time to believe that with SW authorized on a nation-wide basis this factor would be of such magnitude as to result in insufficient support of SW. In any event, the rule we adopt today pro- vides for lease rather than purchase of decoders by subscribers, and thus provides protection to subscribers who may wish to withdraw. 73. As to the estimate that program costs would run about 357. of program revenues, it is said that unless SW spends more than that for quality product it will not achieve a better penetration than it did in Hartford and it will fail; and that quality product sometimes costs more. Yet we are not told how much quality product there is that costs more, or how much more it costs other than that "it will bring as high as 907, for first-run exhibition in New York or Los Angeles," or that it often obtains as much as 50% or more for first subsequent run and that closed circuit television in theaters can expect to pay 507,-607. of the gross. We believe that the question of what programs STV can obtain and how attractive they will be to how many people cannot be mnswered with any great degree of cer- tainty. It is conceivable, for example, that a nation-wide SW system, even if only moderately successful, could provide an audience sufficiently large to make payments of 357, of program revenues very attractive to suppliers of quality product. In fact, with larger audiences, suppliers might be willing to charge lower percentages. Moreover, there is the possi- bility that if more than 357. had to be paid to obtain quality programs, SW operators could charge more for the better product. In any event, the question of STV penetration and what it might take to obtain great penetra- tion is one about which there can only be speculation at this stage. At worst, using a 1% penetration, and accepting the other assumptions of the projections, presumably STY could be viable in the top four markets (New York, Los Angeles, Chicago, Philadelphia). At best, it would be successful in many more. Having decided that SW can provide a beneficial supplement to present TV programming, we are content to let this aspect work itself out in actual operations under our new rules and under a requirement (as a matter of policy) that applicants for SW authorizations make a showing that they have the financial capacity to operate for at least a year. 74. Although not previously mentioned, we here note with regard to the matter of potential penetration of STV that it has been argued that STV would be something which only the very wealthy could afford. Zenith and Teco provide the following table, based on the Hartford trial, contro- verting this: PAGENO="0045" Income Lev 41 PAGENO="0046" such stations to yield an expanding service envisioned by the all-channel law. As with other aspects of this or any other new service, this cannot be known until the actual operations commence. However, we note that our new rules require that STV stations carry at least the minimum of conven~' tional service specified by our present rules. Whether STV Would Seriously Impair the capacity of the Present System to Continue to Provide Advertiser-Financed ~Programming of the Present or Foreseeable Quantity,, Free of Direct Charg~e to the Public~, The Close~ P~1.s~A ~ ~f Whether STV Would Result in Significant Audience Diversion from `"~ ~ and Siphonir'~ of ~" Talent Away from Free "~`~" Into STV Service. 42 -26- "In our judgment, our consideration of subscription tele- vision should proceed with due regard both for its poten- tial benefits and disadvantages and for the inherent strengths and advantages of the existing system. That subscription television on a nation-wide scale can be effectively integrated into a total TV system, with ad- vantages to the viewing audience, appears to be a reason- ably sound conclusion at this point. While.., there may be some impact on free TV, we do not believe that this is in itself necessarily bad or that it need occur to a degree contrary to the public interest, particularly if safeguards such as those previously mentioned are adopted. Our concern, as it must be, is with the over-all public interest and not with protection of any existing service as such. It may well be that competition between conven- tional and subscription TV for viewing audience and program material may result in improved and more varied fare, both for subscription viewers and those who continue to rely on conventional television. But we also emphasize that we regard the preservation of conventional television service and the continued availability of good program material to the free service as extremely important considerations...." 77, With regard to the matter of impact of SW on free TV and the related subject of siphoning, we stated in the Further Notice (pars. 16): 78. We also stated in the Further Notice (paras. 13-14) that al- though no final conclusions could be drawn from the Hartford trial about the extent to which SW would divert audience from conventional TV, the trial data suggest that such diversion would not be destructive of the latter ser- vice. In connection with that statement we advetted to the fact that the average Hartford SW audience at any particular time was. 3.~% of the sub- scribers, and that the number of subscribers was less than 11~ of the net weekly circulation of the market. We stated that even with 1OZ penetration PAGENO="0047" 43 -27- and 10% average subscription audience (as compared with the 5.5% of the trial), the average STV audience in prime viewing time would only be 17. of all the TV homes in the United States. This diversion and whatever effect on revenues it might have we felt would not seriously impair the free TV service, 79. We went on to say that conceivably the aud.ience diversion might be substantially greater if STV should result in "siphoning" ~/ of programs and talent from free TV to STV. And, 4side from audience diversion, should siphoning occur, we stated, it could make free TV a less rich and varied medium for those continuing to view it. Because we found it difficult, on the basis of the Hartford or any other information, to arrive at conclu- sions about siphoning, we invited comments on the extent to which it might be likely to occur and on what rules or policies, if any, should be adopted to prevent it from occurring to a degree contrary to the public interest. Paragraph 14 mentioned and invited comments on possible regulative approaches to the problem-- the safeguards mentioned in the quotation in paragraph 75 above.~/ 26/ A matter of key importance in this area is the possibility of diversion of talent and programs from free TV to STV, a process often called "siphoning." 27/ The pertinent portion of paragraph 14 is as follows: "It is difficult, on the basis of the Hartford trial or any other infor- mation which we have, to arrive at well-founded conclusions concerning siphoning of programs or talent. We invite comments on the extent to which such developments are likely to occur, and what rules or policies, if any, should be adopted to prevent them from occurring to a degree contrary to the public interest. For example, such regulations might include (1) rules preventing or limiting interconnection of pay TV operations by microwave or otherwise, (2) rules prohibiting a system manufacturer or franchise-holder (who might hold franchises in numerous markets) from engaging in subscription program procurement and supply, which could be made the responsibility of the individual licensee, or (3) rules to assure that subscription television entrepreneurs do' not unreasonably contract with performers in such a way as to prevent or discourage their appearing on conventional television. Another pos- sible approach to this question, urged by Zenith and Teco, is that subscription television be limited to kinds of programs not presently available in substantial amounts on conventional TV. This is discussed in paragraphs 41-42 below. We anticipate that, if subscription TV opera- tions are authorized, the licensees thereof will be expected to furnish the Commission, on a continuing basis, with information as to number of subscribers, per-subscriber expenditures, and programs presented so that we may be periodically informed as to the factors bearing on their potential for siphoning programs or talent from conventional television." PAGENO="0048" 80. Comments of Proponents of STV. Comments received are sum- marized in this and the succeeding paragraphs 28/ and are followed by our conclusions. Zenith and Teco, incorporating by reference previously sub- mitted material, state that audience siphoning would be minimal because the average subscriber at Hartford had an SW viewing time of approximately 2 hours per week as compared to the average U.S. free TV viewing ~of about 38 hours per week. This is about 57. of the hours the public now views free TV. If every home were to become an STV home, which is unlikely, there would thus be a loss of 57, of viewing time to STy. But if 107. penetration of STV were achieved, the loss would be ½ of 17.. Moreover, since even in prime time between 35 and 50 percent of TV homes do not use their sets, some of those viewing STV might be those whose sets would otherwise have been dark so that their viewing would be additive rather than subtractive. They also demonstrate the minimal audience siphoning effect by stating that the average SW audience at any particular time was 5.57. of the subscribers. Thus even if there were 1007. penetration by SW, only 5.57. of the subscribers would be diverted at any given time, leaving 94.57. of TV homes available to watch free TV. 81. Concerning pre-empting of time now used by free TV, it is stated that WHCT at Hartford broadcasts an average of 30 hours per week of subscription programming and that, because of the limitation on the number of box-office programs and the size of the recreational budget of families, that number is unlikely to vary in other STV operations. 29/ Since typical TV stations broadcast about 115 or 120 hours per week, in a multiple-station market of three or more stations.STV could not absorb more than 107. to 157. of the total broadcast time available. Moreover, it is argued, because con- ventional TV stations affiliated with networks probably would not wish to desert profitable operations by giving up network programming for STV pro- gramming, it is likely that SW will have to support the establishment of new stations if it is to get off the ground. New stations would not siphon time that would otherwise be available to free TV. They would add to the total amount of time. 82. As to program siphàning, Zenith and Teco inform us that none of the programs shown at Hartford were available on free TV. With regard to talent siphoning, they remind us that stars, producers, directors, and writers often work for more than one medium and there is no more reason to assume that STV will siphon talent than there is to suppose that the motion picture indus- try would do so, since for much of its programming SW merely would substitute 28/ Many of the arguments made in the comments have been previously made in earlier stages of this proceeding. 29/ Zenith and Taco state that because of these limitations a total of about 30 hours of SW programming is all that can be absorbed many market regardless of the number of SW stations therein. PAGENO="0049" 86-399 ~ - 67 - 4 PAGENO="0050" 46 -30.. For purposes of nation-wide projection, the Commission in its Further Notice has estimated, on the basis of the Hartford trial, that a 107. nation-wide penetration of television homes would be a relagively optimistic figure in the foreseeable future. A 107. nation-wide penetration would amount to approximately 5.5 million subscribers. Five-and-a-half-million subscribers spending $65 each per year, of which $22.75 would be available for program pro- curement, would make available $125,125,000 for subscription pro- grams. This amount is dwarfed by current network expenditures for programming. Thus, in 1965 (latest figures available), the net- work and their 0&O's spent $686,752,000 and the total broadcast industry spent $953,251,000 on conventional programming. In short, with a 107. nation-wide penetration, subscription would have avail- able for program procurement less than one-fourth of the amount spent by the networks and their 0&O's and less than one-seventh of the amount spent by the entire television industry for programming in 1964. Stated otherwise, subscription would have to achieve approximately a 70Z nation-wide penetration of television homes to have an amount available for program procurement which would even approxi- mate tIm amount already being spent by the television industry for conventional programming. Thus, the fear that subscription could win in a bidding contestwith conventiona) television is simply not realistic." 83. To the often ead~ argument. thai STV would siphon from free TV the programs that have high ratings and sake the public pay for them, Zenith and Teco say that the Hartford experience shows that even for box office programs the public is selective. Thus the cumulative audience rating for first subsequent run files was about 27~i but for older films it was 187,. Therefore, they argue, it is unreasonable to assume that the public would pay to see the type of program now available on free TV, especially when programs of that type could be seen on some other stCtion free. Even with the 40 top- rated programs on free TV during the Fall season of 1964, according to the Nielsen rating, an average of 767, of the viewers did not watch them. 84. To the contention that STy would siphon all ma.jor sports, they state that even with an SW penetration of 20f in the top 175 markets, at an average yearly subscriber program expenditure of $65, there would be $650 million in program revenues. Assuming that 357, of this amount would be avail- able for program procurement, there would be $227,500,000 for all STV pro.. gramming. Citing figures for relative amounts of spending by the public for movies, plays, sports, and other entertainment, assuming that these figures will apply to STV spending, and allocating a proportionate amount for program purchases accordingly, about $32,000,000 would be available for sports programs. This figure they point out is about 60~ of the sum of approximately $50,000,000 that free TV spends for some, but not all, of the sports programs seen on convefl- tional TV. This reflects the relative abilities of STV and free TV to acquire sports programming. They state that with the money available, the major con- tribution of STY to sports programming would be that of carrying heavyweight championship fights and blacked-out games. PAGENO="0051" 47 -31- 85. Finally, to the argument that SW would siphon all present network conventional programming from free TV, they state that there are just too many such programs to permit them to be absorbed by the public's recreational budget at a rate higher than sponsors will pay for their showing on free TV. 86. Other proponents of SW also present their positions in this area. Telemeter says that SW will not siphon but will show programs not now available to free TV. Teleglobe says that free TV is a giant and can't be hurt, its revenues having increased from 324 million dollars in 1952 to about 2 billion in 1965. With lO~ penetration, SW revenues would only be about 500 million dollars a year. Jerrold says that phonograph records and tape recordings have not driven radio out of business or decreased quality of radio programming, nor have motion pictures become extinct be. cause of TV. Actually, in Jerrold's view, pictures have improved because of the competition of television. Competition, it is said, should be assumed beneficial until a contrary showing is made and the government should not inhibit competition for the sake of preferring one kind of com- munications over another. Acorn says that if SW programming is good enough it is conceivable that free TV would try to siphon it away--a siphon- ing in reverse. 87. comments of Opponents of SW. Concerning the matter of audience siphoning, the Joint Committee says that the trial gives no infor- mation because with an average of 5.57. of subscribers watching SW at any one time, only 267 persons (5,57. of 4,851) would be watching, and in a market with a net weekly circulation of 800,000 there would be little audience siphoning effect; and besides such an SW operation would not long survive. However, they argue, proponents foresee a lO~i to a 507. penetra- tion for STV. With such penetration in Hartford it would mean anywhere from 80,000 to 400,000 subscrikers for that market. But if programming of a quantity and quality were available to attract that many subscribers, j~., to establish a successful SW operation, what would the average viewing time be? Hartford provides no information about that. The Joint Committee points out that the Liston-Clay fight attracted 82.67. of the sub- scribers. With 80,000 to 400,000 subscribers, the~r state, this would have had a disastrous iapact on free TV on the night of the fight. AMST says that although Zenith and Teco allege that audience siphoning would amount to only ½ of 17. of the audience available to free TV, by far the greatest part of STV programming would be shown at peak viewin3 hours and it would therefore have a critical impact at the very time that free TV generates its largest advertising revenues which sustain programming `in less profitable periods of the day. Free TV relies on low cost-per-listener economics and. would be vulnerable to audience losses.' Moreover,-AMST urges, the success of Sty depends on its ability to penetrate the largest markets, as well as the smal1~r ones, and the destructive impact of SW through the larger mar- kets would strike at the heart of free TV. PAGENO="0052" 48' -32- 88. Pre-empting by STV of time now used by free TV is a matter toward which ABC, NAB and the Joint Committee direct remarks. The latter party states that the allegation of Zenith-Teco that there would be 30-40 hours of STY programming per week in any market and that this would still leave ample time for free TV overlooks the facts that the 30-40 hours are in prime time and that Zenith-Teco do not propose to limit STY to multiple station markets. The Joint Committee also questions the assumption of a 30-40 hour limitation of STY programming--a limitation based on the re- stricted amount of box-office programming and limitations in the family recreational budget. NAB points out that Zenith and Teco have said that stations would be predominantly STY or free TV because of such factors as prime time demands by both types of programming. If a station has STY programs on the air, the time is taken away from non-subscribers. In most markets, even the use of one station for STY would seriously restrict the public choice among programs. The concern of ABC about time pre-empting is expressed somewhat differently.. It states that the Commission, recog- nizing the number of free TVhout~s would be reduced tc~ some degree by STY, has proposed a limitation on the number of hours of STY broadcasting. In spite of this, it is stated, hours of free TV will be lost. There are relatively few markets with four or more stations where the loss would be less noticeable. To the extent that existing network affiliates use prime time for STV programs, network clearances could be severely compromised. This could be especially serious for ABC, which has the fewest number of pri- mary affiliates and therefore has a greater problem in obtaining clearances for its programs. Failure of a significant number of stations to clear a program could badly hurt ABC's position in satisfying advertiser requirements, especially if the lack of clearances occurred in some of ABC's key markets. It could spell the difference between the retention or dropping of a program. Nor do delayed clearances help, because research has shown that programs cleared on a delayedbasis frequently do not have sufficient audience to make them economically viable. Finally, ABC argues, the demand for station time of competing sources of entertainment which results in non-clearance of network programs frequently leads stations to drop network public affairs and other public service programs. Pre-empting of station time by STY pro- gramming would do this. 89. Several opponents state that the Hartford trial failed to give information about program siphoning. For example, ABC says this is because it was such a small ooeration that there wasn't even a remote pos- sibility that it could compete for the most popular programs of network television that are sold nationally. CBS says that since the Hartford trial was limited to 5,000 subscribers,rather than 50,000 it originally contem- plated as a maximum, meaningful conclusions on program diversion cannot be made. However, it is said, the trial established that STY and free TV rely on the same program sources, and if the Hartford business projections are correct, STY would have financial resources to siphor~ significant amounts of quality programming from free TV. Owners of box-office programs now on free TV would invite offers from both STY and free TV. PAGENO="0053" ..33.. 49 90. The tatter point..~that STV and free TV would compete for the e programs-~is made by many opponents. It is variously argued that SW id cater to the same general audience tastes as free TV since the trial Hartford showed that most of the programming would consi t of mass circ n entertainment (movies and sports), that S f most c - r free TV pr - a dcv stating ing of asw ~ 91. Both ABC and CBS discuss selective program siphoning. ABC says that CBS is presently paying $19,000,000 for the right to show the NFL ~"~`-ball games and that it appears that this is near the limit of what free TV can It states that although it is difficult to estimate what STV penetration be nationally, if only 15,000,000 sets were tuned in to professional football ~ $1.00 for each game, over a l4..game season revenues of 1 be obtained~-an amOunt which dwarfs the $19,000,000 that it is implied that STV could outbid free TV for such games. 92. Although questioning some of the reasoning of Zenith and Teco underlying the assumption that about $32,000,000 would be available to SW for procurement of sports events (if there were 207. penetration in the top 175markets), CBS says that even assuming that figure, the ZenithTeco state~ ment that free TV spends about $50,000,000 for selected sports events so that STV could presumably not outbid free TV for them is not correct. CBS maintains that SW could concentrate its programming dollars on the lion's share of the major events and thereby siphon them from free TV. 93. Finally, ABC argues that there is no effective protection against siphoning. It states that if STV is authorized on a nation-wide basis and siphoning then develops, the immense capital investments and the establishment of viewing patterns will make it difficult, if not impossible, for the Commission to take effective regulatory action. ABC says that it was this sort of considera. tion that led it to urge the Commission to assert jurisdiction over CATV. As to taking action now to prevent siphoning by Commission rule, it is asserted that the limitation of SW programming to box-office attractions is imprac- tical, and in any event would raise Section 326 and First Amendment problems. PAGENO="0054" 50 94. Reply Comments of Proponents. Zenith and Teco reply to comments of STy opponents on siphoning as follows The Joint Committee argues that even though talent might continue to work for free TV and STV, it could not do so at the same time. This completely overlooks the fact that programs may be taped or filmed so that the artist need not perform the impossible task of being in two places at the same time. Recently, (citing an example) the same artist appeared on CBS and on NBC simultaneously. The argument that if talent appears on both STV and free TV it might dilute its conventional TV audience by self-competition (j~., by siphoning part of its free TV audience to STV) is poppycock. 95. They advert to the example of ABC which stated that if 15,000,000 STV sets were tuned in to NFL football games at cost of $1.00 per television household, then over a season of 14 games $210,000,000 would be generated so that STV could siphon the games from free TV because the latter medium can only afford to pay $19,000,000 for them. To this they reply: The ratings of AFL and NFL football games have averaged between 10 and 14. Therefore, if STV could achieve the same rating by levying a charge as was obtained when the programs were shown free, STV would need a penetratioil of 100 to 150 miliion subscribers in order to obtain revenues of $15,000,000 per week. But there are only about 55 million sets in the country. It is more reason- able to assume a 10% STV penetration which would result in about 5 ~ million subscribers. At $1.00 per game and with a rating of 10, STV would obtain $550,000 per week or $7,700,000 for the 14-week NFL season--an amount far less than that which CBS pays for the games. 96. As to the Joint Committee's questioning of limitations in the family budget that would serve as a brake on pre-empting of time, the Joint Committee had stated that this limitation was incapable of measurement. Zenith and Teco reply: It is measurable and. was. measured at Hartford. Thus, during the first two years of the trial only 27% of the feature films shown were first. subsequent run. Between October 1, 1965, and September 30, 1966, 70% were first subsequent run. However, the average weekly expenditure of subscribers was about $1.20 in both situations. Therefore, even with improved programming the amount remains fairly constant and this is proof that there is a family budget limitation. 97. In response to arguments that the trial was too small to give information about siphoning they state that the sample of 5,000 sub- scribers at Hartford is about five times larger than the Nielsen sample for the whole country on which free TV so heavily relies. It is averred that it gave the data on which estimates of potential may reliably be drawn. 98. Zenith and Teco urge. that contrary to hurting free TV by pro- gram siphoning, STV may well help free TV. because of helping to increase the total box office returns (by adding to the theater returns) it will make for a larger total box-office revenue and this in turn will make for the production of more and better quality feature films. They state that this will help free TV because although that service is apparently p]~cing more and more reliance on feature films, the fact is that the source is drying up. The stimulus that STV will give to motion picture production will, according to them, help to alleviate the situation. PAGENO="0055" 51 99. Finally, they observe that the Commission stated that if nation-wide STV were authorized it would require SW licensees to furnish it with continuing information so that it might take steps to control siphoning if it should appear to be developing. ~ note 27.) 100. Telemeter also voices the argument that SW will stimulate more and better motion pictures by increasing box office revenues. It points to the fact that only a small percentage of the population sees any particular film (see para. 43 above) in the theater, and home viewing of current films would add to this number. In addition, it states, millions will still wait for the film to be shown eventually on free TV. Hartford and Etobicoke, Telemeter urges, show that STV and free TV can exist side by side with the latter taking up the interest and attention of viewers 957. of the time. SW will be a supplement to the more extensive free programming. 101. Reply Comments of~ponents. The reply comment: of opponents generally do not direct then%selves to specific points concerning siphoning, but generally reiterate previous arguments, The most emphatic voie~. perhaps that of ABC which emphasizee that it is erroneouè to argue that the public will not pay for what it can see freed Thei~e are teeny ~rograms--fllms, World Series, professional football gaM --that would dommand a price if not available on free TV. Thus,* ABC argues, if such piograms wEre siphoned to STy, jt would be not a question of paying versus seei~mg the program free, *t would be a question of paying or not seeing the *:program at all. 102. Conclusions. We have given careful consideration to the in- formation supplied by commenting parties concerning the impact of STY on free TV and the related problems of audience diversion, pre-empting of time, and siphoning of programs and talent. As might have been expected, a con- siderable amount of the information is speculative. But this is not to say that it has not h~en heloful in illuminating various facets of the problems. As far as actual facts are concerned, we are-left with those provided by the Hartford trial~ 103. About audience diversion, we know that at any particular time the average subscription audience was 5.57. of the subscribers, although some programs, such as a heavyweight championship fight, generated viewing among 82.6% of the subscribers; that most of the programming was during prime time; that the average subscriber viewed SW about two hours per week, viewed one program per week, and spent $1.20 per week. In view of the fact that the total number of subscribers was about 5,000 and in view of the foregoing facts, audience diversion was minute. PAGENO="0056" 5 or 104. About pre- were about 30 hours of STV pr average subscriber paid $1.20 per wee the feature films shown on SW were f related que - pre- and talent siphoning. Opponents state that they a_ ful predictions. Proponents aver the contrary. We are of the opinion that the Hartford experience, limited though it may have been, was sufficient to supply information that cai~ serve as an adequate foundttion for reason- able estimates about the future. Nevertheless, as with any new and untried service, there are imponderables. 31/ Considering both the Hartford facts and the i.mponderables, we believe it is in the public interest to establish a nation-wide SW system with the regulatory safeguards which we adopt today-- safeguards directed at program siphoning and pre-empting of time. ~a' 30/Thirty hours of programmthg per week is the fact that we shall have to use in our consideration of this topic with regard to authorization of nation- wide STV. Whether there was actually pre-empting of 30 hours per week in Hartford is open to question because at the hearing prior to the grant of the Hartford authorization 111(0 informed the Commission that WHCT had been operating at a loss and that if the grant were not made it would discontinue operation of the station (30 F.C.C. 301, 307). Had the station gone off the air, there would have been no free programming over it. Thus the trial not only provided SW programming, but, since WHCT was required to broadcast at least the minimal number of hours of free programming required by the rules for television stations, it added to the amount of free programming in the market instead of subtracting. The argument of SW proponents, of course, is that nation-wide SW would aid marginal or new stations to do just that. ~J~/ One im~onderable,mentidned by the ibintCommittee, is the recent develop- ment of CATV. That group urges that we should defer action on authorization of STV until the impact of CATV on the present system is known. We find this argument lacking in merit, especially in view of the actions which we have taken by the adoption of-rules to govern integration of CATVinto the present tele- vision structure of the nation, 32/ Topics such as whether interconnection of STV operations should be prevented or limited, whether SW should be limited to carrying certain kinds of programs, whether STV system manufacturers or franchise holders with franchises in more than one market should be allowed to engage in SW program procurement or supply, and similar problems relating to siphoning are discussed in the subsequent por- tion of this document which treats of the issues mentioned in paragraph 45(b) of the Further Notice (see para. 15 above). PAGENO="0057" PAGENO="0058" 54 -38- in a one-station market turned to STV it could reduce the amount of free programming by a fourth, and in prime time could replace free TV entirely. In a two-station market, in prime time the free programming could be halved. Of course, if STV were carried by new stations, any free programming (as well as SW programming) would be additive unless one were to argue that without STV the new station would have carried all free TV programming. On the other hand, the argument could be made that without STV the new station might never have gone on the air. 109. In connection with the last point, Zenith and Teco state that the Hartford trial indicates that there is a likelihood that TV Stations will be primarily SW or free TV in their programming because of the demands of prime time of either service, the need of free TV stations to maintain net- work clearances and continuity of audience, and because existing free TV stations, especially network affiliates, may deem it imprudent to forsake present substantial profits for the speculative profits of STy. For this reason, it is observed that, to develop, SW will probably have to turn to new statiohs. Such stations, they urge, will not pre-empt time but will add new SW tirne plus conventional programming time to the total available to the market. 110. Zenith and Teco say that the limited supply of box-office *attractions and the limitations on the family recreational budget will serve as brakes so that the numb~r of free TV hours presently available to the public that could be absorbed by STV could flot be great. However, it is clear (see para. 106 above) that although the number might not be great the effect could be great in communities with a limited number of television sta- tions. Moreover, Telemeter informs us that at Etobicoke, on its three-channel cable system, it carried 54~s hours per week per channel for a total of l63~ hours per week for all channels, and that viewing averaged a little under 4 hours per week. Although this Canadian experience might not be typical, it suggests the possibility that more than 30 hours of STV programming might be avail~b1e to pre-empt free TV time, but not necessarily to divert audiences from free TV. In view of these considerations, and in view of our desire to assure an adequate number of hours of free TV service to the nation, the rule we adopt today limits STV operations to markets within the Grade A contours of five or more commercial television stations, and limits STV to only one station in such markets. This, we believe, will assure that those communities will continue to receive the full three network services plus that of an independent station. In such markets, the percentage of time pre-empted from free TV would be minimal, and the effect of loss of free television programming, even if all STV programming were in prime time, would not be great. Moreover, to the extent that a new fifth station broadcasting STV programs is built in a four-station market, as a consequence of the anticipated revenues from STV broadcasting, the effect would be to add new free TV programming that would otherwise have been unavailable, since our new rules will require STV stations to carry a minimum of conventional programming. 111. Program and talentsiphoning, as we have stated, did not occur at Hartford. Whether it would occur if SDI were authorized on a natio~i-wide PAGENO="0059" 55 -39- scale and were not limited by Commission regulation is one of the most hotly contested points in this proceeding. It is one of the imponderables to which we referred. Of the various arguments raised by STV opponents, we find that of so-called selective program siphoning most persuasive. It ~.s at least conceivable that a successful nation-wide STV system, even though possibly not having as much money as free TV to spend for program product, could, by directing its purchases at select programs, ~g.,, the Wand Series or professional football games, take them from free TV and require the huge audiences of those programs to pay to see them or not seem them at all. We would not consider this to be in the public interest. Zenith and Teco, in discussing the charge that STV would siphon from free TV programs with high ratings, say that it is tortured reasoning to assume that people will pay to see siphoned programs on STV when there are programs of the same conven- tional type which could be seen on free TV. We disagree. In a different context, in refuting an argument of STV opponents, we said that a viewer wishing to see a heavyweight boxing match will not be satisfied with a tennis match. The same reasoning applies against the views of Zenith and Taco here. If a viewer wishes to see a particular program and that program appears on STV and not on free TV, he may not be satisfied by viewing Qther programs of the same general type on free TV. 112. Most other arguments on the topic of program siphoning we find too speculative to influence the action which we take here. The rule wh~ch we adopt, and which is discussed more fully in paragraphs 250-276. below, we believe will serve to prevent, or greatly limit, selective program siphoning. First, that rule requires that feature films shown on STV shall not have been given general release in theaters more than two years before STV showing. In other words,'to the extent that STV shows feature films (and both Hartford and Etobicoke suggest that they will constitute much of STV programming) they must be current films. It appears that such motion pictures rarely find their way to free TV, and it does not ajpear that, in the'~Iight of box-office ecnnon~ics of motion picture production, they may do so in the foreseeable future. Thus the older films, which are generally the ones shown on free TV, cannot be shown on STV and there can be no competition between the two services with resulting siphoning to STV of that kind of programming--a kind, incidentally, which opponents seem to indicate is of growing importance to free TV. A single exception to the requirement that films shown on STV must be current is that STV stations may, under the rule, televise up to twelve feature films per year which had general release over ten years before STV showing. STV stations may not choose to show that many old films. In any event, even if they do, this could be expected to constitute a very small percentage of all feature films shown per year by an STV station (see para. 48). 113. The rule will also require that sports programs shown by STV in a community shall not have been shown on free television in that community on a regular basis within the last two years. Thus, for example, the World Series, having been on free TV in October 1964 could not be shown on STV PAGENO="0060" 56 -40- in October 1965. This rule, we believe, will serve effectively to prevent siphoning of key sporting events that might prove desirable to STV entre- preneurs, and assure the continued free viewing of programs of that kind now being seen free. It will, however, permit STV to show programs such as "blacked out" games that presently do not appear on conventional television. Details of this rule are discussed in pares. 253-270 below. Finally, the rule will not permit STV to show programs common in free TV in which continuing characters are presented from week to week in a series using a common setting or central program concept. This type of programming constitutes a not incon- siderable portion of free TV programming. 114. In view of the indications that STV programming will mainly of feature films and sports events, we believe that the z~ will assure that, with regard to the major ~trt of STV programming, will be no siphoning. The restriction on week-to-week series should further prevent such effects. Admittedly, it is conceivable that this still leaves some types of programs open to siphoning, ~ spectacular "one-shot" programs, but we believe that these rules represent the extent to which we shoulci regu- late at this time. As we have stated (see para. 77), although we consider the preservation of conventional television service and the continued avail- ability of free programs to be important, we also believe that the competition between STV and free TV èould result in improved and more varied programming for both services. We believe that the rules we adopt, in the light of the information now before us, strike a desirable balance in this area. We shall, of course, as stated in paragraph 107, continue to watch closely the develop- ment of the infant STV industry to detect any trends with regard to siphoning. Other Information, Such as (1) Modus Operandi of the Service; (2) the Technical Perfor~nce~ of the Systems; (~) the~Nature of the Programs Offered; (4) the Methods to be Employed; (5) the Role of Participa~pA Broadcast Statign~ Licensees; (~) the Possi~le Monopolistic Features of STV. 115. (l)Modus Operandi of the service; (4) the methods to be employed; (5) the role of participating broadca~t atahj~on Licensees ~/ Since these three items are closely interrelated, they will be discussed together. Zenith and Teco say that there are three functional organizations in the opera- tion of STV service: (1) A local franchise organization to scramble programs for stations; to provide for the installation, servicing and maintenance of unscrambling devices attached to television sets of subscribers; to provide information to subscribers so that they will know how to adjust the unscrambling device to obtain desired programs; and to collect and disburse revenues obtained from subscribers. (2) A TV station licensee over whose facilities the STV programs are broadcast. (3) Program sources which supply programs directly to broadcasters. ~4/ Additional information about these subjects appears in Appendix B attached hereto. PAGENO="0061" statjon~ for PAGENO="0062" 58 -42- 120. (2) The technical performance of the systems. The Hartford trial, Zenith and Teen state, established that the system could meet the technical requirements of the Third Report, namely: (a) The operation must not cause interference, either within or without the frequency employed, to any greater extent than is permissible under the present rules and standards of the Commission. (b) The operation must not cause perceptible degradation in the quality of video or audio signals on any receivers during either a subscription program or a non-subscription program. 121. In addition, it is related that the trial established that the Phonevision decoder (unscrambler) could be installed on all makes and models of TV sets if the sets were in good operating condition; that the system provides adequate protection against reception by non-subscribers; that it functions to permit an accurate allocation of per-program charges to the individual programs, the monthly billing reflecting not only the total amount due for programs but the amount for individual programs; that a credit system will work and is accepted by the public; and that Phonevision equipment will function satisfactorily with a minimum of service calls, home service calls having averaged 89C per subscriber per year. 122. Zenith and Teen mention that, as a result of the HarLiord experience, a new model decoder is being production-engineered that will accommodate color as well as monochrome, that can be connectedtothe~antenna terminals of the set in- stead of to the inside wiring, that simplifies the billing function of the new decoder so as to reduce cost and facilitate operations on the part of the sub- scriber, and that has circuitry changes designed to reduce cost and further improve reliability, 123. In connection with the foregoing statements, Motorola says that it has studied the Zenith and Telemeter proposals (presumably the des- criptions of those systems submitted in response to the Further Notice) and that both vary widely from any system used in prior field tests. It is averred that the Hartford field test "involved a totally different concept and the field test results can have no meaningful bearing on the technical aspects of the proposed systems." A similar statement is made with regard to the system used by Telemeter in Canada (which was a cable system) and the proposal (for an over-the-air system) submitted by Telemeter in this proceed- ing. These statements are followed by a suggestion by Motorola that further field testing is therefore needed before STY can be authorized. 124. To this Zenith and Taco reply that the decoder used at Hartford operated in conjunction with certain parts of the subscribers's televisionset to unscramble the signal, whereas the new proposal uses the same unscramb- ling principle but does the unscrambling independently of the set, and sends the unscrambled signal directly to the antenna terminals of the subscriber's set. PAGENO="0063" 59 -43- They further state "(1) that the television broadcast signals and Zenith scrambling apparatus used in Hartford during the past four years were and are exactly the same as those to be used with the new Zenith decoder described in our July 25, 1966 technical submission in this proceeding; (2) that the decoding functions performed by the apparatus under test in Hartford are the same as those accomplished by the decoding apparatus described in Zenith's current technical submission; and (3) that the Hartford test of these signals and the effectiveness of Zenith's scrambling and decoding processes involved several thousanbof hours of everyday transmission spread over more than four years in afield test operation involving thousands of homes. Thus the Hartford operation provided a greater quantity and quality of field testing of the proposed Zenith con- cept in actual commercial use than any comparable type of service has ever before had. Therefore, Motorola's conclusions with respect to field testing of the Zenith concepts are totally unfounded." 125. (3)The nature of the progrpms~offered. This has been fully discussed in relation to the question of whether STV can offer a beneficial supplement of free TV programming and will not be treated here. 126. (6) The possible monopolistic features of STV. Zenith and Teco state that the Hartford trial has established that there are no inherent monopolistic features arising from STV operations. They do not urge that the Commission select Phonevision equipment as the only system to be used for nation-wide STV. On the contrary, they suggest that the Commission adopt general standards that will permit the use of multiple systems, and that will result in competition. They do, however, admit that it is unlikely that, as a practical matter, there will be more than one over-the-air STy system in any single commtinity (were we to permit more than one such operation), although there may be competition within a community between cable and over-tha-ait STy. But within a community, Phonevision could be used with color or mono- chrome sets, UHF or VHF, and could serve more than one station authorized by the Commission to conduct STV operations. This, they point out, would be under the regulatory control of the Commission. 127. As to programming, they aver the following: There are already in existence numerous producers and distributors of programs of al'l kinds from which STV may draw. During the Hartford trial, there was no centralized distribu- tion control over the programs chosen for STV broadcast. RICO was free to negotiate with any program supplier for whatever programs it desired on what- ever terms it worked out. Ninety percent of the STV programs shown at the trial were obi~ne d on the basis of ICs paying the program supplier a fixed percentage of the program revenues obtained from subscribers. In a relatively small number of cases, ~ a Broadway play, it was necessary to pay cash PAGENO="0064" -44- 60 acquisition costs. If requested by RKO, Teco usually pr~ to RKO in return for receiving a certain percentage of 1 ~ved for the program. It is emphasized that this A ~ ~ted for tt"~ program and requested Teco 128. It is claimed ~ thi 1955 alleged that Zenith and Teco would exercise control c tion and selection of STV programs whereas such has not been the case. These two parties state that because of legal and business reasons they could not enter into any arrangement or tie-in with local franchise holders giving any program supplier the exclusive use of Phonevision facilities. If nation- wide STV is authorized, they say, Teco will serve two functions: (1) Granting local franchises and promoting the use of Phonevision equipment. (2) Possibly assisting in obtaining programs for STy, but such assistance will not tie in with its arrangements with local franchise holders, or with the arrangements that such franchise holders may have with station licensees, so as to give Teco an exclusive position with regard to any other program supplier. 129. The comaents of Zenith and Teco on this subject end with a statement that monopolistic conditions in any business result from either the intent of parties involved or natural economic forces. These two parties aver that they have no intent to gain monopolistic control over STV in the United States. With regard to station owners, they say, there can be no monopoly because of the Commission's multiple ownership rules. While the natural economic forces that might make for monopoly are difficult to fore- see, they state that under the operating proposals which they make there does not appear to be "any immediate or reasonable prospect o~ monopolistic evils which would require governmental regulatory action. If, after the full play of the natural forces of competition, a condition now unforeseen should arise at some time in the future which would indicate any trend toward mono- poly detrimental to the public, the Commission can always exert its present regulatory power to eliminate any anti-trust problems that may possibly arise." 130. Combining its comments on the ~ operan4i, methods to be employed, and possible monopolistic features of STy, Telemeter takes issue with some of the views expressed by Zenith and Teco. The position of Telemeter follows, nearly all of it being best expressed in its own words. 131. There is only one STV operation in the United States today-- that at Hartford which numbers but a small minority 0f the community as subscribers, and they only spend about 5~ of their time viewing STy. PAGENO="0065" PAGENO="0066" 62 -46- on the basis of his knowledge of his market. In the early days of motion pictures exhibitors would not go to the expense of building theatres because there was no entertainment available to be shown in them There fore, in order to get the industry under way, a nucurai. identity developed between producers, distributors, and exhibitors. This identity was an absolute necessity if the industry was to come into existence. "At this stage in the development of subscription television, no company (which is truly. independent) is going to invest in decoders if it does not control broad cast facilities, and if it is not able to assure itself chat it will be able to make its own efforts to obtain programming by every means physically available. . . The problem of the infant subscription television industry is chat even where entertainment is available, it has been withheld, so that it is naive to assume that a subscription television operator, at this stage, can sit in his office and expect purveyors of entertainment of top quality to come to him. "Furthermore, in view of the obvious and manifest hostility of existing media toward subscription television, . it is equally naive to suppose that commercial broadcasters in significant numbers will approach a detached subscription television operator- -without his own broadcast facilities- - for the privilege of showing an occasional subscription television program. If subscription .televisjpn~is to develp~p~ it is Telemeter's considered iud~ment,that ~t..will have ~ started by those in full control of every ~asPect of the~sub script~on television business with no.~ or exceedin~lv few. limitations upon their abiltty to solve the multifarious ~prob lems which experience has shown they cannot avoid." (F.~phasis in original,) 132. The Joint Committee directs comments at another aspect of the question of monopoly in its reply comments. It states that STV proponents hold that the Commission cannot regulate STV rates to be charged subscribers. How- ever, the Joint Committee says,it would be singular for the Congress to have intended that broadcast frequencies could be used for STV without at the same time having provided power to regulate rates to prevent rate gouging. It is for this reason, it is stated, that the Commission has no authority to authorize STV. 133. The Committee then goes on to say th~t if, as Zenith and Teco state, it is unlikely that there will be more than one STV system in any single market, then such an STV station would have a monopoly over STV in that community, and it would be unconscionable for the Commission to permit such a situation to exist without having the power to regulate charges. It ~ou1d be an abdication of Commission responsibility, it is argued, to permit STy opera- tors to use the frequencies and charge subscribers without clear Congressional PAGENO="0067" 63 -47- authority to regulate rates and without even considering or deciding whether the Commission already possesses such authority. The Joint Committee also refers to the comments of ADA, a group that favors STV, which indicate that STV should be regulated as a common carrier. 134. Conclusions. In paragraphs 15-16 above, we indicated that we would first consider comments concerning the question of.whether an STV service should be established, and that we would then turn to consideration of fifteen issues of importance in determining what the pattern of regula- tion of such a service should be. We mentioned that comments concerning the broad question of whether to establish the service fell into five categories. The first four have been fully treated above. As to the fifth--concerning modus operandi, monopoly and other matters--the immediately preceding para- graphs contain pertinent information and views thereon supplied by the parties. Since the topics in the fifth category are closely related to some of the fifteen issues, in the interest of efficient presentation we shall evaluate the information and views about them and state our conclusions thereon in the course of treating the fifteen issues to which we now turn our attention. Fifteen Regulatory Issues 135. In the following paragraphs, the issues are stated verbatim as they appeared in the Further Notice, and are followed by a discussion thereof. Appendix C of the Further Notice contained the rules proposed by the Commission on which comments were invited together with comments on the fifteen issues. For the sake of convenient reference, that appendix is also attached hereto as Appendix C. (1) Whether subscription television should be limited to communities receiving a minimum number of television signals, e.g., whether it should be limited to stations the principal communities of which are within the Grade A contours of at least four commercial television stations (ine~4jn ~~hgt~fparty proposing to broadcast. subscription pr~gramming),. or whether it should not be so limited but should, in communities not lying within four commercial Grade A contours~ be restricted to a more limited scope, espe cially as to hours of operation, than those in four-s~rvice communities. (See limitation proposed in Section 73.643(d) of Appendix C.) 136. This issue may be divided into two parts: (I) whether STY should be limited to communities receiving a minimum number of TV signals, and (2) whether, if there is no such limitation, there should be a limitation as to hours of operation of STY stations. Our discussion here will be re- stricted to the former. The latter may more properly be dealt with under Issue (2) below which has to do with the general topic of hours of operation of STY stations. Both parts of the issue, of course, ur~derscore our concern over possible reduction of free TV hours and services available to the public in communities where STY operates. 137. Some proponents of STY urge that the service be permitted to operate in any community, regardless of the number o~ TY signals which it receives. Telemeter, for example, states that STY has a potential for use~' fulness under varying situations in different sizes and types of markets. PAGENO="0068" 64 -48- Thus, in marginal communities it might form the financial basis a station that would otherwise not be built. In large communit~ three network services it might provide the basis for the develc viable UHF competitor. Kaiser makes a similar point, stating tF is particularly true in markets such as Los Angeles, where the competing stations is large enough to strain the advertiser-supç system's ability to provide financial and programming support." 138. Zenith and Teco hold the view that Section 307(b) of Act, which requires the Commission to make a fair, efficient and equ distribution of broadcast service among the several "communities," d the conclusion that STV should be made available to all communities there is a demand for it. In this connection, they mention that if STV could bring about the construction of a first TV station for a community, they would find it difficult to think of any public interest considerations that would justify not permitting the building of such a station, Along the same lines, Teleglobe says that it believes that among the principal objectives of STV is that of aiding UHF broadcasters in their struggle to survive, and a limitation of STV to, for example, markets with two or more stations would defeat that objective~ Zenith, Teco, Telemeter, and Trigg-Vaughn suggest that questions of whether STV operations should be permitted in a particular community would best be handled on an ad hoc basis. 139. ACLU urges that STV operations should be permitted in any market. Its views are founded on its interest in advancing diversity of expression (which it regards as an application of the First Amendment) by way of over-the-air broadcasting. It believes that by providing new and different programming STV can increase diversity. If it is not limited to particular markets, there will be op~n competition that will also enhance diversity, ACLU states. ADA also believes that STV should be permitted in all markets. ACLU and ADA have additional views which are related to this belief, but they more properly belong with a discussion of hours of operation discussed under Issue (2) below and will be treated there. 140. ABC, as previously mentioned, opposes STy. However, in the event that the Commission should decide to authorize such a service, it offers its views on the various issues. It believes that this and the following three issues are related to the question of what rules are necessary to pro- t.ict the existing structure of conventional commercial television, It states that "/u/ntil the impact of pay-TV operations upon the free televi- sion structure can be assessed, it would not appear meaningful to adopt restrictive rules which, at this juncture, are neces- sarily somewhat arbitrary. If the Commission elects to go for- ward with authorization for pay-~LV, ABC urges that it adopt no rules at this time with respect to Lthis matter]. . ,If, based upon meaningful experience with pay-TV, it appears that rules of some kind should be adopted, further rule making proceed- ings are available to the Commission." of PAGENO="0069" 65 -49.. ABC adds, however, that the Commission should make it clear that STV is not intended to disrupt the existing structure of free TV, including network service, and that it should place STV proponents on notice that the facç that no restrictive rules are adopted does not mean that they might not be at some future date if found to be necessary to preserve that structure. 141. As opposed to the aforementioned views that there be no limi. tation in regard to the communities in which STV may operate, both proponents and opponents suggest the contrary. Thus, Acorn, a proponent, believes that STV should not deprive anyone of free TV that he now has, and therefgre thinks it inadvisable to allow STV operations over existing stations in one-station communities. The more stations in a community, the less the effect of STV over one of them would be~, Acorn states. On the other hand, it sees no reason arbitrarily to restrict STV only to the larger markets since in some cases it would appear that STV would not undermine free TV service. Wherever possible, Acorn deems it best to conduct SW operations over new stations, for this could only add to the TV service of a community. 142. Munn and Chase, also proponents, are of the view that STV should be limited to communities that have three Grade A commercial signals in addition to that of the STV stations, so that there will be three network services available. Of the same view is the Joint Committee which urges that, if STV is to be permitted, it should be limited to communities within the Grade A contours of at least four commercial TV stations, for this would be consistent with the goal of the Commission to promote parity among the networks. It was this policy which underlay the conditions of the Third Report, it is said, and the Hartford trial provides no basis for changing that policy. However, the Joint Committee would superimpose on such a rule the additional requirement that, if a market is one of the top 100, there be a hearing to determine whether it is in the public interest, and, speci- fically, consistent with the establishment and healthy maintenance of free TV service in the area, to permit STV therein--a requirement not unlike that used in CATV proposals to extend the signals of TV stations beyond their Grade B contours into one of the top 100 markets. The Joint Committee argues that such a requirement exists for CATV in spite of the voluminous infotmation available about CATV which was prepared by Drs. Seiden and Fisher, the National Community Television Association, CBS, and AHST, so that a fortiori there should be such a hearing requirement for STV about which much less is known. 143. AMST, in discussing this as well as other issues, says that the very fact that the issues have been posed recognizes rather than cures the incompatibility of STV and free TV. With regard to this issue it argues that to restrict SW to the largest markets will not prevent the pre-empting of free time from free TV and that in such markets more people would be deprived of this time. McClendon expresses the view that STV should not be permitted over VHF stations in multiple-station markets having at least one UHF or one independent VHF station if those VHF stations broadcast one or more hours of network programming during prime time. This, it is suggested, would correct the economic imbalance between UHF and VHF stations, PAGENO="0070" 66 50- 144, Conclusions. Because we believe that STV can furnish a bene- ficial supplement to the programming of free TV and that it might well ?ro- vide a wholesome stimulation that would improve free TV and the overall pro. gramming available to the public, we believe that it should be authorized. However, as indicated in previous portions of this document,, although the Hartford trial did furnish information that has proved helpful in making reasonable estimates of the future, its proscribed nature has left numerous areas about which we are legitimately concerned. Until we know more about how STV will develop on a nation-wide scale, we feel it best to proceed with caution. For this reason, the rules which we adopt are designed to strike a reasonable balance that will not hamstring the development of the new service and yet will provide safeguards against the occurrence of events that might be contrary to the public interest. 145. One area of concern is that of the pre-empting of time by STY from free TV. The Third Report provided that STV trial operations might be conducted only in communities lying within the Grade A contours of at least four commercial TV stations including the station of the STV applIcant. It mentioned that one of the primary reasons for this provision was to assure the continued availability of substantial amounts of free TV programming to the public, i.e., to prevent undue pre-empting of free TV time. We stated in that report that it was our intent to suspend judgment on the question of whether there should be such a market limitation if permanent STY were auth- orized. The Further Notice, having referred to the foregoing in paragraphs 31 and 32, announced that, in the light of the Hartford information, we tenta- tively agreed with the view of Zenith and Teco that STY should not be so re- stricted. However, we specified this matter as Issue (1), the present issue, and invited comments thereon. 146. We have carefully weighed the comments, including those sum- marized in the immediately preceding paragraphs as well as those mentioned in paragraphs 80, 81, 88, and 104 above, and believe on further consideration that the tentative conclusion of the Further Notice should be rejected. Fc'r reasons stated below, we are now of the view that, at least for the present, STY should be restricted to communities lying within the Grade A contours of at least five commercial TV stations including that of the STY operator, and are adopting a rule to that effect. 36/ (It is thus more stringent than the requirement of the Third Report.) This conclusion has been anticipated in paragraphs 108-110. The following supplements those paragraphs. 36/ This rule appears in Section 73642(a) of Appendix 0. As may be noted, it also contains other provisions designed to restrict pre-einpting of time. One is that, not counting the station of the applicant, at least four of the stations must be in operation. Another, discussed under Issue (4) below, pro- vides that in the five-station markets where STV will be permitted, only one station in the market may engage in STY operations. It may also be noted that the rule requires that the entire community, not merely part of it, be located within the five Grade A contours. PAGENO="0071" 67 -51- 147. Elsewhere (para. 77) we have indicated that we regard the con- tinued availability of free programming as a most important consideration. This is so because we think that the tremendous investment of the public in television receivers based on the expectation of free service ought to be pro- tected and the millions of viewers ~ho rely on that service for free enter- tainment should be permitted to do so. Although we are aware of the merits of the arguments that STV should be permitted in all communities--the arguments maintaining that permitting SW in all communities might help marginal or new stations in small communities, might aid UHF in such communities, might pro- mote diversity of programming; arguments that Section 307(b) of the Act re- quires that STV be allowed in all communities where a demand exists; arguments that we should not regulate in this area until the impact of SW on the free TV structure has been assessed--we are of the opinion that at this stage, where uncertainty about the new service exists with regard to this subject, considera- tions of protecting against pre'empting are overridin&. In smaller markets, pre- empting could substantially reduce the amount of free programming available to the public, as some parties have mentioned. Since it appears likely, from the Hartford trial, that much of the SW programming might be in prime time, the effect would be even more marked, for although the loss in terms of hours is the same regardless of the time of day when the pre'empting occurs, the loss in prime time would generally speaking be a loss of more popular programs. 148. The rule protects against such loss in smaller markets. In the markets where it permits SW, it assures three network services and one independent service. To the extent that existing stations in those markets offer STy, there will be a relatively small amount of time pre-empted. To the extent that STV operations occur on new stations, there will be no pre-empting at all. It gives ample assurance against the dangers to networks, mentioned by ABCand the Joint Committee, which could conceivably result in an untoward waakening of the present broadcast structure, At the same time, the rule will permit a not inconsiderable portion of the nation's population to have the opportunity to use the new service if it so desires. 37/ Moreover, this will afford an opportunity to observe what factors evolve in the operation of a nation-wide STV service, such as, for example, the broadening of the base for the purchase of programs which Zenith and Teco tell us was lacking in a s~ngle- city trial, the possible development of an SW network, audience diversion, pre-empting of time, program siphoning, or others, With this additional in- formation we should be in a position to take further steps to guide the develop- cent of this service in the public interest as seems appropriate. 149. At the present time there is no certain way of predicting what SW penetration will be after the service has been authorized on a nation-wide 37/ The Commission has allocated 5 or more channels to 80 markets which include 807. of the nation's TV homes. STY is potentially available to all of those markets. More immediately, of those markets, 63--including 78.87. of all TV homes--presently have activity on 4 or more channels, j~., there are licenses, permits, or pending applications for 4 or more stations. PAGENO="0072" .68 -52- basis. If we were to hazard a guess, it would be that 107, to 207. would be optimistic for the near future. If this is correct, it would appear likely that the most interest in STV would be focused on the largest markets where the potential for more subscribers lies. Our rule, therefore, should not seriously impair the development of STV since it would permit it in those markets. 150. We do not adopt the suggestion that the point at issue be handled on an ~ jj~ basis. This would involve separate hearings, and the results, in our opinion, would not be commensurate with the cost, time, and effort expended thereon. A rule on this subject is clear and automatic in i application. It appears to be the better way to handle the matter. 151. Finally, we note the suggestion of the Joint Committee chat hearings be held on applications requesting authorization to engage in STV operations in the top 100 markets. The Joint Committee maintains that the important factor common to both STV and to CATV proposing to extend television signals beyond the Grade B contours of stations to one of the top 100 markets is that of the introduction of programming not otherwise available to free TV in the market. The principal concern of the Commission in the CATV and the STV proceedings, it states, has been over the impact on free TV. Since hearings are required by rule in CATV for the top 100 markets, they should also be re- quired when STV attempts to enter those markets. The point is lacking in merit. 152. In the Second Report and Order in Docket Nos, 14895, 15233, and 15971, we discussed in detail the reasons for the rule which requires hearings for the top 100 markets, ~ and we shall not repeat that discussion here. Suffice it to say that STV and CATV involve different considerations- -of which we shall mention only a few- - that clearly indicate that the concern that led us to the conclusion that CATV hearings should be held does not exist here. Thus, (1) in the case of CATV systems entering the top 100 markets, we were concerned with the fact that CATV stands outside the program distribution process through which UHF stations have to obtain their programs. In the case of STy, there is no such element of unfairness since the STV operator would be in a program pro- curement position similar to that of the UHF free TV operator. (2) In the case of CATV, audience diversion from the UHF station could be large. In the case of STV, it would, as we have said, probably be small. In this connection, we note that CATV systems have multiple channels and thus a single CATV system is a source of multiple competition for local stations, whereas here we are per- mitting only one STV operation in a market. (3) STy can broadcast over a UHF station. If so, it is because the licensee thereof believes that it will help his station, not harm it. In fact, one of the principal arguments of propo- nents of STV is that it will aid UHF, not damage it. These few observations should make clear the reasons why we reject the Joint Committee's proposal. ~/ 2 F.C.C. Zd 725, 769~784. PAGENO="0073" 69 i As with Issue I with making sure that adequate amounts of free programming remain available to the public in markets where STV operations exiSt. Requiring STV stations to broadcast a minimum number of hours of free TV would be directed toward that end, as would the establishing of limits on STV broadcasting both as to amount and time of day of such broadcasting. in paragraph 33 of the Further Notice, we mentioned that if free TV is to remain available, the amount of permissible STY broad- casting by a station should depend on the amount of free TV available from other stations in the market. As an example, we suggested that all STy be required to broadcast the minimum number of hours of free TV required by Section 73.651 of the Rules, and that the amount of STV broadcasting (assuming only one STV station in a market) should vary with the number of TV stations serving the community and with the time of day (prime time or non-prime time). The proposed rule to that effect appears in Section 73,643(c) gnd (d) of Appendix C. Comments were invited on the proposal, which assumes one STY station per market, and on what the rule might be if communities were per- mitted more than one STV station. 154. Many parties agree that STV stations should be required to carry the minimum number of hours of free TV required by Section 73.651 of the rules in the interest of helping to maintain a supply of free programming for the market. However, this view is not without its opponents. Munn and Chase, for example, say that the free programming of STY stations might be anun- warranted burden on STV stations and could turn out to be prograaaing designed to fill the required number of hours, but of low c~uality. This could be especially true, they state, in major markets where STY stationS would be competing with large, well-equipped and well-staffed stations. Moreover, in large markets, the free programming of STY stations might be purely redundant. For this reason, they urge that no such requirement be adopted, and that STY be allowed to pursue the development of good STV programming without having to present free programming. 155. Trigg-Vaughn also disagrees with the proposal to require a minimum number of hours of free TV over STV stations, and for the same reasons expressed by Munn and Chase. It states that the requirement could impose a severe operating disadvantage on STV licensees who are attempting to pioneer Sly, by requiring them to do far more than their competitors simply for the right to engage in STV operations. It suggests that, since both STV andfree PAGENO="0074" 70 - 54- TV are broadcasting, the purpose of Section 73. mitting STV licensees to fulfill the require-meii or any combination of STV and free TV broadcast 156 It goes on to say that if at a later time it should appear that such a rule is necessary, the Commission can take necessary action. In the mean~imo, it is said, absence of such a rule at the outset will permit STV to have greater `frea.dom in the programming erea and a better opportunity for develop- ment. 157. As to liaiting STV to certain segments of the broadcast day, or limiting the number of hours of STV, proponents generally oppose such restrictions, stating that the record shows no need for them, that at this stage they would hamper the development of STy, and that the amount of time of broadcasting of STV programming should be determined in the market place. 158. On the other hand, one prOponent--Zenith-Teco- states that because single-station markets present a unique problem, and because there is no problem of time availability for free TV in markets within the Grade A contours of five or more stations, the proposed rule with regard to such markets should be adopted. They believe, however, that markets receiving service from two to four ~rade A si~gnals, present different considerations. As a practical matter, it is said, network affiliates in such markets are not likely to gi~ie up assured profits to enter the speculative STV area, Moreover, the Hartford trial has shown that STV will have greater demands for STy pro- gramming in prime time than the proposed rule would permit. These two factors could operate to confine STV to only a few markets where five Grade A signals are received, and- where therefore there would be no limit or~ STV.broadcasting. They therefore suggest that the Commission exempt UHF stations in two to four station markets. This would, they urge, permit STV to have the same competi- tive access to UHF that free TV has always bad, and would restrict the rule to VHF where most of the free TV is. 159. They also suggest that any time limitations be applied on the basis of an annual average and not a. daily or weekly average, as is permitted with the AM-EM non-duplication rule (Section 73,242), so that programs will not be arbitrarily restricted. Finally, since the meaning of "prime time" is vague, they propose that the rule define the term as the hours between 6:00 p.m. and 11:00 p.m., which is also the period used in the~programming portions of the Commission's -application forms. Another clarifying suggestion is made by ABC, which points out that ambiguity exists in the proposed rule as to the meaning- of "community," which may be cured by language making it clear that it is referring to the community to which the station is licensed. PAGENO="0075" 71 55- 160. AMST does not.think that the proposed rules should be adopted because, amcng other reasons, in a five'.station market it would be possible in peak viewing time to have no free TV available, in a four-station market, it would be possible that there would be no free programming available be- tween 7:30 and 9:30 P.M., and so on with regard to markets of smaller sizes. The Joint Committee suggests restrictions more stringent than those in the proposed rule, Among others,, it suggests that no SDI station be permitted to devote more than 607, of its broadcast day to SW programming. Thus, whereas our proposal would have imposed no restrictions on SW stations operating in five-station markets, the Joint Committee would impose the 6~f4 restriction on them because the lack of information about the possible impact of STV on free TV "does not warrant the risk of permitting any Pay-TV station to operate on unlimited time in any market." 161. ACLU believes that STV should not be viewed as a beneficial supplement to free TV, but as a different and independent system. Therefore, that group argues, both services will have the greatest chance ~f developing their potentials if stations are exclusively STV or free TV, and they accord.. ingly propose that there be two classes of TV broadcast stations. This, they state, would best promote diversity (see pars. 139) because an exclusively STV station would have the incentive to provide diversified programming for all hours of the day and evening. (In addition to working against diversity, they state that to permit SW and free TV over the same station could lead to various problems which they set forth.) ADA has sim$,lar views, but they contain additional ramifications which are discussed later in paragraphs 217-219. 162. Conclusions, In discussing Issue (1) we stated that we were adopting. a rule limiting SW operations to markets within the Grade A contours of five commercial TV stations because we believed that assuring adequate amounts of free TV programming to the public was an overriding consideration. We shall not repeat the discussion of the subject which we presented there, but point out that the same considerations lead us to adopt a rule requiring STV ~tations to broadcast at least the minimum number of free TV hours re- quired by Section 73.651 of the Rules. We believe that, at least at this point in the development of the new service, such a rule is a necessary safeguard. 163. We cannot agree with ACLU and ADA that there should be two classes of stations and that SW stations should not only not broadcast the minimum number of free TV hours, but should be prohibited from doing so. One of the principal arguments made by proponents of STV is that it will promote development of new or marginal stations and of UHF by supplying needed finan- cial support. Clearly the development of which they speak is one that envisaged both SW and free TV on the same station. We are of the opinion that SW and free TV can exist side by side on the same station, each service supplementing the other to the ultimate benefit of the public, and that free programming will not be an undue burden on SW stations. 164. We are adopting a rule limiting SW to five (or more)-station markets, permitting only one SW operation in a market (see Issue (4)), and requiring that SW stations broadcast at least the minimum number of hours of PAGENO="0076" 72 free programming, all in the interest of assuring adequate free programming for the public. We now face the question of whether STV programming should be limited as to segment of the broadcast day and to number of hours of pro- gramming. The answer to us is a clear "no." We have made adequate provi- sions to assure free programming. The new service cannot be completely surrounded with restrictions lest it smother. Some flexibility in operation is needed, and for various reasons we think that this is an area where that flexibility should be preserved. For example, to limit the number of hours of STV programming in prime time could, in the light of the Hartford trial, quite possibly prevent the new service from becoming financially viable. Prime time was the principal programming time at Hartford, and it would appear that it will be in new operations. STV should be permitted to program that or any other time with STV programming if it so wishes, with as many or as few hours as it wishes. 165. With the limitations which we are adopting, the fears of the Joint Committee about impact should be allayed~ and the AMST argument that the proposed rule might allow all STV programming (and no free pro- gramming) during prime time in five-station markets vanishes. In the light of the position we take, it becomes unnecessary to discuss some of the other points made in the comments. As with other parts of our rules, should experi- ence indicate the need for modification thereof, such changes can always be made. (3) Whether subscription television should be permitted over any television station (subject to possible qualification as in pa'r. 45(b)(4) concerning number of stations in the market), UHF stations only, or some other limitati~. 166. Comments on this issue present a mixture of views. Several parties state that STV should be permitted over any station, for to adopt limitations, such as limiting it to UHF stations, is inherently anticompetitive, and no station should be precluded from rendering STV service if it wishes. They argue that there is no apparent reason for any limitation of this nature, and that if one were adopted it would foreclose VHF stations in some markets from STV operations and some markets might be deprived of SW, contrary to the public interest. Although Trigg-Vaughn is of the foregoing view, it states that as an interim poli.~y the Commission might, in comparative hearings, favor UHF applicants proposing SW operations. Kaiser, believing that it is too early to decide whether to limit SW to particular types of stations, in effect says that there should be no limitation at the present time. AMST, although opposing STy, apparently would favor not limiting it to UHF stations because, among other reasons, it is irrelevant whether free TV is impaired by STV over UHF or over VHF stations, and because to limit it to UHF would do violence to the principle of an integrated UHF and VHF national television system on which the all-channel law is based. "In any event," AMST argues, "the Commission's plans for UHF development are long-range and short-term expedients like this would only divert UHF stations £roin providing ttie ~re~ television service contemplated for them by the Congress." PAGENO="0077" 73 -57- 1 On the other hand, some parties would have us limit STV opera- The usual reason for this view is that STV can supply needed program sources for marginal and new UHF stations. The views .ly: Skiatron, for example, would limit STV to UHF and marginal Springfield says to limit to UHF but to waive the rule on an "~i would limit STV to UHF stations at the outset. It I is more likely to be a new station and that the to pay for programs over that station than to ich they have been receiving programs free. In addi- n ob ~--e UHF stations are more likely to be new, there is e of g of free TV time than there is if anestablished VHF gins ation. 168. Conclusions. Although as a practical matter, STV may turn out to be limited mostly to UHF stations, we do not think that it should be so limited by rule. To do so could, as some parties argue, foreclose some VHF stations that wish to engage in STV operations from doing so. With the rules that we adopt today, sufficient restrictions are placed on STV to act as safeguards in areas of concern. We do not find any of the reasons given for restricting STV to UHF of sufficient weight to merit such a rule at this time. (4) WI-tether more than one station in .4 community shou1~ be permitted to enaaae jn~subscript~on~te1evi~ion operations. and.~if ço whether such statipns~shgu].d be permitted to broadcast ~sub~ription programs simultaneously. 169. Telemeter states that this is a complex question which should be decided on a case-by-case basis, at least until some pattern emerges. It thus appears to oppose a rule restricting STV to a single station in a market. Zenith and Taco mention that as a practical matter it is likely that there* will only be one STV station in a community, but to impose such a limi- tation by rule would apparently go contrary to the uomm~ss~on's policy of en- couraging competition. They suggest deferring this kind of decision until such time as a second station in a market applies for STV authorization, at which time the Commission will have information concerning the operation of the first station therein and could make a judgment on the basis of that information and other local public interest conditions. The opinion of Kaiser that it is too early to decide this issue is consistent with the foregoing. 170. Various parties, including ABC, Teleglobe, and ACLU take a position that STV should not be restricted to a single station because this is anticompetitive. Teleglobe adds that a limitation would also be unfair to another station in the community wishing STy. 171. Munn and Chase say that STV should be limited to one station per market because there is insufficient box-office programming for more than one station, and that allowing more than one to engage in STV operations would deteriorate the service. Trigg-Vaughn and AMST state that to limit STV to one station in a community would give the single station a monopoly. Moreover, according to AMST, "the combination of these market monopolies, deeply committed to pay television, would be particularly effective and energetic in efforts to `siphon' free television audiences and programming." AMST admits, however, that such a restriction would reduce the pre-empting of free TV time by STy. PAGENO="0078" 74 -58- 172. conclusions. Our concern about pre-empting of time has been previously discussed. It has led us to the adoption of a rule restricting STV to certain markets, requiring STV stations to carry some free TV programming, and, finally, to restricting STV to one station in a community. If more than one station should broadcast STV progran~s in a single market more time could be pre-empted than we consider to be in the public, interest at this juncture. We foresee no serious problems of monopoly in this connection. In relation thereto, it may be noted that there are numerous communities in the i~ation which have but a single free TV station, but monopoly problems sufficient to warrant action on our part have not arisen. In paragraph 133, we mentioned the views of the Joint Committee to the effect that it would be unconscionable for the Commission to permit such a monopoly without having clear-cut authority to regulate rates. We do not find it so. In balancing the conflicting con- siderations of dangers of pre-empting time against dangers of monopoly, the scale tips in favor of protecting against the former. As to the matter of rate regulation, it is discussed under Issue (9) below. 173. In view of the rule which we adopt it is unnecessary to con- sider the question of simultaneous STV broadcasting in the same community. (5~Whether more than one subscription television technical system should be authorized~. and~ if so, whether more than one technical system shoyld be authorized to operate in any one community (assumine that the answer to para~ 45(b)(4) is such as to'permit more than one.~ta.tio~ in a.communtty to engaae in subscription operation); and, if only a ~single technical system is permitted. what system should it be? 174. This issue was referred to briefly in paragraphs 36-39 of the Further Notice which mentioned that Zenith and Teco favor not limiting STV operations to a single technical system because the underlying policy of the Act encouraging competition points to the adoption of general technical stan- dards within which more than one system might operate. We stated, however, that there might be advantages to the adoption of a single technical system- - advantages similar to those accruing to the basic broadcast services, color TV, and FM stereo where we have required all broadcast stations in any band to use a single system so that receiving equipment in the hands of the public will be capable of using signals from any station. 175. Possible disadvantages in using multiple systems were mentioned in those paragraphs as well as in Appendix B of the Further Notice, which con-. sisted of a memorandum from the chief Engineer of the Commission for the in- formation of commenting parties. These included the following: yiewers living within the service areas of more than one STV station would be put to unnecessary expense and inconvenience if they wished to see the programs of more than one of them. Persons purchasing decoders and later moving to other communities where other STV systems are used would be put to unnecessary expense and incon- venience. Even if decoders were rented rather than bought, there might still be inconvenience and expense in installing more than one kind of decoder in the home. Having multiple systems might restrict competition because viewers with one decoder attached to their sets could not, without additional inconvenience PAGENO="0079" 75 -59- and expense, receive STV programs of other stations. Thus, different systems in the same area might have different audiences. Competition between systems in the market place might become a popularity contest between competing systems which would be decided largely on the basis of promotional efforts rather than on their respeclive merits. The competition should occur before the Commission and be decided on the basis of technical meritg before the STV service is regularized. With multiple systems, it will be necessary for the Commission to decide on a city-by-city basis what system should be used. This would necessitate detailed technical evaluation of the comparative merits of systems competing for the same market. If different kinds of decoders are used, their price would be greater than if only one kind were manufacturered in greater quantity for a single system. In addition to the foregoing, the Chief Engineer's memorandum contained considerable detail about patents, patent holders, and the Commission's revised patent procedures adopted December 6, 1961, which are designed to prevent the public benefits of systems which the Commission specifies shall be used from being derogated by unreasonable exercise of patent ~rights. That information will not be repeated here. 176. The comments in favor of having a single technical system are very brief. Thus, ABC states that it favors a single system because the public interest would be served, but does not say how. ACL.U favors a single system because multipl.e systems would ha.ve a deleterious effect on diversity of expression for the reasons mentioned in paragraph 37 of the Further Notice. Motorola gives somewhat more on the matter. It states that authorization of multiple systems would be; `. .a tragic regulatory mistake for which the public would pay a.high price in years to come. "A single technical system provides the basic tools for growth of the service, as it has for television, both monochrome and color and for FM-Stereo. A single technical system permits better regulatory control by the commission. A single technical system allows equipment rnanufactureres a better opportunity to plan, to produce, to control inventory, to control national distribution and service, all of which reflect in higher quality, more reliable, lower priced units for the ultimate consumer." Motorola urges thorough field testing of all systems before a single one is selected. It states that both the Zenith and the Telemeter systems have not been adequately tested (see paras. 123-124 above), and urges the Commission to institute a formal program of technical investigation and to request the industry to reconstitute the National Television Systems Committee as a vehicle for obtaining the field performance results for the Commission to evaluate. PAGENO="0080" -60- 0 de posed connec the TV set), and its centralized metering and billing immediate knowledge at a central office that a program is being viewed and which entails no coin or token insertion into the decoder or periodic sending in of tapes, code cards or the like for billing purposes. There were three STV systems in existence in 1957 when Teleglobe came on the scene, Had the Commission in 1957 decided to adopt a single technical system for STy, tech- nical developments would have been frozen, progress stultified, and Teleglobe's novel concepts of external decoder connection and centralized metering and billing would not have emerged. Moreover, "[a]ll systems are workable. They are all ready for the market place. But only the, actual operation of the individual systems-- over a period of years- -with tens of thousands of subscribers- - in a number of markets- -will be able to establish conclusively their comparative technical merits, efficiency of collection methods, ease of operation in the subscribers' homes, degree of servicing problems and general practicability. There is no other evidence that will justify the Commission to choose now one system in preference to the others. To make a choice of a single system for nationwide use, merely on the strength of circuit diagrams and written specifications is extremely unsound. . .A commitment by the Commission to a single system- - in the present circumstances-- will be a deterrent to progress and inventiveness. "A `hands off' policy on the part of the Commission may or say not lead ultimately to the establishment of a single nationwide system. The public will not be hurt, however, since it is our proposal that television decoders should be installed by the Pay-TV operator and not sOld to the subscriber." In addition, not only would the adoption of a sinale system be unfair to the entrepreneurs who have pioneered STV at considerable expense and in the face of difficult opposition, but it wouto present a single company with a billion dollar monopoly, with profits not only from decoder sales, but from yearly royalties paid by franchise holders for use of the system. Finally, multiple systems should comply with general standards of good engineering practice, and should not be limited to one system per market since there is no technical difficulty in attaching more than one decoder to a set. 178. Telemeter presents arguments like those of Teleglobe with regard to stifling of invention and competition to improve systems if a single system is adopted. In addition, Telemeter says that because having a single system would eliminate competition, it would prematurely necessitate rate regulations, patent license regulations, and other burdens which would tend to stifle an industry which does not yet exist. It is premature, we are told, to fix upon a single system because this is not merely a technical question; it goes to the heart of the commercial organization of STV. In addition, as mentioned PAGENO="0081" -61- earlier, (see para. 131), Telemeter believes that broadcasters, decoder owners and maintainers, and programmers will have to be one and the same in the early phases of STy, and it wi~1 probably be necessary at the start to grant franthi~es in order to induce investment in STy. Because of this, it is argued, having multiple systems would be the only way to have competition. 179. Zenith and Taco make the following presentation: Multiple systems are dictated by the underlying policy of the Act of encouraging com- petition. The Commission should adopt general technical standards under which the systems may operate. They could be as follows: (a) The system should be compatible with existing TV ser~rice (both UHF and VHF and monochrome and color) so that present TV sets can be used. (b) The STV system should not cause inter- ference or have other undesirable effects within or without the assigned fre- quency. (3) It should result in no perceptible degradation of the quality of the video or audio signals received during either an STV program or a conven- tional program. There is no disagreement with the policy of single systems for basic broadcasting, color TV, and the like, but the same consideratiox~s do not apply here. There is no apparent reason why one method of secrecy to pre- clude non-subscribers from seeing STV programs need be used everywhere. Whether one or multiple systems are used, they would all be compatible with existing TV sets. 180. Like Teleglobe and Telemeter, Zenith and Teco are concerned about stifling inventiveness. They believe that establishing a single system would tend to make it impossible to incorporate future improvements- - improve- ments which, among other things, could reduce ultimate costs to subscribers. We are told that based on the Hartford trial experience Zenith has made many new improvements in its equipment. The general technical standards that they have proposed would permit this sort of thing, they state. Moreover, they urge, decoder and encoder design involve other considerations than technical trans- mission of signal, such as billing, for example; and the Commission need not concern itself with what billing method is used as long as it is cogpatible with existing transmitter and recéiver staddards. 181. Zenith-Taco also argue that to have a single system would be contrary to the national policy against enlarging the monopoly of patent holders. To adopt a single system which would be inherently anti-competitive, there must be overriding social interests not presented here, they urges Other arguments given are that there is an urgent needtoindrease the box-office support of feature films which are now so important to the free TV industry~ that delay caused by the selection of a single system could cause TV channels to lie idle and open the door to reallocation of those channels to other serVices, as Motorola appatently would desire; and that there is no need for extensive field testing of systems as Motorola suggests. 182. Finally, they argue as follows: If multiple systems are used, it is unlikely. bedause of economic reasons, that there will be more than a single system in a community. This is so because an existing system in A community could also serve other stations subsequently authorized by the Commission to engage in STV operations therein. The later STV operators probably would not bring in new systems because it would be more economical and expeditious to use the existing system. Therefore, the inconveniende foreseen by the Chief Engineer if there were more than one system in a community is not likely to occur, and financial burden on the subscriber is minimized by renting of Although there will probably be only a ~~:` reason why there should be a rule requiring 86-399 0 - 67 - 6 PAGENO="0082" 78 62- 183. As to the last-mentioned subject-- limitation of STV to a single system in any one community--Acorn says that it favors STV broadcasting by more than one station in a community and for that reason urges that only a single technical system be permitted in one community so that all subscribers may receive the programs of all STV stations there Munn and Chase on the other hand, believe that STV should be limited to one station per market (because of the limited number of box-off ice programs) and say that this view carries with it the requirement of having only one system to a community, al- though they see no reason for not having multiple systems nationally in non overlapping markets. Trigg-Vaughn opposes limitation of one system to a com.' munity simply for the sake of confining all STV operation in the market to a single system, on the ground that this would be contrary to the public interest. However, it would apparently favor the adoption of appropriate limitations if having different kinds of SW service in a community would c loss of the public's investment in receiving equipment or cause incompatibility with such equipment. 184. Conclus~ons. We have carefully considered the comments of filing parties and the views of the Chief Engineer of the Commission and here decide that it is in the public interest that multiple technical systems of SW be permitted. Many of the negative aspects of having multiple systems that are mentioned by the Chief Engineer are nullified by the fact that we are limiting SW to a single station within a community. Thus there is no problem of inconvenience and expense to the public caused by having two decoders attached to one receiving set for the purposes of receiving two SW operations in the community. While there may be viewers within t~be range of STV operations in more than one community, we do not believe these situations will be so numerous that, in the overall, significant inconvenience will be caused. Because of the foregoing, the argument that multiple systems might ten.d to restrict competition by dividing STV audiences between two SW sta- tions falls. Our rule requiring that decoders be leased rather than sold (see issue 11 below) protects those subscribers who move from one community with SW service to another SW community. To the argument that one system may be better than another and that `with multiple systems use of one or another may be based on the efforts of salesmanship rather than technical quality, we reply that by establishing standards which multiple systems must meet, we assure that they will be able to transmit satisfactory pictures and sound. Moreover, as to the matter of decoders costing less with a single system as compared to manufacturing fewer of each kind with multiple systems, we be- lieve that caspetition between systems may well serve to stimulate better methods of production that will tend toward lower costs. We agree that, under the rules which we adopt, `if two or more applicants within a community apply fot~ SW authorizations, a comparative consideration in a hearing may be necessary to determine the relative merits of the technical systems, but this fact does not deter us in view `of the advantages to the public of the action which we here take. . 185. Many of the arguments made by those favoring multiple systems we find to be of ~ makeshift nature and lacking in merit, Thus, for example, while we can sympathize with the argument that many entrepreneurs who have PAGENO="0083" 79 -63- invested time and money in STV systems will lose if a single system is selected, private interests would have to yield to public interest con- siderations, as they did in the case of color TV and Ft4 stereo, if the public interest considerations in this case appeared to be in that direction. On the other hand, we believe that there is merit to the position that adopt. ion of a single system at this time might well stifle inventiveness and the incentive to improve SW systems. At some future date, depending on the factors then existing, it might be ~n the public interest to adopt a single system, and STV operators are hereby put on notice to that effect, We be- lieve that a broad trial of multiple systems over a period of years, pos- sibly coupled with the reconstituting of the National Television Systems Committee to aid the Commission, might form the basis for subsequent deci- sions in this area. However, we do not believe that the testing should be made in the abstract. Standards which we adopt can assure the reception *of satisfactory signals on all multiple systems used. In view of this, we see no reason why the market place should not be the proving ground. Finally, we agree with the argument that there is a paramount public interest in fostering competition and diversification of program sources as quickly as possible. We have already found that STV could provide a beneficial supple. ment to free TV. In view of this, in view of the paramount public interest just mentioned, and in view of the foregoing observations, the time to begin nation-wide STV--using multiple systems--is now. (6) Whether a party manufacturing or sellin~eq~iipment, or a holder of a subscription television franchise in more than one market should be permit~~4 to engage in the procurement and supply of programs to television stations for subscription use. (7) What requirements should be imposed upon station licensees engage4 ~ subscription television operations to assure licensee control, i.e., wheth~ the licensee should be reQutred to retain sole control of all decision~~ to program choice, charges to the public, etc., or whether the regui~emen~~ should merely concern such matters as the licensee's retention of~ the right to reject programs, to make free choice of programs, to schedule the~ttme of showing of programs, and to set the maximum price to be paid for a p~og~~ ~y~subscribers (see Section 73.642(e) of Appendix C). (12) What restrictions should be adopted concerning the nature of arrangemen~ among patent holders, patent licensees, franchise holders, and television sta lion licensees, e.g., concerning such matters as whether,and under what~ergt~ and conditions, patents on any particular subscription television system will be required to be made available to franchise holders and station licen~~es, and whether stations engaged in subscription television operations should.~ permitted to enter into contracts that would give them exclusive rights to use a system in a particular community. 186. These three issues are dealt with together because of their close interrelation, bearing as they all do on questions relating to monopoly and competition and on the licensee's responsibility for the programming which is broadcast over his station. We have already set forth considerable infor- mation about them in paragraphs 115-119 and 126-133 which presented material PAGENO="0084" 80 -64.. on the subjects of ~ operandi of the TV service, the methods to be employed, the role of participating broadc~ast station licensees, and the possible monopolistic features of STy. n paragraph 134 we stated that we would evaluate that material in our discussion of the issues, a~d this will be done in stating our conclusions below. Reference is also made to footnote 32 in which we indicated that such topics as whether interconnection of STV operations should be prevented or limited, and whether STV system manufac- turers or franchise holders with franchises in more than one market should be allowed to engage in STV program procurement or supply, and similar problems related to siphoning, would be discussed under the issues, (The question of whether STV should be limited to carrying certain kinds of pro- gramming, also mentioned in footnote 32, is treated under issue (14).) 187. Issue (6). In paragraph 59 of the First Report we stated: "Opponents of subscription television have charged that the conduct of subscription television operations on the lines proposed in this proceeding would permit or foster monopolis- tic control of the medium. It is pointed out, for example, that a sole franchise holder in an individual community of a system employed exclusively in the local community for the encoding and decoding of subscription television programs might become the sole medium for the channeling of subscrip- *tion programs into the community. This, it is argued. would enable the franchise holder, and through him the persons con- trolling patents on the equipment, to control the program availabilities, determine the terms of services to the sub- scribers and otherwise control the operation without compe- tion from any other persons performing similar services lo- cally, It is also argued that any system which by virtue of nation~wide standardization by the Commission, or otherwise, established a nation-wide network of local outlets, may gain monopolistic control over provision of subscription televi. sion service for the public in all the communities where that system was exclusively used for subscription television operations. We then went on to say the following in paragraph 61: "It is superfluous to say that the Commission favors competi- tion in the conduct of subscription television operations. The conditions set out herein for trial operations have been care- fully determined with that objective in view. A trial conduc- ted under these conditions would, we believe, provide useful indication of the extent to which it is possible to create and maintain competition in all phases of subscription television operations: among program producers and distributors, among manufacturers and distributorsof equipment, and among stations, to name several. Should a trial disclose that competition among several systems is not feasible, or that the need for standard- ization of equipment precludes it, there would be ample oppor- tunity, after trial data are available, for deciding whether the PAGENO="0085" "In Our Opinion, a holder of a subscription television fran~ chise in either a single market or in several markets Should not be prohibited from engaging in the procurement end Supply of programs to television stations for subscription use, so long as the subscription television station is free to use the franchise holder's System, whether or not it Uses the programs supplied by the franchise holder, Indeed, in many cases the subscription teievis10~ station and the franchise holder may be the same party. Thi5, ~s the Commission knows, is true of RKO in Hartford. This may also occur in the case of two Phonevision franchise options which have been granted to Field Communications in Chicago and Kaiser Broadcasting in Los Angeles. PAGENO="0086" 82 `lie believe chat so long us any :oibscriptior television franchisa holder stands willing to provide subscription service to all stations authorized by the Commission to carry subscription progress in a particular market, it should not make any difference whether the franchise holder - on some occasions obtains programs which are in turn sup- plied to the stations. The stations will still have plenty of other sources from which they may obtain programs. "It should be emphasized that because of legal and busi- ness considerations involved, Zenith and Taco would be effectively precluded from entering into any aerangement or tie-in with a local franchise holder giving any pro- gram supplier exclusive use of Phonevision facilities. Likewise, the same legal and business considerations would preclude a local franchise holder from entering into any tie-in arrangement which would require stations to use only programs supplied by the franchise holder. "We, of course, recognize that the television station should have ultimate control over the final selection of all subscription programs broadcast . . . They then refer to the three methods for arranging for programs which involve various degrees of cooperation between the licensee, the franchise holder, and program producers which were mentioned in paragraph 118, and conclude by saying: "We do not bel~eve th~.tt any sound regulatory purpose will be served at this point by putting unnecessary restric- tions on a franchise holder's participation in program procurement. Nor do we believe that any usef~~l purpose would be served by putting a program distribution restric- tion on any other group or classification. At the outset at least, subscription stations will require all the col- lateral help they can possibly obtain to acquire sufficient box-office product to make subscription teleyision a success." 189. The views of Telemeter were set forth in detail in paragraph 131. On the basis of those views, Telemeter urges that, at least at the outset, there be no limitations placed on the system proponent, such as Telemeter, or on the franchLse holder with regard to their ability to produce, acquire, obtain or supply STV programming. In one respect, Telemeter dis- agrees with Zenith-Teco. The position of the latter parties, we are told, would preclude exclusive franchise agreements between Telemeter and TV sta- tion licensees. Telemeter believes that an exclusive franchise may be the only method for commencing STy in the early days of the service. PAGENO="0087" 83 - 67- 190. Without mentioning them by Oasis, weñote that other pro- ponents have views similar to those sentioned in portions of the foregoing. However, we specifically mention Kaiser because of its reference to network- ing of STV programs. It states that the key to the success of STV lies in its ability to obtain programming that will be supported by subscribers, and that to prevent interconnection of STV operations in diffetent markets or to prevent equipment manufacturers from engaging in program procurement or supply would be to impose severe restrictions in this vital area with no real evidence that they are necessary either to protect free TV or to pre- vent ariti..competitive practices. One proponent, ACLU, holds he view that there should be a complete divorce of programming from other facets of STY operation because diversity is limited by monopolizing programming in the hands of those who control distribution,and diversity is broadened by de.. veioping new entrepreneurs in. programming. 191. Among opponents of SW, ABC believes that the Commission should not presently adopt rules limiting equipment manufacturers or sellers or franchisees with regard to engaging in program procurement and supply for SW. It observes, however, that "/a/lthough these combined functions may raise questions under the anti-trust laws, the questions are subtle and do not lend themselves to answers in the abstract. The sound course would be for the Commission to adopt no rule at this time and to await development of the subscription television industry." AMST is of the view that although if such restrictions were adopted they would preclude certain groups from siphnning programming from free TV, they would not prevent siphoning itself. Finally, the Joint Committee, in order to mini- mize the risk to free TV, opposes any form of networking of STV programs or other types of multiple program purchase agreements. 192. Issue (7). Generally, comments favor tr8ditional concepts of licensee responsibility, and most favor the requirements in proposed Section 73.642(e) for assuring licensee control. They are those required by the Third Report for trial operations, and suggested by Zenith-Teco for final rules, and it is stated that they would be adequate to insure licensee responsibility for STV station operations. Kaiser, however, believes that it is too early to decide on detailed restrictions because we do not yet know along what lines the program procurement process will develop, It might be along the lines of free TV with a network-station relationship, or it might be different and therefore call for more complete control by the licensee over operational de- tails. Munn and Chase state that having ruies on licensee control might pro- tect licensees against outside pressures. PAGENO="0088" ~93. Telemeter supports the proposal providing it is made clear that axclusive franchise agreemants are permitted and that stations may enter into contracts whereby the franchise holder undertakes to broadcast a minimum of STV programs within specified time segments. ABC favors the proposal but states that the Commission should recognize that in order to offer special and unusual attractions some kind of network-type distribution structure may be necessary. 8ecause of this, it stares, `L~/he Commission should not foreclose subscription te.levi- sion operators from contractual arrangements necessary to provide a nationwide audience for programming. In the free television and radio areas, a reasonable accommodation be- tween the concepts of licensee responsibility with respect to program selection and national program distribution has been realised, and a comparable relationship would appear appropriate for subscription television." 194. Issue (12). Comments on this issue vary. Teleglobe believes that It would be premature to adopt rule.s on this subject at this early stage. Telemeter, expressing the same thought, says that if multiple systems are per- mitted, there may be some cross-licensing and pooling.of patents. Some system proponents may manufacture and others not. Therefore, until the pattern of the industry emerges, it would be impractical to attempt to be specific about patent licensing terms and conditions. Trigg-Vaughn believes that the proposed rule In Section 73,642(e) concerning licensee control is sufficient to protect against abuses, should any develop, that might be im- posed on licensees and ultimately the public by manufacturers of equipment. Zenith and Teco are of a similar view. ABC, on the other hand, believes in having appropriate restrictions to guard against anti-competitive practices. If the Commission should adopt a single technical system and permit more than one STV operation in a community, it then urges that rules be adopted that would permit sharing of rights and that would limit exclusivity arrangements. 195. ~ We have carefully weighed the foregoing material and have arrived at the conclusions in the following paragraphs, Because of the limited scope of the Hartford trial, we lack information about conceivable problems of monopoly with regard to STy. As we said in paragraph 187, this may b~ partly the result of the more limited conditions which the Third Report imposed for. trial operations. For example, had one system been tried in three markets, as would have been permitted by the First Report, we night now have trial information about interconnection of systems and the purchase of programs from a broader financial base by a franchise holder in more than one community. This lack of information, and other con- siderations mentioned below, lead us to the conclusion that, at least until such time as the infant STV industry grows to the point where patterns of organization and problems are discernable, we shall not adopt rigid regulations in respect to matters related to Issue (6) and (12), and the kindred matter of interconnection of 511' operations, instead, we are adopting rules in respect to Issue (7) which are of such breadth that each application may be treated on the basis of its specific fact pattern as to topics therein relating to Issues (6), (12), and interconnection. I 84 PAGENO="0089" PAGENO="0090" 86 - 70- franchise holders with frinenices in more than one city, or by equipment .manu- facturer~, when there ic no real evidence that such restrictions are essential to protect free TV or to provide sifeguards against anti-competitive practices. AMST states that even if we had such restrictions they would only prev~nt some program siphoning but not aLl.. To which we can only reply that it is not our intent to erect a complete fence about free TV. It may well benefit the public to leave at least a small opening in the enclosure. Finally, to the A~LU argument that diversity is best promoted by separating the functions of pro- gramming from other parts of STy operations, we can only reply that we give credence to the view that there may he a need for flexibility of approach to program procurement and supply in the early stages without which ttte service may not develop at all- -a rasuit that would make for even less diversity. 200. I~g~jfl 10 view of the foregoing discussion about Issue (6) and the discussion of Issue (12) hereafter, we are of the view that proposed Section 73.642(e) concerning licensee control should be adopted with amend- ments befitting the situation as it appears to he. Before specifying what the amendments are, we shall refer briefly to a related topic--our chain broadcasting rules- - to illustrate what we consider to be. fundamental policy. That policy underlies the chain broadcasting regulations end the amendments to Section 73.642(e) which we adopt today The chain broadcasting rules, adopted for radio in 1941, were later carried over to television stations when TV came into being, and the essentials of those rules are in effect today. The rules were designed to protect against two types of situation that the Commission deemed to be contrary to the public interest--so-celled exclusivity of affilia- tion, and territorial exclusivity. The former consisted of an agreement between a station and a networl; whereby the station agreed to accept programs only from that network The latter uas the reciprocal undertaking on the pert of the network whereby i.t agreed that it would not make its programs available to any other station within a given radius. The former was economically advan- tageous to the network heca~oe I.;: gave assurance of en outlet in the community. The letter was of advsniage to the station because it had a definite source of programs assured, and bee that rio other station in the area. could carry those programs. 201. lo adop~inp~ the chain broadcasting rules, we found both types of exclusivity to he n~rrry to the public interest. Exclusivity of affili- ation was proscribed hcausa IL hindered affiliates in the choice of their programs, since they couic aci broadcast those of another network even though the other network night offer some programs that were highly desirable and the broadcasting of which would be in the public interest. In addition, such exclusivity arrangements limited the chances of other networks to have their programs broadcast in that cassunity, since the station having an exclusive affiliation ~ith One network could not broadcast programs of another. In other words, network coapetitfon in tne community was restricted, contrary to the public interest Similarly, territorial exclusivity also restricted competition in that if an ~ffiiiate. did not carry a program of its network, other stations in the rari~et were prevented from competing to obtain and broadcast the progree. PAGENO="0091" 87 -71- 202. As explained above, and for the reasons mentioned, we are adopting rules providing that only one station in a community may engage in STy operations. In effect, then, we have, decided that under the conditions of uncertainty about the future development of STy, and to protect the interest. of the public in having sufficient amounts of free TV programs available, there should at least at the present time be something akin to territorial exclusivity for the STV operator in each community. 203. As to the n~tter which is analogous to the exclusivity of affiliation which was struck down by the chain broadcasting rules, we have, as the previously stated views of the parties indicate, a conflict of thought between two of the principal proponents of STV- -Zenith-Teco, and Telemeter. Zenith and Teco relate that for business and legal reasons they would be pre- cluded from entering into arrangements with local franchise holders that ~ give any program supplier exclusive use of Phonevision facilities. They state that the same considerations would prevent local franchise holders from arrange- ments with STV stations that would require the stations to broadcast only STV programs which the franchise holder supplied. On the other hand, if we understand the position of Telemeter correctly, it is of the view that it is essential that arrangements which limit Sn STV station to obtaining programs from a single source b~ permitted or the new service will not be able to develop in its early stages. It appears that Telemeter would agree that at ,a later stage of development such arrangements might conceivably not be in the public interest. 204. As a general principle, we believe that the philosophy under- lying the chain broadcasting rules should apply to STy, for it is in the public interest to stimulate competition and diversity However, general prindiples are subject to modification if the situation indicates a public benefit may result. Such was the case with our decision to limit STV opera- tions to one station per community. As to the present problem, in our judgment, we do not know enough about STV at this time to adopt rules proscribing exclu- sive programming arrangements- -which on their face would appear to be anti- competitive. For it may be that under the circumstances that prevail IC the early phases of STV such arrangements, as Telemeter argues, will be necessary to nurture the new service into being- - thereby once again modifying the general principle. Thus, on the one hand we believe, along with ABC, that there should not now be specific regulation. But on the other, we would be remiss in our duty, in setting up a new service, to write rules that are silent on a topic of great concern. For this reason, we have chosen a middle course. We adopt rules (see Section 73.642(e) of Appendix 0, which with modifications is the proposed Section 73.642(e) of Appendix C) which provide that, generally speaking, parties will not be granted STV authorizations i1~ they have entered into agree- ments that prevent or hinder them from making a free choice of programs. However, we provide that we shall examine each application on an ~ ~ basis, and if it appears under the given fact situation that the rule should be waived, we shall do so. 205. Similarly, Telemeter has urged what in effect is a rule per- mitting optioning of a station's time for broadcasting a certain number of hours PAGENO="0092" 88 208. Although, as stated in paragraph 288, we do not now decide what information will be required in applications for STV authorizations, we believe that the subject just discussed is of such importance that information on it will have to be contained in applications. For this reason, we are adopting a rule stating what material on the subject must appear in STV appli- cations (see Section 73.642(g) of Appendix 0). 209. Issue (12). As with Issue (6) we believe that we have insuf- ficient information at present to know what, if any, regulations may be neces- sary. Much, if not all, of the issue is mooted by the new rules which we adopt. Thus, for example, restricting STV operations to one per community moots the question of whether stations should be permitted to et~ter.into con- tracts giving them exclusive rights to use a system in a particular community. The adopting of rule permitting multiple systems greatly dilutes the other question posed in the issue. 210. As with other aspects of the new service, we shall keep the matters covered by this issue under surveillance and may from time to time require the submission of reports and other information to keep us abreast of developments, toward the end of having an informed basis on which to take any further regulatory action that may be required in the public interest. (8) The nature of the technical rules that should be adopted. 211. Appendix C of the Further Notice cont~ained a proposed Section 73.644 concerning equipment and technical operating requirements. That section indicated that STV equipment must be approved in advance by the Commission's established type approval and type acceptance procedures. It further stated -72 of STV programs per day or segment theieof. We 1 option time for free TV because we fot conduot of TV network operations, For reasons stated in the precedin~ it might be in the public interest to p~ early stages of STV. Therefore, we have 73.642(e) provisions to the effect that v authorizations will not be granted to parties who have entered into such arrangements unless the Commission has approved them. 206. The rules which we adopt are broad enough to encompass not only equipment manufacturers, franchise holders, or others who may be engaged in program procurement and supply, but also any STV networks that may develop or other types of STV interconnections between communities. We do not f ore- close STV interconnections or networks, but if arrangements related thereto restrict the freedom of choice of STV stations in procuring programs, the Commission must approve them or no STV authorization will be granted. 207. In periodic reports which we shall require those holding STV authorizations to submit, we shall obtain information in this area, and do not, of course, foreclose further rule making with regard to it. PAGENO="0093" (as did paragraph 39 of the Further Notice) that additional rules concerning equipment and technical operating requirements would be announced at a later date. (This, of course, was contingent on the establishment of a nation-wide STV service.) 212. No comments were received on whether to adopt the proposed Section 73.644. After having considered that proposal, we are of the opinion that the type approval portion thereof should be deleted~ Type acceptance is generally used throughout the radio services in the absence of an urgent need for type approval. No such urgent need appears evident here. Section 73.644 adopted herein is modified accordingly. 89 -73- 213. As stated previously, we have deCided that multiple technical systems should be permitted (paras. 184-185). We are today, simultaneously with the adoption of the instant document, adopting a further notice of pro- posed rule making in this proceeding which invites commCnts on proposed rules for STV equipment and system performance capability These proposed rules would establish standards with which any STV system proposed to be used by an STV applicant would have to comply. We do not presently foresee the need for special technical operating requirements for STV, and in the absence of such requirements the operating requirements for conventional television operation will apply Should any parties believe that special rules on the subject are necessary for STV, their suggestions and comments will be welcome. ~9) Whether~ and to what extent,. the Commlsgjpp should~ggula~ th~ charke5~ terms and conditions pursuant tq~~jch subscrip~pp~glevision service will be offered to the public. 214. Zenith and Teco support proposed Section 73.643(b) of Appendix C which would require that charges, terms, and conditions of STV service to subscribers be applied uniformly, although providing that subscribers may be divided into reasonable classifications, approved by the Commission, with different sets of terms and conditions applied to subscribers in different classifications. However, beyond that, they believe that the actual decoder installation, decoder rental, or per-program charges should not be regulated by the Commission. Trigg-Vaughn has a similar view. Among other reasons that STy should have the same freedom in pricing as other box-office entre- preneurs enjoy. 215. Acorn states that there should be no rate regulation initially because the competition between free TV and STV should keep the STV charges reasonable. Kaiser says that it is too early to decide whether to regulate rates, and Teleglobe holds that it is premature to regulate charges, terms, and conditions because there should be as little regulation of STV as possible in the beginning. Trigg-Vaughn argues that no need for rate regulation has been shown and that regulation would place an artificial restriction in that area. If experience shows the existence of abuses, it is argued by Zenith- Teco and others, the Commission may take appropriate action. PAGENO="0094" 90 - 74. 216. As to actual jurisdictin to regulate rates, Telemeter holds that the Commission has no such author~ :y because STV is a broedcast service, Section 3(h) of the Act states that bradcasting shall not be deemed common carriage, and rate regulation has tra. ~cionally and legally been limited to common carrier and public utility fieds. ABC expresses doubts that the Com- mission can regulate rates because ST. has been determined to be broadcasting so that it comes under Title III of the Act; thus it would not appear that the Act would sanction STV rate regulation. It suggests that the Commission seek Congressional guidance on the matter because STV is such a drastic step which changes traditional concepts of American broadcasting. Others, too, state that the Commission has no jurisdiction. For example, the views of the Joint Committee have been expressed in paragraphs 132-133 above; and, Trigg-Vaughn urges that the regulation of the economics of broadcasting is beyond the powers of the Commission. Although AMST states that it takes no position on the matter, it points out that rate and other regulation would be vast and complex, and that because of the doubtful benefits and substantial threats tø the public, STV should not be authorized. 217. It is appropriate here to mention the proposal of ADA which forsees as a development of the future a system described by Dr. Joseph V. Charyk, president of the Communications Satellite Corporation. The system is based on the "telephone exchange" principle. It is briefly described as follows: - .The home or place of business would have a TV set and speaker with an auxiliary tape recorder for both picture and sound, connected to a central exchange by a single coaxial cable through a selector switch like a telephone dial or push-button. "The cable would come from a central exchange, like a telephone exchange, which would have literally thousands of feeder connections from television and radio station studios, film and tape libraries, newspaper offices, educational classrooms and laboratories, retail stores, banks and accounting services, movies and sports centers, theaters and concert halls. Each service and individual newspaper, lecture, film, game, etc. would be individually dialed. `Viewing and listening need not be `live.' The receiver can be turned on and off to a specific channel by a clock- switch, so the subscriber can receive and tape record programs and services for later, more convenient viewing or study; newspapers, for example, would be recorded in the early morning hours for breakfast consumption - and continually t~pdated around the clock." PAGENO="0095" 91 -75- ADA states that such a system would provide a choice of all available programs and services whether paid or sponsored. All programs would be carried by the system. The producer of programs would be separate from the television station and cable carriers, and would pay them on a cost-plus- fair-return basis. 218. This is not a complet~ description of the views of ADA, but it serves to give the central theme of their comments..-that although AbA favors SW, the Commission should withdraw its proposed rules and propose new rules under which free TV and SW stations would be separately licensed, with the latter being regulated by common carrier principles under direct FCC supervision of carrier rates and terms, It expresses the fear that to adopt STV rules along the lines of those proposed in the Further Notice might thwart the development of the foregoing type of system, contrary to the public interest.~2/ 219. Conclusions. With regard to the ADA views, we admit that the future may well bring with it the sort of development which they describe, but it would appear to be years away. We do not believe that SW, which we think is in the public interest, should be required to await such a great passage of time, especially since there is nothing to lead to the conclt'sion that our action taken today would, as ADA fears, thwart the future. We see no reason to believe that STy, authorized as we propose, should impede the development of a `telephone dial" system any more than would the fact that retailing, banking, accounting, distribution of newspapers, and the like are presently cast in a mold that is highly different from that which ADA foresees. SW has already been postponed for a number of years and, with the information now before us, we believe that it should at last be given its chance to pro- vide what lies within its power to the public. Should the situation envisaged by ADA occur, there will be time enough to switch to a common carrier type of regulation if that is then indicated. 220. It is stated that the nature of STV, like that of common carriers and public utilities, is such that rate regulation is necessary. Coupled with this are two additional argumehts: That we must consider and decide whether we have such rate-regulatory authority before permitting SW operations; and that lacking clear-cut authority we should go to Congress for legislation amending the Act to give clear authority. 221. We cannot agree with these views. For reasons stated in the First Report, we have concluded that we have jurisdiction to authorize SW. Although we do not here decide whether we possess authority to regulate SW rates, we observe that the authority to authorize SW is not dependent on a concomitant one permitting such regulation. It is stated that television channels are in the public domain and that the STV operator will make a direct charge to the public for use of the public's property. Such a situation, we are told, requires rate regulation. The argument is without merit. Through- out this document we have used the term "free W," However, "free TV' is not really free. The advertising costs which support free TV are eventually passed 39/ We also note here the suggestion of WC of California, Inc. and Com-Sumers, Inc. that space satellites be used for SW. The suggestion is couched in the broadcast terms, contains no details, and is, in any event, outside the scope of this proceeding PAGENO="0096" 92 /6- or to the pubi c ~nd a profit is ~ by the licensec or others from of the public s ch~nne1s et we uo not regulate the rates charged by station~. br time over their stal ions which results in their profits has been said that we cannot. ~/ 222. The public is free to subscribe or not to subscribe to STV services. We believe that the market plaée will regulate the charges that are paid and that if they are excessive the operations will not succeed. There is nothing in the Hartford trial to indicate that rates will be exhotbi- tant. The highest price for a feature film during the first two years of the trial was $1.50. The lowest was 50~. The most costly sports event was $3.00; the lowest, $1.00. The average prices for such programs during the second year were $1.03 and $1.37, respectively. Prices for other programming were comparably reasonable. We have already advertad to the fact that for a very popular heavyweight fight nine persons were viewing at each tuned- in set for a cost of $3.00 whereas the same fight was shown on closed circuit TV in local theaters for a price of $5.00 per head. Moreover, the rules which we adopt provide that the station licensee shell have ultimate control over the maximum charges to be made for programs, and the licensee is responsible to the Com- mission at renewal time for the stewardship of the station in the public interest and is expected to govern his activities during the license term accordingly. Regulation of charges, terms and conditions as prescribed in Section 73.642(f)(2) (Appendix 0) which we adopt today is the extent of regulation that we deem necessary at the present time in this area. Should abuses arise, we are not barred from taking whatever steps appeer to be necessary to correct them. (lO)Whtther a at~tionena~ged in subsr. tion~elevision opera n~j~ould be recuired to furnish subscr~ io~~prviceto all persons within its s~rviçe area who de~g~f. 223. Several parties are of the opinion that it would be premature to adopt rules on this subject in this stage of development of STV. In this, as in other areas, Kaiser believes that because of the uncertainty about how the new service will develop, overly narrow and detailed restrictions might both fail to achieve their desired ends and smother the infant industry. Kaiser states: .[lJt is far too early to conclude that there is a need to impose full-blown public utility regulation upon subscription operations, with an obligation to serve everyone within some defined area and with detailed regulation of rates and earnings." Trigg-Vaughn thinks it too early to impose a regulation requiring that every- one within the service area of a station be furnished STV service if he desires it. The reason given is that there might be a limitation on the ability of ~.Q/ ~4~zer u~blishin ~. v. Fe4~J~Communn~ommisskon, 94 F. 2d 249, 251 (C.A.D.C., 1937). PAGENO="0097" 93 astatjo~ to do 86-3990_677 PAGENO="0098" 94 227. It is suggested that ~e not nave rules on the subject, at least until more is kown about the pettern of STV activities. However, although for that reason we have beer eiliing to defer possible action in some of the areas discussed in the issues mentioned above, we believe that with regard to the instant issue the possIble problems are rather clearly drawn, and that to defer action could lead to difficulties that by rule cou].d be avoideci. We know, for exnr~p1e, that ~ithin the normal service areas of television stations thoic say be poor reception at some places; that a small percentage of people ace. poor credit risks, that they may violate the terms of a centract with an STV operator, end that they may damage decoders installed in th,,ir homes; and that when an STV service is commencing operation~ in a community it may be sore efficient and expeditious to install decoders on the basis of geogrmphi.c sections. 228. The rule which we adopt (Section 73.642(f), Appendix D) takes such matters frito consideration. We believe that it will avoid problems that might arise with regard to theni, that it. will not hinder STV operations, or, on the other hand. do a disservice to the public by unjustly preventing them from receiving STy programs which they desire to view. With regard to the relatively tiny percentage of the public who might not pay their bills, for example, we note that even inthe public utility field precautions are takea on the matter, Thus, for example, it is common for a utility like a tele* phone company to include in its tariff rules a provision that the company may require potential customers to supply a surety bond or cash deposit satisfactory to the company> to assure payment for service. Moreover, they often provide that, the company may teroiriate service for non~payeent of bills. The fact that the tariffs state that the compony "may" discontinue service, ~ leaving the matter to the discretion of the company, instead of stating that the ser~ice "shall" be discontinued whun certain conditions of non~payment prevail, raises certain questions about possible dissimilar treatment of customers by the utility which have not. yet been solved, Be that as it may, we mention the tariffs to indicate t±vt: even in the utility field, of which the cornerstone is service to the public on demand, there are pr~vi8iOoS of the type ref en-ed to, 41/ We do not find it unreasonable, therefore, to have similar provisions for STY service, for we think that they would do no more violence to the concept of broadca;ting serving all of the general public than the telephone company pronisions do to the concept of a public utility, 229. However, since the service Is new, we do not kno~i under exactly what circumstances precautions or other actions should be taken by STV operators or what the precautions or actions should be. This is an area as uncertain as the "may" vs. `shall" provision mentioned above. The rule which we adopt is broad enough to permit an STY operator, as Telemeter re~ quests, to install a cash, rather than a credit decoder for poor credit risls, and to permit requirement of a reasonable claposit in advance for poor credit risks. However, we emphasize, thai; we do not expect such cases to arise fre~ quently, and that we regard as fundamental the. concept that STy, like other broadcasting, iS for the general public. We view ections like those just mentioned as reasonable under the circursaterices, and as not precluding the ~j./ In other words, utiijt~~s must serve the public on demancl.~for a charge. They are not charities. PAGENO="0099" 95 -79- persons involved from becoming STV subscribers. We ilso regard it as reason- able to permit termination of service for non-payment of bills, damage to decoders, or the like. It is stressed that we expect STV operators to use good judgment in this area of business operations. We shall observe carefully the operation of STV under the leeway which we here provide, and shall take appropriate action to correct any abuses that may occur or any other situatfons which we deem contrary to the public interest. From time to time, as with other aspects of STV operations, reports on the subject may be required of STV operators. 230. As to geographic or other reasonable patterns of installation f or new STV services, the rule is drafted to permit this. Such a provision seems reasonable and likely to make for a more rapid and efficient development of the new service in any community. 42/ Finally, our preliminary study of the technical systems for STV leads us to recognize that the service area of an STV operation may well be smaller than that of its free TV service that our rules will require it to provide. The rule adopted today ~n relation to the instant issue of whether STV service should be provided to all within the service area of a station is designed to strike what seems a reasonable re- quirement, namely, that STV service must be provided to all within the Grade A contour of the free TV service of the station, with the exceptions mentioned above concerning non-payment, poor reception pockets, and the like. This rule is cohsistent with our use of the Grade A contour in limiting STV to five-station markets. No doubt many subscribers will be obtained outside that service area, but service there will not be mandatory. (11) Whether requirements should beJ~psed to insure that the public wo~k~ not be adversely affected ~y obsolescence of subscription television equipm~ or cessation of service, e.g,, shoLild the Commission x~q~.ire that such equip ment be leased rather than sold, 231. Kaiser states that because the industry is not yet developed, it is too early to decide whether a rule requiring SD.' equipment to be rented would protect subscribers from obsolescence or cessation of service, or whether it would serve primarily to prevent thea from being able to obtain equipment from the sources they might prefer. Others, like Telemeter, Tele- globe, and Munn and Chase, believe that a requirement of renting would protect the viewers, Telemeter believes that it would not only protect from obsoles- cence and cessation of service, but that (assuming multiple systems were authorized) it would protect those who changed from the service of one STV company to another, Munn and Chase say that renting would help in the matter of maintaining equipment in proper operating conditio~ They analogize de- coders to postal meters, saying that "the basic unit is sold to the customer but the meter, containing the postage printing element, is only leased, subject 42/ The rule also provides that STV service need not be furnished to those residing in pockets of poor reception withinthe service area of an SD.' station. PAGENO="0100" 96 -80- to regular service, with postage added o y by postal authorities.' ABC states that whether equipment is sold or eased, regulations should be adopted to protect agairst early obsolescence, 0: cessation of service. Trigg-Vaughn believes that, at this point, to protect the public, it would be wise as an interim measure to have a rule requiring that equipment be leased instead of sold, but with provisions for waiver thereof, 232. Zenith and Teco believe that STV operators will rent rather than sell decoders because of practical business considerations. This is because the decoder contains the elements of secrecy of the system and the billing apparatus which the operator would want to keep under his control. They do not object to a rule requiring rental instead of sale, at least during the early years of STy, to protect the public. 233. They also point out that in paragraph 17 of the Further Notice the Commission, because of its doubts about the viability of STV, suggested that if nation-wide STV service were authorized, it might require a showing on the part of STV applicants~ that they have the capacity for sustained opera- tion just as is the policy with applications for proposed free TV stations. ~ Zenith and Taco believe that such a requirement, a showing by the applicant that it could continue operation for at least one year, would not be unreason- able, They stress, however, that this showing should be limited to the sta- tion applicant, and not extended to others such as the franchise holder, As an analogy, it states that if a free TV applicant proposed to use General Electric transmitting equipment it need not show the financial capabilities of that company.. They admit, however, that if the franchise holder and the applicant for the station STV authorization are the same party, it might be appropriate to require a showing that the financial situation of the franchisee is such that it will not impair the ability of the station to be constructed and to operate for a specified period. 234. Conclusions. At this stage of development of STV service, it appears that the best way to protect the public against obsolescence of equip- ment or cessation of service is to adopt a rule requiring that equipment be leased and not sold to subscribers. We recognize that at some later stage it may better serve the public interest to permit sale or lease. Should STV flourish and become a regular part of the television scene, a continued leas- ing requirement could mean that subscribers would pay in continued rental fees more than it would cost to buy the decoding equipment. However, for the present it would appear that a rental requirement is more in the public interest. ~ 43/ Ultravision Broadcasting Co., 1 F.C.C. 2d 544. 44/ In addition to protecting subscribers against obsolescence or cessation of service, requiring lease of decoders could conceivably stimulate the growth of SW since attempts to sell decoders might restrict the market for it. PAGENO="0101" 97 -81- 235. In addition, although we do not adopt a rule on the subject, we shall, as with applications for new free TV stations, follow the policy of requiring STV applicants to demonstrate financial ability to continue operations for a period of one year. This will apply not only to applicants for new stalions wishing to provide STV service, but also to applicants for STV opera- tions over existing stations. In addition to the usual reasons for requiring such a financial showing in the case of applications for free TV stations, the requirement will here have the added functiàn of protecting subscribers in the following way: It appears from the Hartford trial that in addition to weekly or monthly decoder rental fees, subscribers may be charged an installation fee (in the case of Hartford, $10.00). By assuring against early cessation of service, this investment of the subscriber is given some measure of protection. This requirement, as suggested, will run to the station applicant and not to franchise holders, although it may involve inquiry into financial status of the latter if station applicant and franchise holder are commonly owned. (13) Whether means sbou1dbe~p~ovid~d to ~ service will be available to aU~elig~ble stat~psQn8 non-disqi~~ basis. * 236. Telemeter suggests that, assuming that the commission estab- lishes a class of eligible stations, STV should be made available to all sta- tions within that class, subject to the ability of the station to work out satisfactory terms with appropriate parties, auch as the franchise holder. It further states, assucing that STV is permitted over more than one station in a community, that just as a network may make an exclusive affiliation arrangeaent with a station in a market, an STV operator should be permitted to negotiate with a station on an exclusive franchise basis if it wishes to do so. 237. ABC believes that STV should be made available to all eligible stations on a non-discriminatory basis., but thinks that at this time a policy statement on the matter is all that is required. lf for any reason discrimi- natory practices should occur in the future, the Commission could regulate them. Zenith and Teco state that no problem could arise in this regard until more than one station is authorized to carry on STV operations in a community. Because they believe it unlikely that in the foreseeable future there would be more than one station applying for STV authorization in the same community, they think it the better course to defer action on the matter until an occasion arises in which a second station applies for STV authorization in a community. By that time, they say, there will be more experience with STV and thus a better basis for dealing with the problem which will exist. 238. c~nclusLo~. We have already determined that all UHF and VHF television broadcast stations are eligible to conduct STV operations. However, since we today adopt rules limiting STV operations to one station in a com- munity, possible discriminatory problems with regard to making technical equipment available to all stations in a community are moot. Of course, possible problems on a national scale are conceivable, For example, a party PAGENO="0102" 98 -82- way ha a licensee in each of two five-station markets. He may be engaged in STV operations in one of them using technical system X, and might have an agreement that the supplier of that system will not make it available to any station in the other market until such time as the viability of STy in the former market has been determined. If viable in the former, then the licensee might use the same equipment in the second market. If not viable, and the licensee does not wish to engage in STV operations in the second market, then the supplier of the system could make it available to another station there. Although the example is conceivable, and such an arrangement might hinder the development of STy, we believe that the fact that multiple systems may be used for STV operations greatly reduces chances of adverse effect on the public interest that might occur and tbe possibility that this sort of arrangement might be made. Similarly, we foresee no difficulties nationally with regard to other equipment arrangements. As to the Telemeter suggestion that it be permitted to negotiate with a station on an exclusive franchise basis, insofar as this pertains to programming arrangements and not to the matter of technical equipment discussed above, it has been dis- cussed in paragraphs 196-199. (14) Whether a limitation should b~e laced on~e type of ~rpggammina wJiigj~ subscription te1evisior~ operations may bros~cast, andif so. wh&~bB4 liaitat~on slould be and wnether applicants for subscription authorizatio~~ should be required tomakea showing of~bow ther prograg~ing will ~iffer from conventional program~sin~g~wou~ otherwise servethe nee4~ and inte~sts of the community~to be served, and wha~~at showina should he [rr~nce~ p~ra. nos~ omitted). W ~in~aUmitat~pn~on type of subscriptiq~pro~am~ min~is within the scope of the Commission's ag~Qrity, taking into account Sectior~s 303(b) and 326 of t~.g Commui~icatiQn~.,Ac~. 239. Briefly, the principal views of parties on this issue are the following: There should be no program restrictions on STV because this would be contrary to the First Amendment of the Constitution and Section 326 of the Act (ABC, AcLU, NBC, Telemeter). Only if there were an imperious need to limit STV programming might the Commission have authority to restrict (Kaiser). There is no such need because it is unlikely that there will be siphoning from free TV and thus there is no imminent threat of STV to free TV; and the very fact that there is no such threat raises serious questions about the censorship problems (Zenith-Teco). 240. Moreover, it is difficult, if not impossible, to draft a rule that would define the programs that STV could carry (ABC, Kaiser, NBC). For example, the Commission recognised the difficulty of defining "box office" in the Further Notice (ABC). Any attempted definition of a restric- tive term appearing in a rule would lead to endless interpretations and PAGENO="0103" 99 -83~ reinterpretations of the rule by the Commission chat could have a paralyzing effect on large areas of program procurement for STV without there being any evidence that a need exists for such a restriction (Kaiser). In addition, a restrictive rule might inhibit, channel, or otherwise bind creative activity (Trigg-Vaughn) and prevent diversity of programming (AcLU). Even if one succeeded in drafting a restrictive rule, it might not be adequate to protect against siphoning. For example, if a rule were adopted like the one suggested in the Further Notice which would prohibit STV from carrying certain types of programs common to free TV such as those in which continuing characters are presented from week to week in a series using a common setting or central program concept, it would not protect against the siphoning of all of the other types of programs which free TV carries (AMST, NBC). 241. The Hartford trial and Etobicoke have demonstrated what the programming of STV will probably be (Telemeter, Zenith-Teco). That programming shows that serious siphoning of programs or talent from free TV is unlikely (Telemeter, Zenith-Teco). Thus, there is no need to have restrictive rules to protect against siphoning (Zenith-Taco). If there were such a rule, it would probably have little influence on the actual programming anyway (Telemeter). 242. However, and without conceding that the Commission has the authority to regulate programming, it might be desirable to have a broad regulation that could serve the purpose of casting STV into the mold in which it is most likely to develop, if for no other reason than to placate the alleged fears of the opponents of STV (Telemeter). This rule or policy might provide that STV stations are expected not to duplicate free TV programming, and are expected to provide programs of the type shown at Hartford, ~ current movies, sports events not carried on free TV, and the like, with the content thereof to be determined by the licensee or STV entrepreneur (Telemeter). 243. A rule prohibiting commercials is acceptable (Teleglobe, Trigg-Vaughn). Yet, since the impact of commercials on program diversity of STV is unknown, any rule or policy used by the Commission should be viewed as in the nature of an experiment to see how programming diversity is affected (AcLU). ?ossibly., prohibiting commercials on STV would violate principles of free competition (ACLU). PAGENO="0104" 100 ,84~. 244. As a yardstick for the future, a rule night be adopted limiting STY to programs not presently being shown on free TV (Acorn). A possible rule would be one prohibiting STV from showing `trade name" programs for a period of three years, witn the Commission reviewing the matter at the end of that time (Angel). A rule in proposed that STV not be permitted to devote more than 507, of its STY broadcasting time to feature films in order, among other things, to promote, during the remaining portion of STV broad~ casting time, a variety of programs over STy which proponents of STV have always promised that STY would furnish (Joint Committee). Still another rule is proposed that would prevent STV from carrying sports events which have been regularly carried locally on free TV within the past Live years~- for the purpose of restricting STY to the kind of sports programming which has not been gva~lable on free TV (Joint Committee). 245. Finally, as to requiring applicants for STY authorizations to make a showing that programming would be different from that of free TV, no such showing should be required because the programming of STY statioOs should be decided in the market place (Muon and Chase). Besides, since the Hartford trial has shown what programming is likely to be presented over STY, such a showing would be redundant (Zenith'.Teeo). Moreover, it would be impossible to give meaningful definition to the showing that would have to be made by STY applicants in order to distinguish their programming from that of free TV because the programming of the latter service is of unlimited variety (AMST). 246. Conclusions, We cannof agree with the arguments that the First Amendment and Section 326 of the Act preclude the Commission from restricting the programming on STY. Section 303(a) of the Act gives us the authority~ using the public convenience, interest, or necessity standard~~to classify radio st~nions. Section 303(b) provides that.~using the same standard~-we have the authority to Lp/rescribe the nature of the service to be rendered by each class of licensed stations and each station within any class." We regard it as settled law that under theme provisions we may decide what the programming of STY, or other stations, say be. On this matter, the Supreme Court of the United States, in affirming our chain broadcasting rules, has said in National Eroadcastiag~~~pj v, U.S., 319 U.S. 190 (1943), at pages 215.216: "The Act itself establishes that the Commission's powers are not limited to the engineering and technical aspects of regu~ lation of radio communication, ~et we are asked to regard the Coemission as a kind of traffic officer, policing the wave lengths to prevent stations from interfering with each other, But the Act does not restrict the Commission merely to supervision of the traffic, It ruts upofl the Commission the burden of determining the copposition of that traf~~ The facilities of radio are not large enough to accommodate all who wish to use them, Methods must be devised for choosing from among the many who apply. And since Congress itself could not do this, it committed the task to the Commission." (Emphasis supplied.) PAGENO="0105" PAGENO="0106" 102 -86~ siphon from free TV, and that therefore no rule is necessary. The ultimate path that STV will follow is not clearly known. Although it may be that STV programming will follow the path of the Hartford and Etobicoke operations, and we think it well may, we would be remiss in our duties if we did not take regulatory steps to afford some assurance that free TVwill continue to be available in ample quantity and quality. 250. The rules which we adopt will require that feature films shown on STV must not have been given general release in a theater 45/ any~ where in the nation more than two years before they are shown on STV. The purpose of this rule is to assure that the feature films shown on that ser~ vice are generally of such recency that they are unlikely to appear on free TV Thus the siphoning threat ~s minimized for this type of program a type which we are told is becoming increasingly important in the programming of free TV. Since a major part of the STV programming apparently will be feature films, the importance of this rule is especially great. 251. Under prevailing practices of the motion picture industry, films are given general release for showing in some parts of the country sooner than in others. The question thus arose as to whether the two~year period should run from the date that the picture was first released anywhere in the nation, or from the date that it was released in the community where the STV station is located. We have chosen the former. This will give added 45/ As used herein, "general release" means the first run showing of a feature film in a theater or theaters in an area, on a non.reserved seat basis, with continuous perforiSances. If a first run film is given general release atmore than one theater in an area, the opening will usually be on the same date, "General release" is distinguished from "roadshowing" of a filn~ which means the showing of a film on an exclusive first run basis by one theater in an area, on a reserved seat basis, with non.continuous performances, usually at prices greater than the theater's normal admission price. The tickets sold for roadshow performances are colloquially called "hard tickets," to describe the rectangular tickets sold for such performances as distinguished from the regular ticket torn from a roll for general release showings. "General release," as is used 1~erein and in the rules which we adopt (Appendix D, Sec. 73.643(b)(l)), does not include special situations such as the first run showing of a picture at 1~adio City Music Hall in New York City on a non~ reserved seat basis. We consider the general release date of such a piàture for the New York City area to be the date on which the picture, after closing at Radio City9 is first shown at other theaters in the immediate area on a non~reserved seat, continuous performance basis. PAGENO="0107" 103 .87- protection to free TV from siphoning of pictures, for with that date it is more likely that free TV would not be eligible to obtain the film. On the other hand, if the latter date had been chosen, it would mean that when an STV station might wish to negotiate for it, the file would be older and thus more likely to be the subject of negotiation on the part of free TV. Our decision, of course, could mean that in any particular community motion pictures shown on SW will, with regard to that community, be more current than in other communities, but we do not regard this as having any disad.' vantages. Attention is directed to the fact that the rule speaks of "general release." Some movies, of course, are "roadshowed" on a hard-ticket basis for a considerable period of time before general release. Usually, however, they are of the "blockbuster" variety, and although the two-year period for such films will still be measured from the date of general release rather than of roadshow release, we think that protection for free TV with regard to them is still adequate because such films generally take longer to exhaust their `box-office" possibilities before going to free TV than do ordinary films. 252. Although the two-year restriction will assure that generally feature films shown on SW will be of such recency as to protect against siphon- ing from free TV, we are of the opinion that ii is in the public interest that STV also be allowed to show a limited number of older films of great public appeal that might or might not be available to free TV. rilms that would fall into this category are, for example, "Gone With The Wind," and "All Quiet On The Western Front~' Accordingly, the rule will permit STV stations to present, during one week of each calendar month, one feature film the general release of which occurred more than ten years previously.' The film may, however, be shown more than one time during the week selected tor it. ~/ 253. We also believe that a rule giving a measure of protection against siphoning of sports events from free TV would be in the public interest. The Joint Committee (as mentioned in pare. 244) suggests a rule the core of which is as follows: "No licensee shall broadcast any program involving sports events for which a fee is charged which was regularly tele- vised into the market via a free television station within 5 years from the last date on which the event appeared on- free television." 46/ As the table in paragraph 17 indicates, each feature film at Hartford was, on the average, shown 3.55 times. Sometimes all of the showings occurred in one week; sometimes, in two widely-separated weeks. It may be expected that SW operators will similarly have motethan one showing of both current and older films. Older films can he expected to constitute only a small percentage of all feature films shown by STV stations (see paras. 48 and 112). We believe it generally to be in the public interest to spread throughout the year the showing of older films; hence the provision that only one such film may be shown during one week during each calendar month. How- ever, if STV operators should desire to show more than one in a single month, ~ to show a "festival of classics" during all or pert of a month, we shall give con- sideration to waiver of the rule. PAGENO="0108" 104 -86- Its proposal also contains a requirement that STV stations notify other television stations in the area of intent to broadcast a sports event, and a provision under which such other stations could file with the Commission, within a specified time, petitions to prohibit the showing of such programs. We find the latter proposals cumbersome, unduly restrictive, and unnecessary. However, we are of the opinion that the part of the proposal quoted above contains a helpful concept for the prevention of siphoning of sports, and the rule which we adopt is basically like it. 254. Our new rule. appears in Section 73.643(b)(2) of Appendix D. Generally speaking it prohioit. the STV broadcast of sports events regularly televised in the community via free TV dur ng the previous two years it differs from the proposal of the Joint Committee in that it uses a period of two years rather than five. The Joint Committee states that the five-year period would act as a deterrent to siphoning, and would give free TV stations an adequate time in which to adjust to the loss of sports programs. We ~ lieve a period of two years to be a more realistic and workable figure on which to base a rule that will provide the desired deterrent effect. As to giving stations an adequate time for adjusting, we regard thIs as a makeweight argument, and, in any event, two years appears to be an adequate time for such adjustment. In addition to the foregoing modification of the proposal of the Joint Committee, other modifications, consistent with the discussion in the following paragraphs, appear in our rule. 255. The Joint Committee, in discussing its proposal, states the following: "Such a rule, for example, in the Washington, D.C. area, would proscribe from Pay-TV the World Series, the Kentucky Derby, the National Football League and American Football League games of the week, Weshingtor~ Senator baseball games, Washington Redskins regular season `away' games, Atlantic Coast Conference basketball games, National Association basketball games, American League and National League baseball games of the week, specific golf and tennis tournaments, specific professional and college pre-season and post-season football games. Sports events which could be carried would include Washington Redskins `home' football games, games of any professional or college team not formerly carried in Washington on a regular basis, and boxing bouts including championship boxing bouts since boxing has not been carried on a regular basis." Although our views are essentially similar to those of the Joint Committee expressed in the foregoing statement, we believe that some refinement and elaboration is necessary as will become apparent below. Since to include in the rule all of the points covered in the following paragraphs would make it extremely cumbersome, we are, in NOTE 2 of Section 73.643(b)(2), calling attention to the fact that when questions arise with regard to administering the rule they will be resolved in the light of the following discussion-- the "legislative history" of the rule. PAGENO="0109" 105 256. The principal questions raised by the proposed rule quoted in paragraph 253 have to do with the meaning of the term `sports events," and the phrase "regularly televised into the market via a free television station." It is to these questions that we now direct our attention. 257. To begin with, some may raise the question of the meaning of "sport." One dictionary defines it as a pastime or diversion involving "activity requiring more or less vigorous bodily exertion and carried on according to some traditional form or set of rules, whether outdoors, as football, hunting, golf, racing, etc., or indoors, as basketball, bowling, squash, etc." It is our belief that the term must include an element of physical agility or skill-~the bodily exertion mentioned in the foregoing definition. Thus, we would not view chess or bridge as sports. On the other hand, there are activities, ballet for example. that require physical agility and skill (and that are carried on according to some traditional form or set of rules) that we would view as an art form rather than a sport. Generally, we believe that there will be no difficulty in recognizing, for purposes of the rule, what the term means. 258. As to the meaning of "events," there would appear to be two types: (1) specific events, such as the baseball World Series, or the PGA G31f Tournament, and (2) games, or other contests, which are part of a regular series, such as football or baseball games played during a regular season (but, as indicated below, the games need not be played during a regular season), 259. The following are examples of what would be regarded am "specific events" within the meaning of the rule. The list is neither exhaus- tive of such specific events within any sports category (~g,, major league baseball, college football), nor does it include all sports categories in which such specific events might occur: Ma] or LeaAue Baseball World Series * All-Star Game Professional Football League Championship Game Division Championship Game Game Against College All Stars College Footb~lI~ Rose Bowl, or other Bowl Game East-West Game North-South Game Blue-Grey Game Professional Basketball NBA All-Star Game NBA Championship Game PAGENO="0110" 106 Colleg~~,skethal I Nationa Invitational Tournament (NIT) N~AA Semi-Final Games After Regular Season NCAA Final Games After Regular Season Horse Raci,~g Kentucky Derby Preakoess Belmont Stakes Golf U.S. Open PGA Masters Thunderbird USGA Amateur Tennis National Singles Championship National Indoor Championships Other Le Mans Grand Prix Auto Race Olympic Games 260; It may be noted that sorue of the specific events mentioned above consist of more than one game or match Thus, there are at least four games in the World Series, there are numerous games in the NIT,and matches in golf or tennis tournaments, If a substantial number of games or matches (or portiuns thereof) were shown by a free TV station, it would be considered to have broadcast the specific event within the meaning of the rules. With the World Series, there would likely be no problem, since stations usually carry all of the. games and carry each game in its entirety. However, with a golf tournament, or the National Singles Tennis Championship, not all of the matches, and possibly not all of cry particular match, may be carried. How- ever, if a tournament runs for three days, and a station broadcasts it one to two hours per day for two or three days, it would be considered to have covered the event, although it is likely in such a case that only portions of play for all three days would have been broadcast, For etample, in the case of a golf tournament, the broadcasts might have covered the last four holes of various matches on several days, but not the complete matches, and not all of the matches. Similarly, the broadcast of an auto race that takes twenty-four hours, like the Grand Prix at Le Mans, need not occupy twenty-four hours to be considered as having covered the event for protection within the rule. In this connection, we might also point our that, conceivably, some specific events might be regularly carried on television news programs. However, it is likely that such programs would only show vary small portions of events, and we would not consider such broadcasts to merit protection against siphoning. Moreover, (as stated in paragraph 270) the rule will only provide protection for events that are televised live, and not for those broadcast on a delayed basis, and most news programs are broadcast en a delayed basis. PAGENO="0111" 107 -91- 261. In addition to "specific events," we believe that certain other sports events should be protected against siphoning. We characterized these in paragraph 258 as games or other contests which are part of a regular series, such as football or baseball. For easy reference, we shall herein- after refer to them as "non-specific events." For the purpose of the rule, we shall afford protection to non-specific events falling into well-defined categories, but shall not afford protection between categories. The follow- ing will serve to explain our meaning and intent. For some sports there is a regular season during which the sport is played, ~ football, baseball, basketball. Games played during the regular season we view as non-specific events. In these sports, the networks broadcast "games of the week." Examples are the NCAA games of the week for college football, games of the week in the National Football League and the American Football League, or games of the week for the American League or National League in baseball. Such broadcasts, for each sport, will be considered to constitute a category for pur- poses of the rule so that if they have been regularly broadcast by free TV in a com- munity for a period of two years immediately preceding proposed STV broadcast of such programs, STy may not carry them. On the other hand, in addition to network games of the week during a regular season, other games may be tele- vised in a community. Thus, in the case of major league baseball or professional foot- ball, games of the. week might be shown in a community, but "away" games of the home team might also be televised, though the latter might not be network games of the week. Such "away" games would be considered a separate category. This means that if, for,a period of two years, baseball games of the week were regularly broad- cast by free TV in a community during the regular. season, and "away" games were nOt, STV could then show the latter but not the former. The same would be true for pro- fessional football. 262. Another category of non-specific eventz is that consisting of pre-season games which do not qualify as "specific events." Before the start of the regular football season, a championship professional team plays a game against college all-stars. This game we regard as a specific event. However, professional football teams play other pre-season games among themselves which we view as non-specific events. For purposes of the rule, such pre-season games will constitute a category separate from regular season games of the week or "away" games. Finally, some clarification should be given with regard to "playoff" games. It is customary in NBA professional ba~ketbal1 and NHL professional ice hockey to have playoffs at the end of the regular season. These games are a regular feature of the season and will'be viewed as such -- i.e., as non-specific events, They may be broadcast either as games of the week or as "away" games, and dealt with accordingly under the rule. However, in professional football or major league baseball, occasionally two teams will be tied for the division or league title at the end of the regular season, and a playoff is necessary. Such playoffs are not regular features of the season, usually generate great public interest, and will be viewed as specific events rather than as non-specific events. 263. Having discussed the meaning of "sports" and "events," we now deal with the phrase "regularly televised into the market via a free television station." As stated elsewhere, the rules which we adopt permit STy operation in communities which lie within the Grade A contours of five or more operating PAGENO="0112" 108 -92- commercial TV stations, thcluding the contour of the STV station. deciding whether sports events have been regularly televised in a via free TV, we shall only consider commercial stations which ~ tour over the community. Moreover, stations placing such a contour munity will be considered coliectively, so that if one broadcasts league baseball games of the week, and another ea)or league games, both categories will be considered as having been furnished the community~ 264. As stated previously, we shall prohibit STV from broadcasting sports events that have been regularly televised over free TV during the two years preceding the proposed STV broadcast. With regard to the meaning of "regularly televised," our standard will be somewhat different for specific events, and for non..specific events. Our standard for specific events is best illustrated by an example using the baseball World Series. If that Series were televised in a community or free TV in October 1965 and October 1966, it could not be shown on STV in October 1967 by a station licensed to the community. Ilowever, if the Series were on free TV in that community in either October 1965 or 1966, but not in both years, it would be viewed as not having been `regularly televised" there, and an STV station could show the Series in October 1967. Moreover, tho Period of tmo years need not be exact. Thus, if free TV showed the Series Inc community starting Wednesday, October 6, 1965, and did not show it during 1966, an STV station In the same community could show it in 1967, even though (since it starts October 4) the full two- year period had not elapsed. In other words, for the purposes of the rule, if an event is held each year, the time between occurrences need not be exactly a year. 265. The rule also provides that if the lest regular occurrence of a specific event, ~ the Olympic (aees, was more than two years before the proposed STV broadcast of the event, It may not be televised on STV in a community if the lest occurrence was televised therein over free TV. Another point should also be mentioned. It is conceivable that, for some reason, an event normally occurring at regular intervals might not take place. ror example, it sight usually occur yearly, but skip a particular year or years. In such cases, we would prohibit the showing of such events by STV in a com- munity if the event was carried there on free TV the last time that it occurred. Finally, as previously stated, we shah view professional division playoffs and major league baseball as specific events. Since such playoffs do not occur on a regular basis, we shall proscribe their broadcast on STV if they were televised in the community by free TV the last time that they occurred. 266. We have indicated in paragraph 260 that a specific event will. be considered to have been broadcast by free TV even if the entire event is not televised. Although with regard to non-specific events the whole contest is usually televised, in those cases where this is not the case, the event will be considered televised on free TV if a substantial portion thereof was broadcast. As to the meaning of "regularly televising" non-specific events, PAGENO="0113" 109 -93- we shall view any category of such events as having been carried on a regular basis within the past two years before proposed STY broadcast if a substantial nMmber of events in the category were televised over free TV in the community within each of the two years preceding the proposed STV broadcasting thereqf., The standard will be applied on a category by category basi~ ~ maj,or league baseball games of the week, major League baseball `away" ~ames, professional foot- ball games of the week) as explained in paragraphs2~l,and 262. If duringone, but not both, of the two years preceding proposed STV broadcast a substantial num- ber of events in a category. were not televised in the community, the category will be considered not to have been regularly televised therein, and STV rn~y show the cont~sts in that category. games would ~ists in CitiE games of the WaE :ies where. this sort of ~e games on STY only to the t ~. - ~ was previouE y shown, Thus, for example, if for a period of STV proposed to show home games in Washington, D.C., five such games, on the average, had been shown for each of the two previous baseball seasons, STV could broadcast such games in that community, above and beyond five for a season. This means that five would be shown on free TV and any additional number could be shown on STY. 268. We would view a title boxing match.--heavyweight or otherwise-- as a "specific event." Other' boxing matches probably would not be so viewed. As the Joint Committee suggests, it is likely that all boxing bouts including championship fights, would be available for STY since they have not been carried on a regular basis on free TV. Until recently, this would clearly have been true of heavyweight title fights which for many years were carried only on closed cfrcuit theater TV. However, a few recent heavyweight champion- ship bouts have been broadcast over free TV, Should a pattern of broadcasting all heavyweight title fights on free TV develop, and s within a two-year ~ ~ c m spor have been p ,~ ,,ere in each of two professi. Association, and the National Professional Soc vising such games has not yet clearly emerged. 86-399 0 - 61 - PAGENO="0114" 110 .94 - that, as mut~ers develop, soccer aught he shown on STy. Should special problem~ in this or other areas occur, we shall face them as they arise. 270. Finally, it is our belief that only sports events that are broad- cast live should be afforded protection, and the rule reflects this view. It appears unlikely that STV would wish, or he. able, to sell taped sports programs. To the extent that they should do so, we believe that this sort of programming should be open to competition between the two TV services. This means, then, that the showing of such programs as ABC's Wide World of Sports, or the CBS Sorts Spectacular which consist, generally, of taped sports events would not prevent the showing of similar programs on STV. 271. In addition to the foregoing, we are adopting a rule prohibiting STV stations from devoting more than 90% of their STV programming hours to feature fiim~ and sports cosibined, the percentage, generally speaking, to be applied on the basis of annual STV hours broadcast. Once again, this is similar to the proposal of the Joint Coatnittea, That group suggests that not more than 50% of the STV time be devoted to films. This, coupled with sports events, they aver, would be an equitable balance that would give STV sufficient programming on which to operate, and yet require it to mine new program sources and give the sort of diversity of programming that it; has promised. We believe that the Joint Committee's concept is a good one, but that its proposed restriction is of a harshness that could spell the death knell of STV before It even began. Itwould appear from the Hartford and Erobicoke experiences that feature films will be a staple part of the STV programming. To reduce the amount of this to 50% in an STV operation would he ta raise serious doubts about whether it could be viable. 272. The figure of 90% which we select is, as with all lines of de- marcation (voting age of 21, for example), arbitrary to some extent. However, it is roughly based on the information in the t~hle of paragraph 17 above, and appears to be a reasonable one in teruss d the Hart~rd operation. Using the figures of t;ha~ table, it appears that the average length of a single program was about 3.7 hours, and that films and sports events occupied about 91% of the STV programming hours. 47/ 273. This rule, of course. does not Itsit STV operators to showing for only 10% of their STV broadcast hours programs 3.1km opera, ballet, theater, and other programs of their choice exclu~tve of feature films and sports. They may show more if they wish. Calculating percentages on an annual basis, as we do with our AH.FM non-duplication rules, will, provide flexibility. However, we wish to avoid the possibility that some STY operators might have an overload of opera, ballet, theater and similar ptograms during, say, the summer months when there might be lass STV viewing, in order that; they could devote more STV broadcast hours to sass-appeal feature films during other months when there might be more viewing. Therefore, in the absence of a shoving of good reason for not doing so, we shall expect -STY stations to devote at least 5% of their STY broad- cast hours in any calendar month to programming other than sports and feature films. ~/ The table supplies us with the number of programs per year in each cate~ory, and the total number of showings for eenh category. Thus, in terms of number of separate programs, films constituted 727. of the offerings and sports, 13%, for a total of 85% for the combined categories. In terms of number of showings, films occupied 86.5% and sports, 4.5% for a combined total of 91%. PAGENO="0115" 111 -95- 274. Still another rule adopted to prevent siphoning is that which proscribes the showing on STV of a series type of program with inter- connected plots or substantially the same cast of principal characters, heretofore mentioned (para. 240). Since this sort of program is a staple of free TV it would appear essential to afford protection in this area, consistent with our desire to assure ample free programming to the viewing public. 275. Finally, we adopt a rule prohibiting commercial ahnouncements of any kind during STV programming hours. However, it would permit promotional announcements about STV operations, at the beginning or the end of each separate program. Thus, for example, if the same feature film were shown twice in the same evening, such announcements could be broadcast between the two showings. We cannot agree with ACLU that principles of free competition should weigh in favor of permitting commercials on SD.'. Such operations are based on an entirely different economic concept from that of free TV--namely. that of financial support from paying subscribers rather than from advertisers. This fact works to permit the enhancement of the beneficial supplement which STV can offer by additional advantages mentioned elsewhere, namely, no inter- ference with artistic continuity of a program by commercials or by cutting programs to make them fit a time schedule. 276. The advantage of the rule concerning feature films is that it is clear, definite, and easy of application. In addition, although some difficulties may occur in application of the rule on sports or on series- type programs, we do not anticipate that they will be serious. None Qf the rules is plagued with the indefiniteness mentioned by some commenting parties. We believe that they will serve to fulfill thetr functions of preventing undue siphoning, promoting program diversity, and preserving artistic con- tinuity. Some may complain that in the areas of programming dealing with other than movies, sports, and series programs ~ programs like those of Andy Williams or Lawrence Walk) there is no siphoning protection. To this we say, as we have said before, that some competition (between STV and free TV in the programming area) may be beneficial to free TV and to STV as well, ahd we leave this type of program to competing factors in the market place and the performer's desire for exposure.. 277. We believe the foregoing rules adequate to prevent siphoning of programs. It does not appear to us that rules to prevent siphoning of taLent are necessary to achieve the end of assuring adequate quantity and quality of free TV to the public, at least at this time. However, we would view with a jaundiced eye unreasonably restrictive contracts on the part of either STV or free TV with talent that would prevent the latter from performtng on or otherwise serving the other service, We shall watch this area closely. and shall entertain petitions by aggrieved parties for corrective action that may appear necessary in the public interest. 278. As to the subject of a required showing by STV applicants that their proposed programming will differ from conventional programming PAGENO="0116" 112 or would otherwise serve the reads ~nd interests of the cormnunity, we shall, or course, require such a showing, contrary to what some parties suggest, for without it we could not: sake a public interest finding that grant of the authorization would be in the public interest:, We do not believe, as AMST suggests, that such a showing will ne Japossible to m4ke. As to feature films, a vital item will be the length of lisa ~ince general release. Meeting the two-year test, a major hurdle s passed. Similarly with sPorts. Other programming, which we expect to comprise by far the lesser portion of programming should present no irt~ursounta~le problems. As with free TV, we shall require that applictuts provide us with narrative statements about what they have done to determine the needs oi rIte community with regard to STV programming and the manner in which they propose to fulfill those needs. 279. Concerning the conventional programeing which STV stations will be required to carry, we have already indicated our belief that such programming will provide a valuable service to the community.. Applicants for STV authorizations tsust, in auditaon to a showing with regard to sub- scription programming, also sake a uhowing with regard to the conventional programming,which they propose to broadcast in uon-STV hours. This will have to be based on a survey of coasiunity needs with a showing of how the proposed programaing is designed to meat: those needs, just as with any application made by a non-STV television station. We shail tot consider that the STV applicant has mat the standard with regard to conventional pro- gramming if it carries entirely, or almost entirely~ industrial and other available free film prograa'sing. We shall expect STV stations to develoo a staff--for prograatsing, sales~, name, eaginmarinf, etc. --which will perform the same functions as the staffs of ounventional TV stations. Whesthe v rious sect~ions of ths Act end of~ 0p(~gigfkqfl. rul eS ~f Commiss ion poUcie~,_e ~ per~aiflinAtQ_ ~ b odfied y~f~tc~. ~b~qTiP~ ~ 280. ~aragraph 30 of the ~u.rther Notice, referred to in the issue, reads as follows: "Since over-the-air subscription television is considered Co be hroadcastrng, the question arises as to whether certain pro- visions of the Communications Act and our rules pertaining to broadcast stations shou'd apply to subscrfption television operations in the satsu way they do to regular broadcasting. In the Act, Section 303(i) gives the Cot~mission authority to make special regulations applicable to stations engaged in chain broadcasting; Section 307(d) Limits the term of broadcast sta- tion licenses to three years, end of other stations to five years; Section 315 provides for oqual use of hroedcastirtg facilities by political candidatas~ Sectioa 317 provides that announcement mast be made - -. [about mattersj for which money or other consideration has beer. paid; Section 325 prohibits broadcast stations from rebroadcasting programs of other stations without PAGENO="0117" 113 .97.. permission; Section 605 prohibits the unauthorized publication of communications, but expressly exempts `the contents of any radio communication broadcast' from its application. Most of the foregoing are the subject of Commission rules. We invite comments on whether we should recommend Legislation to the Congresa, and if appropriate, make changes in our rules, to modify any of these sections insofar as they affect subscription television, In addition, comments are invited on how the `fairness doctrine', which does not appear in our rules, but which is given recognition in Section 315(a) of the Act, should apply to subscription television." 281. Some comments favor applying present sections of the Act and of the broadcast rules and policies to STy, without amendments of any kind, since STV has been determined to be broadcasting. Others state that at Je~" some of the foregoing should not apply, or that STV experience should be gained before deciding. Illustrative of these views are the following. 282. Telemeter states that it sees no reason for adopting new rules. It believes that to the extent to which STV programming would bring present rules and policies into play, they should apply, and mentions that at Etobicoke (although i,t was a cable STV operation, and in Canada), candi- dates for public off ice appeared over STV without charge to them or to the subscribers in accordance with Section 315 and the fairness doctrine princi pies Zenith and Teco say that WHCF at Hartford reported that it experienced no dissimilarities i~ complying with the Commission's broedcasting rules when operating conventionally as compared to operating with sTy. The station did not find it necessary to request a waiver of any of the rules except to the extent necessary to scramble its signals. These parties observe that should any problems arise in STV operations, they could be handled on an ~ basis. Teleglobe says that the only amendments necessary are those proposed in Appendix C of the Further Notice as modified by the comments in this proceeding. 283. AMST, mentioning the paragraph 30 material, says that since STV has been designated as broadcasting by the Commission, the fairness doctrine and the sections of the Act and of the Commission's rules which govern free TV should apply. As to Section 317 of the Act, it says that it should apply if sponsorship is allowed on STV, which it should not be. It stresses the fact that comments of proponents indicate that a system of one or more national organizations similar to free TV networks is contemplated. Therefore, the chain broadcasting rules (Section 73.658 of the Rules and Section 303(i) of the Act) should apply to STy. These rules, it is said, are intended to guard against dangers which the Commission assumes are inherent in network systems, and would be especially important if only one STV network were to emerge, in which case even more stringent prptective measures might have to be adopted. Finally, it mentions that Section 315 and the fairness doctrine should be kept within the different confines of STV and free TV PAGENO="0118" 114 -98- oper~ions over the same station so that a candidate appearing on STV may not be balanced against one appearing on free TV. 284. ABC states that STy, which has been designated to be broad- casting, should not be exempt from the rules and policies of the Commission such as the fairness doctrine. Although admitting that it is possible that some of these provisions may not have any real meaning with regard to the public interest insofar as they are related to STy, it would recommend no action on the matter at present. Specifically it says: `At this juncture, however, ABC suggests that the Commission should not attempt to carve out exceptions to its rules and policies. If subscription television is to be authorized, the burden should be upon the proponents and applicants to show in each instance where exemption from the requirements of a rule or policy is appropriate. At this juncture, the Commission should presume that all of its rules are applicable and reserve judgment on exemptions until particular matters are raised and probably until some meaningful experience with subscription television has been realized." Trigg-Vaughn takes the following position: `We think that the Commission should gain actual experience with the day-to-day operations of pay television services before carrying over to pay television wholesale the limita- tions on program presentation which now apply to conventional broadcasting. The absolute statutory equal time obligation concerning political candidates would apply to pay television, of course, but there is a problem of significance in connec- tion with the treatment of contrGversial issues. Applicants for pay `television shouLd be encouraged at the `outset to set forth their plans for presenting in the course of pay tele- vision programs full opportunity for the expression of varying viewpoints on public issues. Whether the strict obligations of the Fairness Doctrine should apply exactly as they do in tele- vision broadcast operation is not clear at this potht. If problems of significance are detected in the course of operation, it might later be appropriate to extend the Fairness Doctrine and similar regulations to pay television operations, but at this stage we think a less restrictive policy should apply to pay television than to television broadcasting as it presently operates. "We think that the distinguishing feature of pay television - its usefulness only if the public wishes to pay for it - calls PAGENO="0119" 115 -99- for more thought and observation before the many existing rules on regulation of programs are extended to it." 285. Munn and Chase state that since STV offers primarily box- off ice entertainment and does not involve problems of politics and personal attack found in editorial and advertising programs over free TV, the subject of "fairness" does not enter. AGLU, on the other hand, maintains that it regards the fairness doctrine and Section 315 of the Act as essential to assure that STV will operate in the public interest, because they "help to promote the concept of balance and fairness which undergird diversity, and we see no reason why they should not be vigorously enforced." 286. Oo~chi~1on~. The purpose of this issue was to elicit infor- ration in recognition of the fact that STV might have different features from those of conventional TV and that therefore changes in the Act or the Commission's rules might be indicated. Those of the commenting parties whe say that because STV has been judged to be broadcasting all broadcasting rules should apply to it are, in effect, saying that there are no differences between the two services. We are not sure that this is correct. However, neither do we know for certain at this point what the differences are that might require different regulation through the Act or our rules, We are of the view, therefore, that, for the present, the better course of action is to adopt Section 73.643(e) of Appendix C which proposed that, except as other- wise waived by the Commission in issuing STV authorizations, the rules appli- cable to free TV broadcast stations be applicable to STV operations. ~8~/ (In addition, of course, all of the other STV ruies adopted today are new and in addition to present TV broadcasting rules.) We have no evidence on this matter other than that provided by Zenith and Taco (see para. 282). The path we pursue is consistent with that evidence and with the recommendation oe those parties, and is not fundamentally at variance with the views of all parties. The rule will provide a necessary flexibility in a relatively unknown area. At a later stage, should we find that additions, deletions, or other changes are indicated, we shall act accordingly. S 287. The rules which we adopt appear in Appendix D. They are based on careful consideration of all of the comments Lilac! in this proceeding. Although parties did not comment on some portions of the rules which we proposed in the Further Notice, we believe that they are reasonable and in the public interest and adopt them. These include the requirement that holders of STV authorizations shall complete construction of STV transmitting faciUties within a period of eight months after issuance of the authorization, and that ~/ The rule which we adopt is modified to say "the ruaes and policies applicable to" free TV stations so as to include the fairness doctrine for which we have no rule. PAGENO="0120" 116 100 STy authorizations will not be issued or renewed for a period longer than the regu ar L cense period of the applicant s television broadcast station Al thouah in some cases the adopted rules add to or otherwise modify the rules pro posed in Appendix C in accordance with previous discussion in the document in ocher cases the only modification is a change in paragraph number In a few cases amendments not discrissed in the document have been made because they appear to be reasonable and in the public interest (fg eompare proposed Section 73 642(c) of Appendix C with the same section in Appendix D; and see new Section 73.642(g) in Appendix 0). Applications, Financial Requirements~ Repo~t~ 288 As indicated in the NOTE to Section 73 642(b) of the rules appearing in Appendix P no applications will be accepted for filing until such time as we have adopted rules concerning equipment a~d system per- formance capability. At or before that time we shall announce the manner in which applications are to be filed and the content thereof with regard to equipment, technical operation, and other matters. We contemplate that applications wiil be required to contain, among other things, financial information sufficient to permit us to make a judgment about capacity for continued operation for a period of at least one year (see pares. 233, 235); a program showing (see paras.278-279); information pertinent to Section 73.642(g) of the new rules; and some, but not all, of the information which was required of applicants for trial operations by paragraph 32 of the Third Report. In- formation already on file with the Commission in formal application forms or ownership reports may be incorporated by reference in these applications. We also contemplate that, at least in the early stages of the service, we shall not adopt an FCC Form to be used by those wishing to apply for STV authorizations. Section 1.531 49/ of the Rules will be amended to indicate that STV applications will be viewed as formal applications although no FCC Form will be used for them. Public notice of the acceptance for filing of such applications, or substantial amendments thereto, will be given by the Commission, and no grants will be made earlier than thirty days following the issuance of such public notice. We intend to charge filing fees for STV applications equal to those charged for applications for authorizations to operate TV stations. Thus, for example, if an applicant simultaneously files applications for a construction permit for a new TV station and for authorization to conduct STV operations over that station, the filing fee would be $150 for the former, and $150 for the latter, for a total of $300. Section 1.1111 of the Rules (Schedule of fees for Radio Broadcast Services) will be appropriately amended, prior to the time that applications are accepted, to reflect the filing fees for the new service. * 289. We adopt no rule requiring applicants to make a showing as to their capacity to sustain operations for at least a year. This is, rather, a policy that will be followed. Similarly, although no specific rules are adopted thereon, as mentioned in various portions of the document we shall periodically require those possessing STV authorizations to submit reports and information to us for the purpose of keeping us informed about various aspects of STV operations. ~j Section 1.531 of the Rules states (in part) the following; "`Formal application' means any request for authorization where an FCC Form for such request is prescribed. `Informal application' means all other requests for authorization." PAGENO="0121" 292, Te1eg1o~~, in its comments, has the PAGENO="0122" 118 -102- 293. On the same subject, ACLU states: "Although the FCC notice is silent on this question, ACLU believes it to be in the public interest to permit educational, municipal, and non-prof it stations to employ STV for portions of their broadcasting schedules. STV programming by such stations could be expected to add to the variety of services available to the public, as well as contribute to their financial self-support." 294. Because, as stated before, we have no adequate record on which to base decisions about STV operations by noncommercial educational stations and because the whole matter of educational television is under broad study on many fronts, deci- sions on the subject cannot and should not be made, 51/ However, if parties having STV authorizations wish as part of their programming to broadcast educational or cultural programs in conjuncation with non-profit educational organizations, such pro- posals will be given consideration in connection with their other proposed programming. In this regard, we point out that we are of the opinion that programming of an educational and cultural nature is certainly in the public interest. This is the main reason for our having adopted a rule requiring that at least ten percent of STV broad. cast hours be devoted to other than feature films and sports. WIRE OR CABLE SUBSCRIPTION TELEVIS~~ Preliminary Statement 295. As stated in paragraph 4 above, the scope of this proceeding was enlarged by the Further botice to include not only over-the-air STV, its previous subject matter, but an inquiry into what the role of the Federal Government should be, if any, with regard to the establishment and manner of operation of wire or cable SW, and how that role should be effected, This was done, as the Further Notice mentioned, because of the change in conditions since this proceeding began in 1955. An important change has been the rapid growth of CATV systems. 296W Because of the necessity to avoid frustration o~ our television assign- ment plan and policies under Sections 1 and 307(b) of the Act by the existence and growth'of CATV systems throughout the nation, on March 4, 1966, we asserted jurisdic'i tion o~zer all such systeffis"-micrswave-served an~ off-the-air--and adopted rules designed to uib~caur~s~stamat- thetotal't~levision system.52/ In connection 51/ In passing, we note that Section 73,621 of the Rules provides that educational stations may not broadcast programs for which consideration is received. This rule, of course, was adopted in a context devoid of STV possibilities. We also note that we have in the past authorized noncommercial educational television stations, on an experimental basis, to transmit "scrambled" signals which could be viewed "unscrambled" on specially adapted equipment. An example is that of four such stations in California which have been authorized to present, in that manner, programs designed to meet the educational needs of the medical profession and not deemed suitable for the general viewing public. The programs are broadcast to hospitals and educational institutions for viewing by physicians, hospital staffs, and others. We shall continue to autho- rize such operations on the same basis where application is made and it appears appropriate to do so. L2/ Second Report and Order, Docket Nos. 14895, 15233, 15971, 2 F.C.C. 2d.725. PAGENO="0123" 119 -103- with the proceeding in which the CAW rules were adopted, some parties had expressed the fear that CATV might become a vehicle for STV or combined CATV- STV operations whichwould siphon programs from free TV and.possibly result in a transition from free TV to STV. Because of this, we invited and received comments therein on the question of whether it would be feasible or desirable to have STV operations over CATV, whether any conditions might be necessary to protect the interest of the public in free TV, and, if so, what condi- tions might be appropriate. 297. The Further Notice herein stated that, in addition to com- ments filed in the instant proceeding on the subject of wire or cable STy, we would take notice of the above-mentioned comments (in Docket No. 15971) on the matter of the CATV-STV relationship. In addition to comments on the general topic of wire or cable STV, the Further Notice requested comments on problems that might be encountered by parties proposing to bring over- the-air STy to communities in which there were established CATV systems. These included much questions as whether (if the subscribers do not have antennas because their only reception is by Ce~.TV) it would be necessary to have built-in antennas in decoders attached to sets of subscribers; whether a single decoder attached to the antenna of the CATV system which delivered an unscrambled signal along the cable would suffice, and, if so, how collec- tion of charges could be made; and whether the C~TV rules on carriage of signals of local stations would apply to carriage of STV stations. Having considered all of the comments, we set forth below the princi~ml material therein and then our conclusions. Jurisdiction 298. As to the question of jurisdiction of the Commission over wire or cable STV, several parties, without giving detailed legal arguments on the subject, state their views. Thus, Telemeter says: `Telemeter is aware, of course, of the Commission's assertion of jurisdiction over non-microwave served CATV's and of the pending legislatiàn in Congress to support that jurisdiction. In the case of the closed-circuit subscription operation by wire, however, which involves no use of frequency space what- soever, and in the case of the GP~TV system, which, itself, ori- ginates subscription television programs (as distinguished from the off-the-air pick-up or microwave-fed subscription programs), there should be no question that tiG federal regu- latory authority exists." 299. CBS is of the opinion that the Commission does not have juris- diction over cable STy. It states that although jurisdiction was asserted over CATV, "an all important element was the fact that television stations' signals were extended by CATV systems beyond the area or zone to be served by the originating station, a factor not involved here." (It goes on to say that even if the Commission had such jurisdiction it should not regulate PAGENO="0124" 120 -104- cable STy because it does n~t involve scarce spectrum space.) On the other hand, Taft asserts, simply, that there is no jurisdictional problem with Commission action in this area because it has established such ,juris- diction over all forms of CaTV. 300. ABC expresses the following view; "ABC believes that the Commission should apply the same standards to pay-TV by wire as it applies to pay televi- sion by `broadcasting.' The logic of the Commission's assertion of jurisdiction in CATV would support jurisdic- tion over pay-TV by wire. Although the Commission would appear to have no power to A horize pay television by wire, it should, in ABC's view, apply whatever regulatory policies it determines to be appropriate, to wire television to the extent found necessary to protect the `public interest in the larger and more effective use of radio." Finally, Trigg-Vaughn states: "We think it premature to consider the question of the Com- mission's jurisdiction to regulate pay television systems conducted by wire. We believe that it is too early to tell how and in what way pay television by wire should be auth- orized. Experiments with off-the-air systems of pay tele- vision have been conductedand have produced meaningful operating data- - the same cannot be said with respect to the relatively limited wire pay television systems." How CATV Systems Can sick Up Scraji~blecL STV Sianals 301. Concerning the speciftc questions raised in the Further Notice about how CATV systems might pick up signals of STV stations, we are in- formed by Zenith-Teco and Telemeter that it is technically feasible to attach a decoder at the CaTV hea&-~nd that would unscramble signals of an STV station and transmit them to sets of subscribers. However, Zenith-Taco states that it is doubtful that any STV station would permit this since it would defeat the purpose of having single subscribers pay charges on a per-program basis, and Telemeter says that any flat rate arrangement with the CATV operator would be commercially impractical since program suppliers for box-office product prefer to participate in the gross receipts on the basis of percentage arrange- ments. Moreover, Telemeter states, such an arrangement implies a flat fee for CATV subscribers for STV service, and "the public has shown a reluctance to pay a flat fee for blocks of entertainment." 302. Both of these parties also indicate that it is technically possible to have CATV systems pick up scrambled signals, transmit them along the cables, and have them unscrambled by decoders attached to sets of STV subscribers just as if the signals had been picked up off the air. No built-in antennas would be necessary in the decoders. PAGENO="0125" 121 * 105- of. cATV Rules on~ Carriaae o~Local Stats 303. Telemeter states that since SW stations will probably be required to broadcast conventional commercial programming part of the time, it seems logical that the CATV rules on carriage of local stations should apply. AcLU expresses the opinion that it would be consistent with the present CATV carriagerules requiring carriage of local conventional tele- vision stations to require CATV systems to carry STV programming of local STV stations, for otherwise millions of families might be deprived of free TV programming without having the right to subscribe to STV services that replaced them. On the other hand, the Joint Committee argues that at least until such time as the Commission is prepared to evaluate the significance of CATV generally with regard to free TV, it should prohibit CATV systems from carrying STV programs broadcast by STV stations; and it should also prevent STV stations from entering into arrangements whereby SW stations would use CAW systems as outlets for STV programming. Will CATV Turn Into .STV? 304. The principal arguments in the instant proceeding as well as in Docket No. 15971 on the matter of CATV-STV relationship revolve about the question of whether CATV might develop into an STV or a combined CATV-STV operation which would siphon programs from free TV. It is urged that revenues obtained from large CATV operations, in major cities, for example, would permit the CATV operators to outbid free TV for programs, and that a transi- tion from free TV to STV might thereby occur. It is argued that this is not only unfair because CATV operations would be using free TV, which makes CATV possible, as a stepping stone to SW operations that will harm free TV, but that such undermining of free TV is contrary to the public interest. Various parties point to cases where there is already program origination by CATV systems and imply that this shows the dir~sction that will be followed. STV would thus enter by the back door, using the financial base created and made possible by free TV. If it is to enter, it is said, i~ should enter by the front door after appropriate proceedings. Some suggest that the approp- riate proceedings should include trial STV operations over CATV systems similar to the Hartford trial in order to develop information helpful to arriving at decisions on the subject. It is also urged that if importation of distant signals by CATVs is. prohibited, the systems may well have to turn to program origination to survive. Still another argument is that if copy- right law is modified to require CA~IVs to pay fees for programs, the strength of the argument against program origination over CATV which derives its base from free TV is lessened. 305. On the other hand we are told that there can be no objection to program origination by CATV systems in areas where there is no television station; that in the few cases where there is presently program origination by CATVs it is programming of a public interest nature such as local news, PAGENO="0126" 122 106- local sports, and the like; and that C~TV alone or in combination with STV may well pose an economic threat to the present system of broadcasting, but that system i~ not central to the economic structure of this country, and what is central is whether or not the public is being served in the best possible way- -CATV with multiple channel capacity can provide a wider diver- sity of programs to the public. Conclusions Carria&e of Local STV Stations by CATVs. 306. As to views on jurisdiction (see patas. 298-300), it may be noted that Telemeter makes a three-fold distinction: (1) STV systems, like the now defunct system that operated in Los Angeles and San Francisco, in which the programs travel entirely by cable from studio to sets of subscribers, (2) C~.TV systems which, in addition to their traditional function of receiving and retransmitting conventional TV signals, also originate STV programs that travel by cable to sets of subscribers, and (3) CATV systems which, in addition to traditional functions, transmit over-the-air STV programs which they have picked up either off the air or by microwave. ~/ It denies jurisdiction in the first two categories and appears to concede it in the third. Although it is not clear, it seems that CBS limits its statement to the second category, but that it would, g ~ortigr~, deny jurisdiction in the case of the first. Its position with regard to the third is not certain. Taft appears to suggest that we possess jurisdiction with regard to the second and third, and is silent on the first--a view similar to that of ABC. 307. We think ~it clear that we have jurisdiction in the third category. Appendix C of the aforementioned decision on CATV systems (sj~I~ note .51) sets forth in detail the basis on which we asserted our jurisdiction over such systems. We have concluded that STV is broadcasting and a bene- ficial supplement to present free TV, and have taken measures to assure its effective integration into the total TV system. If necessary to protect our television assignment plan and policies, it is entitled to the sams protection as conventional television, and for the same reasons stated in the aforementioned Appendix C. However, since STy is different from ordinary broadcasting in that it involves the scrambling and unscrambling of signals, and since we anticipate that it generally will not broadcast programs normally available on free TV, different considerations apply. 308. To the extent that, under our new rules, STV stations will be required to broadcast at least the minimum number of hours of free TV programs required by Section 73.651 of our rules, such stations are conven- tional stations and, for their non-subscription programming, are entitled to the pvotection of our CATV rules, including the carriage and non-duplication provisions. As~to the STV programming, we are inforjued that a decoder attached ~/ To the best of the Commission's information, there are presently no STV operations in the United States in any of these three categories. There is, of course, some program origination by cATV systems, but as far as the Commission knows these programs are available to CATV subscribers at no addi- tional charge. PAGENO="0127" 123 -107- to the head-end of a CATV system could unscramble an STV signal and transmit the decoded signal along the cable like any other TV signal. However, this is said to be commercially impractical, and we dismiss it from further con- side~ation. It is also said that existing CATV systems could carry scrambled signals along a cable to decoders, attached to sets of subscribers, which could unscramble them just as it they had been picked up off the air. However, we shall not at this time require that CATV systems carry s~crambled signals of local STV stations. The matter will be given consideration, if warranted, at a later date. 309. Should an STV station and CATV systems within the Grade B contour of the conventional service of that station wish privately to arrive at agreements whereby the CATVs will carry STV programming of the station, the public interest might be served (by having the STV signal of the station ex- tended within its conventional TV service area). We shall therefore give consideration to proposals of STV stations wishing to make such arrangements. However, no party holding or applying for an STY authorization shall consummate such an arrangements without Commission approval thereof. 310. It should be noted that we here speak of permitting such carriage of STV signals by CATV systems within the Grade B contour of the STV station. We do not now intend to permit it outside of that contour. This will confine STV to the communities which we have selected for that service. Because of this, we see little merit to the Joint Committee argument that STV-Ct~TV arrmngements should be prohibited (see pare. 303). As to the argument of AcLU that CATV systems should be required to carry STV signals so that those who have lost free TV service may have the opportunity to vieV the STY service which pre- empted the free TV time, we reply that the considerations that led to our limiting STY to five-station communities, with one STV station to a community, as a safeguard that would assure adequate free TV programming in such markets, apply to all viewers in the community, whether they use CATV or pick their signals off the air. The question of whether CATV systems outside the service area of an STV station should be permitted to carry its STV programming is one to which we shall devote further study. 311. A final matter should be mentioned which may require future action. Of tap the CATV operator, in installing the cable connection, dis- connects the TV set from the outdoor antenna. This can make it impossible for the subscriber to receive a local TV station directly off the air. Under the provisions of Section 73.1033(c) of the Rules, we have provided that if a CATV system dc~es not carry the conventional signals of a local TV station it must offer and maintain a switching device for each subscriber so that the subscriber may choose between viewing the local station off the air or viewing other stations on the cable. This need not be done if the subscriber indi- cates in writing that he does not desire the device. With regard to STY, it is possible that, if the CATV operator has disconnected the set from the outdoor antenna, is not required to carry the scrambled signal of the local STV station (see para. 308), and has not made arrangements with the local STY station to carry its scrambled STV signals (see pare. 309), the CATV subscriber might not be able to pick up the scrambled STV signals off the air, and thus PAGENO="0128" 124 -108- might be precluded from becoming an STV subscriber. At a later date, we may need to consider whether to adopt a rule for STV similar to Section 74.1033(c), or to take other measures that would leave the TV set of the CAXV subscriber accessible to STV service. Proaram Origination by CATV systems. -. - 312. As to the other two types of cable STV mentioned by Telemeter (see para. 306), we make no decision about the question of jurisdiction or other matters at this time. There are problems in this area which we wish to study further in the light of our decisions with regard to over-the-air STy, possible changes in the copyright law with regard to C&TV, and kindred subjects. 313. Authority for the adoption of the rules herein is contained in Sections 3(o), 4(i), 301, 303(a), (b), (d), (e), (f), (g), (r), and 307(b) of the Communications Act of 1934, as amended. 314. Accordingly, IT IS ORDERED, That the rules contained in the attached Appendix D ARE ADOPTED, effective , 1967. 315. IT IS FURTHER ORDERED, That, in view of our having adopted today a Second Further Notice of Proposed Rule Making in this proceeding proposing technical standards for over-the-air subscription television systems, and in view of our intent to study further the subject of cable subscription television, the proceeding is not terminated. FEDERAL ~)NMUNI C~TIONS COMMISS ION Ben F. Waple Secretary nn4 (~.h1~ STy Wt~ R~.1~-.A t~. CATV Attachments PAGENO="0129" 86-399 0 - 67 9 PAGENO="0130" 126 APP~NDI~ SUMMARY OF HARTFORD SUBSCRIPTION TV TRIAL - AND ZENITH-TECO PROJECTIONS BASED, THEREON' The information presented here except where otherwise indicated, is based on material contained in the Zenith-Teco corn- ments and the RKO General response to the Commission questionnaire It is intended to provide a convenient summary of the facts and conclusions as reported by the petitioners Part I Facts About the Hartforçl SubscriDtion Television (STV) Trial 3 Year F~cpeç1~en~ce 1. This service was introduced by RKO's station WHCT, Channel 18 in June 1962 in Hartford, Connecticut, which is part of the Hartford- New Haven television market. This market is served by other stations affiliated with all 3 networks. - The net weekly circulation of this.market. is approximately 800,000 homes (ARE, 1965) which is the number of homes estimated to be tuned in at least once a week to the largest station WTIC, Channel 3. The net weekly circulation of WHGT Channel 18, prior to. its STV experiment was 108,000 homes. 2. During the evening hours, and Saturday and Sunday afternoons, station WHCT, Channel 18, transmitted a scrambled signal which could be viewed intelligibly only by those having a decoder attached to their set. The decoder was installed for a $10 installation fee and a rental fee of $3.25~per,month. All service calls were made free of charge. 3. By means of a weekly program schedule (supplemented by newspaper ads and listings), each subscriber was advised of the sub- scription features to be shown, the time and the price, and was given a code number for each feature. For example, the movie "What Ever Happened to Baby Jane" was listed for a price of $1 and was shown Monday, July 1, 1963 (Code Number ll5E), and Thursday, July 4 (Code Number hiD), at 9 P.M. Subscribers wishing to see the movie simply set the code numb~r in the decoder and the picture became unscrambled. The code number o~ each feature viewed and the price of the feature was automatically printed on a tape, which the subscriber removed each month and mailed to RICO with his check for the total amount for the programs viewed plus the monthly rental charge. 4. RICO intended to commence operations after 2,000 decoders had been installed, and "looked toward installation of 10,000 decoders by the end of the first year of trial. A maximum of 50,000 subscribers is contemplated . . . ." J,/ Actual operations started with fewer than j/ FCC R.~port and Decision, February 23, 1961; Par. 8. PAGENO="0131" 127 200 decoders on June 29, 1962, and progres~e~ through three years of operation, as follows: Number of Subscribers at Ifl!~11ed ~onnec~ End of Year First Year 3,183 422 2,761 Second Year ~ 1,386 4,769 Third Year ~Z~j_ .L~2Q. Three Year Total 8,329 3,478 4,851 According to Zenith..Teco, "at the close of the second year of trial operations, R1(0 decided to limit the number of subscribers to 5,000 f or the remaining third year of trial authorized because business prudence and fairness to subscribers did not warrant further sub-. stantial expansion Without some assurances that the Connuission would authorize the trial beyond the third year." The 4,851 STY subscribers at the end of the third year represented 0.67. of the net weekly cir.. culation in the TV market or 4.57. of WHCT'~ net weekly circulation prior to its STY operation. 5. Zenith-.~~, disputes the contention that STY is a service which only the wealthy can afford. The following table shows the income level and program expenditures of the Hartford subecrjber8: Hartford Subscribers By Family Income Level Proportion Proportion Average of Total U,~. of Total Weekly Program ~ome Levels __________ Subscribers 0 $3,999 29.17. 1.57. $0.99 $4,000 6,999 32.5 40.8 1.25 7,000 9,999 21.0 43.3 1.23 10,000 and Over T0T~.Ls (rounded) 100.07. 100.07. $1.22 (avg.) ~/ Statistical Abstract of .the U.S. 1964, p. 338. PAGENO="0132" 128 6. To interest new subscribers RICO, from time to time, did extensive advertising, used door~to..door specialty salesmen, made offers of free decoder rentals, gave program discounts and used other promotions. During the first two years, RiCO was able to obtain only a limited number of first subsequent run (neighborhood release) motion pictures and practically no first run (downtown release) movies. Most of the movies during this period were over six months old. In the third year, subsequent first run movies were available in greater number. 7. The turnover rate (the number of subscriber homes discon~ nected as a percent of the average number of subscriber homes) was 277. the first year, 367. the second year and 347. the third year. Turnover results from such factors as subscribers moving from the community, `insufficient use to justify expenditure for decoder,' rental and credit delinquencies. 8. The following table summarizes the income and expense statements of the Hartford tr~a1 operation: .(~OO) First Second Third Total 3 Yea~ Year , Year,~. Net Income Totals ` 134 320 436 890 Installation 30 36 . 20 86 Decoder Rental 30 92 154 276 Program 74 192 262 528 Expenses Total ~1,487 1,687 l~254 4,428 Program Product 31 . 75 ` 110 216 Other Program expenses 17 68 66 151' Time Charges paid to~ WHCT 3/ .698 799 482 1,979 Technical . 157 146 106 409 Sales, Advertising and Promotion 74 112 60 246 Depreciation 4/ 375.~ 308 289 972 Other General and Administrative 135 179 141 455 Operating Loss (1,353) (1,367) (818) (3,538) 3/Stat~on was paid $300 per hour Zenith Teco comments suggest that payment of $400,000 per year would normally be made to station in market of this size. If sueh $400,000 were paid in this case, 3 year loss would be $2,759,000 instead of $3,538,000. Decoders cost $125.00 each arid, for the test were comp3a tely depre'~ `ciated during the three-year period'. ` . ` ~J For this year cost of decoders purchased was reported rather than depreciation. PAGENO="0133" Program Income Net Program Income 2/ Gross Decoder Rental Inconie.8/ Net Decoder Rental InCome 2/ ~/ ~.mount actua],]~, charged fc PAGENO="0134" 130 jØ* I.~ itS commentS, ZenithTe~0 has prepared business projecti0~~S itLus trating the viabilitY of STV under various ~8sumptt0l'~S These statements show that an STV franchise ~o~td brea%c even with 20,000 subscribers spendiflE an average of $65 per year for programs and $39 for decoder rental' If the number of subscribers is more, or the ~vetage program expendttUt~ is higher, the business shoWs profits as indicated: SummatY of Business ProjeCtiofl5 by ZenithTCCO Number of Subscribers Cost of and average Program Sales Equipment 7. of 7. of ~ Sates ~~j~met $ 65/yr. 2,120 2,711 1 07. 0% 20,000 subscribers: 75/yr. 2,320 2,711 119 s , 4 65/yr. 4,240 5,393 619 14 40,000 subscribers: 75/yr. 4,640 5,393 855 ~ 16 65/yr. 7,950 10,087 1,780 22 18 75,000 subscribets 75/yr. 8,700 10,087 2,223 26 22 65/yr. 10,600 13,441 2,591 24 19 100,000 subsCrib~S 75/yr. 11,600 i3,4~1 3,181 27 24 PAGENO="0135" RESTATEMENT ON A "PER SUBSt,i~.1BER" BASIS OF ZENITh-TECO'S BREAK-EVEN PROJECTION* EXPENSES: Program Product Sales and Commissions Franchise Fee Technical Taxes (Other than Fed.) Supplies, Truck, Bad Debts, Other Depreciation $22.75 8.15 5.20 (57. of Program and Rental Income) 7.93 2.22 3.10 27.09 (almost all for decoders) FIXED EXPENSES: Station Time Administrative Salaries Program Staff Lines and Facilities ASCAP and BNI Fees IBM Equipment Rental Rent Legal, Audit, Insurance, Travel, Telephone, Util- ities, Dues, Maintenance Total Fixed Expenses $300,000 94,000 23,000 32,000 18,000 88,000 15,000 20,000 $591,100 20,000 Subscribers 1.0/ Some of these expenses listed as "fixed," actually do increase slightly with increased income. 1.1/ Zenith-Teco assumes 207. turnover, or 4,000 per year. This gives a total of $40,000 installa- tion income, or $2.00 per subscriber (20,000). * Prepared by Commission staff, VARIABLE DATA INCOME: Programs Decoder Rental Installation Total Income Per Subscriber $65.00 39.00 2.00 $106.00 Break-Even Point $591,100 4- $29.56 Total Variable Expense Gross Margin Before Fixed Expense C' $76.44 $29.56 PAGENO="0136" -.7- ~ipenditUreS and Income once of $~2S plus $6.38 for freigh PAGENO="0137" ?AI~T 3: Zenjtb.~Teco c PAGENO="0138" 134 APPENDIX C 1. Ic is proposed that the following new sections be added to Part 73 of Consnission Rules and Regulations; OVER-THE-AIR SUBSCRIPTION TELEVISION OPERATIONS §73 641 Definitions (a) Subscription Television. A system whereby subscription television broadcast programs are transmitted and received. (b) Subscription televj~sion broadc~sç sam. A television broadcast program intended to be received in intelligible form by members of the public only for a fee or charge. §73.642 Licensing Policies. (a> Subscription television service may be provided only upon specific authorization therefor by the Commission. Such authorization will be isaued only to; (1) The licensee of a television broadcast station; (2) The holder of a construction permit for a new television broadcast station; or (3) An applicant for a construction permit for a new television broadcast station, (b) Application for such authorizations shall be made in the manner and form prescribed by the Commission. If the Commission, upon consideration of such application finds that the public interest, convenience and necessity would be served by the granting thereof, it will grant sOch application. In the event it is unable to make such a finding, the Commission will then formally designate the application for subscription television authorization for hearing and proceed pursuont to the provisions of Section 309(e) of the Communications Act and the Commission's Rules and Regulations applicable thereto. The Commission may impose such conditions upon the grant as may be appropriate. (c) Holders of subscription television authorizations shall complete construction of subscription television transmitting facilities within a period of eight months after issuance of the authorization unless other- wise determined by the Commission upon proper showing in any particular ease. (d) A subscription television authorization will not be issued or renewed for a period longer than the regular license period of the applicant's tele- vision broadcast authorization. (~s) No subscription television authorization shall be granted to a tele- vision broadcast station licensee or permittee, or to an applicant for a construction permit for such a station, having any contract, arrangement or understanding, express or implied, which: PAGENO="0139" 135 -2- (I) Prevents it from rejecting or refusing any subscription television broadcast program which it reasonably believes to be unsatisfactory or unsuitable or contrary to the public interest; or substituting a subscription or conventional program which in its opinion is of greater local or natio~a]. importance; or (2) Delegates to any other person the right to schedule the hours of transmission of subscription programs: ~ however, that this rule shall not prevent a licensee, permittee, or applicant from entering into an agreement or arrangement whereby it agrees to schedule a specific sub- scription television broadcast program at a specific time; or (3) Prevents it from making a free choice of subscription programs, whatever their source; or (4) Deprives it of the right of ultimate decision concerning the maximum amount of any subscription program charge or fee. ~73.643 General operating Requirements. * (a) No commercial advertising announcements shall be carried during subscription television operations except for promotion of subscription television broadcast programs before and after such programs. (b) Charges, terms and conditions of service to subscribers shall be applied uniformly: j~rovided, however, that subscribers may be divided int reasonable classifications approved by the Commission, and the imposition of different sets of terms and conditions may be applied to subscribers in different classifications. (c) Any television broadcast station licensee or permittee authorized to broadcast subscription programs shall broadcast, in addition to its sub- scription broadcasts, at least the minimum hours of programs required by Section 73.651 of the Rules. (d) If a television broadcast station supplies the only Grade A signal to a community, not more than 15% of its non-prime broadcast time (including subscription and non-subscription broadcast time during that period), and not more than 50% of its prime broadcasting time (including subscription and aon-subscription broadcast time during that period) may be devoted to subscription broadcasting; if it supplies the second or third Grade A signal, not more than 25% of its non-prime broadcast time, and 60% of its prime broadcast time; if it supplies the fourth Grade A signal, not more than 50% of its non-prime broadcast time, and 75% of its prime broadcast time; and if it is one of five or more stations supplying a Grade A signal to the community, there is no limitation on the amount of broadcast time that may be devoted to subscription broadcasting. * (a) Except as they may be otherwise waived by the Commission in author- izations issued hereunder, the rules applicable to regular television broadcast stations will be applicable to subscription television operations PAGENO="0140" 136 -3.. §73.644 EquipUlent and Technical OperatinS Requirements. (a) Subscript3.On televjSiofl equipment must be approved in advance by the CommiSSiOU pursuant to the "type approval" and "type acceptance" prO cedureS now established by l~'art 2, Subpart F__EqUiPm~t Type Approval and Type AcCeptanc5~0~ the Commission'5 Rules and RegulationS. Additional proposed rules concerning equipment and technical operating requiret~nts will be announced at a later date. PAGENO="0141" §73.641 Definitions. a construction permit for a new commercial television broad- ~; or (3) An applicant for a construction permit for a new commercial television broad- station: Provided, however, That such authorization will not be issued prior _ssuance of the construction permit for the new station. Moreover, such an authorization will be issued oi~ly for a station the principal com- munity of which is located entirely within the Grade A contours of five or more commercial television broadcast stations (including the station of the applicant), whether the principal community each station is authorized to serve is the same as that of the applicant, or is a nearby community. Only one such authorization will be granted in any community. No such authorization will be granted unless, not counting the station of the applicant, at least four of the stations which include the community of the applicant within their Grade A contours are operatjng stations. (b) Application for si~eh authorizations shall be made in the manner and form prescribed by the . Commission. If the Commission, upon consideration of such application finds that the public interest, convenience and necessity would be served by the granting thereof, it will grant such application. In the event it is unable to make such a finding, the Commission will, then formally designate the application for subscription television a :horization for bs - - pursuant to the provisions of S - - - - - - - Commission's Rules and keg - such conditions upon the ~ 137 APPENDIX D 1. Part 73 of the Commission Rules and Regulations is amended by adding the following new sections thereto: OVER-T}IE-AIR SUBSCRIPTION TELEVISION OPERATIONS (a) Subscription television. A system whereby subscription television broa4~ cast ptograms are transmitted and received. (b) Subscription te4vjsion broadcast ~ intended to be received in intelligible form by members fee or charge. A television b PAGENO="0142" 138. NOTE: No applicationswill be accepted for filing until such time as rules concerning equipment and system performance capability have been adopted in Section 73.644. At that time, the manner of filing such applications, the form, and the content thereof with regard to equipment, technical, and all other matters will be announced. (c) Holders of subscription television authorizations shall complete construction of subscription television transmitting facilities within a period of eight months after issuance of the authorization unless otherwise determined by the Commission upon proper showing in any particular case. During the process of construction of the subscrip- tion television facilities, the holder of the authorization, after noti- fying the Commission and the Engineer in Charge of the radio district in which the station is located, may, without further authority of the Corn- mission, conduct equipment tests for the purpose of such adjustments and measurements as may be necessary to assure compliance with the terms of the authorization the technical provisions of the application therefor and the rules and regulations. The Commission may notify the holder of the authorization not to conduct tests if such tests appear to be contrary to the public interest, convenience, and necessity. Upon completion of the construction, the holder of the authorization shall submit a detailed showing that compliance with the terms of the authorization, the technical provisions of the application theref or, and the rules and regulations has been achieved. No subscription television operation shall commence until requirements of this paragraph have been fulfilled and operation has been specifically authorized by the Commission. (d) A subscription television authorization will not be issUed or renewed for a period longer than the regular license period of the applicant's television broadcast authorization. Renewals of such authorizations will usually beconsidered together with renewals~ of the regular station authorizations. (a) No subscription television authorization or renewal thereof shall be granted to a party having any contract, arrangement, or understanding, express or implied, which: (1) Prevents or hinders it from rejecting or refusing any subscription television broadcast program which it reasonably believes to be unsatisfactory or unsuitable or contrary to the public interest; or substituting a subscrip- tion or conventional program which in ~ts opinion is of greater Local or national importance; or PAGENO="0143" 139 -3- (2) Delegates to any other person the right to schedule the hours of transmission of subscription programs: Provided, however, That this rule shall not, prevent `a licensee, permittee, or applicant f rum entering into an agreement or arrangement whereby it agrees to schedule a specific subscription television broadcast program at a specific time or to schedule a specific number of hours of subscription programs during the broadcast day (or segments thereof) or week subject to Commission approval; or (3) Prevents or hinders it from, or penalizes it for, making a free choice of subscription programs, whatever their source: Provtded, however, That upon making a satisfactory showing to the Commission that the public interest would be served by permitting the licensee, permittee, or appli.. cant to enter into an agreement or arrangement whereby it agrees to obtain all or a specified portion of its programming from one or more sources, this rule may be waived; or (4) Deprives it of the right of ultimate decision concerning the maximum amount of any subscription program charge or fee. (f) No subscription television authorization or renewal thereof shall be granted to a party having any contract, arrangement, or understand- ing, express or implied, with other parties `the provisions of which do not comply with the following policies of the Commission: (1) Unless a satisfactory signal is unavailable at the location where service is desired, subscription television service shall be provided to all persons desiring it within the Grade A contour of the non-subscription television service provfded by the station broadcasting subscription programs: Provided, however, That geographic or other reasonable patterns of installation for new subscription services Shalt be permitted: ~ provided further, That, for good cause, service may be terminated. (2) Charges, terms and conditions of service to subscribers shall be applied uniformly: Provided, however, That subscribers may be divided into reasonable classifications approved by the Commission, and the imposition of different sets of terms and conditions may be applied to subscribers in different classifications: And provided further, That with- in such classifications deposits to assure payment may, for good cause, be required of some subscribers and not of others; and, also for good cause, if a subscription system generally uses a credit-type decoder cash operated decoders may be installed for some subscribers. (3) Subscription television decoders shall be leased, and not sold, to subscribers. PAGENO="0144" r parties con including sp nted at a par `~~y(ors 140 -4- prevents or hinders si r party fr sources. The applicant shall use due diligence to a and nature of arrangements to which it is not a party. §73.643. General operating requirements. (a) No commercial advertising announcements shall be carried during subscription television operations except for promotion of subscription television bt~oadcast programs before and after such programs. (b) Subscription television broadcast programs shall comply with the following requirements; (1) Feature films shall not be broadcast which have had general release in theaters anywhere in the United States more than two years prior to their subscription broadcast: Provide4, however, That during one week of each calendar month one feature film the general release of which occurred more than ten years previously may be broadcast, and more than a single showing of such a film~may be made during that week. NOTE: As used in this subparagraph, "general release" means the llirst run showing of a feature film in a theater or theaters in an area, on a non- reserved seat basis, with continuous performances. For first run showings of feature films on a non-reserved seat basis which are not considered to be "general release" for purposes of this subparagraph, see note 45 in Fourth Report and Order in Docket No. 11279, 8 F.C.C. 2d ). (2) Sports events shall not be broadcast which have been televised live on a non-subscription, regular basis in the community during the two years preceding their proposed subscription broadcast; Proyide4, however, That if the last regular occurrence of a specific event (~g., summer Olympic games) was more than two years before proposed showing on subscrip- tion. television in a community, and the event was at that time televised on conventional television in that community, it shall not be broadcast on a subscription basis. PAGENO="0145" PAGENO="0146" 142 Attachment B Before the B FEDERAL C0MMUNIC~TIONS COMMISSION Washington, D.C. 20554 in the Matter of Amendment of Part 73 of the ) Docket No. 11279 Commission's Rules and Regulations (Radio Broadcast Services) to provide for Subscription Television Service. ) SECOND FURTHER NOTICE~0F PROPOSED RULE MAKING Adopted: ; Released: By the Commission: 1. Further notice of rule making is hereby given in the above- entitled matter. 2. The Commission on this date has adopted a Fourth Report and Order in this proceeding which establishes a nation-wide, over-the-air subscription television (STV) service and promulgates rules governing that service (FCC 67- ). Those rules which the Coi~mission has adopted do not include any that govern the performance capability of STV systems except for Section 73.644, which states that STV systems must be type accepted in advance by the Commission pursuant to the type acceptance procedures estab- lished by Part 2, Subpart F,of the Commission's Rules--Equipment Type Approval and Type Acceptance. The standards to be used in type accepting STV systems, however, have not been established. instead, a NOTE to Section 73.644 states that additional rules concerning system. performance capability will be adopted after a furt~her rule making proceeding in this docket. 3. Accordingly, the Commission is adopting the instant document inviting comments on proposed rules governing STV system performance capa- bility. It is the hope of the Commission that such rules can be adopted without undue delay since, as a NOTE to Section 73.642(b) of the Rules statis, no applications for STV authorizations will be accepted for filing until such time as they have been adopted. Having found that an over-the-air STV service is in the public interest, it should be given a chance to pro- vide benefits to the public as soon as possible. 4. In the Fourth Report and Order (pares. 174-185), the Commission decided that it would not limit STV operations to the use of a single tech- nical system. Instead,it chose to permit the use of any system so long as it could meet the system performance capability standards established by the Commission. The Commission has studied detailed sp~cifications of present or proposed SW systems submitted by parties to this proceeding. This has helped it in the formulation of the proposed rules contained in the Appendix attached hereto, on which comments are invited. These rules would require PAGENO="0147" 143 -2- adequate performance of STY systems in serving their subscribers and in avoiding any increase of interference to conventional TV services. 5. As stated in paragraph 213 of the Fourth Report and Order, we do not presently foresee the need for special technical operating re- quirements for STY, and in the absence of such requirements the operating requirements for conventional television station operation will apply. Should any parties believe that special rules on the subject are necessary for STV, their .uggestions and comments would be welcome. 6. Pursuant to the procedures set forth in Section 1.415 of the Commission's Rules and Regulations, interested parties may file comments on or before 1967. and reply comments on or before 1967. All relevant and timely comments and reply comments will be considered by the Commission before final action is taken in this proceeding. In reaching its decision in this proceeding, the Commission may also take into account other relevant informttion before it in addition to the specific comments invited by this Notice. 7. Authority for the amendments proposed herein is contained in Sections 4(i), 301 and 303 (a), (f), and (r) of the Communications Act of 1934, as amended. * 8. In accordance with the provisions of Section 1.419 of the Rules and Regulations, an original and 14 copies of all comments, replies, pleadings, briefs, and other documents filed in the proceeding shall be furnished the Commission. F~D~RAL COMMUNICATIONS COMMISSiON Ben F. Waple Secretary Attachment PAGENO="0148" 144 APPENDIX 1. it is proposed that Section 73.644 of the Commission's Rules and Regulations be amended by the addition thereto of a new paragraph (b) as follows: S §73.644 Equipment and system performance requirements. * * * * ` * (b) The criteria ~or type acceptance of subscription television systems are as follows: (1) The system shall be capable of operating by delivering a suitable signal to the antenna input terminals of receivers designed for reception of a signal meeting technical standards for color or monochrome television transmission and accompanying aural signal as set forth in Subpart E of Part 73 of the Commission's Rules. For the purpose of this requirement, a `suit- able signal' shall be one which, except for distortion or changes caused by the transmitting antenna, receiving antenna or entering in the propagation medium, complies with all technical standards for color or monochrome trans- mission and accompanying aural signal set forth in Part 73 of the Commission's Rules. (2) Spectral energy in transmission shall not exceed limitations set forth in §73.687(i). (3) No increase in width of the television broadcast channel (6 Nc/a) shall be required. (4) Visual power (peak or average) and aural power shall not be neces- sary in excess of that now authorized, to provide coverage equal to that obtained by normal transmission standards. (5) The encoded visual and aural programs shall be recoverable without perceptible degradation as compared to the same programs transmitted in accordance with Commission monochrome and color standards. (6) Internal modifications to subscribers' receiv~rs shall not be required. (7) Interference to conventional television and subscription television, co-channel and adjacent channel, monochrome and color, shall not exceed that occurring from conventional television broadcasting conducted in compliance with the standards of Subpart E of Part 73 of the Commission's Rules. (8) Susceptibility to interference of any kind shall not be greater than with conventional television broadcasting conducted in compliance with the standards of Subpart E of Part 73 of the Commiss~Lon's Rules. PAGENO="0149" 145 Mr. MACDONALD. Thank you very much. Actually you touched on what I think is a very basic feature of these hearings, the concern of some members of the subcommittee and the full committee, about the right of the FCC jurisdiction to put out licenses for subscription TV. While doing homework during the week on this matter, I couldn't find except one case in which the court agreed with you that you did have jurisdiction. I know it will be very helpf iii for the committee if you can outline why you believe you do have jurisdiction because I think that is the bedrock of this entire hearing. Mr. HYDE. Mr. Chairman, I believe it might be well to bring up to date the memorandum of law that was submitted by the General Counsel. I think the only case in point would be the appeal from the Commission's decision authorizing the trial in Hartford, We recognize, of course, that this was- Mr. MACDONALD. Yes, but I have the language here. I would be interested. The court affirmed the Commission's decision but it noted that "distinguishing characteristic of the Federal Communications Commission authorization of subscriptioii TV in this case is the ex- perimental or trial basis upon which it is to operate for the duration of its 3-year authority." This was page 873 of that decision. It would seem to me that al- though you buttressed the fact that fundamentally you do have juris- diction, I would think if I were a lawyer on the other side, and I am not, that you could use that very case against the fact that the court felt that you had jurisdiction for an experiment but not on a full-time basis. I wish that you would explain your position about this. This is not going into the merits of the thing that is pending before you but it is just the basic question that we are concerned with here. Mr. HYDE. Mr. Chairman, you are quite right in pointing out that the decision we have just now cited was an appeal from a grant for experimental authorization and to sustain the Commission's power to grant the authority for an experiment would not necessarily imply that we had authority to grant authority for a regular service. But we do not base our assertion of authority and responsibility on this case alone. I think I PAGENO="0150" 146 But what is the new technology basically about this? It is just a way of getting money, is it not? Mr. HYDE. It is a combination of technology and service concepts. This is characteristic of developments in communications. New con- cepts are introduced from time to time in telephone message service for one thing. The after 9 plan was an entirely new concept. There are new categories of mobile services that have come on from time to time. It will be remembered that we started first with use of radio for safety of life at sea. Then we got into such obvious safety services as police. Then we progressed to where we used radio for dispatching of trucks. We have a whole host of new services that were never thought of at the time that the Communications Act ~as first framed. I think it was very wise on the part of Congress that they did give the licensing agency the flexibility necessary to provide for these new uses as they were developed. Mr. MACDONALD. We are operating under the 5-minute rule. I am going to hold myself to it. I just have one other question which has been bothering me and it is a very small question perhaps. On page 4 of the report by your Subscription Television Com- mittee-again I am not going into the merits of it, I just want your observation on it-you talk about feature films and according to what I read the main thing that went well in Hartford were old films and sports. I suppose that would be true on a nationwide basis as well. Mr. HYDE. The Committee report-I am referring to the FCC's Committee on Subscription Television-pointed out that perhaps the staple and backbone of the Hartford experiment were feature films which had not been made available to conventional TV. Mr. MACDONALD. And also sports. Mr. HYDE. And sports. Mr. MACDONALD. I repeat, I am under the 5-minute rule and I want to adhere to it. Since I follow sports I could not quite figure out the attitude about the sports feature in pay TV when it says sports events may not be broadcast on STV which were regularly televised within the com- munity within the 2 years preceding the proposed STV broadcast. My question is this: Is that sort of like the option that professional football players have, say the Redskins, although they have broadcast on so-called commercial TV, not so-called commercial TV but coni- mercial TV, if they wanted to they could play out their option and not broadcast on commercial TV for 2 years and then be locked up com- pletely by pay TV? Mr. HYDE. I believe it was the Committee's thought that the rule they have suggested here would prevent what is called in the trade "siphoning" of spectacles now shown on free TV over to pay TV. Mr. MACDONALD. Right. Mr. HYDE. This 2-year period was a test to determine whether or not the spectacle about to be shown was one that would have been free except for subscription TV use. Mr. MACDONALD. The answer to my question then is "Yes." If the Redskins or the Forty-Niners or anybody, the Chicago Bears, the Boston Patriots, don't want to go along with commercial TV for a PAGENO="0151" 147 2-year period, then to all intents and purposes they can refuse to be shown on commercial TV and can only be seen on pay TV. Is that right? Mr. HYDE. For 2 years that would seem to be the result, yes. Mr. MACDONALD. No, the 2-year period is just the period they play out their option. Mr. HYDE. That is right. Mr. MACDONALD. They penalize themselves for losing commercial revenue for 2 years. But then they go completely pay TV, is that right? Mr. HYDE. Yes. Mr. MACDONALD. In other words, it is conceivable that if all the major league teams and baseball and football decide to play out their option, there would be no sports on TV commercial, so-called free TV, at all after a period of 2 years. Is that correct? Mr. HYDE. May I say this point has been made in the discussion before us and we will have to examine that. I think we are getting into the issues of the hearing before us and you will excuse me if I say that we have to study that. Mr. MACDONALD. Thank you very much. Mr. Kornegay. Mr. KORNEGAY. Thank you, Mr. Chairman. Mr. Chairman, it is nice to see you here this morning. Pursuing the question of jurisdiction raised by the subcommittee chairman, I want to build as much a record on this point as I can. As I gather from what you said to the chairman, Mr. Chairman, there is no question in your mind or the mind of the Commission about the fact that the present law gives you the authority to authorize the establishment of subscription television throughout the country? Mr. HYDE. The Commission does take the position that it has the authority and it has the responsibility to act upon the various peti- tions that have been addressed to the Commission. Mr. KORNEGAY. How do you reconcile that position with the legisla- tive history or with the history of events relating to this matter that are enumerated a~nd well set forth in this statement? It was in 1958 when the House Committee on Interstate and Foreign Commerce, February 6, adopted a resolution expressing the sense of the committee that FCC should not grant authorizations for subscrip- tion television operations contemplated in the first report unless and until the Communications Act of 1934 is amended so as to specifically empower the Commission to grant such authorization. I was not here at that time but I gather from your statement that this resolution passed by this committee expressing the sense of the committee and was not in fact passed by the Congress. Is that right? Mr. HYDE. Congressman Kornegay, that would be correct. I do not want to indicate by this any lack of respect for the views of the committee at all. The committee did authorize the experiment. Mr. KORNEGAY. I am not raising the point to put you on the spot. I just want to get in the record as to where we are. I don't know. Mr. HYDE. As a matter of law I would assert that the resolution of the committee did not amend or modify the statutory responsibility already vested in the Commission. PAGENO="0152" 148 operation and that is We would now welcome congressional guL~ Mr. KORNEGAY. Going back to 1959, prior to the adoption of the reso- lution which you referred to on page 5 of your statement, did the Com- mission request the committee to take action on this resolution? Mr. HnE. I do not believe we did. .1 think the idea originated with the committee. I think the committee became concerned about the development. A number of bills, I am told, had been introduced regarding the concept of pay TV. I am sure these matters brought it to the attention of the committee. Mr. KORNEGAY. Was that resolution of March 26, 1959, actually passed by the House? Mr. HYDE. To the best of my knowledge there has been no resolution by the House. Mr. KORNEGAY. I thought I would go into this because it was not spelled out in your statement. Mr. HYDE. We undertook to recite the entire legislative record here. If I omitted anything it was an oversight. Mr. KORNEGAY. ~ow you do have for the record copies of the fourth report? Mr. HYDE. Yes, we do. We will be pleased to supply them for the record of this proceeding. (See p. 15.) Mr. KORNEGAY. That is all, Mr. Chairman. Mr. MACDONALD. Mr. Broyhill. Mr. BR0YrnLL. Thank you, Mr. Chairman. Mr. Chairman, it is good to see you here today. It is true that throughout the years this committee has consistently, as I view the record and my study, held to the position that the Fed- eral Communications Commission did not have the full authority to implement a nationwide STV system. Would you agree with this conclusion? Mr. HYDE. I would agree that the committee has tended to take the view that the FCC. did not have the authority. This is the force of the resolution that was adopted. The new resolution only went so far as to consent to an experiment. Mr. BROYHILL. That is the point I was getting to. In the past you have abided by the apparent feeling of the chairman of the committee on STV and when the committee in the late 1950's adopted a resolution calling for experiments, the FCC abided by this mandate. Is that correct? Mr. HYDE. I feel that we have cooperated fully with the committee, that is right. Mr. BROYHILL. Like the chairman, I have studied this situation and all the information available to me, in recent weeks. In my mind I question whether the Federal Communications Commission has full authority. PAGENO="0153" ~aking decisitn ~ions of the Communications Act and you are stating that ~ J is broadcasting. Mr. HYDE. We do state that STV is broadcasting. Mr. BR0YrnLL. Yet, it seems that the Commission is recommend- in~ rules under which the~ FCC would go far beyond w~ quire ti ~broa1 Lasters to C' thet S is unique, it is ~ t, it goes ~ that the Commission has provided in other cases. - ~iri.. It is also not true that in the court case on your experimental system in Hartford, Coun., the court case really went to the question of whether or not you had the authority to authorize a trial test, it did not go to the question of whether or not you had full authority? Mr. HYDE. The case litigated was for application for experimental authority. Actually, I am not personally familiar with the briefs and the issues as they were raised before the court. I would prefer to have our general counsel discuss that further. For t' that if it would r~L L1~ ~1 P PAGENO="0154" 150 the Communications Act of 1934 which the Commission believes constitute authority for the authorization of subscription television service. On February 6, 1958, the House Committee on Interstate and Foreign Corn- inerce adopted a resolution expressing the sense of the Committee that the Commission could not authorize subscription television absent amendment of the Communications Act of 1934. A second resolution, of March 24, 1959, stated the Committee's view that the earlier resolution should not preclude the grant of an authorization for trial or experimental operations, under the terms of the Commission's Third Report in Docket No. 11279, 26 F.C.C. 265 (1959). On February 23, 1961 the Commission granted an application of Hartford Phonevision Company for an authorization to conduct an experimental sub- scription television " `~~` WHCT, Hartford, Connecticut. Hart- ford Phonevision U' " ~ was made after hearing, and upon the basis of t )rt in Docket No. 11279. Upon a~-~l to `~e United S'~'~ t of Appeals for the District of Colum'~'- "~-~ the mmisr'~'~ challenged both with respect to its jurisi - on ser'~ of thi +7. The Court it~.4f characterized the ~ntent~,~, that the Commission lacked statutory power to authorize any cast system which required the direct payment of fees by the public. Thus, it stated (301 F.2d at 837) that the first issue was whether "the Commission lacks statutory power to authorlze a television broadcast system which requires the direct payment of fees to the public." On this issue, it stated (301 F.2d at 837) "The Federal Communications Commission was established In 1984 under a lypically broad grant of power by which the Commission was authorized by Congress, subject to limitations not pertinent here, to issue a broadcasting station license to any applicant `if public convenience, interest and necessity will be served thereby.' 47 U.S.C.A. *307(a). Additionally, Congress specifically com- manded the Commission by Sec. 303(g) of the Communications Act, to `study new nses for radio, provide for eamperisn~enta,~ nses of frequencies, and generally encourage the larger and more effective use of radio in the public interest.' (Emphasis added.) The plain language of the statute thus makes clear that Con- gress placed an affirmative duty on the Commission to experiment with and de- velop the most desirable deployment and utilization of the nation's communica- tions facilities. The Supreme Court has said that `where the language of an enactment is clear, and construction according to its terms does not lead to absurd or impractical consequences, the words employed are to be taken as the final expression of the meaning intended.' United States v. Missouri Pac. R.R. Co., 278 U.S. 269,278,49S. Ct. 133,136,73 L. Ed. 322 (1929)." The opinion goes on to refer to "the distinguishing characteristic" of the authorization as the experimental nature of the grant, in response to the appellant's arguments that the grant was made with inadequate knowledge of the programming plans of WHCT and that it had not been shown that these plans would serve the public interest. And, noting its assumption that the Coin- mission would `carefully scrutinize the operation and oversee the form which programming would take under the' subscription system, the Court added: "Surely its power to see that this area of the public domain is used in the public interest is not less for `paid' television than for the existing system of so-called `free' television." (301 F2d at 838.) At no point In its opinion does the Court indicate that the authority found in the statute is limited to the grant of an experimental license Thus the Commission s position Is I believe fully supported by the opinion of the Court of Appeals. Furthermore, when certiorari by the Supreme Court was sought by the ap- pellant, the Solicitor General, on behalf of the Federal Communications Com- mission, advised the Supreme Court that the Court of Appeals' decision was not limited to the `question of authorization of an experimental operation, since basic jurisdiction must be present whether the authorization be for a trial or permanent opOratlon A copy of the opposition to certiorari is enclosed as attachment B. See footnote 8 therein. I PAGENO="0155" 151 In sum, I believe that the Commissioti's power to authorize subscription tele- vision operations under the broad provisions of the Communications Act of 1934 has been judicially confirmed. I hope that this letter satisfactorily explains the position of the Commission. Sincerely yours, RosuL H. HynE, Chairman. ATTACHMENT A-MEMORANDUM OF LAW CONCERNING AUTHORITY or THE FEDERAL COMMUNICATIONS CoMMISsIoN To AUTHORIZE SunscRwrxoN TELEVISION OPERA- TIONS The several proposals for subscription television on which the Federal Com- munications Commission is conducting a rule making proceeding (Docket No. 11279) raise the threshold question of whether the Commission has the authority under the Communications Act of 1934, as amended, to authorize the use of radio frequencies for a subscription television service. For the purposes of this Memorandum of Law the term "subscription tele- vision" is used to describe the broadcast or aural and visual portions of televsiion programs in scrambled or encoded form which cannot be received in intelligible form except by the use of decoding devices attached to the television receiver and the payment of a charge for the decoding process. THE STATUTE The Communications Act of 1934, as amended, like the Federal Radio Act of 1927, contains neither express authorization nor express prohibition of the li- censing of radio frequencies by the regulatory body for a subscription service. The Commission's general powers to authorize the use of the radio spectrum by broadcast station licensees are found principally in Sections 301, 303 and 307(a) of the Communications Act. The underscored portions of the following excerpts appear to be relevant to the jurisdictional question under consideration in this memorandum. (italic is supplied). Section 301 states in relevant part: "It is the purpose of this Act, among other things, to maintain the control of the United States over all the channels of interstate and foreign radio transmissions: and to provide for the use of sue/v channels, but not the ownership thereof, by persons for limited periods of time, under licenses granted by Federal authority". Section 303, in relevant part, empowers and directs the Commission "as public convenience, interest, or necessity requires" to: (a) Classify radio stations; (b) Prescribe the nature of the service to be rendered by each class of licensed stations and each station within any class; (c) Assign bands of frequencies to the various classes of stations, and assign frequencies for each individual station and determine the poWer which each station shall use and the time during which it may operate; (d) Determine the location of classes of stations or Individual statiOns; (e) Regulate the kind of apparatus to be used With respect to its external effects and the purity and sharpness of the emissions from each station and from the apparatus therein; (f) Make such regulations not inconsistent with law as may deem neces- sary to prevent interference between stations and to carry out the provisions of this Act... (g) Study new uses for radio, provide for experimental uses of frequen- cies, a'nd generally encourage the larger and more effective use of radio in the public interest. Section 307(a) provides: The Commission, if public conivenience, interest, or necessity will be served thereby subject to the limitations of this Act, shall grant to any applicant therefor a station license provided for by this Act." The broadcast licensing powers of the Commission deriving from the fore- going excerpts from the Communications Act are qualified in certain respects by specific limitations legislated in express provisions of the law. For example, Sec- tion 310(a) provides, in substance, that station licenses shall not be granted to or held by aliens, foreign governments, or corporations organized under the law of any foreign government. Section 311 prohibits the grant of a station license to any person whose license has been revoked by a Court under Section 303 relating to application of anti-trust laws to Commission licensees. Section 315 lays down PAGENO="0156" 152 radio comn - The fore mal p specific tex e iimitat impo general power t license the ~i Ldio fre des. I limitations as the foregoing, uo~ ~s has Ld down - that as a condition to the issuance of licenses authorizing the use of r. frequencies, the `C~mmission determine that the public Interest, convenience or necessity would be served thereby. Thus, the authorization of subscription tele- vision would be subject to the requirement of such a finding. There appears to be no other language in the statute suggesting Congressional intent to limit further or to prohibit authorization by the Commission of subscription radio or tele- Vision operations. The bare language of the statute must be read, however, in the context of the history of broadcasting and the circumstances of the industry at the time the relevant portions of the statute were enacted. LRGISLATIVE HISTORY There is little in the legislative history of the Communications Act of 1934, or any of the amendments thereto which casts light on Congressional intent re- inling to the powers of the Federal Communications Commission to authorize the use of radio frequencies for subscription programming involving the en- coding of broadcast signals and the payment of a charge Incidental to the re- ception of subscription programs in intelligible form. Congressional debates and actions relating to the predecessor Radio Act of 1927 do, however, make some di- rect reference to the question, Since the relevant portions of the Communications Act of 1934, constituted virtual re-enactment of provisions of the earlier law it is appropriate to consider the legislative history of the earlier Act in this respect, particularly since there had been no change between 1927 and 1934 in the universal practice of transmitting broadcast programs in the clear and their reception `by the radio audience without the payment of any fee or charge. In these circumstances the legislative history of the Radio Act of 1927 may be usefully studied with a view to determining whether Congress intended that the established universal practice of the broadcast industry of relying on advertising revenues and of broadcasting prograin~ which could be received free of charge to the viewer, theretofore a voluntary practice, become mandatory under the 1927 statute. It seems clear that so-called "free" broadcasting was not mandatory prior to 1927. The limited powers of the Secretary of Commerce under prior laws were inadequate even for the enforcement of the terms of licenses issued by him designating the frequencies on which licensees were to operate. A careful `review of the legislative history of the Radio Act of 1927, however inconclusive it may be in some respects, gives little support to the theory, put forward `by some parties to the Commission's subscription television proceeding, that Congress in- tended to prohibit authorization by the Federal Radio Commission of sub- scription radio. In light of the legislative history, which is briefly summarized in this Memorandum, it appears unlikely that if such had been the intent of Con- gress, it would have relied upon merely inferential limitations on the otherwise broad powers conferred on the Commission. As will be seen, the question of sub- scription radio was debated and was the subject of certain Congressional actions. Yet, the legislation as finally enacted contained no language specifically prohib- iting subscription radio, while express limitations were laid down in relation to other matters, already mentioned in which Congress intended to limit the other- wise broad licensing powers conferred on the Commission. PAGENO="0157" PAGENO="0158" 154 By the time the Federal Communications Act of 1934 was enacted, there had been no change in the universal practice of financing broadcast operations by selling time to advertisers, a fact which presumably explains the lack of attention to the question of subscription broadcasting during the debates on the new statute. Since 1934, a nun~ber of Bills have been introduced in Congress, including H.R. 586, introduced during the current session by Represenative Celler of New York, which would operate to prohibit authorization of broadcast frequencies for subscription television. It is understood that none of these Bills have been reported out of Committee. Their introduction appears to reflect an assumption on the part of the sponsors that in `the absence of some such specific prohibition, the Commission is not barred under the provisions of the present statute from authorizing subscription television operations, provided of course the basic requirement of a finding that subscription television service would be in the public interest, is met. CLASSIFICATION OF SURSOMPTION TELEVISION The Radio Act of 1927, contained no definition of broadcasting. The present Act, in Section 3(o) defines "Broadcasting" as "the dissemination of radio com- munications intended to be received by the public, directly or by the intermediary of relay stations." Section 3(h) of the Act defines "common carrier" or "carrier" as "any person engaged as a common carrier for hire, in interstate or foreign communication by wire or radio or interstate or foreign radio transmission of energy, except where reference is made to common carriers not subject to this Act; but a person engaged in radio broadcasting shah not, insofar as such person is so engaged, be deemed a common carrier." (italics supplied) Thus, under the statute, broadcasting and common carrier services are mutually exclusive classifications. A number of parties to the subscription television proceeding (Docket 11279) have submitted contradictory views concerning the question of whether sub- scription television is properly classifiable as a broadcast service, a common carrier service or some other kind of service not specifically defined in the Act. The various views on this question are not discussed in this Memorandum, the scope of which is limited to the question of whether the Commission has jurisdiction to authorize subscription television. It is ~vell established that the Commission has time power to authorize the use of broadcast frequencies for non-broadcast radio services. Thus, the question of whether subscription tele- vision falls within or outside the scope of "broadcasting" as defined in Section 3(o) of the Act is not controlling on the question of Commission jurisdiction. An example is furnished by the Commission's action authorizing FM stations under stated conditions to render what is called a functional music service which is primarily non~broadcast in nature and which is fum-nished to subscribers under contracts with FM stations calling for the payment of a charge for the service. The questioll of the possible classification of subscription television as "broad- casting" shall be ~ "- y in the light of the defimtion in section ~\, but r1~ in r ~ations deriving from other sections of the `~tion 315, 317, 325, 326 and 605. A -~-~ `~ -` ~`-~ on of section 1~,..~~ -~ ..-~ 4 subscription telei the meaning of - 3(o) of the ( omnmun )ns ~ y be classifiable as some other types of services, in v tem- plated in this Further Notice, it is necessary or ~ -~ that `r to reach final conclusions at this stage concerning the proper classi on of sub- scription television. While we recognize the importance of settling question, e believe that it would be premature to attempt to decide it until we have ad- tional information concerning the manner in w1~ich subscription television, if ithorized, would operate in actual practice." pted: July 3, 1957. PAGENO="0159" 155 ATTACHMENT B Uu~ ~ ~aurt 9Jf tke ~hUt1~L ~tatess OCTOBER TERM, 1962 COMMIp~E AGAINST PAY TV, ~ PETITIONER ON PETITION FOR 4 WRIT OF UERTIORAEI TO STATES COURT OF APPE4L~ FOR THE DISTRICT ~ UIRCUIT BRIEP FO1~ The opinion of 1-7) is reported at Third Reports on Sul eral OOmmufljcat ions COfldjtj~~5 thorjze a ~VSjon h ported uj CONNECTICUT No. 161 V. FEDERAL COMMUNICATIONS COMMISSION OPINIONS BELoW rescribing PAGENO="0160" )fldUct 151 et seq., are PAGENO="0161" PAGENO="0162" 158 tion until 30 days after the adjournment of the 85th Congress. This Report followed the introduction in Congress of a number of bills which would have either prohibited subscription television or restricted the Commission's authority to authorize it,1 as well as adoption of resolutions by the House and Senate In- terstate Commerce Committees proposing that the Commission withhold action until specifically author- ized by Congress (id. at 1539-4540). When none of these pending bills were acted upon by Congress, the Commission on March 23, 1959, adopted a Third Report in Docket No. 11279, 26 F.C.C. 265, in which it decided to process applica~ tions ified in conformity with revised requirements ~et forth therein. These requirements provided, inter alia, that trials would be authorized only in cities with four, or more commercial television services; that trial authorizations would he limited to a three-year period, not renewable as of right; and that the licensee would be required to retain control of programs and sub~ scription rates and to furnish periodic and other special reports to the Commission concerning all as- pects of the subscription television operation, includ- ing the fixing and collection of fees (26 F.C.C. 267-272). In order to insure against a premature establishment of subscription service, the Commission added further requirements (1) limiting the trial of any one system to one city and permitting only one trial c~peration in any particular community, and (2) `See, e.g., H.R. 586, 85th Cong., 1st Sess.; S. 3201, 85th Cong., 2d Sess.; H.R. 9629, 85th Cong., 2d Sess.; S. 2934, 85th Cong., 2d Sess. PAGENO="0163" 159 prolnbitmg the sale to the public of the special rec~i~ ing devices required for subscription television (Id. at 266). At the same time the Commission reaffirmed (26 F~C.C. 266) its intention, announced in the First Report, to hold full public hearings before reaching a decision on the permanent authorization of sub- scription television (23 F.C.C. 556): The Commission will, when it finds that suffi- cient, meaningful data are available from trial subscription television operations, conduct a public hearing at which all interested parties * will have full opportunity to submit informa~ tion, data and views concerning the foregoing * [specified public interest questions] an4 any other questions which remain to be answered in reaching a decision as to whether the authoriza- tion of a subscription television service on some extended or continuing basis would serve the public* interest.. On March 26, 1959, the House Interstate Commerce ~Committeé adopted a resolution stating that it had no objection to the authorization of trial subscrip~ tion television: operations as contemplated in the Third Report (105 Cong. Rec. 5362-5363). On June 22, 1960, Hartford Phonevision Company (RKO) 2 ified an application for authority to conduct trial subscription television operations over its tele- vision station WHCT in Hartford, Connecticut, dur- 2 The name of the applicant was subsequently changed to BKO Fhonevision C9mpany, and is now RICO General Phone- yision company See niot~on of RICO Geneial Phonevision Company for leave to be named a party i espom~lent~ in this Court1. PAGENO="0164" 160 by ambles" audio signals a decoder, r' which restores and maintenance ser' of from 25 cents to advei consist gramming for which the I an admission charge), I system standa PAGENO="0165" PAGENO="0166" 162 or modified at any time upon notice and heaiing (id at 321-322). The court of appeals affirmed the Commission's decision on March 8, 1962 (Pet. App. 1-7). It did not accept the contention of petitioners that the Comrn mission lacks statutory power to authorize a system which requires the direct payment of fees from the public The court found that the Commission was given a "broad grant of power" by Congress, subject to limitations not peitment here, to issue a license to any applicant if the public interest would be served (47 U.S.C. 307(a)), and that Congress had specifically commanded the Commission in Section 303(g) of the Communications Act to "study new uses for radio, provide for experimental uses of frequencies, and generally encourage the largei and more effective use of radio in the public interest"(Pet. App. 5-6). Th~ court held that the plain language of the statute: "thus makes clear that Congress placed an affirmative duty on the Commission to experiment with and develop the most desirable deployment and utilization of the na~ tion's communications facilities" (Pet. App. 6). Finding that the distmguishmg chaiacteustic of the authorization in this case was its trial nature, the court of appeals also rejected the contention that the predicted dangers of a trial of subscription television rendered such a trial contrary to the public interest (Pet. App. 6-7). It noted that every license for fu~ tur~ operation necessarily involves some predictions as to an uncertain future, and found reasonable the Commission's determination that "the public benefits anticipated by the Commission warrant the risks of PAGENO="0167" 163 the experiment" (Pet. App. 6). The court also pointed out, in this connection, the power retained by the Commission to terminate the trial upon notice and hearing at any time prior to the expiration of the 3-year period, and the Commission's expressed determination to oversee carefully the conduct of the trial. ARGUMENT 1. The only issue properly before the Court is whether the Federal Communications Commission is empowered to authorize on a trial basis a sub- scription television system which requires the pay~ ment of direct fees by the public.5 The decision below, upholding this power, was correct and no further review by this Court is warranted. Petitioners' contend (Pet. 17-20) that, bec~tuse o~ the novel nature of subscription television, the Corn, mission is without power to license it, in the absence of .a specific affirmative grant of such power in the communications ~4~ct. This contention rests on a misreading of the Act which, as found by the court ~ "The dangers inherent in a pay-TV operation" set forth at pages 15-17 of the petition represent petitioner~ predic- tions of the effects of permanent authorization of subscription television and do not. provide a reason for the grant of cer- tiorari in this case. It is for the precise purpose of providing operational data which will enable the Commission to evaluate the impact and benefits of subscription television before. de- ciding whether to authorize it on an extended basis, that this trial was authorized. A determination of the public interest objections to permanent operation asserted here by petitioners ~ill~ l~e made ~!,t a ~further he4ring to be held by the Commission at £hc condiis~on of the trial operation (2~ F C C 556) PAGENO="0168" 164 of appeals, confers a "broad grant of power" upon the Commission (Pet. App. 5). Thus, Section 307(a) authorizes the Commission, subject to limitations not pertinent here, to grant a station license to any app1i~ cant "if public convenience, interest, or necessity will be served" (47 U.S.C. 307(a); Pet. 6). Sections 303(a) and (b), 47 u.s.c. 303 (a), (h), Pet. 4), empower the Commission to classify stations and to prescribe the nature of the service rendered by each class of station and each station within any class. Congress, in Section 303(g), also directed the Com~ mission, "Except as otherwise provided in this Act," to "Study new uses for radio, provide for experi~ mental uses of frequencies, and generally encourage the larger and more effective use of radio in the public interest" (47 U.S.C. 303(g); Pet. 5). Since there is no provision in the Communications Act either prohibiting a service requiring the direct pay~ ment of a fee by the public or limiting the use of radio frequencies to those services which were com~ mon when the law was enacted, these provisions, without more, afford ample basis for the Commis~ sion's action and a full answer to petitioner's attack upon it. The Communications Act does not itemize the types of radio service which the Commission is authorized to license and neither the statute nor the cases in~ terpreting it provide a ground for petitioners' asser~ tion that such specific authorization should be re~ qu.ired in the case of subscription television.6 For, * The authorization of a subscription service is not without precedent. See In the Matter of Musak Corporation, 8 F.C.C. PAGENO="0169" PAGENO="0170" 166 firmative duty. . . to experiment with and develo the most desirable deployment and utilization of 1± nation's communications facilities" (Pet. App. 6 The license challenged here falls squarely within ti scope of that duty.8 2. Petitioners' contention (Pet. 22-25) that tli Commission erred in authorizing a trial subscriptio television operation without first determining whethc it can or should regulate rates, is raised for the flr~ time in the petition and is therefore not properl before the Court. This allegation of error was nc included in the notice of appeal or in the stipulate issues ified with the court of appeals (J.A. 1-4~ Contrary to petitioners' present contention (Pet. 2~ fn. 27), it was not presented to the court of appeal in the briefs below.9 * Petitioners also urge (Pet. 20-21, 22) that, while the Con: mission found it had statutory power to authorize subscriptio television on a regular, permanent basis, the court of appeal did not reach this question ftnd found such authority only t authorize a trial test We do not believe this to be a correc evaluation of the opinion below, so far as the issue of basi authority raised by petitioners is concerned. Statutory suppor for the Commission's jurisdiction to authorize a system requir ing the payment of fees by the public is equally necessar whether that authorization be for a trial or a permanent opera tion. Neither the Commission nor the court below (nor, indeed petitioners) made the alleged distinction As petitioners recog nize (Pet. 21, fri. 23), the court below correctly stated petition ers' contention as a broad attack on the Commission's statutor~ power to authorize any system requiring the direct payment o: fees from the public. ~ their briefs before the court of appeals (copies of whici are being lodged with this Court), petitioners assumed that th~ Commission had no power to regulate rates in arguing that ii had no power to authorize subscription operations, but did nol PAGENO="0171" 167 In any event, the contention is without merit. This is a trial authorization. The information obtained will assist the Commission in determining whether rates should be regulated, and, if so, what kind of regulation would be required and whether additional legislation might be desirable (see First Report, 23 F.C.C. 531, 533). Petitioners' assertion, made for the first time here, that the Commission was required to answer these questions in advance of the trial authori~ zation would put the cart before the horse. More~ over, the absence of such a determination in no way threatens the public interest. Should the rates charged for the trial service prove objectionable at any time, the Commission, which has required the licensee to retain control over maximum charges (30 F.C.C. 311-312) and has itself retained the power to revoke or modify the authorization upon notice and hearing (Id. at 321-322), is amply prepared to act. The short answer to petitioners' contention that the Commission erred in failing to determine its power to regulate the rates charged when and if permanent operations are authorized, is that the trial authoriza~ tion being contested in this case nowhere presents that question. It will be time enough to consider this issue when the Information to be obtained by the trial operation is available and when the question whether to authorize a permanent operation is before the Com~ mission. urge that the Commission had erred by failing to consider whether it could or should regulate rates (Brief for Appel. lants, pp 20-21, 22-23, Reply Brief for Appellants, pp 2-6) PAGENO="0172" MAX D. PAGLIN, General Counsel, DANTh~L R. ORLBALTh~, Assistant General Counsel, RijTIE V. R~L, Attornell, FecierO2 Comfl~fliC0~i0ns Commission f~JLY 1962.~ PAGENO="0173" 169 Mr. BROYHILL. I have no other questions at this time, Mr. Chairman. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN DEERLIN. Good morning, Mr. Chairman. In the event that the decision were to go forward with this sub- scription television system, has the Commission given any thought, Mr. Chairman, to the guidelines it would impose in awarding licenses? I have visions, in every market area, of all current licensees apply- ing to provide the subscription signal. Mr. HYDE. Nothing beyond what has been suggested in the commit- tee's recommendations, Congressman Van Deerlin. We have not, as a matter of fact, had an opportunity to discuss the committee's report since the oral argument. Attachment B to the committee's report, a sug- gestion for further rulemaking going to technical standards, very general ones, was released by the Commission for comments on July 26. (The document referred to follows:) BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, D.C. FCC 67-891-3085 In the matter of Arn,endment of Part 73 of the Commission's Rules and Regula- tions (Radio Broadcast Services) to provide for Subscription Television Service (Docket No. 11279) ORDER SETTING ORAL ARGUMENT AND SECOND FURTHER NOTICE OF PROPOSED RULE MAKING (Adopted July 26, 1967; released July 31, 1967) By the Commission: Commissioners Bartiey, Lee and Loevinger absent. 1. The Commission has before it for consideration its Order released in this proceeding on July 14, 1967 (FCC 67-819; 32 P.R. 10606, July 19, 1967), and the Attachment thereto which consisted of a Rer'~rt of the Comr~~n's seription ~elevlsion Committee ~ T~17 3~ ~ 1~ ~ ,.l.~4- .~- aid in ~ 1 which might - and Order are made. 4. `] e reason for the decision to issue the Second Further Notice of Proposed Rule Making at the present time is that this will permit the Commission to give consideration to the technical matters concerning system performance capability sooner so that if, after oral argument, it should be decided to establish an STV PAGENO="0174" 170 ., ~ I service and not limit it to the use of a single technical system, the technical and other matters can he considered concurrently and the new service could get under way with a minimum of delay. * ~ 5. It is emphasized that the decision to issue the Second Fifrther Notice of Proposed Ithie Making at this time is not to be construed as a prejudgment of the basic Issue of whether a nation-wide STY service should be established, or if the issue of whether, if authorized, STV should be restricted to the use of a single technical system or permitted on any system which meets general system performance capability standards established by the Commission. The decision, it is repeated, is solely for the purpose of expediting an earlier commencement of the service should it be decided that such a service is in the public interest and that use of multiple systems should be permitted. 6. The Commission has studied detailed specifications of present or proposed STY systems submitted by parties to this proceeding This has helped in the formulation of the proposed rules contained in the Appendix attached hereto which would permit the use of any STY technical system which meets the standards set therein. These rules would require adequate performance of STY systems in serving subscribers and in avoiding, any increase of interference to conventional TV services. 7. The Commission does not presently foresee the need for special technical operating requirements for STY, and in the absence of such requirements the operating requirements for conventional television station, operation will apply. Should . any parties believe that special rules on the subject are necessary for STV, their suggestions and comments would be welcome. 8. Authority for the rule amendments proposed herein is contained in Sections 4(1), 301 and 303(e), (f), and (r) of the Communications Act of 1934, as amended. * 9. Accordingly, it is ordered, That pursuant to the procedures set forth in Section 1.415 of the Commission's Rules and Regulations, interested parties may, in response to the Second Further Notice of Proposed Rule Making, file com- ments on or before September 29, 1967, and reply comments on or before October 20, 1967. All relevant and timely comments and reply comments will be considered by the Commission before final action is taken in this profeeding. In reaching its decision in this proceeding, the Commission may also take into account other relevant information before it in addition to the specific comments invited by this Notice. 10. It is further ordered, That, in accordance with the provisions of Section 1.419 of the Rules and Regulations of the Commission, an original and 14 copies of all comments, replies, pleadings, briefs, and other documents filed in the proceeding shall be furnished the Commission. 11. It is further `ordered, That oral argument will be held In this procebding at the Commission's offices in Washington, D.C., on October 2, 1967. 12. It Is further ordered, That parties interested in participating in said oral argument shall ndtify the Secretary of the Commission in writing on or before September 15, 1967, briefly setting forth their intention to appear at the argument, their position in this matter, and the approximate amount of time they wish to use in argument: Provided, That Interested parties may, in addition to the aforementioned brief submission submit (in a separate filing) written comments or outlines `of their arguments, not to exceed 50 pages, on or before September 15, 1967, pursuant to our Order released on July 14, 1967, in this docket: And provided further, That the aforementioned brief submissions, com- ments, and outlines of arguments shall not be addressed to that portion of the report of the Subscription Television Committee dated July 3, 1967, which consisted of the Second Further Notice of Proposed Rule Making pertaining to system performance capability standards. 13. It is further ordered, That after the various requests filed pursuant hereto are received, the amount of time allowed to variou~ parties will be Specified by further Order, which `will also set forth the order of presentation. FEDERAL CoMMUNICATIoNS CoMMIssIoN, BEN F. WAPLE, secretary. APPENDIX 1. It is proposed that Section 73.644 of the Commissions Rules and Regulations be amended by the addition thereto of a new paragraph (b) as follows: § 73.644 l~Jquipment and system performance requirements. * * * * * * * PAGENO="0175" 171 (b) The criteria for type acceptable of subscription television syStems are as follows: (1). The system shall be capable of operating by delivering a suitable signal to the antenna input terminals of receivers designed for reception of a signal meet- ing technical standards for color or monochrome television transmission and accompanying aural signal as set forth in Subpart E of Part 73 of the Commis- sion a Rules For the purpose of this requirement a suitable signal shall be one which, except for distortion or changes caused by the transmitting antenna, re- ceiving antenna or entering inthe propagation medium, complies with all technical standards for color or monochrome transmission and accompanying aural signal set forth in Part 73 of the Commission's Rules. (2) Spectral energy in transmission shall not exceed limitations set forth in §73.687 (1). (3) No increase in width of the television broadcast channel (6 Mc/s) shall be required. (4) VIsual power (peak or average) and aural power shall not be necessary in excess of that now authorized, to provide coverage equal to that obtained by normal transmission `standards. (5) The encoded visual and aural programs shall be recoverable without per- ceptable degradation as compared to the same programs transmitted in accord- ance with Commission monochrome and color standards. (6) Internal modifications to subscribers receivers shall not be required. (7) Interference to conventional television and subscription television, co- channel and adjacent channel, monochrome and color, shall not exceed that oc- curring from conventional television broadcasting conducted in compliance with the standards of Subpart E of Part 73 of the Commission's Rules. (8) Susceptability to interference of any kind `shall not be greater than with conventional television broadcasting conducted in compliance with the standards as Subpart E of Part 73 of the Commissior~'s Rules., Mr. HYDL I would expect that if the Commission did move ahead after due deliberation on the record we have, that there would have to be some furthei~' consideration as to how we went about it. Mr. VAN DEERLIN. What consideration has been given to the im- pact of CATV? Mr. HYDE. It is discussed to some extent in the committee's report here. I may say the community antenna activity has all developed since subscription TV was first suggested and has largely become a factor in broadcasting while this case has been under consideration.. The committee notes it and indicates that in its judgment the~Com- mission should not wait for the further development of community antenna business. Mr. VAN DEERLIN. From an engineering standpoint isn't the signal on OATV an improvement over the airborne signal ~ Mr. HYDE. In many instances it is. As a matter of fact, the interest in community antenna systems was / based in the first instance on the inability of consumers in certain situa- tions to get an adequate signal. Of course, it has now been expanded to become a service which brings new signals into an area through microwave and various relays. But the original justification for it was to provide a more adequate signal. Mr. VAN DEERLIN. Now, of course, the desire of CATV is to get into program originations. This would make CATV a form of subscriptioni television, would it not? Mr. HYDE. It would be very hard to make a distinction between a subscription service by cable and a subscription service over the air when the only difference would be the manner in which it is delivered to the house. PAGENO="0176" 172 ~.~.nsuch~ the people whow ould have need for ao signals could get them under conditions that v.~d not jeopardize free TV. I may say it has been a most difficult challenge for us. We are watch- in~ with considerable interest the development of copyright law in this field,, hoping that it will help in the resolution of the problems that have arisen. Mr. VAN DEERLIN. Your mail has been somewhat augmented, has it not, by `the dispute over C'ATV? Mr. HYDE. It has. Mass communications has a way of generating mail. A dispute or an issue as to a broadcast matter or a CAT'V matter can become the subject of a lot of correspondence. Mr. VAN DEERLIN. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Harvey. Mr. HARVEY. Mr. Chairman, you have been with the FCC for a good many years. Mr. HWE. Yes, sir. Mr. HARVEY. I wonder if you can straighten out some of us on the committee who have not been on the committee such a long time re- garding the various resolutions. In your statement on page 3 you refer to the 1958 House committee resolution. Was that adopted by the committee first and then by the House? Mr. HYDE. Only by the committee. Mr. HARVEY. The gist of that resolution was that it was a sense of Congress resolution against subscription TV? Mr. HYDE. That is correct. Mr. HARVEY. Is that right? Mr. HYDE. Yes, sir. Mr. HARVEY. In other words, that reflected the sense of the committee? Mr. HYDE. That is right. Mr. HARVEY. Now you refer then in your history here to another resolution in 1959 which somewhat amended the earlier resolution. Mr. HYDE. Yes. The restrictions of the earlier one were ~ased so as not to preclude a trial operation. Mr. HARVEY. Was that a sense of the committee resolution? Mr. HYDE. Yes. PAGENO="0177" 86-399 PAGENO="0178" 174 granted always that Congress may, if it sees fit, modify the act which we administer. Unless they see fit to do that we must continue to administer the act that we already are charged with administering. Mr. HARVEY. I just have a couple other questions here. Is the case presently before the FCC considered to be one within its rulemaking authority? Mr. HYDE. Yes, the Commission has so stated in its last notice on this matter. Mr. HARVEY. Is it presently in what we would call and adjudicatory ~. Yes, it is. the adjudicatory posture in the here you have various parties pi ivir.r ~ Mr. EACDONALD. Just to clear ~. up- back to the jurisdiction question-earlier you indicated to me that the memorandum of law which was sent to Mr. Harris in 1957 indicated that in the judgment of the Commission they did have jurisdiction. Mr. HYDE. That is correct. Mr. MACDONALD. Since you gave me that answer, Mr. Chairman- I am not being forceful but I have just read it and it does not say that at all. If jou will pardon me I will read it to you and you can judge for yourself what it says. It says- The question of the adequacy of the Commission's regulatory powers presents different problems with respect to full-scale nationwide subscription television operations. We cannot determine until after a reasonable trial period whether the authorization of subscription TV on some general scale would be in the public interest. This is the important part I am coming to now. "Nor can we determine at this time"-this is the letter by which you s~r~ed jurisdiction-"nor can we determine at this time the condi- tions which it may be necessary to impose ultimately on subscription television `operations if their authorization on some general basis should be found to be in the public interest. Thus it would be in our view premature to attempt `to ascertain whether amendments to the Communications Act would be required." So, obviously he was saying that you did not have jurisdiction. If that is the basis under which you are asserting jurisdiction it seems ~i~Ji~tle flimsy one to me. Mr. HYDE. May I discuss the matter a little fully Mr. MACDONALD. Of course. Mr. HYDE. I believe the language you are referring to has some reference to what the powers of the Commission might be to regulate the fees. Under the committee's suggestion here there would be no effort at regulations of that kind. I also would like to qualify my earlier answer about the Commission's power. PAGENO="0179" 175 The Commission's authority under the act to authorize this service would be based upon a finding that the operation of such a service would be in the public interest. What I should have said is that we are confident of both our author- ity and our responsibility in the matter conditioned on a finding that the operation would serve the public interest, convenience, and neces- sity. Mr. MACDONALD. Then what you are talking to me about, this mem- orandum of law- Mr. HYDE. With your permission we will bring this memorandum of law down to date. (See p. 149.) Mr. MACDONALD. Fine. Thank you. Mr. Brotzman. Mr. BROTzMAN. I would like to recap, Mr. Hyde. It seems to me that we can only talk to you at this particular point relative to something we call a legal conclusion without going into the substance of this particular matter. What we are talking about now is jurisdiction. I would understand and I understand clearly, aM I think the sub- committee does, that you have arrived at a legal conclusion that you do have jurisdiction over this partiqular matter predicated by a case which I don't think is exactly in point, and I think you willadmit that, because it relates to experimental TV, bolstered by the basic power in the Federal Communications Act of 1934. Now there is a conflict in conclusions, obviously, that although Con- gress, according to your testimony, has not spokenin its entirety on the question, yet the only expression you find of record comes from this particular committee at the time Mr. Harris was chairman when they said in essence they were reserving jurisdiction or that they withheld jurisdiction. As of this particular moment, I think the chairman of the subcom- mittee stated correctly, that if we do not act, the law is quite clear that we have by inaction assented to the legal proposition that you are correct. I think the law is rather clear in this regard, at least from what I have read and from what I understand. These are just a few conclu- sions I have drawn from listening to the testimony as of this moment. Getting down to the last official pronouncement of the Commission on March 24, 1966-that is the last pronouncement, is it not, that re- lates to the Zenith-Teco petition? Mr. HYDE. Right. Mr. BROTZMAN. You restate your proposition there. First of all that you do have jurisdiction. I understand that. Now the second paragraph is one that kind of points up what I have been talking about. First of all, was this passed unanimously by the full Commission? Mr. HYDE. Yes, it was. Mr. BROTZMAN. You do recognize the interest of Congress in this subject and in providing time for Congress to act if it so desires before the proceeding is terminated ~ Mr Hmr That is correct Mr BROTZMAN What do you mean by that ~ The words are clear but I want to be sure I underst~nd PAGENO="0180" 176 Mr. HYDE. We want to make it clear that we did not want to be seemingly acting in disregard of Congress. We recogn~ 1 1 field of great interest and in the event Congress wishi issues here or come before the Commission we think it C - to provide time for that attention. May I correct an answer I made previously. You asked me if the last expression of the Commissiofl wa~ mous. It was as to the members pre~ ~ommissioner Loe was not present at the meeting. Mr. BROTZMAN. So what you are 1 mce a~ directing our attention to the.very ~iu~ that under the existing law and the decision, you say it is your conclusion that you have j However, recogni~ing the right of the Congress to act i if we desire to assert our authority. Is that a fair statement? Mr. HYDE. Right. Mr. BROTZMAN. I have just one more question and this relates to paragraph 5 of your 1966 pronouncement. In the last sentence you say that, "Subscription television on a na- tionwide scale can be effectively int.egrated into a total TV system with advantages to the viewing audience. That appears to be a reason- ably sound conclusion at this point." While I know that you have not finally determined, it would indi- cate to me that you feel that there is merit in this particular use of the medium. Mr. HYDE. I would say that what you have read is the view of the committee that made a rather intensive study of this. We will all be looking at it again in the light of the hearing just concluded. Mr. BROTZMAN. As of this particular moment all I am trying to do is to nail down the FCC's position. Mr. HYDE. That is the latest document on the subject. Mr. BROTZMAN. Thank you. Mr. MACDONALD. On that point, in the document they have indi- cated that for the first time FCC would be going into the program requirements. Isn't that correct? Mr. HYDE. Mr. Chairman, these rules suggested by the committee are a new concept. It is the first time that this approach has been men- tioned according to my recollection. Mr. MACDONALD. I have been on the committee for quite a while now and I have never heard it suggested by anybody, and I mean any- body, that FCC should get in the business of programing and telling the stations that they have to reserve 10 percent of their time for the ballet and drama of substance, because frankly we just passed a bill that is going to cost quite a good deal of money where we authorize money to educational types of stations for just the things that you say the pay TV people will have to use up to 10 percent of their time doing. Mr. HYDE. Mr. Chairman, without involving myself in an expres- sion of opinion about the substance of the provisions here, may I just make this observation. The committee is apparently in its recommendations to the full Commission trying to devise regulations that. would permit the opera- PAGENO="0181" ~o be ~ matter I guess - a problem on the matter. The committee's report says that section 315, fairness doctrine and other policies that have been developed in the licensing regulation of broadcasting would apply to subscription TV. It looks toward the application of the same policies and principles 1' pay TV as apply in the conventional TV. Mr. MACDONALD. It m -~ to it `~`~ theii u u~ n~ ~ to regulate or to authorize the i ion of pay TV and, ~ you have the right beyond that to go beyond the regulations you have just been discussing with the Chairman? Mr. HYDE. That was challenged in the hearing before the Com- mission. There was a good deal of argument about `the right of the Commission to make the type of regulation which has `been suggested by the committee. We will have to consider those arguments very carefully. `Mr. BROWN. If `the committee sits silent and therefore assents `to the Commission's right to license pay TV, would our silence also be considered as assent to the regulations of program ~4 other PAGENO="0182" 178 serve as a guide as t.o what the sense of -Congress may be in ti of pay TV? Mr. HYDE. The resolutions certainly indicated an interest.. We certainly have every respect for the interest of Congress. Mr. BROWN. They represent an interest by the committee and not a formal action `by the entire Congress. Mr. HYDE. We are not disposed to treat the interests of the com- mittee lightly at all, as you can tell by the procedures that we have followed. Mr. BROWN. May I ask if you- consider the expression of the com- mittee as equivalent to an expression `by the Congress? Mr. HYDE. No, I do not-. As a 1a~yer I could not. I do not- believe you would expect me to. - Mr. BROWN. What relationship do they have? They are a guide, but not a legal proscription. Mr. HYDE. That is right. They are an advice, let me put it- that way. Mr. BROWN. Let me ask about a couple of resolutions. In the first place, I note that there -has been a change in the language we are using in broadcast legislation from the language used 8 or ~ ago in these resolutions, or at lea-st I presume t-hat is the case of the use of the term "radio and wire transmission." But in ]anguage used I find -difficulty reading anything but ~-ATV as it is now operating, to wire transmission of pay TV. -Mr. HYDE. There is no doubt but what t-his development of cable television has brought about this new interest in -the term "wire" -or the broader look at the whole subject-. Mr. BROWN. There has -been a specific limitation by the F-CC, how- ever, to experimenting in subscription television and its use of the spectrum but not much control of the commercial usage of CATV. Mr. HYDE. This is true. Our regulations in the community antenna field are just regulations. We have not asserted licensing authority. We do consider petit-ions for waivers of regulations. It sort of looks like granting a permit in some circumstances. But our overall posture there is one of administering some rather broad regulations which have nothing to do with original franchising, these are normally grant-ed by the communities. What we have endeavored to do is bring a bit of order into the distribution of broadcast programs, which absent Com- mission regulation tended to disregard the rights of local statioiis. Mr. BROWN. You say it has nothing to do with original franchising but in certain instances original franchisers have gotten into the CA.TV business. My question is, Why would you consider a resolution by t-he committee which speaks to subscription TV by radio as a more serious proscription than the use in that same resolution of subscript-ion TV by wire and not have moved more quickly to control CAT-V develop- ment by certain licensees versus the interest expressed n subscript-ion pay TV? Mr. HYDE. Congressman, I do not believe that we have made such a distinction. Up to now there have been some program originations but by amid large CATV handles programs originated by the networks and statio-ns. Local origination is incidental to a larger interest- in handling the programs originated by the networks and stations. Mr. BROWN. I have another quest-ion but first I have to check some language, Mr. Chairman. PAGENO="0183" 179 Mr. MACDONALD. While Mr. Brown is checking this I would like to ask you a question which I don't think is unfair and you don't have to answer if you don't want to. - I quite agree this thing has been kicking around for an awful long time. You say you look for congressional guidance. Every time the Congress has done anything about this s~ibjec.t, including under our former chairman, Mr. Harris, they have just~ stood up on the floor, this committee, and have been opposed to subscription TV. So my question is a small one, but. would you not think that is a little bit of guidance? Mr. HYDE. Mr. Chairman, I would suggest that the last expression from the committee was to acquiesce in the carrying on of an experi- ment.. We are now looking at it in the light, of the information developed in the experiment. Mr. MACDONALD. Let me ask you this question: Does the Commission contemplate taking any action before this committee or t.he Congress has a chance to vote Mr. Dingell's bill up or down? Mr. HYDE. We have not met to discuss this matter since our hearing last week. But I will give you my personal view that I would not. expect precipitate action. Mr. MACDONALD. In other words, you would wait for the Congress to a~ct on the bill before us om perhaps another resolution, if that is the sense of the committee, such as Mr. Harris put out? Mr. HYDE. I would assure you of this, that the Commission is cer- tainly not going to take hasty action while the committee has this matter under consideration. Mr. MACDONALD. That is one of the reasons these hearings were called, despite of what. you have read in the trade press and other places, was actually merely to avert, a head-on collision between one of the branches of Congress and the Congress. Certainly they were c.alled for October 2 before it was realized that that. was a religious period of time and it. was riot, to try to exercise any heat on the Commission. I want all the Commissioners to understand that. The Congress has felt, strongly about this. Several members of this very committee have. Therefore, we felt it was necessary that we hold hearings at a. time convenient to you, but close enough so that we would not run into any difficulties between each other. Mr. BROWN. Will the Chairman yield? Mr. MAcDONALD. Surely. Mr. BROWN. The language to which I referred is on page 2 of Com- mnitt.ee Chairman Harris' House Resolution 130, January 20, 1959. I want to be sure I understand what your view of this is. This language, if I may impose on the Commission's time, reads: "Re$olved, That. the Senate and House of Representatives in Congress assembled ex- cept as provide in section 2, until new legislation has been enacted setting forth the terms under which pay television programs may be broadcast. or transmit.ted"-Congress gave a- clear indication by radio or wire-" (1) the Federal Communications Commission may not authorize any person to broadcast or to render a communication serv- ice by radio or wire which would aid in the broadcast or transmission of any pay television program; and (2)," and it goes on and I pre- sume your feeling `is that the key word is "programing," pay tele- vision programing, rather than pay to receive an improvement of existing programing? PAGENO="0184" But as they have explain~a m LII. to broaden the number of channels t [`be a v a became distributors as well as improvers of the signal. Mr. BROWN. Right now OATV does two things; does it not? It im- proves the quality of the signal or it increases the selection of signals that the viewer may receive? Mr. HYDE. Right. Mr. BROWN. And that is all. Mr. H~mi~. They increase the number of broadcast signals that are available `but to some extent they are beginning to do program origina- tions. That is a new service. Mr. BROWN. Are these FCC licensees? Mr. Hmi~. They are not licensees, except to this extent. We have issued permits for microwave systems to provide carriage in situations where a signal could not be found over the air. Mr. BROWN. Let us say a CATV operator has one of these scanning devices which scans the weather report or the news headlines or what- ever it may be that he originates in his operation and he is not an FCC licensee but people are paying to receive the signal which he sends out and this is the program which he originates in `his studio. Now, that is not subscription or pay TV; that is CATV? Mr. HYDE. By usage in the trade that is CATV. Is it not also the same function that subscription TV porforms? Mr. BROWN. I am asking you. The committee has to know what the FCC's view of the distinctions may be. Mr. HYDE. Subscription TV undertakes in the context of that term as used in the committee's report to bring some programs to the public that were available only through `box office arrangements. They pro- pose to bring in new movies, sports attractions not available by conven tional TV. But when you do have a program service of any kind originated by someone, delivered to your house for a fee, how do you distinguish it from subscription TV by function? They begin to look very much alike, don't they? Mr. BROWN. It seems to me if Mr. Macdonald wishes to use subscrip- tion TV to go on the air and campaign and his constituents who sub- scribe to his viewpoints want to pay money to hear him on subscription TV, it may not be a lot different from his being interviewed in the studio or having his presentation made on CATV where people also pay to have that channel selection. I don't know whether Mr. Mac- donald is box office or not. Mr. HYDE. We may have solved this problem of the television ap- pearances for candidates. Mr. KORNEGAY. Will the gentleman yield for a question? Mr. BROWN. I yield. Mr. KORNEGAY. With reference to CATV, Mr. Chairman, to what extent, if any, have any of the CATV systems gonc `beyond weather and news in their program originations? PAGENO="0185" 181 Mr. HYDE. I have been informed that in some instances they are carrying local advertising. I do not have exact information as to other programs beyond weather and news I am sorry, it has come to my attention that in some conimunities they have presented the city coun- cil, that there have been some efforts to put on what in broadcast field is called public interest programing, local civic activities Mr. KORNEGAY. In other words, beyond the scope of news and weather? Mr. HYDE. Yes. Mr. KORNEGAY. Do you promulgate rules and regulations with refer- ence to that situation? Mr. HYDE. We have no rules on that. Mr KORNEGAY You have no rules on program originations so far as OATV is concerned? Mr. HYDE. I believe we have an outstanding notice. You are asking me do we have any present rules? Mr. KORNEGAY. Right. Mr. HYDE. I think not. Mr BROWN If I may make a final observation, broadcasting the city council was one of the things claimed as a good reason we should not finance by the taxpayers and approve by the Congress the so- called recent Public Broadcasting Act. It seems to me that we have a very definite blurring of the lines, perhaps the result of the technical developments, the state of the art, between instructional television, educational television, cable television, subscription television, and whatever that old form of television we used to have was. Mr. MACDONALD. Mr. Kornegay. Mr. KORNEGAY. Your rules and regulations you have under con- sideration in connection with subscription television, Mr. Chairman, I rather run to the licensee and not to the promoter or sponsors of the programs to be seen on STV; is that right? Mr. HYDE. They would run to the licensee. Mr. KORNEGAY. He is the only one you have any Jurisdiction over? Mr. HYDE. That is right. This would be similar to the situation with respect to the network regulations. We call them network regulations, but they are (~ ii to stations. Mr. K0RN: ou F'~ve no dir~ t is~' five stations which have grade A contours. Mr.r Mr. I ~AY. v many different communities in the country would be eligible under that rule? PAGENO="0186" 182 Mr. H~E. Eighty-three, I am told, is the number. Mr. BROWN. Would the gentleman yield alt that point? Mr. KORNEGAY. Yes. Mr BROWN As I understand, the community under FCC considera tion is a municipality wherein television or radio stations are located? Mr. Hyi~. There must be what we call five grade A signals at the location. Mr. BROWN. That is what I wanted to clarify. At the location of reception or at the location of origination? Mr. HmE. Location of origination. Mr. BROWN. You talk about municipality. Mr H~D Well, a principal community A municipality has a certain limited meaning. We are talking about a, principal community. I think that word is used in census figures. Mr. BROWN. If the gentleman from North Carolina will permit me to ask another question to refine this, let us say there are two sizable communities a distance apart wherein one community has two stations and another community has two stations and in neither of these com- munities can you receive a grade A signal of the other, but in between there is an area of overlap where there are four signals received. Mr. HroE. The committee did not seem to anticipate that exact situation. It does talk about communities rather than places in. between them. Under the suggested rule the principal community would have to be entirely within the grade A signal. Mr. BROWN. I am talking about an overlap situation where there is no originator but four signals received. Let us suggest that those two separate communities produce signals and that in each of the two communities there are four signals received. How does that apply?. Mr. HYDE. I suggest if there were five grade A signals over both communities that there might be two eligible communities. I think it would be a most unusual circumstance. Mr. MACDONALD. Mr. Broyhill. Mr. BROYHILL. I just want to pursue for a moment my qu~stion of a few minutes ago. Could the Federal Communications Commission require no commercials to be shown on free or commercial TV ~ Mr. HYDE. The committee report recommends that the Commission should prohibit commercials on subscription TV. I think that that indicates the feeling that the Commission has toward making such a regulation. Mr. BROYHILL. What is the statutory basis, then, for treating these two forms of television broadcasting differently? Mr. ~ Section 303(b) of the act which authorizes the Commis- sion to make rules and regulations with respect to different classes of stations. Congressman, the Commission did have under consideration the rule to prescribe limits on the number of commercials carried on conventional, commercial broadcasting stations. It determined that it would not be in the public interest to adopt such a rule, but did not find it laCked power to do so. Mr. BROYHILL. This committee frequ~ntly disagrees with you? Mr. HYDE. Yes, the committee does. It disagreed with us on that, too. Let me review that. No, I think the final action that the Com- mission took was in agreement.~with the committee. PAGENO="0187" 183 Mr. BROYHILL. That you did not have? Mr. HYDE. No. I think the committee took the view that the Com- mission should not adopt such a regulation The Conmussion, in fact, did determine not to adopt such a regulation but it; did not do this on a question of law. Mr BROYHILL The same question, of course, comes up in the hmita tion on programing. I see in the rules, for example, the proposed rule would prohibit the series type of pi ograms, it; would also prohibit showing movies over a certain age I am inquiring what is the statutory basis for this `difference in treatment of program content, so-called free TV on the one h~nd and STV on the other, when. you are using the same language of the act to justify your actions. Conversely, you could do the same with free TV. As in years past we will have.changes in the Commission and whatnot.. Mr. HYDE. I think you must have observed that the committee was concerping itself with ways and means of authorizing subscription TV under conditions that would not lead to a conventional TV subscrip- tion system. I suppose they would argue that the Commission has authority to make regulations appropriate to this class of service. Mr. BROYHILL. That brings up an interesting point, Mr. Chairman. I read somewhere that one of the networks, I believe, `or some com- pany-I have forgotten now which it was-was considering a cartridge type of program where the individual could actually play his program over his own television set. Would the FCC want to exercise jurisdic- tion over this? Would this not be a siphoning off of audience? Mr. HYDE. Neither this committee nor the FCC-well, so far as the FCC is concerned it would seem not to worry about this. True, this replay device would use your TV set but it. would be like playing a program on your TV set in the same way you would play a record on your high-fidelity set. Mr. MAcDONALD. Mr. Harvey. Mr. HARVEY. Mr. Chairman, I want to go back for a minute again to what has motivated the FCC in going ahead with its hearings, and getting back to the question that Chairman Macdonald asked you a few minutes earlier. In answer to Mr. Macdonald, did I gather that you thought that because our committee of the House amended its earlier resolution to permit the experiment in Hartford, that this was congressional intent that the FCC go ahead and decide this question? Mr. HYDE. No, I did not intend to say that. But I did intend to say that this would seem to be an indication of interest onthe part of the committee in taking an additional look in the light of what was developed as a result of the experimental operation. Mr. HARVEY. The i~eason I bring that up is that I think we would both be in agreement that the remarks by Chairman Harris would indicate clearly that the committee reserved its jurisdiction in this particular area and they had no intent to turn over to the FCC juris- diction in this new field. Isn't that correct? Mr. HYDE. I think he made it very clear that they were giving ap- proval only to an experimental operation. Mr. HARVEY. So that the only guidance that the committee or the Congress has given the FCC has clearly been that we reserve the deci- PAGENO="0188" 184 sion whether to go ahead in this field or not and you do not have that jurisdiction? Mr. HYDE. Chairman Harris' statement indicated that he did not wish to be understood as conceding anything in the matter of granting a regular authorization, that the committee's action was only to acqui- esce in the experiment and any views they had about regular operation were reserved. Mr. HARVEY. In your opinion, Mr. Chairman, what sort of addi- tional congressional guidance would be necessary for Congress to as- sert its jurisdiction in this particular field and to restrain the FCC from proceeding further with the hearings that they have? Would a sense of the committee resolution make clear the congressional intent or would you insist on the matter going to the floor finally? Mr. HYDE. May I give a lawyer's answer to the question? I think that if Congress wished to preclude the Commission, from-or let me put it this way-if the Congress wished to deny the Commission authority to grant an authorization like this, they should do so by amendment of the statute. Mr. HARVEY. Otherwise the Commission is going to proceed on the assumption that they have this authority? Mr. HYDE. Otherwise the Commission will, consistent with the views that we have heretofore expressed, feel that it does have authority to grant such authorization, it appearing that if they do so it would serve the public interest, convenience, and necessity. Mr. HARVEY. Although contrary to previously stated congressional views. Mr. HYDE. I did not say that. Mr. MACDONALD. One last question, Mr. Chairman. You have been very patient. You would like to have the Congress amend the Com- munications Act? Mr. HYDE. What I had intended to say was that the Commission must administer the act as it now stands absent some action by the Congress to amend that act. Mr. MACDONALD. Even though you can't prove that you have any jurisdiction to do what you are doing? If you have I would like to hear what the basis of the jurisdiction is. We have been going around the mulberry bush all the time. Mr. HYDE. Mr. Chairman, we will give a full discussion of this ctuestion of jurisdiction in the Commission. I would want to say again that any time that the Commission would act here it would have to be based on a finding that the action it took would serve public interest, convenience, and necessity and that decision, whether to deny or grant, would be subject to judicial review. Mr. MACDONALD. Thank you very much, Mr. Chairman. You have been very cooperative and very helpful. Mr. HYDE. Thank you. Mr. MACDONALD. The next witness is Mr. Julian Goodman, presi- dent of the National Broadcasting Co. Mr. MONDERER. My name is Howard Monderer. I am Washington attorney for NBC. Mr. Goodman, who is president of NBC, is sched- uled to be the next witness. Unfortunately, the plane on which he was due to arrive this morning had engine trouble. We do not expect him PAGENO="0189" PAGENO="0190" 186 were sharply differing views on this matter, the proponents arguing that pay television "would provide a wider choice * * * in the fine arts, operas, education, and informative material," while the opponents claimed that it would "offer programs of the widest popular appeal." To develop experience that would settle this question, the Commis- sion authorized limited pay television test operations in its third re- port of March 1959. The House Interstate and Foreign Commerce Committee then adopted a resolution approving the concept of these limited tests, with the specific understanding that Congress would make the ultimate decision on whether pay television should be au- thorized on a permanent basis. Only one' organization took advantage of the test opportunity and conducted a 3-year test in Hartford, Conn. When the test was con- cluded, the records showed that 91 percent of the pay television pro- graming consisted of feature films and sports. These are clearly mass appeal programs types widely shown on free television. Thus, the Hartford test completely failed to show that pay TV would provide a distinctive program service that would broaden the television base. If anything, it tended to demolish the proponents' argument, since the pay TV operation offered a much smaller pro- portion of cultural and informative programing than is provided by free television. Following the test, the FCC appointed a committee of Commis- sioiiers to prepare an analysis whith was submitted in the form of a proposed fourth report. It acknowledged that if pay television pro- graming- * * * is merely duplicative of types of programs now appearing on free TV in quantity * * * it would not appear that other public interest considerations could justify the authorization of STy using broadcast channels. The report also found that- * * * the major part of the programing, as opponents had argued, will be of a kind that would appeal to a mass audience. This should have settled the issue. But despite the acknowledged evidence, the r ,~t concluded that pay television wi]1 provide a "beneficial sw ,ment" because the "types" of programs it will pre- sent I be ~ ;." The difference used to justify this broad con- 1 es would be ii miteci to those less than 2 and 1 :ye sports coT-~~ ~e would st ii. - S. t mer nmnul: no longer~, because ea~h year, LL wision I recent movies and has broadened its sports coverage. Apart from whether pay television would duplicate program types already available, the FCC recognized another important question: whether pay television would siphon away selected program attrac- tions from free television. The report acknowledged that danger, stat- ing that pay television "could, by directing its purchases at select programs * * * take them from free TV and require the huge audi- ences of those programs to pay to see them or not see them at all." PAGENO="0191" 187 After recognizing this as a threat t.o the public interest, the report pl0l)OSeCl a detailed regulation of pay television programs to prevent "selective ~~1og~~m siphoning." Basically, these pioiosed regulations would prohibit entertainment "series prograimng on pay television and would control the kinds and ainoimts of movies and sports piOg~~ni5 P~Y television could show. rf his includes a stipulation that movies and sports may not exceed 90 percent of im~ television piogiaimng annually, or 95 peicent in any month. Of course, this concedes that the concept of program diver- sity-wliich was supposed to be pay televisions special contribution- has been abandoned. Instead, the dangerous principle of program regulation is adopted to legislate a- far lower standard of diversity than is now typical on free television. \\Te believe that these detailed program controls raise the most serious questions of constitutional validity and FCC authority. We op- pose such regulatory control of programing whether it is directed to pay or free television. We also feel the program regulations would be ineftect.ive, because they could easily be manipulated to permit large- scale diversion of programing from free to pay television. Before discussing these points, we believe that some additional pub- lic policy questions should be considered. One of these centers on the claim that pay television should be given the chance to rise or fall on the basis of public choice. This concept. of public choice is a camouflage. To take a specific example, if the world's series should move from free to pay television, the public's only choice would be either paying or not- seeing the gaines. It- is also claimed tIm at the market is broad enough to permit the coexistence of free and pay television, since the pay service is likely to attract only a minority of the public. This disregards the enormous economic leverage p~ty television could exert, with relatively fefr sub- scribers. For example, if pay television could achieve a 20-percent penetration mate, as assumed in the fourth report, and operated under the limitations outlined in that- report, it could accumulate annual revenues approaching $1 billion, enabling it to outbid free television foi key program attractions. As a result, by having to pay for pro- grams, 20 percent of the public could foreclose free television from mak1ng those programs available to all of the public. tfhius, the advertiser-supported mednun would lose the economic base for it-s own costly and less popular-but extremely important- news and public affairs programing. There is nothing to indicate that the loss or reduction of t.his type of programing would be made up by pay television. Currently such programing represents approximately 25 percent- of the NBC television net-work schedule. By comparison, the "educational and instructional" features offered during the first 2 years of the Hartford test. represented about 3.2 percent of the total. The fourth report mistakenly assumes that free television cannot grow beyond the types of movies ~and sports it offered in its earlier years. When the Hartford test started, there were no movies on tele- visioii that- had been released within 2 years. But during the last broad- cast. season, over 10 percent of the network movies were less than 2 years o]cl, and we estimate that the proportion will more than double during the current. seasons Similarly, free television now presents on PAGENO="0192" 188 a nationwide basis many sports events formerly carried only in a few markets or not at all. It is naive to believe that the proposed regulations could prevent pay TV siphoning of free television programs. If pay television is to be assigned feature films under 2 years old, film suppliers would have every reason to withhold such films from free television during the 2 years following their release-and after-to realize maximum reve- nue from box office television. The owners of sports rights need only keep the games from free television for 2 years-nationally or in any given market-to qualify them for pay television; and in the case of specific sports events like the world's series, the real effect of the com- plicated regulations is to reduce the waiting period to 1 year. If these movie and sports features are to be preemptible by pay television, the free service would tend to be limited to older movies and to sports already carried, and would be fenced off from natural de- velopment in these fields. Finally, the free television programs most vulnerable to siphon- ing-like major entertainment specials and taped sports coverage- would be wholly available to pay television, endangering the continua- tion of free television in these distinctive fields. Another public interest consideration relates to the portion of the public that could not afford pay television-estimated in the fourth report at 30 percent of the total population. These are the people who have the fewest privileges and opportunities and are most in need of the full entertainment and information services free television can offer. The diversion of programs to a service from which they are economically barred would be a denial of their justified expectations All the considerations indicate that an issue of basic national corn munications policy is presented on which the Commission should not act without specific congressional authorization. This has been recog- nized in resolutions previously adopted by this committee and by the Senate Commerce Committee. And as I mentioned before, in 1959, Chairman Harris emphasized this committee's understanding that pay television would not be authorized on a permanent basis without further action by the Congress. The fact that Congress has not acted does not justify Commission authorization of pay television, especially when there is no public demand for the service. To summarize, the record of pay television's test operation demon- strates that it will not provide a service distinctive from free televi- sion service in any significant way. Accordingly, there is no affirmative public interest reason that would justify diversion of broadcast fre- quencies from free to pay television. On the contrary, there is a danger that pay television could siphon popular attractions from the free service and thus diminish the scope of service to the total public. The fourth report recognizes this danger and seeks to guard against it by a system of detailed program regulation that is bad in principle and would not be effective in practice. While the events of the past years demonstrate that there is no public demand for broadcast pay television and it would not affirmatively serve the public interest, free television has progressively broadened its service, in programing; in the UHF expansion; and in the growth of noncommercial broadcasting. These positive developments can be impeded by broadcast pay television. PAGENO="0193" On the br'~~ 189 don' . . . ~atistics on the )n but I think the average program attracted something like 200 home subscriptions. Now, you would have assumed that there is a turning away from advertiser supported programs because of the interruptions of com- mercials and particularly in the movies. And taking into account fact that the primary programin'~ tion ~ as racte ome t you think that 1 disturbing to the public? Mr. ADAMS. I think it i but it is not the networl 86-399 0-67-13 PAGENO="0194" 190 id you have said )U more-could y ou an `~culation and as ~i audience in every corn- 11teamr is a ~ the oner ~ for sports r - provisions. Mr. MACDONALD. The worst example I can think of did not affect me directly, although I di4 get mail about it. When Mohammed Au was fighting some guy from Arizona-Folley, I believe. They allowed the programing every place except where it was being fought, which I think was Madison Square Garden, in New York City. Then they blacked it out in Phoenix, Ariz. Do you think this was a good practice? Mr. ADAMS. I don't know the circumstances. On the basis you de- scribe it does not sound to me like a good practice, but I do not know the conditions that prompted it nor do I know under what conditions the blackout was imposed. Mr. MACDONALD. They blacked it out because Folley was from Phoenix. I guess they had theater TV and therefore they did not want it to go on free TV to knock out the hometown boys' theater revenues in Phoenix. So they blacked it out in Phoenix and the people in Phoenix who wanted to see him fight in this heavyweight match had to go to a theater and pay money to see it. Mr. MONDERER. I seem to recall, I believe it was the RKO people who had the rights and they apparently chose to do it on that basis in their hometowns. Mr. MACDONALD. Don't you think that continuation of this type of thing would make people willing to pay to see some programs? Mr. ADAMS. I think the example you used of the fight, Mr. Chair- Mr. MAcDONALD. I am talking about blackouts really. Mr. ADAMS (continuing) Is the same sort of example we use when we are concerned with pay television over the air. We think that also would result in blacking out home screens for free viewing. We do not like the blackout principle. Until we have the ability to negotiate our way out of it we have to accede to demands on the part of the rights holders for it. Their interest is an economic interest. Mr. MACDONALD. Do you see any chance in the future that the black- out question will stop? Mr. ADAMS. I would hope so, but I don't see the basis on which rights holders would agree to let us broadcast in the very places where they are inviting an audience into a stadium. Mr. MACDONALD. Mr. Kornegay. Mr. KORNEGAY. Mr. Adams, would you have any basis for your statement other than the fact that Hartford had 1 percent of the sub- scribers, the statement that it was not interested in or, whatever it was, there was no public interest in pay TV? PAGENO="0195" 191 Mr ADAMS I think the Hartford experiment is a pretty good mdi cation of that. Pay television has been tried in several other places. It was tried in Palm Springs on a different basis. It was tried in a suburb of Toronto. In each case the public reception was at a low level. The context of my statement, I believe, is this: that if you give the benefit of doubt to pay television, at best it is a dubious enterprise as far as Commission authorization is concerned. It certainly is a radical departure from past communication policy. Our position at least is that to justify the exercise of authority in a cloudy situation and to. depart basically, taking a new direction in communication policy, there ought to be some very active, very strong, very, articulate, and clearly visible public demand. There is no evidence of any such public demand. It seems to us that the burden of demonstrating that public demand is on the proponents, not the opponents. After all, that was the reason for the Hartford experiment. I think we should remember the context where the Commission, after considering this issue for a number of years and being faced with two, conflicting arguments, said let us settle this on the basis of experience instead of listening to self-inter- ested groups who argue on oppOsite sides of the fence. They laid down certain criteria and objectives. The experiment was held and it seemed to us to prove the opposite of what the claimants for pay television were arguing, including public demand. Mr. KORNEGAY. Is there any public demand for çATV ~ Frankly, in my neck of the woods I don't understand why there is any need for that, but apparently there is. Mr. ADAMS. I think there is in those places where people can't get good signals. Mr. KORNEGAY. I understand that, but in a community where you get three grade A signals and three networks, why should there be demand for CATV ~ But everybody is fighting to get into the business and spending millions of dollars to go into it, so there must be a demand for it. Mr. ADAMS. In the case you cite, I would not see where there would be a demand. Let me make this distinction as ëompared to pay televi- sion. Nobody has to subscribe to a CATV system if he does not want to. If he does not subscribe there is no penalty; he will see whatever is available over the air without paying a cent for it. Mr. KORNEGAY. He does'.not have to subscribe to STV. Mr. ADAMS. What if subscription TV buys away a major sports event because it has a bigger box office potential and it iS removed from free television, th~n he cannot see it on his set unless he pays for it. That is one of the differences between CA'TV and pay TV. Mr. KORNEGAY. Wasn't that same fear expressed by the opponents toCATV~ Mr. AnAMS. I don't believe so, sir. Mr. KORNEGAY. That is by bringing in distant stations. Mr. ADAMS. I think there was concern over more competition than the people in the marketplace, were accustomed to. I don't think an argument has ever been made, nor do I see how it could be made, that CATV would displace free television because you can still get what- ever you can get on your set without becoming a CATV subscriber. Also, I might add that has not been NBC's position. PAGENO="0196" 192 Mr. KORNEGAY. Do you feel it would be possible for over-the-air STV and free TV to exist side by side without either system causing the economic ruin of the other? Mr. ADAMS. We do not think so, sir. If over-the-air pay television is authorized and fails then, of course, there is no issue. Mr. KORNEGAY. That is what I was going to say. You may have answered it. If there is no demand for it you should not be worried about the competition. Mr. ADAMS. That may well be true. But as has been said before, the concern is what if it does not fail? Mr. HARVEY. Will you yield at this point? Mr. KORNEGAY. I will yield because I have to go on the floor. Mr. HARVEY. The demand might possibly be created by the decision of the artists themselves. If Elizabeth Taylor and Richard Burton decide only to appear on subscription. TV they have the right to make that decision and not the FCC; is that correct? Mr. ADAMS. That is true. There is one other consideration I believe. If 10 percent of the public or even 5 percent of the public felt that what pay television promised was worth subscribing to, pay television could on the basis of a rather small minority of the public build up a kitty large enough to outbid advertiser supported television for the very attractions that are on the air now. It is a case where a small number of people can exercise a lot of leverage that affects the total service to the total public. - Mr. BROYIIILL. Is that the reason you say there is a danger that pay television will siphon off these attractions from the free service? Mr. ADAMS. Yes, sir. That is not true of any other types of com- peting service, that I can think of anyway. It is a peculiarity of pay television. Mr. KORNEGAY. Where have you ever seen Elizabeth Taylor and Richard Burton on free TV. Mr. HARVEY. I did see them on free TV. It was not very good, as a matter of fact. Mr. MACDONALD. The House is in session. Are there any further questions? Mr. BROYHILL. I don't have any questions, Mr. Chairman. I appreci- ate your coming here. I regret that Mr. Goodman was not able to be here but I can understand that it was a matter beyond his control. Mr. ADAMS. I think he is on a p~ane right now trying to get here. Mr. BROWN., NBC appeared in favor of the establishment of public television. Was there a great public demand for that? Mr. ADAMS. No, I don't think there was a great public demand on the part of the large masses of people, but for many, many years the educational enterprises of this country and a good deal of the leader- ship of the country have felt that public television, so-called public television, noncommercial broadcasting, could supply a specialized service that by its very structure and its function commercial television cannot supply as extensively as some people would like. Mr. BROWN. What is that service? Mr. ADAMS. That service includes more detailed discussion of public affairs and analysis than a mass audience can take and cultural pro- grams of specialized interest. Mr. BROWN. You mean as differentiated from the superficial news coverage that we get on commercial TV? PAGENO="0197" 193 Mr. ADAMS. That would not be my characterization, Mr. Con- gressman. Mr. BROWN. Between detailed and superficial is what we are dis- cussing. Mr. ADAMS. Well, superficial is a sort of vituperative epithet. Let me give you an example. Mr. BROWN. Limited? Mr. ADAMS. More limited in quantity. What a commercial television network does a minority of its time a noncommercial broadcasting en- terprise can do all the time because it is not dependent on large audi- ences. Mr. BROWN. You are spending 25 percent of your time on public affairs broadcastim»=1 see :, if the artist chose or the movie owner or rights holder chose not to sell it on commercial TV there is nothing on commercial TV, is there? Mr. ADAMS. That is true, but the experience has been that com- mercial television programing has broadened its program scope very broadly over the past 5 years. Let us take movies as an example. Motion picture films of fairly recent vintage, that is 2 or 3 years old, and major productions are now regularly on commercial television. Mr. BROWN~ Why? Mr. ADAMS. Because there is a substantial audience for them when shown on television. Mr. BROWN. That is not the reason you put them on. You put them on because somebody pays for them. Mr. ADAMS. Somebody pays for them only because there is a sub- stantial audience watching them. Mr. BROWN. Should not that substantial audience have an oppor- tunity to watch without commercial interruption? Mr. ADAMS. That is a question for your judgment. T" 1 tial audience that now ~ £1~~es the'~ PAGENO="0198" 194 Mr. ADAMS. I think necessarily. Let us take the Commission's fourth report- Mr. BROWN. After they put "My Fair Lady" on pay TV, why can- not NBC outbid them and put it on commercial TV or put it on public TV for that matter? Mr. ADAMS. It is a possibility but `I doubt whether the commercial value to advertisers would be as great on that basis and whether the payments we could make would therefore be as large as the program suppliers are now getting. I think pay television would tend to skim off the cream of popular appeal and exhaust their appeal before free showing. Mr. BROWN. Let us relate this to something that has been on present commercial teliwision. I see reruns all the time, the series of only a couple of years ago are making the rounds again in the middle of the afternoon or in the early morning, whenever it is. Somebody has bought those things and put them on and got them sponsored. Would there not be a commercial possibility of selling "My Fair Lady" or the world series games again next week at night so that I could see it so that I would not have to stop what I am doing during the day to see it? Mr. ADAMS. I think that is a possibility, sir, but at a much lower economic level than the original broadcast. The example you use iftdi- cates that. The network fare that you see in the middle of the after- noon 2 or 3 years after it has gone off the network is in syndication. The owner of the rights has licensed the material for television exhibi- tion on a station-by-station basis at a small fraction of what the net- works originally paid for a national network exhibition fee. I don't think that small fraction as applied to a network rerun of what was formerly a pay television attraction would be enough to sustain the whole network program enterprise. Mr. BROWN. One of the motives of the Public Broadcasting Act, according to some of those people who testified before us, was to raise the cultural level ~f Americans. If somebody wants to put a cultural event on pay TV and has paid heavily for it out of money that people put in the slot, or mail in, or however they are going to do it, doesn't that broaden the cultural re- ward, the financial reward, that people who undertake cultural activi- ties get, and encourages the opportunity for expansion of culture? Mr. ADAMS. If that happened I think what you said would be true. One of the purposes of the Hartford experiment was to see whether it would happen. As the figures in the statement indicated, it did not happen at all. The "cultural" material- Mr. BROWN. It will happen if we let the FCC say 10 percent of the effort must be in the cultural line, or 20 percent or 30 or 50. I would presume they can do this if they say that 90 percent of it is the limit which can be in the sports and otherwise. Mr. ADAMS. To begin with, we disagree very strongly that the Commission has authority to lay down that sort of program regula- tion and to quota the amount or types of programing that can be shown on the air. Mr. BROWN. if this committee does not speak, the Commission, I would take from the testimony of Mr. Hyde this morning, will take that authority unto itself. PAGENO="0199" 195 Mr. ADAMS.. I guess that is a reason for the committee to speak. Mr. BROWN. By the acquiescence of the committee we would permit that tohappen if that is the s&j~uence of events. Mr. ADAMS. Then I guess the only recourse the public interest would have would be the courts. Mr. BROWN. Thank you. Mr. MACDONALD. Thank you very much, gentlemen.. The hearings will be adjourned until tomorrow morning in room 2322, at 10 o'clock. (Whereupon, at 12:25 p.m., the subcommittee adjourned, to recon- vene at 10 a.m., Tuesday, October 10, 1967.) PAGENO="0200" PAGENO="0201" SUBSCRIPTION TELEVISION TUESDAY, OCTOBER 10, 1967 HousE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMUNICATIONS AND POWER, COMMIm~E ON INTERSTATE AND FOREIGN COMMERCE, Was1th'i~gton, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2322, Rayburn House Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) presiding. Mr. MACDONALD. The hearing will come to order. This is a continuation of the hearing on subscription TV. The first witness is our very distinguished colleague and member of our committee, John Dingell of Michigan. STATEMENT OP HON. JOHN 1). DINGELL, A REPRESENTATIVE IN CONGRESS PROM TEE STATE OP MICHIGAN Mr. DINGELL. Mr. Chairman, I thank the committee for the privilege of being here this morning. I am aware of the fact that the committee is busy with an abundance of labors and that this fine subcommittee, so ably chaired by the gentle- man from Massachusetts, has many witnesses to be 1 reason, Mr. Chairm~. J 1 ~ rea~ ion, I d many imp d~ ~erate consideration and action by the that the Commission is the Federal agency sibihty and equipped with the expertise nee~ (197) PAGENO="0202" iblic interest wh 198 communications industry. Instead' amission y has coni iterest The grei lug itself are numerous review a few of them. THE SPEOTIWM What has the Commission done to solve the problem of allocating the radio spectrum? At the insistence and direction of an exasperated Congress, the Corn- mission has failed to follow through. Since that time and with increasing fre- quency, each day's mail to the Congress brings more complaints and pleas from taxpayers and from police departments throughout the nation who urgently need and require space on the radio spectrum. For years the Commission has had "un- der consideration" a study and analysis of a proper allocation of radio frequencies to commercial public safety users of land-mobile facilities. But instead of once and for all establishing a workable, usable system, the Commission has stumbled oii in patchwork fashion without usefully and equitably allocating the spectrum. In addition to the 7,~O commercial and educational radio and television trans- mnitters in the United States, there are five million transmitters that are not used for such broadcasting. Not only police and fire departments, but the space pro- grain, aviation, and business firms require additional space on the spectrum. I have found shocking the many comments I have received from the Chiefs of Police throughout the country describing impossible circumstances under which their departments labor because adequate frequency space has not been allocated to them. According to the Commissioner of Public Safety for Mt. Vernon, New York: "During our recent disturbances during July our one frequency was a specific example of various instances where a shortage of radio space hampered our men in the efficient performance of their duty and delayed or prevented prompt and effective response to emergency . . ." The Chief of Police of Cleveland, Ohio, has written that: "This department . . . desperately needs more frequencies. . . because Texas police departments are on the same band as the Cleveland Police Department, this creates obvious confusion in our broadcasts. . . . During riots or national catas- trophies the police and Ohio National Guard have no mutual radio frequency." As recently as August 23, the Los Angeles Police Department stated: "The Los Angeles Police Department still has not been able to activate its planned city-wide emergency frequency because of a lack of a frequency which can be assigned to that use. . . . The lack of radio frequencies for critical public safety service has become acute." The Chief of Police of Newark, New Jersey, has said: "Even during normal operations, we are seriously handicapped because of a lack of available frequencies. It was a serious problem during the recent disturb- ance in our city and the solution to this problem is a reallocation of the fre- quencies, particularly to those larger cities who have considerable mobile equipment in the field." On September 26 of this year, the Chief of Police of Sioux City, Iowa, wrote of his growing concern about the channel crow-ding of the public safety radio frequencies: "We share our frequency with the cities of Pipestone, Minnesota; Laverne, Minnesota; New Ulm, Minnesota; and Davenport, Iowa, and should a mass civil disturbance occur in Sioux City. this outside traffic could easily disrupt our com- munications network here and render it ineffective. This has occurred during routine daily work, but I can foresee serious problems if we urgently needed to utilize our radio and were unable to (10 so because of foreign interference. My department relies omi the radio system and without it, I feel that law enforcement deteriorates badly.' Instead of devoting its energy to solving this important problemim, the Commis- sion has ignored the seriousness of the situation. It proposes to allocate precious spectrum space for yet another forum of commercial entertainment, completely ignoring the present pressing necessity to study and reallocate the spectrum for Public safety and other pnrposs. impom PAGENO="0203" 199 ~ TECHNOLOGY To what extent has the Commission endeavored to improve the technology of radio or television broadcasting We all know the answer. It has done next to nothing. It has made itself a servant of the Goliaths of the communications in- dustry. If those Goliaths, for their own purposes, want to make modifications and adjustments, they can generally count on the Commission to go along. If technological innovation is not in their selfish interest, then there will be no in- novation or improvement in the public interest because the Commission fails to fulfill its role as the public's David. Stations merchandise goods so that their owners can merchandise their sta- tions. Does this utilization of the public airwaves serve the public interest? I be- lieve most Americans agree that the public interest requires more than profits alone. I requires public service as well. To what extent has this Commission attempted to improve the content and the form of programs? The modern miracle of broadcasting can give us so much. It need not provide the same bland emptiness hour after hour, day after day, week after week. But the Commission has not promoted the public interest by requiring diversity of program content or by encouraging those persons who profit from the use of this public property to invest a reasonable portion of their resources lnto adequate diverse public service programming. As a matter of fact, the Congress is soon expected to give its final approval to the Public Broadcast- ing Act of 1967, to remedy the Commission's inaction. Does the Commission honestly believe that promoting a new form of private fee use of the public domain serves the public interest? I do not. PROTECTING THE PUBLIC INTEREST The most important responsibility that the Commission has to the American public is, in the words of the Communications Act of 1934, to act "as public convenience, interest or necessity requires." To what extent has this watchdog of the public interest exercised Its responsibility `to protect the public? `The `airwaves and the radio spectruni are public property-they are part of the national doniain-they are a natural resource belonging to everyone in America. The `Commission is charged with regulating this precious resource in the public interest. The TOO regularly permits the purchase and sale and resale of what is the public domain by entrepreneurs `whose only interest is to maxi- mize profit Examples are legion All too often we see reports of another major financial coup by broadcast-station-merchants acting with the implicit or explicit approval of `the Commission. This is no different than if the `National Park Service leased a public park to a private *businessman for a dollar a year and permitted that businessman to sell and resell the right to exploit the park to the `highest bidder. `Any government official would find it impossible to justify such action. Yet this is exactly what `station owners do and the `Commission has ta'ken no effective steps to discourage or terminate `this misuse of public property. Shouldn't the Commission spend more of its time and energy reviewing the damaging impact such misuse has upon our national economy? HOUSE'CLEANINQ This year once `again the term or parte ha's been injected into an FCC pro- ceeding. The Commission should have learned `by now that `Congress means what it says when it forbids cc p'arte proceedings in adjudicatory `matters. In short, `has this `agency acted guard to the public interest? Has it embarked upon studies which would ena'ble it to recommend legislation `to insure that the public gets an Seven `break from `the healthy `commercial exploitation of the airwaves? Has it acted to `assist public safety by fair allocation of the airwaves? Has it "acted t'o prevent the same bland `programming by every station on the air? WHY SUBSORIPTION TV? `The Commission has not resolved these problems, instead, it has spent untold time and effort pasting `together a new communications horror-so~cal'led sub- scription television. `Once again, unhealthy exploitation is taking precedence over the people's interest in high quality non-fee programming. Fifteen years have beefi devoted `to this pro~'ect with scarcely a thought given `to whether there is a need for it. Instead of exercising its statutory responsibility to regulate the PAGENO="0204" 200 present system of broadcasting, the Commission proposes to create a new form of broadcasting. This act of the Commission is *an admission of its own inadequacy. Rather than face up to the issues, once again in its character- istic fashion it has avoided them. instead of improving free television it is merely creating an alternative medium without any considered forethought, without any direction, and s~ithout the faintest guarantee or assurance that this new gimmick will serve the public interest. This is regulatory bankruptcy What basis has the Commission estahlished for its latest panacea to right the wrongs of commercial broadcasting? Wha:t thorough studies has it made during all these years Which clearly point to the direction it now proposes to take? I have reviewed the Cbmmission's recently proposed fourth order and report and its accompanying proposed regulations for subscription TV, and can see no logical or compelling reasons for the Commission's action. From the time it asserted its dubious authority, the Commission's reasoning has been fraught with contradictions, vagaries, and inaccuracies which cannot go unchallenged. By what specific statutory authority does the Commission find that it has the power to license non-experimental subscription television stations to use a portion of the public 4omain? In my opinion and in the opinion of many legal authorities in this field it has no such right. It is true that from time to time the Commis- sion has written to Members of Gongress with regard to its statutory authority to permit subscription television. It has not received that authority. In fact, reso- lutions were adopted by the House Interstate and Foreign Commerce Committee in 1958 and 1959 requesting the Commission not to authorize subscription TV cu a permanent basis without appropriate legislative action. The Congress has not amended the Federal Communications Act to permit subscription television. Nevertheless, the Commission has att~mpted to invent a jurisdictional basis and thereby to thwart the will of Congress. The Commission hangs its hat on Sections 301 and 303 of the Communications Act for authority. A careful examination of Section 301 reveals that it is merely a general purposes provision. It does not give any authority whatsoever to the Commission to act. That authority must be found in the appropriate provisions of the Communications Act which specifically delegate to the Commission its rights and its power. These are enumerated in Section 303. If the Commission relies upon Section 303(g) which provides "for the experimental use of frequencies and generally encourages the larger and more effective use of radio in the public interest," then it is clearly erroneous to build upon that provision by permitting `non-cuperi- mental, permanent type licenses for pay TV. The rest of the jurisdictional argu- ment which the Commission has proffered concerns itself, curiously enough, with the express prohibitions relating to broadcast licensees, namely SectIons 315, 31T, 325 (a) and (b) and 32(1. Simply stated, the Commission cannot claim stat- utory authority to grant these licenses on other than an experimental basis because the statute does not give the Commission that authority. Does the Commission now rely upon the decision in Connecticut Uo~nm4tte~ AgcAn8t Pay Teleeisioa v. Federal Uoeimunioations Commission as authority to license a subscription television station on a non-experimental, permanent type basis? Nothing in that decision grants the C*ommis~ion such authortiy. The deci- sion is specifically based on the Obvious power of the Commission to grant an experimental license. Let us make for the moment the unjustified assumption that the Commission does have the jurisdictional authority to grant a non-experimental subscription television station a broadcast license. Has the Commission forgotten that all its license grants must be "In the public interest"? How can the Hartford experiment justify subscription television as an activity "in the public interest"? If the Hartford experiment proved anything, it was that there is no extensive public demand for subscription TV as presently conceived. To begin with, the Commission decided that the best kind of an experiment for subscription TV would be one taking place in many markets so that the findings would enable the Commission to make valid projections based upon a broad sampling. In 1957 in its first order and report on subscription television the Commission made 20 m!arket areas `available for the operation of experimental subscription television stations. However, so little Interest was generated that the experiment was made in only a single market area-an area, incidentally, which is not in the top 10 malor TV markets of the country. The Hartford trial actually was supposed to begin operations after 2,000 sub- scribers had been obtained Its propenents including the Commission looked for ward to installation of some 10,000 decorders the first year and eventually 50,000 PAGENO="0205" 201 subscribers. What were the results? The trial began with 188 subscribers includ- ing 48 who were test subscribers and 12 who were complimentary subscrlbers~ not 10,000. By the end of the second year there were only 4,782 subscribers, not 50,000. It was at that juncture that the proponents recognized their failure and placed a 5,000-subscriber "limit" to the experiment. Moreover, the FCC documents reveal the shocking fact that throughout the Hartford experiment, the average number of persons who viewed subscription television at any one `time wan 151. This was one-fiftieth of one percent of the total Hartford audience. The proponents of subscription television originally told us that pay television would provide programs of educational and cultural value not available from commercial broadcasting. They would offer a wide choice of fine arts, educational, informative, and similar programs to the public. The experiment conducted at Hartford demonstrated that subscription TV would not provide these choices Ninety-three percent of the programs shown were movies and sports events and the small remaining percentage devoted to the type of programming that STV proponents claimed were to be broadcast in abundance. Moreover, the proponents of STV now admit in documents on file with `the FCC that they are not able to obtain first-run films, outstanding sports events, and other "box-office" attractions. There is no good reason why the Commission has refused to explore the single most important issue arising from the impact of pay TV; that is, how free TV will be affected by the competitive aspects and the monopolistic tendencies of subscription TV. The Commission also has avoided the questions of the impact which STV might have on OATV and noncommercial educational television. In customary FCC fashion, the fourth order and report `relates that the Commission has decided to defer analysis of `the real STV/CATV problem for another day. Unfortunately, technologh~al `advan'cement cannot wait. It is entirely improper that the diverse and complex ramifications of CATV would be omitted from any Important `study of subscription television. As to the impact of STV on iioncommerical educational broadcasting, the House has recently passed the Public Broadcasting Act of 1967. This legislation ulti- mately will call for outlay of substantial funds to finance an ambitious and neces- sary project to provide innovative programs for the American people. Yet no- where in the Commission's study of STV can we find even the slightest hint as to what STV's impact might be on ETV. Essential to any consideration of STV, of course, is cable TV. Despite the limit- less possibilities cable communication offers to conserve valuable spectrum space, It is `but another area of FCC neglect. How ironic that in view of the lack of available radio spectrum' for the many necessary services which it must provide, the FCC should fail to give us an expert analysis of the benefits which cable transmission might offer. Why didn't the Commission include a study o'f cable transmission in its study of subscription television? On page 75 of the proposed order and report, there is a discussion of the fact that although pay TV inherently requires a payment of fees by the public, there is no necessity for the Commission to decide what these fees should be-in other words, that the situation does not require rate regulation. After all, the document blithely states, "The public is free to subscribe or not to subscribe to STV services." They then go on to say that the market place is the best regulator, and will undoubtedly establish, over a time, what the proper fee structure would be. This is just unbelievable-to give an individual firm a monopoly on one of America's largest markets, and then to allow them to charge whatever they desire. Perhaps we need to conduct a course in basic economics for the members of the Commission. I would have hoped that, at this late date, these gentlemen would realize the distinction between the granting of a monopoly and the competition of the market place. I find it frustrating and exasperating that the agency to which Congress delegated the responsibility to protect and serve the public interest has avoided the problems it was set up to resolve and embarked instead upon an ill-conceived course. On page three of the proposed order and report, there is a rather detailed discussion as to the "lengthy period" during which the Congress might have have provided "Congressional guidance" on this matter. It is stated that "The Congress has not acted on the matter. We welcome any guidance it may wish to give. PAGENO="0206" 202 Mr. Chairman, it is true that the Congress has not acted on the matter. It is true in the same sense that the Congress has not passed a resolution requesting the National Park Service not to put a cork on Old Faithful Geyser and sell steam to the nearest electric power producer. In view of the rather abject record compiled during the test run of pay TV, one would not have supposed that any "guidance" was necessary to prevent the Commission from establishing subscription television on a permanent non- experimental basis. Gentlemen, the Commission has asked us for "guidance." I feel we would be remiss if we do not provide it in an specific and clear a manner as possible. In this regard, there is pending before this ~emmlttee H.R. 12435 which I introduced with but one though in mind. It amends the Communications Act to provide that "Nothing in this Act shall be held to empower the Commission to authorize any person to engage in the broadcasting of pay television programs." I urge you to recommend to the Full Committee that this bill be favorably reported and sent to the Floor for passage at the earliest possible date. Such action would provide the Federal Communication Commission with the clear intent of Congress and would prevent any recurrence of this seeming Inability by the Commission to resolve the subscription problem. Mr. DINGELL. I ask leave of the chairman that I may be permitted to summarize briefly the comments that I would have given to this dis- tinguished sutcommittee on this matter. Mr. Chairman, for the record, my name is John D. Dingell. I am a Member of Congress from the 16th Congressional District of Mich- igan. As you will recall, Mr. Chairman, I have long opposed the use of the free broadcasting spectrum to provide substantial financial profits to private individuals through the device of charges for receipt of broadcasts. I believe it is a shame that we have to waste the time of this very busy committee to try to rectify an absolutely wrongheaded determi- nation on the part of either the Federal Communications Commission or certain members thereof to establish sithscription TV despite the clear expression of Congress to the contrary, and despite the economic failure, the visible lack of public acceptance, and outright public re- jection. Despite the repudiation by Congress repeatedly and notwith- standing expressions of outrage from Members of Congress and oppo- sions from congressional committees, the Commission appears deter- mined to go forward toward establishment of pay or subscription TV. First of all, this proposal in the fourth order and report of the Federal Communications Commission is on the most doubtful juris- dictional grounds. The agency bottoms its so-called authority to go forward on this under section 303(g) of the Federal Communications Commission Act. A study of that particular section makes it very plain that it authorizes the Commission to "study new uses of radio." The section goes on to "provide for experimental use of frequencies" and then it finally authorizes the Commission "generally to encourage the larger and more effective use of radio in the public interest." I see nothing in there that authorizes the erection of a tollgate at the family's television set and I see nothing that authorizes the use of subscription TV. The history of the act is very clear. I can find nothing to indicate that subscription TV was in contemplation of the original authors of the Radio Act. I could find nothing in the amendments to the Federal Communications Act or the act, itself, authorizing the use of tolls and charges at the television set. PAGENO="0207" 203 More importantly, the history of broadcasting in this country is entirely against this concept and I would point out that there is no showing whatsoever, even the most specious, that the use of pay or sub- scription television would be "in the public interest," as required by section 303(g). So, I believe that jurisdictionally the Federal Communications Corn mission has no authority whatsoever to proceed in this direction. Cer- tainly when the words "public interest" are considered in their proper context it becomes very plain that there is no authorization to the agency either on jurisdictional grounds or on the solid grounds of public policy to convert what is now a workable and working free television network in this country to pay television The Federal Communications Commission's own report indicates on the basis of its experiments that 30 percent of the American people will be unable, because of the economic cost of it, which will run some- thing like $60 a month, to afford the cost of subscription or pay TV. it is obvious to me that this then does not meet the test of public in- terest upon which the Commission could base its powers and its judg- ments in that matter. Second of all, Mr. Chairman, the proposal simply resurrects a great failure. The Hartford test was a total failure in two regards. One, it never achieved the number of subscribers that it had proposed. They had contemplated 50,000. They got less than 5,000, of whom a signifi- cant number were either complimentary or experimental u~ers of the test. In addition to this, it provided no new programing, no higher quality programing, and in programing it was a complete and total loss. Now, there are technical problems, Mr. Chairman, which should be viewed very carefully by this committee. One of the things that this committee should query the Commission on very carefully is why are they diverting from free television a very valuable and a very broad portion of the spectrum into toll or pay or subscription TV? As this committee well knows, the spectrum is badly crowded. There is a tremendous demand for business, for maritime, for educational, and for public safety use of the television spectrum. Overcrowding of these portions of the assigned spectrum has long since reached crisis proportions. `I am chairman of a subcommittee on the Small Business Committee of the House of Representatives on which my good friend, Mr. Broy- hill, also has the pleasure of serving, and we have been much troubled in that subcommittee about the inadequacy of space for business, mari- time, educational, and for public safety. The recent riots of last summer tended to point up the fact that there is at this particular moment a gross inadequacy of spectrum in all of these areas but particularly in the area of public safety. I have submitted a number of samples of communications from per- sons and particularly police chiefs and administrators in the law enforcement area pointing out the great shortage of spectrum and the problems which they have in terms of providing for the public safety in the event of riots because of spectrum shortage. Mr. Chairman, this amount of spectrum could much better be used to provide for the public safety, than to provide for a silk-stocking PAGENO="0208" 204 experiment on the conversion of a free resource into a toll or type of operation. Now, Mr. Chairman, it is very clear that the proposal will not in- crease television services. As a matter of fact, a careful reading of the order and report of the Federal Communications Commission recently presented to the committee indicates that the Commission expectation is that the proposal will convert what is presently free television spec- trum into pay or toll TV so that in effect a portion of the present spec- trum will be siphoned out into television for hire rather than in afford- ing new broadcasting opportunities. So, what the fourth order and report will actually do will be to close much of the spectrum which is presently available to persons of the lowest income, and to deny them opportunity to the high quality programing the Hartford test says will not be forthcoming. Now, this fourth order and report, Mr. Chairman, is an extraordinary document. It asks congressional guidance. And I believe this committee can feel very free on that basis to scrutinize very clearly, and advise freely as to its will. I believe this committee can feel very free to come forward with appropriate legislative guidance to the Commission without con- cern on the Pillsbury decision. It is interesting, and I believe the committee should note this, that that device is signed by only two of the seven Commissioners, and by one, who, while signing it did not endorse either the document or its contents. Now, I believe another question of public policy that should arise is that subscription television will interfere with the implementation of public television. First of all, it will take Commission time. Second, it will compete for writers, technicians, artists, engineers, and other technical and engineering personnel now presently in short or in inade- quate supply. It will compete for public acceptance and viewers' time. It will also compete for money and investment. It will involve the Commission in matters of controversy which will preclude adequate fostering of pub- lic TV and also an adequate approach to an abundance of other prob- lems which urgently require attention of the Commission. These should not remain swept under the rug while the Commission rambles so far afield to tilt with windmills like subscription television. Public television, I believe, offers a much better device to get new quality programing and the type of programing which the Hartford tests prove that the subscription television cannot, will not, and does not give. I believe that the Commission and this committee should take vigorous action to see to it that public television is fostered. We should not allow the kind of outrage that we see being prepared for our people in subscription TV. There are many questions that the Federal Communications Com- mission should better use its time with. Many are problems which have long been before it which urgently require solution. First of all, there is the ancient and hoary problem of clear channels, one which has been around for as long as anyone can recall, and on which very little progress has been demonstrated of late. There is the problem of providing adequate service in the so-called white areas and the problem of inadequate service in many of the other areas in the radio AM band use. PAGENO="0209" 205 There is the gross shortage of `business, educational, fire, police, and public safety radio spectrum. There is the question of perfecting Commission rules to more expeditiously finish the business before it. I will point out that a careful scrutiny of the way the Commission proceeds in most of its matters indicates that once a matter falls before the Commission, absent some extraordinary happening, it can be ex- pected to outlive any of the litigants. Now, it is also fair to say that the Commission should devote itself to a rigorous attention to the problem of price manipulation of sta- tions and to the trafficking in stations. There is more careful attention needed to devices which will stimulate new advances in programing. It is also necessary that the Commission should devote itself to the achievement, in the public interest, of control, of licensing, and of fair regulation of CATV and CATV charges. CATV is growing like Topsy, with the most minimal attention by the Federal Communica- tions Commission, which has taken inadequate steps to control, regu- late, and direct its growth. I believe that if the `Commission is sincere in wanting to increase the amount of programing which is available to the American people, the Commission should be exploring wire alternatives to `STy rather than to be engaged in the active use of trying to prostitute or to con- vert a portion of the broadcast spectrum to toll or pay or subscrip- tion TV. I believe last week the Commission could well have dedicated itself to the very broad authority they have, some of which they cite in con- nection with their fourth order and report, to advance the science of `broadcasting and the better use of the airw'ays. Now, Mr. Chairman, I want to give a few more thoughts, if I may. First of all, subscription television raises more questions than it answers. How can we be assured that there will be no siphoning of good programs, of spectaculars, outstanding sports events, programs, and stars and persons of this kind who have achieved great acceptance on commercial television? The Commission in its order and report indicates that they cannot give this kind of guarantee and assurance. The fourth order and report proposes to preven't sports from being siphoned off by the 2-year limit which was discussed yesterday in this committee by Chairman Hyde. Most of the membership of this com- mittee who listened very attentively recall the difficulties that the Chairman got into with this statement. The fourth order and report very clearly indicates that the cost, the opportunities, and the advantages of subscription television are such that financial arrangements will be possible to overcome revenue losses and other difficulties `that might be anticipated in the waiting period of 2 years. In fact, the so-called waiting period of 2 y'ears is really one season, let us say, of football and baseball, and not 2 years, at all. These are some of the problems that I believe have not been ade- quately treated in the report. In addition to this, Mr. Chairman, in other types of programing the Federal Communications Commission proposes to instruct STV operators as to program content and schedule content. I would point out `that this again raises grave questions under the Federal Commum- 86-399 O-~6~-14 PAGENO="0210" 206 cations Act, since the act precludes direct instructions to and inter- ference in programing by the Commission. These are just some of the questions that are raised by the fourth order and report. Now, Mr. `Chairman, I want to make it very clear I do not oppose subscription television entirely by wire `with no concommitant use of frequencies. I feel if a person `wishes to provide that service it is en- tirely appropriate that he should be allowed to do so. I believe that service would not be using a badly clogged spectrum which properly belongs to all the people of this country. I feel very strongly that we should not convert the public airways into a device that will favor 70 percent of the people and exclude 30 percent of the people, according to figures of the FCC. H.R. 12435, which I have authored, is presently before this com- mittee. It would bar STV. I must confess I drafted that bill in great haste when I saw this fourth order and report. I did so in the secure hope that I would get something before this committee and 1 want to tell you, Mr. `Chairman and members of the committee, how pleased I am to see your attention to this great problem. I understand there `have been some efforts by the persons interested in subscription television to place comments in public places and newspapers and periodicals critical of this committee. I believe this committee is carrying out a very valuable function, of oversight. This it must do `to assure proper administration by the Federal Cominunica- tions Commission. I want you to know, Mr. Chairman, that I certainly applaud what the committee is doing. Lastly, referring again to H.R. 12435, 1 feel very strongly that sub- scription television `is a bit like a viper. You have to squash it in the egg and not let it get out to create mischief. I believe that vigorous action by this' committee to destroy it before it is able to get into the position where it is going to cause mischief in our society i's very much in order. I hope this committee will devote itself very carefully to the thought of getting out legislation, not necessarily H.R. 1243'S or any other particular legislation, but just legislation which will stop subscriptiontelevision for good and all. `This committee, the Congress, and the Federal Communications Commission should devote them- selves to matters of vastly more importance and not fiddle around with something which won't work, which is mischievous and which converts a portion of the public resources to private gain in a manner which is thoroughly inconsistent with the history and practices of the `Con- gress, of `the Federal Communications Act, and of the radio and tele- vision industry. Mr. MACDONALD. Thank you very much, Mr. Dingell. You have made a fine presentation of your point of view. There are two things that entered my mind when you were giving your very fine presentation. I know you have always fought very hard for the public interest as a member of this committee and as chairman of the Small Business Committee. Two things entered my mind. I was not quite sure of the reasoning behind your endorsing pay TV by wire. Does that `mean by cable? PAGENO="0211" 207 Mr. DINGELL. I did not endorse it, Mr. Chairman. I simply said I had no objection to it. If the Commission were to choose to authorize TV by wire, I said I would not have any objection on the basis of the knowledge that I have at this particular time. We have, for example, CATV right now and under the orders of the Commission CATV can originate programing. This, to all lntents and purposes, is really pay TV by wire already. It should, however, be most carefully controlled in this regard. I would point out that neither the charges nor the practices in that particular industry are being adequately scrutinized by the Federal Communications Commission while they are tilting with this other windmill. Mr. MACDONALD. The other question I was going to ask, Mr. Dingell, is this: Is it not true as I have heard and as has been sent to me in the mail that the AFL-CIO has endorsed the proposition of pay TV and the reason I ask this is because you used the phrase that this would just benefit the silk-stocking people and the AFL-CIO is not known for caring that much about the silk-stocking type of person, so-called. Mr. DINGELL. I received a pronouncement from the AFL-CIO some time back which would tend to indicate that they have changed their position of opposition to subscription or pay TV. I must confess when I saw this I was very busy and I did not read the particular pronounce- ment with the care that I think it probably deserved. I would just tell the committee my old dad was the founder of a trade union. His name is on the charter. He was discharged for union activity in 1914 and was sent west to die. So, I have a very strong pro labor philosophy. But I recognize that the AFL-CIO is entitled to be wrong just like everybody else. I certainly would accord them that luxury. Although I have great regard for them and high respect for them, I do not pro- pose to let them lead me into error, too. So, I am still opposed to it. I would have to say that I think even the AFL-CIO is entitled to a mistake every once in a while. Mr. MACDONALD. The last thing I think we ought to clear up for the record. I think in your statement you said just three Commission members signed the report. Mr. DINGELL. That is the way I read it. Mr. MACDONALD. Actually, those three members were a panel set up to report to the Commission. Mr. DINGELL. That is right. Mr. MACDONALD. It is my understanding that even though Mr. Wadsworth's position on it is a little ambivalent, the three did sign it and sent it to the Commission and then all members present, and I think the Commissioner yesterday said there were six present and one absent, did sign the final report. Mr. DINGELL. That may be correct, Mr. Chairman. I was most struck in reading the document that they submitted that two signed it and one appeared to hold his nose and sign it, Mr. Chair- man. I couldn't get any more out of it than that. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN DEERLIN. Thank you, Mr. Chairman. PAGENO="0212" 208 Mr. Dingell, is there any qu~stion in your mind as to whether the FCC would have jurisdiction to regulate subscription television if it were delivered by cable, rather than through the air? Mr. DINGELL. Well, you run into this problem in connection with the regulations. The FCC has control of rates for regulatory purposes in interstate commerce. Now, there are certain exceptions that have been made to this in areas where TV broadly affects intrastate commerce and, of course, they have control over rates in international carriage. So, the FCC would have the power of regulating rates for services of this type if it were to be sent by wire. The other regulation would be carried out by communities and States under their appropriate State and local laws where the trans- missions were entirely intrastate in nature. Mr. VAN DEERLIN. Would it be your idea that if the Commission did have jurisdiction that it should exercise some of the restraints over programing, on subscription television, that it envisions doing on over-the-air delivery? Mr. DINGELL. Well, I am not altogether sure, first of all, that the Commission has the authority under the law that it professes to con- trol programing on subscription television over the airways. I would not be altogether sure whether it would have the authority to regulate its programing over the wires if it were to try to assert that. I have not studied these points in any great depth, but the con- sideration I have given to the matter indicates to me there is a grave question whether the Commission would have this authority either under the Federal Communications Act or under the Constitution. Mr. VAN DEERLIN. You do not limit this to subscription television, then? Mr. DINGELL. No. Mr. VAN DEERLIN. You would doubt that it has the authority over programing in regular commercial television? Mr. DINGELL. That is correct. Mr. VAN DEERLIN. I notice you use an argument against subscrip- tion television that was used against public television-that it would compete for talent and, notably, that it would compete for talent with public television. Do you think this is a very strong argument? Mr. DINGELL. I am not so troubled about public television compet- ing with, let us say, the general area of commercial telecasting. Ap- parently the networks and the stations were not particularly troubled about this and generally tended to support the legislation establishing public television that this great committee just recently guided through the House. But, public television is a rather difficult situation. It is new, young; it hasn't got its financing in order yet. It has not gotten all its stations on the air. The corporation has not yet been fully established and it is not in a position where it can really stand additional competitive pressures, in my opinion. My feeling is that if we are interested, in good, high-quality pro- graming in this country, good television, television that will offer the things that the Commission said it would offer but the fact it did not, that we should encourage this by public television, by encouraging public television, by affording a climate in which it can grow and PAGENO="0213" 209 prosper. I think the Commission is very broadly disregarding the public interest when it ignores the real prospect and promise of public television. I think it ought to be fostering public television, seeing to it that it has the best possible climate to grow in rather than going off and making specious arguments as to its jurisdiction to create something that nobody really wants. Mr. VAN DEEnLIN. Thank you, Mr. Chairman. Mr. MAODONALD. Mr. Broyhill. Mr. BROYHILL. Thank you, Mr. Chairman. As usual, our colleague from Michigan has provided us with a great deal of information on this subject as he does on other subjects There has been discussion in this committee, and you have dis- cussed it too, about the statements that the FCC has made concerning the desirability of congressional guidance. You have been a member of this committee for some time. As far as you know, has the Federal Communications Commission made any formal recommendations to the Congress or to this committee concerning STV? Mr. DINGELL. First of all, I can recall no request by the Commission for guidance from the Congress previous to the fourth order and report. They have said from time to time if the Congress does not give them guidance they will do so and so. But that is very, very different than a request for guidance. I don't view it to be the power of the Commission to dictate to the Congress when we are going to tell them what they shouid do. They are an arm of Congress, and subservient~to it. They have received a number of expressions from this committee, from the Senate Com- merce Committee, from members of this committee, from Members of Congress generally, all of which without exception, to the `best of my recollection, have been hostile `to subscrip'tion television and have been opposed to the Commission t'aking any actionS without further d'irect instructions from the Congress. Mr. BROYHILL. You would agree with me that the FCC mistakenly assumes that congressional `silence signifies some consent to the course that the `Commission is presently taking? Mr. DINGELL. I would say that in my opinion it almost marks arro- gance. I don't think this is `the relationships that the Federal Commu- nications Commission should have with the Congress. The Congress is the dominant arm and has delegated certain authorities to the Federal Communications Commission. The Commission not infrequently tends to lose `sight `of this just as it tends `to lose sight of questions of public policy laid down in the `act. Mr. BROYHILL. I missed the first part of your verbal statement. I don't know if you read it in that part but I was amused by your state- ment, in your written statement `here, which says: It is true that the Congress has not `acted on the matter. It is true in the same sense that the Congress has not passed a i~esolution requesting the National Park Service not to put a cork on Old Faithful Geyser and sell steam to the nearest electric power producer. Mr. DINGELL. I also had in my `s'tatement, but I took it out, that the board of directors of a well-known automobile company had not fe'lt it necessary to pass new resolutions against the issuance of unsuccess- ful models of automobiles. There is a certain element `of commonsense in this that I think has been lost on the Commission. PAGENO="0214" 210 Mr. BROWN. That is no longer their prdblem. Mr. BROYHILTJ. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Rooney. Mr. Roo~irv. Mr. Dingell, I want to thank you for your excellent presentation this morning. I have one question abOut the Hartford experiment. I understand this has been going on for 5 years. If it is such a dismal failure, why would they not have gotten out of business 5 years ago? Mr. DINGEu4. I think this is a question that the Commission should ask. It is my understanding, if you read on page 7~ I summari2e very generally the experience that has occurred with regard to the Hart- ford "experiment." I point out how there has been a notorious failure by subscribers to subscribe. There has been a notorious failure in terms of production of new and special types of programing that they had looked for. The fare has been entirely sports and movies which have only been slightly newer and not at all different in kind than is avail- able with regular free TV. Indeed, that programing was for the same mass ~audience to which the networks play. I believe that statistical information is available to show, and I think the committee could well direct its attention to the fact that programing and financial fiasco was kept alive only by generous sub- sidies from the firms which conducted the so-called test. Mr. ROONEY. Mr. Dingell, don't you feel that if this is going to have any effect on the taxpaying public that it would be good in effect be- cause it would provide the networks with a little competition, thereby giving the~American public better programing? Mr. DINOELL. I have been as critical as anyone of the networks and I believe all of my colleagues on the Commerce Committee recall that it has been a rare day when the networks and I have traveled the same path. But I do feel very strongly that if subscription television was going to offer anything new this committee probably should sup- port it if it were going to meet the other tests of the public interest. The problem here is that the Hartford test has already proven con- clusively that subscription television does not offer new programing, does not offer quality programing, does not put any appreciable num- ber of ballets or operas or public-interest programs, debates and forums on the air. What STV will give is simply programing for the mass audience because that is the most economically viewable and maximizes the financial returns of the entrepreneur. In other words, he will get the most money back from mass, audiences, and he will program to earn the most money, not from the standpoint of the highest quality. So, I think the matter has been tried and found wanting. I don't think we will get quality programing from STV. Mr ROONEY I will yield to the chairman Mr. MACDONALD. Mr. Dingdll, I would like to point out that al- though I think it is a mistake for the FCC to get into the business of programing, in the order they pointed out that the pay TV would have to put 10 per cent of their air time into so called ballet, public service type of things. Mr. DINGELL. I really question whether or not they have the author- ity to do that. That is my problem. I don't see that under the Federal PAGENO="0215" 211 Communications Act that they have authority to dictate programs or program content. Mr. MACDONALD. I say in the order that we have been discussing and you have been discussing it does provide for 10 percent of the type of programing that you say is not going to be made available. Mr. DINGELL. If you were going to look at submissions to the Amer- ican people by the networks you will find that they are turning out about 10 percent of this kind of time. They might even, perhaps in some instances, be doing better than this, depending, you know, on the question of definition. So that, what you are really doing is convert- ing what we are now getting for free to a subscription charge-type Service. That is what you really are really doing with this subscription Mr. BROWN. Would the gentleman yield to clarify a point here? I understood NBC said they were spending 25 percent of their time on public service broadcasting. I did not understand that to include the general definition of cultural broadcasting. I thought the FCC limitation was only 90 percent of the time could be used in pay TV on sports and entertainment and left the other 10 percent open as to what they would use it for, whether it was news or something else. Is that right? Mr. MACDONALD. That is my understanding. Mr. ROONEY. I have no further questions. * Mr. MACDONALD. Mr. Harvey. Mr. HARVEY. I want to congratulate my colleague from Michigan on a very fine statement. As I understand his position, you are unmistakingly opposed to sub- scription television? Mr. DINGELL. Totally. Mr. HARVEY. But looking at your bill and trying to interpret your bill, if I place the right interpretation on it, let me say, your bill would not necessarily prohibit subscription TV forever in `the future but rather your bill says subscription TV shall not come into being until Congress has held hearings and made the decision on it. is that correct? Mr. DINGELL. In effect that is what the bill does. 1 believe this is a congressional decision. I would point out, as I did very briefly in my comments, that the bill was drafted in haste because of the needs of the situation. I believe on careful scrutiny the committee may find that there are technical defects in the bill. But I believe the intent of the bill is sound and would protect the public interest. Certainly if one of the problems that might rise is that the bill as drawn might absolutely preclude the, use of wire pay TV, this was not my intent. I intended to limit it to the use of the broadcast spec- trum. I have been advised that some people consider the wire to be a part of the spectrum. I certainly did not intend to include that. Mr. HARVEY. What you are trying to do in your bill, what you are trying to accomplish, let me say, is to transfer jurisdiction of this whole subject from the FCC as they have claimed it right to this committee where you feel it belongs. PAGENO="0216" 212 Mr. DINGELL. I am not trying to transfer it. I am trying to make clear where the authority lies, and it lies here, in this committee. Mr. HARVEY. The effect of it would be a transfer and to relieve the FCC of any jurisdiction, let us say, and. to put it in this committee. Mr. DINGELL. To make it very clear that they have no jurisdiction. I challenge the fact that they do. I support strongly the jurisdiction of the committee and I think as a matter of public policy alone this committee should make the decision and not the Federal Communica- tions Oornmission. Mr. HARVEY. I subscribe wholeheartedly to that view and I have expressed it, myself, that I think it should be this committee and this Congress that should decide whether we have subscription television or not and not the Federal Communications Commission. Mr. DINGELL. That is correct. Mr. HARVEY. I have no further questions. Mr. MAcDONALD. Mr. Qttinger. Mr. O~rrINGER. Thank you, Mr. Chairman. I am glad to hear from my good friend from Michigan for whom I have the highest regard. Very few times in my career have we disagreed on anything but I think this may be the first. I foresee the day, and I think very near in the future, when there will be available to the public the ability to select on their home television sets a wide variety of programs retrieved from a TV library, be it operas, symphonies, baseball games from the past, fights, what- ever the viewer may desire. The television set will be hooked into a computer and you will be able to have a range of opportunity through your television set that is completely beyond your ability at the present time. We will need a system of pay television to accomodate this kind of library-retrieval selection. The current experimentation will lay the foundations for this. Mr. DINGELL. You want to remember this is not an experimentation. The "Fourth Order and Report" does not set out. experimentation. There is no question but what under the act the Commission and under the resolutions of this committee, has authority to experiment. There is no experiment here. The FCC order looks to commercial STV. Mr. OrrINGER~ I would think that going forward to authorize a national pay TV system would be a very desirable development in terms of offering a range of opportunity to the home viewer and that it is something that should be considered. I do not quite understand why the gentleman prefers that the public pay for its television through advertising, and it does pay, it pays in terms of additional prices that are charged for the goods advertised, rather than having them pay directly? The end result is having the TV screens of the Nation cluttered with advertising instead of offer- ing a facility through which programs could be offered commercially without interruption. Mr. DINGELL. First of all, I would say to my good friend we don't disagree very often and I have a very high regard for the gentleman from New York and he is a very valuable member of this committee and the Congress but, you know, since we are looking into the future and nobody really on this committee gets a crystal ball with their election certificate but I have tried to indicate the mischief that I foresee in this. PAGENO="0217" 213 First of all, I resent the idea of using a clogged radio spectrum for subscription TV. We need it for business, we need it for radio, we need it for public safety. We need it for public television. Now if something is going to be done it can be done in the wire end of the communications business. We can send these signals by wire and I have indicated to my good friend I have no objection to this. Mr. OTTINGER. If I may interrupt the gentleman, that imposes a tremendous burden on the public, though. If we are going to have available this retrievable library system about which one reads and which I believe is in the very near future a possibility, why should one limit it to the cable system where a person has to pay a substantial charge per month to bring in the cable? Why should not the public at large have available to it the ability to select any movie that they want that has been shown in the past 20 years? Would you exclude that? Mr. DINGELL. Public acceptance first of all of wire TV has already been pretty well established in this country through the medium of OATV. I do not view it as being a hardship. I would point out and I think this committee should study the amount of spectrum that is taken up by one single television broadcast band. This is a much poorer use of a resource. Especially when many stand idle, or are to be converted to something as monstrous as pay TV. I think you will find that on that one single band you can set up a tremendous number of bands for police, business, educational, mari- time radio. These are important uses that are being grossly disregarded by the Commission. The Commission has been promising me informally now for about 2 years that they were going to do something about this. I have seen no action. Let me say to my good friend it may be that in the orderly course of events we are going to come to the point in this country where we can have some extra spectrum space after we have gone over and reviewed very carefully the total spectrum resource that we have in the Nation and after we have made appropriate allocations to space and defense and to business and to Government and to firefighting * and to police `and AM `broadcasting, FM broadcasting, short wave, mi- crowave, UHF~-TV, VHF-TV, and to the public television, if at that time it becomes appropriate that we should make a silk stocking service available for persons of advanced means to retrieve old pro- grams or to get brand new movie spectacles, spectaculars for hire on subscription television, I believe the legislation I have introduced authorizes this committee to take that matter under consideration and to go forward. I believe, however, we have not yet arrived at that time. I think that is probably where we disagree. I think if we were to authorize subscription television at this time we would find, very shortly, that we would have a very peculiar phenomenon. First of all, if it took, and I am not sure it will but there is a possi- bility that it will, we wind up with every television set in this country having a coin box on the side, I don't think you can justify that to' your constituents. I know very well I could not, certainly to the 30 percent that the FCC says will be denied it. Second of all, if this thing did take, I PAGENO="0218" 214 would be well satisfied it would have the same advertising on it that it has right now. I do not like some of the advertising, but I find some of the adver- tising is better than some of the programing I get. Mr. OTTINGER. That is more a reflection on the poor quality of programing than the excellence of advertising, I think. I must say that I would be very much concerned if pay television were permitted to carry advertising in addition to making a charge for its programs. I do think there is a tremendous opportunity for the future here. If we adopted your philosophy, not necessarily your legislation, be- cause I think Congress ought to make the decision, but if we adopted your opposition to subscription TV, we would be denying something which is very exciting to the general public. I think it is a subject that deserves further exploration by the Congress with an affirmative outlook. Mr. DINGELL. I think the committee should demand a full account-. ing from the Federal Communications Commission as to why this abundance of problems are now strangling them, why they have not evolved an expedited procedure to handle the matters, why they have not made a better allocation of the spectrum, why they have not solved the clear channel problem. They are up to their ears in problems and yet they are creating new mischief at a time when it is not desirable. Mr. O~rnNGER. Well, now we are back on common ground. I agree. with the gentleman completely. Mr. MACDONALD. I am sorry the time of the gentleman has expired. Mr. Brotzman. Mr. BROTZMAN. Thank you, Mr. Chairman. I am sure you have followed this subject over a period of years as a member of this committee, is that not right, Mr. Dingell? Mr. DINGEIL. That is correct. Mr. BROTZMAN. To follow up on Jim's questioning here, there really are two problems as I see it. One is jurisdictional and then there is the substantive question of-is subscription TV good? Actually most of your remarks go to the substantive matter., but your bill, if I understand your remarks, is for the purpose of insur- ing retention of jurisdiction in the Congress. Is that correct? Mr. DINGELL. That is correct. Mr. BROTZMAN. Now turning to your statement just for a moment, I understand the jurisdictional question, have you followed the Hart- ford trial over a period of time? Mr. DINGELL. I have made a study of the comments on the Hart- ford trial as included in the Commission's fourth order and report. Insofar as having scrutinizing it or observed how it worked I must confess I did not. Mr. BR0TZMAN. How was this set up? By that I mean what oppor- tunities were afforded to different agencies and different competition to participate in this particular trial? Mr. DINGELL. I did not- Mr. MACDONALD. Mr. Brotzman, if you will excuse me, the people who ran the experiment will testify and I think they will probably have all those answers. PAGENO="0219" 215 Mr. BR0TZXAN. I am more interested in this, though. There is a purpose in my question. This is a foundation question I am asking you. That is, I wondered if this committee was consulted as this thing developed concerning some offer to different individuals to compete. I wondered if you might know that. Mr. DINGELI4. I recall no consultation with the committee during the time I have been a member and that goes back to about 1956 as I recall. My recollection is that they had a hard time to find someone to carry the test out. Mr. BROTZMAN. There was an editorial in this morning's paper. Mr. DING~r.. The Washington Post? Mr. BROTZMAN. Yes. Mr. DINGELL. I am an avid reader of the Washington Post, but I find I am reading them more and agreeing with them less. Mr. BROTZMAN. Not to get down to their particular attitude here but I note one thing. I had been under the impression that there was only one test or one experiment that had been run in the Hartford area. I find the editorial referring to the fact that there have been test runs in several cities. Mr. DINGELL. That is correct. There was one up in Canada, around Toronto. There was a wire subscription TV service that was instituted out in California- Mr. MACDONALD. There have been about six. Mr. DINGELL (continuing). Which wound up in a big fight, amend- ment of the Constitution or referendum out there that held it to be unlawful. Finally this was set aside by the court. While the court case out there was successful the patient died. For one reason or another the entrepreneur who was running that particular test went broke. Mr. BROTZMAN. Are we going to have testimony about these other experiments or are we going to limit ourselves to just the Hartford experiment? Mr. MACDONALD. I am sure that the people who ran the test in Hartford have the knowledge of what happened in the other tests and I am sure they can be questioned about them. Mr. BROTZMAN. Were they involved in these tests, too? Mr. MACDONALD. I don't believe so but I am sure they must have studied them before they invested an amount of money in the Hartford test. Mr. BROTZMAN. Turning to your testimony on page 7 regarding the Hartford test, where did you find these figures? You said the Hartford trial was supposed to begin operations after 2,000 sub- scribers were obtained and so forth. Mr. DINGELL. That comes out of two places. One is the report of the Commission and the other is the comments that were made by some of the individuals who have testified before the Commission in connection with this subscription television proceeding. I believe that this committee could well scrutinize the statements. I would refer particularly to the statements made by the National Broad- casting Co. which was a rather fine presentation and also some state- ments made by Motorola in connection with that which I believe were very useful. Mr. BEOTZMAN. That was testimony before the FCC? PAGENO="0220" 216 Mr. DINGELL. Before the Federal Communications Commission. Mr. BROTZMAN. I just wondered where these figures came from be- cause they are somewhat dramatic as to the public demand. Mr. DINGELL. I believe the Commission could give you precisely the same figures. Mr. BROTZMAN. I thank the gentleman. Mr. MACDONALD. Mr. Kornegay. Mr. KORNEGAY. Thank you, Mr. Chairman. Mr. Dingell, I am sorry I was not here to hear your statement. I had another meeting I had to attend. But I will read it over and study it with care after this meeting. A couple of questions do occur to me based on some of the things you have said since I came into the room. No. 1, your concern for the radio spectrum, the utilization of that spectrum. As you know I share your concern over the fact that there is some question about whether it is being put to its best possible use and whether or not the Commission is taking the necessary steps to see that these rapidly increasing public services that are demanding more and more space on the spectrum, whether or not that space is being made available for them. In that connection, though I raise this question. As I understand it, most of these STV stations, if not all of them, will be U's- the ultra- high-frequency stations- Mr. DINGELL. We have no assurance they will be using UHF or VHF bands. They have established no criterion for that. Mr. KORNEGAY. I have heard from some source that they would expect to use certainly primarily the UHF as opposed to the VHF. As you and I both know, UHF's have gone begging for years. They were there to be used but for economic reasons as I understand it there just has been no big demand for them. The V's are more powerful and, of course, are much better and up to the time we provided for all channel sets there was the problem of reception for the public to receive the U's. I just wondered, pointing that out, if you have given any second thoughts to the business of allocation of spectrum. Mr. DINGELL. Not really. Mr. KORNEGAY. These U's are already provided for. The space is there. If additional measures are taken to make them more attractive would it not increase the variety of television to the American public? Mr. DINGELL. I believe the Hartfor4 test proves first of all that you are not going to have any big rush into the marketplace by investors to engage in subscription television. But second, with regard to the spectrum problem, I have been try- ing for years to get the Federal Communications Commission to use some of the unused UHF bands for business, education, and public safety radio. Now the Commission, I understand, is coming forward with some very, very halfhearted and rather inadequate measures to increase the number of bands by shaving the bands in half that they now make available-at least this is what I understand they contemplate-that they now make available for business, educational, and public safety broadcasting. First of all, this is going to require changes in equipment which are going to impose additional costs. PAGENO="0221" 217 Second, it will not provide additional bands that are needed. We can make many more by doubling the amount of bands we have. This is particularly so where you are trying to provide small communities a public safety band so that all of your small communities can inter- communicate. Every major city now is surrounded by small commu- nities, and there is great need to provide a means of intercommunicat- ing for the small communities in the event of a riot or other public disorder, or in the event of a calamity like hurricane, floods, or major fire or something of that kind. I think that the UHF spectrum is going to have to be-a portion of it at least is going to have to be utilized for this. As a matter of fact, the Federal Communications Commission may be compelled in the not too distant future to restudy the entire allocation of bands in the UHF-VHF, because it may be that each one of these UHF-VHF bands is far too wide for the needs and far too wide when you con- sider the total present and potential demands on the spectrum. So I think before we go on into this spectrum we had better be sure that we have arrived at an appropriate policy allocation considering future needs of the entire spectrum which is something which I think has been very much lacking on the part of the Federal Communica- tions Commission. Mr. KORNEGAY. Do you feel there is any demand or a substantial demand for STV ~ Mr. DINGELL. I have seen none. The Hartford test tends to indicate it, You see, we have two ways you can deliver STy, one by wire and one through the public broad- cast spectrum. S I have asserted this morning no objection to the delivery of this signal by wire. I have asserted a very strong objection to delivering it through the airways. If the FCC wants to do it, fine. And if it is a monopolistic service of this kind where they say they are only going to have one per community is delivered by wire, it can be regulated but it is extremely doubtful under the law whether the communities concerned, the States or the Federal Government, can regulate the charges of delivery through the free public airways. Mr. KORNEGAY. Of course, if it is delivered by wire it does not utilize any of the spectrum but at the same time they must, as I understand the proposed plans, utilize an existing station and that station has received an allocation of the spectrum. So, whether they use the spectrum or use the airways three-fourths of the day, wire or subscription TV, that part is still reserved on the spectrum so we are not accomplishing anything there to provide additional services on the spectrum. Mr. DINGELL. It really does not work out that way. It would be possible conceivably that you could authorize the use of an existing channel for a part of the day free by airways and a part of the day to require delivery of the signal by wire for charge. This would not work out this way. This would not be very good, from a public policy standpoint. This is not to say you could not put an adapter on the side and run a wire in there through your telephone cable because it would probably come through A.T. & T. or the I.T. & T. *or the local independent telephone company, and just have an addi- PAGENO="0222" 218 tional channel on there that would not have to come out of the U or the V or any of the 1 through 56 or Th, whatever channels are now on the all-channel sets. Mr. KORNEGAY. Thank you for coming to testify. Mr. MAcDONALD. Mr. Brown. Mr. BROWN. Mr. Dingell, your bill, IT.R. 12435, is not aimed at OATV? Mr. DINGELL. No; it is most emphatically not~ I recognize that OATV is now a reality. Although I had some doubt, although I had been critical of the Federal Communications Oommission for not hav- ing adequately regulated it, it is not directed in that direction at all. Mr BROWN I agree with you that Congress ought to speak on this subject and I gather that is the main thrust of your bill that you want it to speak negatively on the subject; of subscription TV. Mr. DINGIfILL. This is correct; Mr. BROWN. I cannot see any reason for deferring this decision by the Congress or the FCC in anticipation of the FCC handling all its other problems first because I think we will never get around to mak- ingthat decision. You don't mean that do you? Mr. DINGELL. I fell it is so low a priority that it can well be deferred to some time in the next century without any great loss to the public interest. Mr. BROWN. It seems to me as long as we have started this hearing we might as well come to some resolution of the problem. I think it would be a waSte of time to hear all this and then put it in limbo. Mr. DINGELL. On that we arc both in agreement. I certainly hope the committee will, in its wi~dom, report out legislation which will prevent subscription television as contemplated in the fourth order and report. M~r. BROWN. I understand you have no objection to the use of micro- wave and wire systems to have pay TV utilized through CATV outlets? * Mr. DINGELL. I really assert no objection to that at this time. But I feel it should be approached on1y after hearings by the FCC to explore all the, circumstances. Mr. BROWN. I find myself a little bit at a loss to understand how there would be siphoning off of talent and competition for writers, techni- cians, and FCC time, and so forth, if this were on the wire and not on the spectrum. I don't understand that. Mr. DINGELL. I think you have to come to the fundamental decision as to whether or not the free public airways which are presently mis- allocated-if you want to use the term-which are grossly overcrowded in some areas and which are entirely unused in others, should be con- verted to subscription television. Mr. BROWN. I am talking about wire pay TV. Mr. DINGELL. With regard to wire I have indicated I really have no objection. If we were to go to wire television we probably would have some siphoning off of those particular talents which I believe arc in short supply in this country. Mr. BROWN. Do you think wire TV would hurt; free TV in the same way that it would hurt by ther- Mr. DINGELL. Not entirely, because different factors come into play. PAGENO="0223" 2l~ For example, you have the question of wire charges. You have the question of regulation which you would have at least insofar as charges for the service delivered by wire. Mr. BROWN. I am talking about the siphoning off of writers and technicians. Mr. DINGELL. Conceivably there would be some of this siphoning which would take place. Mr. BROWN. This is also true of public broadcasting? Mr. DINGELL. It would affect public broadcasting. Mr. BROWN. And public broadcasting would affect free TV; is that right? Mr. DINGELL. Obviously when you have a marketplace and a new factor comes in there is going to be some interaction take place. Mr. BROWN. What percentage of the spectrum would be used for pay TV under the present regulations or the proposed r~gulations that the FCC has set up? What percentage of concern do we have here about whether that spectrumis going to be usedor misused? Mr. DINOELL. I can't give you a precise figure, but I can say that the FCC says that approximately 83 communities will be involved. In those 83 communities and in each one of those communities there will be four or five stations, tTHF's and VHF's. One of these can be con- verted to a subscription television station either in its entirety or in part. Mr. BROWN. You are talking about these UHF stations, that we tried to encourage, that are not on the air yet? Mr. DINGELL. Conceivably two things couldhappen. One, you could convert an existing UHF or VHF channel which is vacant, or, two, you could convert an existing channel, one whJch is presently used for UHF or VHF, to subscription TV. I could not prophesy without a very careful study what would hap- pen in a particular place. Mr. BROWN. My question is: How much absorption or sopping up of unused spectrum or presently used spectrum is this really gOing to create? This is one of the issues in your discussion. If you are going to permit use by pay TV of existing VHF station channels or UHF channels presently allocated but not operating, I don't know how much concern I would have over the spectrum being taken away from the needs of police departments and fire departments, and so forth. Mr. DINGELL. The answer is that I cannot sit here and make you a fiat prediction as to what percentage is going to go. I cannot tell you which of the 83 communities in which they are eligible for this "U" will have a station set up which will have an unused UHF or VHF channel and in which of them you will see an existing "U" or pulled from the present licenses on the free spectrum into the sub- scription spectrum. Mr. BROWN. You have suggested this is a serious part of the problem under this issue and I wondered how serious that problem is. Mr. DINGELL. I think it will vary from community to community, according to the market situation. Frankly, I think either happening is a bad one at this particular time. Mr. BROWN. Do I understand you would concur or not concur in the PAGENO="0224" 220 FCC's right to regulate program content if we have pay or subscrip- tion TV? Mr. DINOELL. As I understand the law, program content cannot be regulated on a day-to-day basis by the Federal Communications Commission. Mr. BROWN, They were talking about percentages. I am talking about their proposed regulation of pay-TV. Mr. DINGEIL. I think this would raise questions which would have to be reviewed by the courts before we would have a final answer as to whether or not they do have authority. But more importantly, I think that you have to look at the awful thicket that this regulation is going to lead the FCC into. First of all, it will lead to a fight. Then they are going to have to determine whether these people are carrying forward their responsibility. With a commission that appears to be as overworked as this Com- mission appears to be, or at least one which is so clogged with minutiae, it is doubtful that they will get down to this question. Mr. BROWN. I would like to get your comments again because I did not quite follow them when you were in your colloquy with Mr. Ot- tinger about the desirability of network executives and advertisers in free TV determining what programs shall be aired and the Public Broadcasting Corp. board in the ETV bill that we just passed deciding program content and the undesirability of people determining what they are willing to pay to see. I don't quite follow how it is desirable for this board of directors of Public Broadcasting and the network executives and advertisers to make that determination in those two areas but it is not desirable for people to be able to put in their quarter or whatever it is to see what they want to see. Mr. DINOELL. You mean to pay the quarter at the box to decide what they want to see? Mr. BROWN. Yes. Mr. DINGELL. First of all, we don't know whether they will do it on a fiat charge basis or do it on a quarter in the slot basis for a particular program. The fourth.order and report is sufficiently far from final implemen- tation that it could undergo many changes before we get at this. First of all, the Public Television Corp. that we set up in the public television bill is not going to dictate programing. We tried very hard to insulate the people of this country from that. Mr. BROWN. They will be making a determination about where the Federal money will be scent for program development. Mr. DINGELL. They will. They will make some determinations of this kind and I hope they will be wise ones. But I have to say that the marketplace enters into what happens on free TV now. If a program is not watched the advertisers drop it. I recognize that we have to afford management the wisdom to make the judgments that are necessary as to when the public is going to accept a particular program or like a particular kind of advertising. I have no objection to that. Mr. MAcDONALD. I am sorry, the time of the gentleman has expired. Thank you very much, Mr. Dingell, for a very fine presentation. Mr. DINGELL. Thank you, Mr. Chairman. PAGENO="0225" 221 I thank my colleagues on the committee for the privilege of being here this morning. You have been very gracious. Mr. MACDONALD. The next witness listed is Mr. Otto Preminger. We welcome you here, Mr. Preminger. Your reputation certainly has preceded you and you are very welcome here this morning. STATEMENT OP OTTO PREMINGER, NEW YORI~, N.Y. Mr. PimMIwoEn. I was very happy when I received a telephone call from an old friend, who strangely enough is a theater owner in Chi- cago, who asked me what my position on pay television was and asked me if I would be willing to come here and testify. I told him "My position on pay television would probably not please you because I am 100 percent for pay television." As a matter of fact, I cannot understand how in our society of free competition we have a system where three networks completely con- trol what the people of the United States are permitted to see on the so-called free airways. We always hear these propaganda phrases, free airways and *free television. If the teleivision were free then how could ABC afford to pay me for a film that I made 12 years ago called "The Man With the Golden Arm," for two showings only, $650,000 cash? Where do they get this money? Are they really that concerned about those 30 percent of the American people who otherwise would not be able to have entertainment without those so-called free airways? The highways of the country also are the property of the people and free. Suppose I would come in here and suggest to you that I with two other friends would start three networks of huge buses and in these buses we would put advertisements, the captive people in the bus would have to look at the ads that somebody said are better than the programs, and I think they are most of the time, and I would then ask you, however, to outlaw the automobile or private automobile be- cause then all Americans could travel on these public highways for free and it would all be paid by advertising. In my opinion as a citizen and as a producer of entertainment on the stage and in the films for the last 81 years since I came to this country, it is completely unbelievable that we should fall for this propaganda. When I hear about this Hartford test, does anybody really believe that if the Lincoln Center had opened in Hartford, Conn., it would have been a success? Hartford cannot support any first-rate entertain- ment. It is ridiculous to speak about tests like this. Why should not our free enterprise people, who want to risk their money, be able to compete with the three networks, and I must say all the chairmen of the three networks are friends of mine. The networks have been doing very well for the last 20 years on these three things that they are giving away. Why should they not be able to compete and see if there is demand? Also a sneaking suspicion I have that some more money could be made by free competition is proven by an announcement about 2 weeks ago when CBS announced that a very talented young man, whom I have known for many years, Mr. Goldmark has perfected a box which we will be able to buy and put on our television set, connect with our television set, and we will be able to have a whole library of home 86-399 O-67-1~ PAGENO="0226" 222 entertainment which will not cost 25 cents or cost $150, but will have cartridges which would fit into this box and you could then play any film that you wantto play on your television set instead of free enter- tainment. Why is this not against the public interest? I think the public interest in a free country like ours is to select the entertainment. 1 think in a capitalistic country like ours it is only the box office that wifl really prove what people want to see and not those free things which I personally don't believe. For instance, it is also very obvious that the qtiality of entertain- ment will immediately become a thousandfold better. I would like you gentlemen to consider the following: If an advertiser pays for a show he pays with advertising dollars. In other words, he can only take a very small portion of the money that he has for this advertising because otherwise he has no money to produce the goods, he has no profits from cigarettes or whisky or aiitomthiles. But if, for instance, a young producer would say, "I would like to produce a terrific production of Shakespeare," he would get the great- est actors from all over the world to do Hamlet, this would not cost more than .about $150,000. Let us say with time charges and so forth, a million dollars. It would take only 4 million people to pay 25 cents to get this initial investment back and then you could play it over and over. Don't you believe that 4 million people in the United States, whatever the Hart- ford test says, would like to see a really great production of Hamlet ~ If you today read the television columns you will see that any show that doesn't have at least 12 million viewers is being canceled. Why? Because the advertiser cannot give awa.y something to 4 million people. He needs to g~t 20, 30, 40 million people. Otherwise he has to throw out this show. And you cannot find really high-class entertainment for that many people because they are different interests. There are people in the United States who want to see ballets. There will be more people if you show them ballets, if it is not restricted to New York, Chicago, and San Francisco. There will be people who will want to see symphony orchestras and listen to them. If we are so concerned about the poor people-I think this is hyprocracy-4f people are concerned why don't they give away food to hungry people instead of entertainment. It should come first. Why don't the advertisers give away something to eat? Why do they give away those terrible shows? And the networks have proven in 20 years of network programing that they cannot compete with old films that we made 20 years ago, 15 years ago. Our films are now, according to their own ratings, what makes people turn on television and what makes the advertisers pay. Otherwise they could not. The network shows all followed. So, where is the proof that our culture has been improved during these 20 years through television? The opposite is true. Furthermore, I believe that the people will pay. They will be happy to pay 25 cents for a show that otherwise, if they went to New York, would cost $10 or $12 a seat. And the whole family could see it on television. PAGENO="0227" 223 I also believe that this is all propaganda, this word "free" that we always hear. What is free about television? You have to buy a television set. You have to maintain it. In most place you have to have an aerial. Now it is very funny because. I must speak from the other point of view, now the networks are going into the production of films and I think they should because the more competition there is, the better, particularly for the people who work. And I want to point out that there is no shortage of technicians. On the contrary, most unions are closed although it is against the law, they closed because they want to protect their old members. I was in Russia. I saw what happened there. We will soon,be obso- lete in comparison to other countries because all our craftsmen are getting old. Nobody speaks about it. If there is more competition the unions will open up, they will have new members and new young people. You can come to any set, television set or movie set, and you will see there is no cameraman under 65 in the United States. That is true. In London, in Paris, in Russia, you see young people. Now, when you speak about freedom and if I may give you this, several years ago I read a book after reading in the paper about the Shepherd murder case. The book was written by a Chicago journalist. The book did not say that Mr. Shepherd, who in the meantime had been freed, was innocent but the book `proved to me very conclusively, so that I was really moved by it, that he did not have a fair trial. I went to the head of the network, Mr. Paley, an old friend of mine. We had lunch. I said, "I want at my own expense to produce a docu- mentary, not a show, a 1~hour documentary according to this book." I will not only not charge him anything, I will give him the whole thing free because I think it is important to show that it is possible in our society not to get a fair trial. It was after all the appeals had been exhausted at that time and he was very enthusiastic about it. Then 2 or 3 days later he called me back and said, "We would rather pay you." I offered it really for free, no advertising, nothing. He said, "We must keep control over what is shown on the screen." I said to him, "I will not make a film where people invest $10 mil- lion and give them the control." Is this free television in the other sense of freedom? It is not true. It is all propaganda. Speaking `of `censorship, there is a commercial censorship on tele- vision which is unbelievable. If I made a film today which would show a connection between smoking and cancer, I could show it in all theaters in the United States and the theaters would charge between $1.50 and $3, no network would pTay a film like this under any cir- cumstances. They would use all kinds of excuses. Otherwise if it is so free, why does the network employ `hundreds of people in the so-called continuity acceptance department? The embarrassment is already clear, of course, something that is a compli- ca~ed name instead of simply saying censorship. I just made a film called "Hurry Sundown." The film was condemned by the Legion of Decency, by the Catholic Office, and that is their right. They have the right to tell their members not to go see my film. PAGENO="0228" 224 In spite of it it was played in all theaters. As a matter of fact, a Catholic university in Omaha, Nebr., made this condemned film by the Catholic Legion of Decency for the opening of their film festival, in spite of it because they have autonomy and freedom: Do you really believe that any network or any station would play a condemned film? I have a condemned film that could be shown to children now~called "The Moon Is Blue" which I made 15 years ago. It is still condemned and no networks bought that film. They bought all my other film. Why should not these people have the right in our society to com- pete for the public like in anything else, like in restaurants, like in any other kind of entertainment? Why should we regulate it at all except where there is obscenity? We have laws against obscenity. This is just like in Russia. In Russia you cannot make a film for theaters, television or anything unless it is approved by the committee. When it is finished this committee says how many theaters should play it because they are afraid some film should notbe seen by all the people. But this is not our society. I think that the `three networks are, and I think they all probably believe in it because they read all this propa- ganda all the time, that it is free, but they are the worst monopoly that I can imagine. It is something that would be unthinkable. I hear that people should only have the right to do pay television by wire, now the three networks the last 20 years have amassed a tremendous amount of money. Why don't they withdraw for 3 or 4 years-this would be a good test-or 1 year, much better than the Hartford test, and do their television on wire which they could cer- tainly afford and give the free producers a chance to compete. And besides, it is the same history that the movies had. Until 1950 when the Government decreed that the big movie companies are not permitted to also control the theaters, I could not have made independ- ent pictures. I was under contract with 20th Century Fox. There was one man, Mr. Zanuck, who told me what I can do and what I cannot do. When I had a fight with him he threw me out and we made up again. It was all on that basis, it was n~t free. He did not say it was free. They invented this thing.. This is a Madi- son Avenue invention, this freedom. Today I can make any movie I want to if I find people who have confidence in me and finance me. Some movies I make make money and some lose money. This is the way it should be in my opinion. That is about all I have generally to say. I was not prepared but I can talk here for hours because I think it is the worst, most incredible and oddest thing that the police must have bands. Therefore, they can have their bands. Suppose they would interrupt the-I don't know what the things are called-the job for the defense or something like that and let the police give their message if they want to, nobody would lose much. Mr: MACDONALD. Thank you very much Mr. Preminger, for a very interesting and informative and I must say entertaining recital of your feeling about the pending status of subscription TV. One question entered my mind. When you got this $650,000 for "The Man With the Golden Arm" did you have to pay the-as I recall Frank Sinatra played in it. PAGENO="0229" 225 Mr. PREMINGER. Yes; Frank Sinatra had 10 percent. Like I pay him on anything that comes in from the theaters, 10 percent. He gets 10 percent of that money. Mr. MACDONALD. Did you have to pay residuals to all the actors and actresses? Mr. PREMINGER. Sure; and it should be like this. Mr. MACDONALD. I have a personal interest in this. How far back doesitgo? Mr. PREMINGER. The picture was done 12 years ago. I cannot say, I don't remember now- Mr. MACDONALD. How far back does the obligation to pay residuals go? Mr. PREMINGER. That I really don't remember. Mr. MACDONALD. You directed my wife in a couple of pictures. You perhaps know her better by the name of Phyllis Brooks. She has not been getting any residuals. Mr. PREMINGER. I think we should look into it and whoever takes care of your wife's finances, Mr. Chairman, is probably remiss. It is not my fault. He should either call me or write to me if it is due to her. Or if I still refuse, sue me. Mr. MACDONALD. I know you are a very hard man to sue. Mr. PREMINGER. No; I am easy to sue. I usually lose my lawsuits. Mr. MACDONALD. Actually with reference to the Paramount decision which divested the theater owners from production and vice versa you were talking about. Do you think that it is freedom to have an associa- tion such as the Motion Picture Association withhold their stamp of approval or say what can or cannot go into a picture? Mr. PREMINGER. I have released' two films, "The Man With the Golden Arm" and "The Moon Is Blue" without their approval and they gave me an approval later. This is a self-censoring administration. I personally do not think it is bad because the majority wants to do it. You can still have the freedom to release it against `their wish. Both these pictures were big successes without the seal of approval. But I doubt very much if I had made or if anybody produced a show for ABC or CBS and they did not like it, you know, that I would have the freedom to `then still insist on having it shown. This is ruled by a committee, by executives who are not producers and who, therefore, go by rules. In Russia it is political. Here it is commercial censorship and also partly political because obviously the reason that Mr. Paley changed his mind about the documentary on the Shepherd case was that he was worried that perhaps the political powers in Ohio, or wherever it was, would not `be happy if it were shown, that there were, some political reasons for not granting the appeal to Mr. Shepherd. Then a lawyer came and got it, Mr. Bailey. Mr. MACDONALD. In conclusion, I would just like to point out `that when you were talking about the three network monopoly, this com- mittee passed and we are now in ~the process of going to conference with the Senate, who also passed a bill, provisions for a fourth net- work, so-called cultural and educational network. I think perhaps that will help ease the situation you have in mind. Mr. PEEMINGER. It probably will b'ut anything that is under bureau- cratic control has always proven in this country not to work. PAGENO="0230" 226 I come from Austria, we had wonderful subsidized theaters. The subsidized theater in the United States has never existed and should not exist. It is not necessary. The people are interested enough to pay for their entertainment and to determine themselves.what they want, not to have it determined by any bureaucrats. I think that the best test would be to permit people to invest their money and to have pay television. Who can lose except the people who invest their money? I am quite sure it would be most successfuL The networks would not go out of business. They would also have better programs. Mr. MACDONALD. Mr. Preminger, could I ask this question? What would be the safeguard against pay television having a mo- nopoly because under the order that the Commission put out there is just going to be one station in a metropolitan center that has already in operation five stations. There will just be one. I would guess there could only be one suc- cessful pay TV network. What would be the protection there against the very thing you say that the networks do? Mr. PREMINGER. I don't know why there should be only one but this pay television- Mr. MACDONALD. Just economics I would think. Mr. PREMINGER. We live in this kind of `society. For instance, I understand that the networks have threatened us that they will not play any old pictures because they will play them on pay television. Fine. If pay television would pay me frankly $700,000 for "The Man With the Golden Arm" I would sell it to them. I think it is my right. This is the system with which we live. I think it is a very good system. There is freedom in this system I think. I think then ABC will pay more or less. That is what they are afraid of, competition, because between three people, although externally they fight each other and they have competition the competition is not very, very strong, you know. I don't say, because I have no knowledge, that there are any secret deals but it is not as strong as if there were 20. Like the competition between seven big studios was it not as strong as it is now with hun- dreds of independent producers doing pictures. Today a man who write a successful book gets much more money for the book because there are hundreds of people bidding for it, for the film rights, than he got when there were oniy seven or eight. Mr. MACDONALD. Thank you. Mr. Kornegay. Mr. KORNEGAY. What did you say the name of that most recent production of yours was that was condemned? Mr. PREMINGER. "Hurry Sundown." Mr. KORNEGAY. Does that not sort of increase the popularity, such as having a book banned in Boston? Mr. PREMINGER. No. Mr. KORNEGAY. It does not? Mr. PREMINGER. No. It upsets it. Maybe some more people go to see the movie because it is banned but also some people do not go. Other- wise, I don't think that the Catholic Legion of Decency would do it because they are very clever and very shrewd. PAGENO="0231" 227 There are even some theaters, and it is legally questionable or somebody could sue them, who do not book movies like this because in Pennsylvania there is a bishop wh~ does not only see that the movies are banned but if a theater plays one of the condemned movies, then the theater is out of bounds for Catholics for, I think 5 years. I think this would be a restraint if anybody wanted to sue the Catholic Church, it would be some kind of restraint of trade. But I am a knight of the Holy Order of Saint Sepulchre and there- fore I could not sue the Catholic Church. I really am. It is the highest order that the Catholic Church can give to a non-Catholic. Mr. KORNEGAY. Let us move from religious condemnation of a pro- duction to the failure of the Moving Picture Association of America to approve it. If they were to not approve a particular production, would that not sort of create a lot of interest in it on the part of the public? Mr. PREMINGER. No; not always, because there, too, you know, many people wouldn't see it. Many people don't take ads if it does not have the seal from the Moving Pictures Association. It is true there are movies on 42d Street and movies made, really salacious movies. Nobody gets rich with these movies. The theaters are not crowded. Or magazines, when next to Life and Time and Newsweek you see on the stands girlie magazines, dirty magazines, nobody makes fortunes with these things. The people are not that dumb. I think the people know what they want and what entertain- ment is. That is why I believe that pay television will work because they will have good things to show and new things and it would be a show window for new talent. It would give people an opportunity. In every way it would be great. Mr. KORNEGAY. As I gather from what you say, No. 1, or the most important message you have for us today in advocating subscription television is that it would afford more competition for the networks, that there is insufficient competition at the present time. Mr. PREMINGER. Yes, and more competition for talent. It would afford people to direct shows to special segments of the population because it would not be necessary to get that many people to see a certain show. For instance, "The Ed Sullivan Show." I don't know if it is a very high rated show. It is probably seen by 30 million people every Sunday and it is a very good show. I also look at it sometimes. Per- sonally, at the same time on pay television if for 25 or 50 cents I could see an opera, I would prefer it. But it would not hurt "The Ed Sullivan Show." I still think 30 million people would like to see it, or maybe now only 1 million, but 3 or 4 or 5 million people in this vast land would like to see something better or something more serious. This kind of competition gives you the chance to really produce and get the money for your production back and not be supported by advertising money. You see, this also somehow is a very undignified thing, that ad- vertising money that dogfood pays for shows and lets you know it every 15 minutes. I really think, for instance, that in countries that want propaganda against us, if they took a film and would show it PAGENO="0232" 228 like it is shown here, uninterrupted with dogfood where the people say that there is so much protein in dogfood, I don't think it is a very good advertising for our country. I think the people would feel that this is not the way to give away, for free, art or some artistic entertainment. Mr. KORNEOAY. I take it you don't have a dog. Mr. Piu~MINoER. No, but why I bring up the dog food is because I, personally, am hurt by the fact that when some people are hungry that they have not better taste than to advertise and to emphasize how healthy it is, with protein and only meat, and wonderful meat, and no horsemeat. Somehow, it is very tactless. You see, they can be. You see, this is what I would censor. This is where I, if I had some- thing to say and the FCC would say be more careful, don't do this, it can hurt many people; it can also hurt us outside the country. And maybe those 30 million people who get this free entertainment, who could not afford 25 cents, also could not afford dog food and don't like these ads. I think there are terribly tactless things done in these commercials which are produced very well and I agree much better than many shows that you see on television. They also cost more. A minute of television commercial; I heard the other day; I don't want to quote a figure 1 am not sure of, but it cost about $25,000 or $30,000 to produce. Mr. KORNEGAY. I see my time is about up, Mr. Preminger, but I wahted to ask you about one other thing we have not touched on so far. TJ~iat is your estimation of the fact that there is a very little com- petition between the three existing networks. Mr. PREMINGER. Absolutely. Mr. KORNEGAY. In other words, if you had, say, the "Man with the Golden Arm" that you said you sold to one of them- Mr. PREMINGER. I think if I had chosen to show it to another net- work-I sold it to this network because this network was willing to promise me that they would not cut one frame or one line and it would not be interrupted more than seven times and that at every interruption there would be no more than two commercials shown. So, I got something out of it. But I think I could have gotten the same price and not more and also not less from any other network because they buy the same things. Mr. KORNEGAY. If a nationwide system of subscription television had been in existence at that time, you could have gotten more by showing it on pay TV or subscription TV? Mr. PREMINGER. Yes. I would have taken less because I would have preferred that this film which was produced with no interruptions in mind, that didn't have seven acts or eight acts, it was supposed to be seen for 1 hour and 40 minutes without interruption, I would have gladly taken $100,000 less or even more less if it had been shown as Thriginally produced, which is also something that should be con- sidered. Mr. KORNEGAY. I want to thank you very much for coming here. I have thoroughly enjoyed your presentation and found it very ben- eficial. Thank you, sir. Mr. PREMINGER. Thank you. Mr. MACDONALD. Mr. Harvey. PAGENO="0233" 229 Mr. HARVEY. Mr. Preminger, I can remember when you were a film director. Mr. PREMINGER. I still ath a film director. Mr. HARVEY. You are also film producer? Mr. PREMINGER. Yes. Mr. HARVEY. You have your own independent film company? Mr. Pj~sMINGER. Yes. Mr. HARVEY. You produce films and you own films; is that correct? Mr. Pi~MINGER. I direct them. I don't own them always alone. This film, the "Man With the Golden Arm," reverted to me after 7 years. The copyright is owned by me but for 7' years `a company like United Artists in this case that financed it also had the right to distribution. This is where they made their money. Mr. HARVEY. At the present time, you produce films and you do own some of them? Mr PREMINGER Yes, when they come back For instance, I produce films now for Paramount. They finance them. For a while, they have the exclusive right to distribute them. Mr. HARVEY. For how long? Mr. PREMINGER. For 7 years. Then they revert to me if they have made theirmoney back. If they have not made their money back, they keep that right to distribute them until they get their money back. Mr. HARVEY. Do you make any films at the present time that you own outright, yourself? Mr. PREMINGER. No. I don't have that much money. Mr. HARVEY. This is not a case where you would expect to sell films to subscription television, yourself? Mr. PREMINGER. Yes. Mr. HARVEY. Or is it a case where you expect to sell many films? Mr. PREMINGER. I would say this: I think this selling of films to tele- vision is something that will pass. It is only necessary today because the networks are not capable of producing their own entertainment. I would rather produce shows for pay television, special shows, not to sell films. Even if I made less money, it would very much interest me to do a show for pay television which would not be on film or on cominer- cial television. Mr. HARVEY. You keep assuming you would make less money selling to subscription television, but I gather that this is not why the net- works are opposed to subscription television. I gather they feel that subscription television will be able to pay more money for films.. Is thatnot correct? Mr. PREMINGER. Perhaps if they feel that, then they bring forward the most powerful argument for pay television; then it will be very successful. Mr. HARVEY. You made a very persuasive argument for free enter- prise a moment ago. Let us be frank about this. There is definitely a dollars-and-cents angle to this whole thing, is there not? Mr. PREMINGER. it is possible that also films would bring more money on pay television. It is possible. I don't know. I `hope so. I cer- tainly would then choose to sell my film to pay television. I am not charitable like the networks; I do not give anything away. I do believe, besides, pay television would create opportunities and jobs for people who have nothing to sell to now. PAGENO="0234" 230 Mr. HARVEY. One of the arguments made against subscription tele- vision is that there would be a siphoning of talent from commercial television-I will not call it free, I will call it commercial television- to subscription television. Do you think there would be such a siphoning? Mr. PREMINGER. There was a siphoning from the legitimate theater to movies and people also predicted the legitimate theater* would die when the talkie movies came in Then there was a siphoning from the movies to television We all can exist There is enough talent and it will bring forward new talent. I don't think that we should worry about it. I think this is also free enterprise, that you compete for talent. It is not siphoning; it is competing. Mr. HARVEY. Don't you think that the talent would appear on the network or on the medium, let us say, of subscription television, whichever one would give it the most money? Mr. PREMINGER. Probably. For instance, today Mr. Bob Hope is making films and he appears on commercial television, or Mr. Sinatra played the lead in my film; he is making a film now in New York and at the same time a special is appearing on one of. the networks and at the same time he i's doing a concert tour. He might also then appear on pay television. There should be no monopoly. Mr. HARVEY. Let us take Bob Hope and Mr. `Sinatra. Don't you think that if their prices were doubled on subscription television they would go to subscription television rather than to commercial television? Mr. P1~miINGEIi. No. Sinatra gets so much today that I don't think it can be doubled. lie gets for some commercials-they bought him a house and an office and everything. There is no limit. That is the same thing. Just like the advertiser told ABC. We want a certain film, "River Kwai." Henry Ford said, "For my new line, I want this film. It doesn't matter what the cost." They paid for one showing, I. believe, $2 million. The same way if the picture is very popular with the public; pay television would pay for it. It never happened before. Mr. HARVEY. Since I have only 5 minutes, under our committee rule, let me ask one further question so that I don't impose on the others' time. One of the arguments made against subscription television is that at certain times there would be a preemption of time; in other words, that subscription television would be so popular that it would make, say, in the nighttime hours an effort to advertise on the free networks impossible. Do you see that in the future? Mr. PREMINGER. If that happens, that would be the greatest proof that the whole system of the so-called free television, and I call it commercial television like you, sir, was wrong; that television should not be an advertising medium but it should be a free medium where the public ~pays. Mr. HARVEY. As I gather the gist of your testimony, you have such strong faith in subscription television that you feel it could very likely disrupt our present broadcasting system. Mr. PREMINGER. No; I don't believe so. This is an extreme example of the use now. I don't believe so because the present three companies that dominate the present television are so rich and so strong. Also, they will become more inventive. They will compete with pay televi- PAGENO="0235" 231 sion. It is also pay television. The advertisers will still want to have their shows. Mr. HARVF~Y. Thank you. You are a good witness, Mr. Preminger. Mr. P1mMINGEii. Thank you. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN D]~iuu~IN. Mr. Preminger, in forecasting the fine shows that will be available on subscription TV, you have three or four times used the figure 25 cents. Once you raised it to 50 cents. I noticed in a catalog of films that was shown me the other day for the subscription station at Hartford, the rockbottom evening price I saw was one dollar and a quarter for a film, and for some first-run films it was a dollar and a half. This was considerably less than it would cost here to take your family to see the picture in downtown Washing- ton, I will concede. But I think that clearly the reluctance that exists among elected officeholders in regard to subscription television stems from a fear that, first, it is going to raise the cost of living in the average home by anywhere from $12 to $20 a month and, second, that you are not going to see any more world's series or Rose Bowl games or heavyweight championship fights on free television. I think that this fear is going to have to- be beaten down. Mr. PREMINGER. First of all, why should not commercial television buy the World Series and compete with free television? They cer- tainly have a lot of money, too. In Hartford there were 2,000 sets con- necteci with pay television. If you permit 60 or 80 million sets to be connected, instead of $1.50 it will probably have to cost 10 cents or maybe 25 cents. The average homes also spend money to go to the theaters. The theaters in the United States, the movie theaters, are doing tremendous business; better than ever, in spite of the opportunity for families to see moines on television. As a matter of fact, the exhibitors at the beginning fought pay tele- vision; they fought free television; and they fought the showing. They wanted originally to boycott like in London. In London, England, the exhibitors boycotted the showing of movies on television. They said, "Any company that shows their old movies on television, we won't play their movies." Eventually they gave in. This is free competition. Nobody can predict what happens in free competition, but that is the beauty of it, the excitement of it, that people don't know. The cost of living-these are propaganda things that are being spread-like, for instance, in California. I live in New York but I happened to be in California during the time when they voted pay television out of California. The networks and the exhibitors must have spent an incredible amount of money because you could hear on radio every minute, "If you don't vote it out, if pay television is permitted, you won't see Ed Sullivan any more; you won't hear Sinatra for free." That was all nonsense. Mr. VAN DEERLIN. I thought that was a most unworthy campaign. Mr. PREMINGER. And the courts also declared it unconstitutional. I think if there were enough interest in pay television that pay tele- vision could go to the Supreme Court, win the battle, that it must be permitted just like restaurants must be permitted, or cabarets. Suppose they opened another hotel here and the Sheraton Park said, "If you open another hotel, we will be out of business." PAGENO="0236" 232 Mr. VAN DE~ERLIN. The point I am trying to make, Mr. Preminger, is that, regardless of the justification for the position that you are enunciating, the people of California did, by a substantial majority, vote against pay TV. Mr. PREMINOER. To use a popular word, they were "brainwashed." Mr. MA000NALD. That was in Michigan. Mr. VAN, DEERLIN. These are the same brainwashed, as you call them, to whom we must offer Our candidacies next year. I represent San Diego, which is a coastal community; there are some children in my district that were found by the Office of Economic Opportunity never to have been to the beach. Now, they do have, I think, some pro. .graming on television- Mr. PREMINOER. Don't they have to buy their sets? Are the sets there being given away by the networks? Mr. VAN D1~RLIN. Somehow there are television sets in these homes. I am just saying that there is a political problem here that I think the industry and its protagonists are going to have to take cognizance of. Mr. PREMINGER. I believe, however, for instance, in California, if the other side had had the money or had insisted on equal time or what- ever right they have, they would not have voted pay television out, if somebody had told them the truth, that pay television does not mean that they will not have what they have now; they will have more than they have now because the competition will improve the programing on the commercial television. You don't believe really that NBC and ABC, two of the biggest companies in the United States, will close down their shops because of pay television ~ They will become stronger. They will work harder. Mr. VAN DEERLIN. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Brotzman. Mr. BROTZMAN. Thank you, Mr. Chairman. I wss sitting here, Mr. Preminger, thinking that if you ever got tired of what you are doing, you have a brilliant future in the political arena. Mr. PREMINOER. I appear sometimes on television. I played the part on Batman for my children, Mr.-Freeze. Mr. BROTZMAN. Considering your fee for "The Man With the Golden Arm," I can certainly understand why you don't want to change to politics. . / Mr.. PREMINGER. I am old enough also it will sound corny, to feel I want to do something which I really believe or say something which I really believe is in the public interest. Because I am not in the political arena I can speak freely. I will not be very popular with my friends at NBC and CBS when they hear what I have said but I don't care. This is a luxury I can afford, my- self. I feel it is also against all the things that this country stands for. It is a restriction in one field which just grew out of some miscon- ception. It should never have happened. It should always have been free. If it were free could we not even say to competitive pay television, "You must also serve one channel free"-would that not be better-that would really be free without the same programs, without advertising. They would be shown, let us say, 6 months later. There would still be many people who would want to see them now like the people who PAGENO="0237" 233 go to the main theaters and people who will go to the neighborhood theaters. For people who cannot afford it on another channel, give it to them free. I am sure now if the networks want to give it the time pay tele- vision would be very happy to say, "Every 6 months we will turn over this taped program, this opera, this ballet, let NBC and CBS show it on prime time for really free without advertising." Mr. BROTZMAN. I thank you for your answer to my question. I do have another question. There has been a rather intense competition between television and the motion picture industry. Would that be a fair statement? Mr. PREMINGER. In the beginning the motion picture industry that always lacked leadership gave in. They thought they were ruined. Then slowly by the fact that the others cou]d not do anything good, you know, and they started to buy old pictures, `today movie companies are being bought up by big speculators `because the old films are worth so much. It was originally competition. Now the movie companies help the networks by giving them their films, by selling them their films, and the networks support the movie companies by buying their old films for fortunes. `That is also passing because they are already making the' mistake that they now may produce bad pictures, play them quickly in theaters and hope to sell them. They forget that people are not dumb, that people will not turn on the television for the pictures even though they are free. Mr. BROTZMAN. There has been a sort of marriage between the motion picture industry and television. Mr. PREMINGER. Yes. Mr. BROTZMAN. Would you say by virtue of the process you have been discussing, buying the old movies, et cetera, that the motion pic- ture industry is about back economically to the point it was prior to the advent of television? Mr. PREMINGER. Even better. I don't know about the stock market but I a~n sure that motion pictures shares sell for more now and motion picture companies are considered by financial circles to be safer, more prosperous than ever before. Mr. BROTZMAN. I don't quite know what the prices are going to be. I have heard figures too, as my colleagues from California said, of what you would have to pay to see a movie in your own home but I wondered what would this do. Mr. PREMINGER. The answer is very simple. You play today a road show in New York. There is a film like Cleopatra. You charge $3.50 or $4 for a seat for 3, 4, or 6 months, sometimes a year, for "Sound of Music" 2 years. It sells out. Then one day `they stop it and sell it to 20 theaters in the same `city for half the money and the people want to see it. Then it stops and they sell it to 400 theaters for one-third of the money and it still sells. If the public wants to see something there are enough people who first buy it `for higher money, like some people buy more expensive clothes and some people buy less expensive clothes. That is the beauty of the free enterprise I am discussing. It won't hurt anybody. Eventually they will see it for 25 cents and it will be additional income. It will not hurt anybody. PAGENO="0238" 234 It is only the greed and the fear that makes people fight these things because they are afraid they will be hurt. Like the movie industry fought television when it arrived and like now our president, Mr. Valenti, whom you probably know, arrived here, I read someplace, 2 days ago with their lawyer, Mr. Nizer, to protest to the Justice Department that `the television people dare to finance and produce movies. Why should they not? They are American citizens. If they were foreigiiers they should be able to do it. Both sides always try to find some legal reasons why the other should not be free to compete. Mr. MAcDONALD. I am sorry, Mr. Brotzman. Mr. BROTZ1~tAN. Surely. We have gobbled up 5 minutes here. Mr. MACDONALD. A long five. Mr. PREMING~R. I talk too much. Mr. BROTZMAN. I want to say to you that we on the committee do appreciate the fact that you have taken the time to come down here. It is very helpful to hear people who don't have a particular axe~ to grind. Thank you. Mr. MACDONALD. Mr. Ottinger. Mr. O~rrINoER. Mr. Chairman, I want to compliment Mr. Prem- inger on what I consider the most splendid piece of testimony I have ever heard. It was put forward lucidly, clearly, dramatically. I think you made your points very well. In support of your thesis there is one area that I don't think we have brought out, and that is the poteiitial of pay TV for educational pur- poses. Today, for instance, I would like to take Italian lessons, but the time when the educational program station puts that on just does not happen to be convenient for my hours in Congress; so that I can't take advantage of the courses offered on today's TV. With pay television, however, with a retrieval system, you could select any kind of lesson you wanted at the hour and it would be a tremendous- Mr. PREMINGER. May I say that the interest in languages has gone up. I took a crash course to refresh my French when I left for France. Also my children speak better French than I and I wanted to keep up mit. I learned that Berlitz by having these new courses which are very modern, they really brainwash you, they hammer it into you, and that would also be possible on pay television because they could then vary the times. You see, I don't believe that the channels should be limited. I think that in our age of technology you could have more channels. I don't believe, however, that if, for instance, on the educational channel-you see, this is my quarrel with any not free enterprise, I don't think that they will have courses as effective as Berlitz has or as pay television would have. I think that they are limited by the system of bureaucracy. Mr. OTTINGER. I certainly agree with you. I think the people will make a wise choice and that it should be the people who have the choice of what they are going to hear rather than the networks or public tele- vision network, at least as an alternative to these other possibilities. I certainly endorse what you have had to say very wholeheartedly and appreciate that you have said it so well. Mr. PREMINGER. Thank you very much. PAGENO="0239" 235 May I say one more thing. I am at the moment preparing a film about young people. I have made a lot of research about the drug situation. I haven't heard any- thing on free television where young people are warned in a sensible way about the dangers. I do believe, however, that if there were pay television, that people, you know, scientists, the same people who writebooks now, would also be able to appear there and talk to the young people and I think this would be very important. Mr. OTTINGER. Thank you very much, Mr. Preminger. Mr. MACDONALD. Mr. Brown. Mr. BROWN. Mr. Preminger, I would like to compliment you on what I think has been a most eloquent defense of the free enterprise system that we have heard in a long time. We don't get too much about that because most people who come down seem to want th~ Gov- ernment to do something for them or against their competitors. That may have something to do with the point of all this. However, I am sorry to say that like the U.S. Cavalry, I think you may have arrived just about 3 or 4 weeks too late because some of the Indians have already scalped the taxpayers to the tune of $20 million on this public broadcasting legislation which will really be free because we put up $20 million so that there could be some programing and con- struction of television stations which will elevate tbe cultural level of the community, free to the extent that the advertisers are not putting it up, the taxpayers are. I have learned by the experience of my colleagues, I want to ask just you two questions- Mr. PREMINGER. I will make it short. Mr. BROWN. I would like to ask you if you feel there would be even with pay TV or subscription TV more and better programin on commercial television if we had, say, 10 networks rather than three. Mr. PREMINGER. Yes, definitely. Mr. BROWN. That is all? Mr. PEEMINGER. I have also learned to answer short. Mr. BROWN. This is a little bit more fundamental question. If we had pay TV wouldn't everybody wind up watching the Yankees rather than the Kansas City Athletics or watching Frank Sinatra rather than some new talent and eventually this thing would again get down to the centralized problem? Mr. PREMINGER. I don't believe so. This is really something that nobody can prove. Like nobody can predict any success of free enterprise. But I believe that the opposite will happen. I believe that it will be more diversified. I really believe it will raise the cultural level of the United States. Mr. BROWN. You would not have advertising on pay TV? Mr. PREMINGER. I am against advertising on pay TV or, if it is necessary, advertising at the beginning or the end, not in the middle of shows. But I don't think there should be advertiser$. Mr. BROWN. In other words, it should be strictly box office? Mr. PREMINGER. Yes. They don't advertise in movie houses any more-they used to-and they exist very well. Mr. BROWN. Thank you very much. Mr. MACDONALD. Mr. Kornegay. PAGENO="0240" 236 Mr. KORNEGAY. What is your feeling,. Mr. Preminger, with reference to the FCC having any authority in the area of setting or determining the prices that the subscriber pays for TV?. Mr. PREMINGER. If there should be abuses I think it should be regu- lated, the prices. I think there again competition will not make it necessary. I don't think that the FCC should have any power to regulate the content of the programs. Mr. KORNE6AY. Let me interrupt here. As I understand it, under the system that the FCC now envisions under their fourth report and order there would be no competition in the subscription TV? Mr. PREMINGER. That is wrong, too. Mr. VAN DE1~nLIN. Will the gentleman yield? Mr. KORNEGAY. Yes. Mr. VAN DEERLIN. What we are talking about is pay TV that uses the public airwaves. There is a limit on those, you know. Mr. PREMINGER. I don't think that there is much of a limit. This could easily be enlarged. I would be grateful for one channel on pay TV because there will still be competition between pay TV and com- mercial TV, but I think if there were two channels it would be better. I think that technically there is no limit. Mr. BROWN. Will the gentleman yield? I don't understand that in the FCC requirements. As I understand, the FCC have said they will allow them on pay TV if there are four "A" signals, including pay TV in the area. Mr. MAcDONALD. Five. Mr. BROWN. The point is that if there were five then that would not preclude another TV channel, would it? Mr. MACDONALD. Yes, it would. You would have to have 10. Mr. KORNEGAY. You have to have 10 and where do you have 10? Mr. BROWN. Is that clear in the statement? Mr. MACDONALD. Yes. Mr. PREMINGER. Even if it starts like this, if it works, if it is success- ful, wouldn't it be changed, like many laws are being changed, many rules, by necessity. If it just started then everything would be fine. Mr. MACDONALD. Thank you very much Mr. Preminger. I don't have to echo what I have said and what other members have said about the brilliance of your presentation and our gratefulness for your taking time to come here to be with us. Mr. PREMINGER. Thank you. Mr. MACDONALD. I apologize to the other witnesses who are to be heard but inasmuch as the next witness was to be Zenith and they con- ducted this experiment, I think in the very limited time we would have it is only fair that you have a reasonable amount of time. Ordinarily, we would come back at 2 o'clock if we could get per- mission from the Speaker to do so but today there is a very important bill on the floor, important to everyone in the country, a postal bill, which obviously is important to all Congressmen. There will be a number of rollcalls and amendments to the bill so we can't meet this afternoon. So we will meet tomorrow in this room at 10 a.m. The hearing is adjourned for today. (Whereupon, at 12:15 p.m., the subcommittee adjourned, to recon- vene at 10 a.m., Wednesday, October 11, 196'T.) PAGENO="0241" SUBSCRIPTION TELEVISION WEDNESDAY, OCTOBER 11, 1967 HousE OF REPRESENTATIVES, SUBOOMMITrEE ON COMMUNICATIONS AND POWER, COMMITrEE ON INTERSTATE AND Foiu~IaN `COMMERCE, Wa8hington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2322, Rayburn House `Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) pre~iding. Mr. MACDONALD. The hearing will come to order. The first witness of the morning is Mr. Joseph Wright, president of Zenith Corp. I understand you have some other members of your company that you would like to accompany you. STATEMENT OP JOSEPH S. WRIGHT, PRESIDENT, ZENITH: RADIO CORP.; ACCOMPANIED BY PIETEB. E. VAN BEEIC., PRESIDENT, TECO; KEIGLER E. FLAKE, GENERAL MANAGER, WECT-T'V, HARTFORD, CONN.; AND W. THEODORE PIERSON, COUNSEL Mr. WRIGHT. Yes, sir, Mr. Chairman. I have with me Mr. W. Theodore Pierson, of Pierson, Ball & Dowd. Mr. Pierson has represented us in this matter of subscription television before the FCC and generally for the past 15 years; Mr. Pieter van Beek, who is president of Teco, which is an affiliated or- ganization and wh~ has been assistant to the president on phonovision matters for Zenith for many years; and also Mr. Keigler Flake, general manager of channel 18 in Hartford, Conn., the station which has `been operating the subscription television operation authorized `by the FCC. Now, these gentlemen are here and available. If there are any ques- tions that I cannot answer or any questions that anyone from the com- mittee would like to address to them, we are happy to have them avail- able to give you any information that we can. We deeply appreciate this opportunity, Mr. Chairman, to appear before this committee and tell you a little something about us and also to tell you about this project that we have `been engaged in so long. Mr. MACDONALD. Do you want them at the table with you? Mr. WRIGHT. I don't think it will be necessary. We only have three chairs here. They are right here available. If there is any matter that we would like them to handle, we~ can certainly ask them to come forward. Mr. MACDONALD. All right. Mr. WRIGHT. Let me tell you a little something about Zenith by way of background. (237) 86-399 O-67----16 PAGENO="0242" 238 There have been some pretty hard things said about us in connection with the matter of subscription television that has been so conlxoversiai over the years. We started out 49 years ago with two young men who were making radios on a kitchen table back on the Edgewater Beach in Chicago. One of those men is still with us and a member of our board of. directors. We struggled along in this business before most people bad even heard of the word "radio" or that there was such a gadget. These two young men got out of the Navy and they had a license under the old regenerative patents of Maj. Howard Armstrong, who was the greater pioneer and inventor in our business. The company struggled through the years along with thousa~nds of others who were in this business. There are many names of companies that were famous at one time in this area that have fallen by the wayside. We have grown in this business in which we are engaged, which is primarily the manufacture of radio receivers, television receivers, and high fidelity instruments and consumer electronics and hearing aids. This is really the scope and extent of our business. We have tried to stick to the things that we knew how to do. In the course of that, we have grown from a kitchen table operation to a company which, last year, did over $600 million in business. We have more than 20,000 employeçs. We have more than 50,000 stock~ holders We are, we think, the largest company in the world in the manufacture of consumer electronics. Now, in achieving that position, the only way we could do it was by developing products that we thought the public would want to buy in competition with the products of our competitors when they got on the retailer shelves, The whole name of our game, the whole thrust of our businesS, is to develop products and merchandise that we think will meet the public's demands, that will be in the price categories, that will have the features, the styling, that will make it sell in competition not only with the dozen or more manufacturers that compete with us in the United States but with all the foreign goods that come along. Now, we are highly interested in television. Actually, television is the heart of our business. When the new fall programs come on, when the world's series comes on, when the football games come on and the new programs and everyone is excited about them, our industry's sales curve goes up like this. When the summer dog days, the days of the reruns and so forth come along, our sales curve goes down like this. This has been the pattern of our industry from the time that I know anything about it. Now, I tell you this so that you will understand that we have a bil~ lion dollar stake right now at Zenith in seeing television become a vital vigorous force and in seeing that it does render the maximum service to the public. Any suggestion that we would want to do something here which would limit television to a few people who might pay vast sums of money to see it and we would have anything to do with a service which would cut down free television and dry it up would certainly mean that we would be throwing away and working against the main thrust of our business now. PAGENO="0243" 239 Actually, our interest is the other way. Our interest is in doing everything we can to broaden this medium, to get more stations on, to get a greater variety of programing, locally and nationally, because it is only in this way that our business is really going to grow, if this medium renders a great service to the public. Now, many years ago, we came to the conclusion that television was going to be an awful lot different than radio. Whereas in radio you could have a great dramatic show by a few people in sweat shirts stand- ing around the microphone reading from a script, when you got to television this was going to be a very costly and difficult thing to finance. We did not believe at that time that the advertiser could afford to spend the kind of money that we felt was going to be necessary to program this thing. Now we think of advertising support of radio as being something ingrained in this medium, that it was almost invented along with it. The truth of the matter is that this was an accident, this development of advertising in support of it. In the early days of radio when we were starting, this was an amateur thing for the most part. There was no real broadcasting as we know it now. Great arguments went on among men in the industry then as to how radio could be supported. Would manufacturers own a radio station and use it to sell their own goods? Would the set manu- facturers make a levy among themselves to pay for the broadcasting of the stations? The use of this as an advertising support came about, the way I have heard the story, when one of the radio magazines, someone had printed 100,000 too many copies of them and they were stuck with them and they could not sell them. This was in the early days of the National Association of Broadcasters. As a matter of fact, Commander Mac- Donald of Zenith, who was president of Zenith and the man who really built the company, was the first president of NAB, and they got on the radio and asked people to send in for these magazines for a quarter and they sold them out. So far as I know, this was the first real use of radio as a means of selling a product. But the technology had never been developed for practically work- ing out a way that the public could share in the cost of bringing things that advertising could not support. So, we asked some of our cleverest research people whether there was a way that this could be done tech- nically. We have been working on the thing in terms of research now for more than 30 years. In the course of that, we have developed a whole variety of systems which make it technically possible to scramble a signal at the trans- mitter so that when it goes out over the air and is received on the TV set, both the sound and the picture are virtually unusable. They are hashed up so that if you look at them and listen to the sound, you do not get the intelligence from them. And, at the same time, to be a~ble economically and simply to recon- stitute that picture at the subscriber's set in such a way that he does get usable picture and sound and in such a way that his doing that can be recorded so that he can pay for what he has seen. Now, we started an experiment in the city of Chicago in 1951. We had 300 homes that were involved in this. The only programing that we PAGENO="0244" 240 could get for it were movies. Now, these were movies that were unavail- able to television at the time. They were out of theater release but most of them were from a year to 2 years out of theater release. We put them on and charged a dollar per family for seeing them. I think this ran for 6 or 8 weeks. After all, we wanted to know is this the kind of thing that the public wants? Do they really want someth~ing better than is available on TV now? And are they willing to share in the cost of it? We had no doubt about that after that Chicago experiment. So, 15 years ago, we asked the Federal Communications Commission to approve our going ahead and doing this on a commercial basis. I am sure that I do not need to recount the long story that has gone on since that time. After a very protracted controversy before the FCC, we were granted permission to go ahead in Hartford in 1962 on an experi- mental basis. That Hartford operation has taught us a great deal about subscrip- tion television. As a result of our studies there, we made all of this information available to the FCC. By the way, we have a very detailed report that we filed with the FCC which I would certainly like to leave with this committee so that you may have the benefit of a full disclosure of all of our information on these operating results. Mr. MAODONALD. I think, Mr. Wright, without objection, it will be very valuable to have it inserted in the record at this point. (The document referred to follows:) PAGENO="0245" BEFORE THE Federal Communications Commission WASHINGTON, P. 0. 20554 In the Matter of: AMENDMENT OF PART 3 OF THE COMMISSION `S RULES AND. REGULATIONS (RADIO BROADCAST SERvIcEs) To PROVIDE FOR SUBSCRIPTION TELEVISION SERVICE Docket No. 11279 JOINT COMMENTS OF ZENITH RADIO CORPORATION AND TECO, INC. IN SUPPORT OF PETITION FOR NATION-WIDE AUTHORIZATION OF SUBSCRIPTION TELEVISION March 10, 1965 241 PAGENO="0246" 242 INDEX Page I. INTRODTJOTION 1 II. HISTORY OF THIS PROCEEDING 2 III. ISSUES PRESENTED 4 A. Jurisdictional Issue 4 B. Public Interest Issues 4 Jurisdictional Consideration IV. THE COMMISSION HAS TIlE AUTHORITY UNDER THE COMMUNICATIONS ACT OF 1934, AS AMENDED, TO AUTHORIZE SUBSCRIPTION TELEVISION AS A "BROADCAST" SERVICE 5 Public Interest Considerations V. THE HARTFORD TRIAL HAS ESTABLISHED THAT SUBSCRIPTION TELEVISION WILL PROVIDE A BENEFICIAL SUPPLEMENT TO THE PROGRAM CHOICES NOW AVAILABLE TO THE PUBLIC ON CONVENTIONAL TELEVISION 10 A. Motion Picture Films 12 B. Sports Events 13 C. Special Entertainment Programs 15 D. Educational and Instructional Programs 16 E. Charges for Subscription Programs 18 VI. THE HARTFORD TRIAL HAS DEMONSTRATED THAT SUBSCRIPTION TELEVISION PATRONAGE IS NOT LIMITED TO HIGH-INCOME SUBSCRIBERS BUT PRIMARILY ATTRACTS MIDDLE-INCOME SUB- SCRIBERS 20 PAGENO="0247" 243 Index Continued Page VII. THE HARTFORD TRIAL ESTABLISHES THAT SUB- SCRIPTION TELEVISION WOULD RESULT IN AN INCREASE IN ECONOMIC AND PROGRAM RE- SOURCES WHICH WOULD FACILITATE SIGNIFI- CANT INCREASES IN THE NUMBER OF TEI2EVI- SIGN SERVICES AVAILABLE TO THE PUBLIC UNDER THE PRESENT SYSTEM 23 A. Business Projections Based on Hartford Trial Ex~ perience 25 B. Conclusions Which May Be Drawn From Business Projections 35 VIII. THE HARTFORD TRIAL DEMONSTRATES THAT SUBSCRIPTION TELEVISION WOULD NOT IMPAIR THE CAPACITY OF THE PRESENT SYSTEM TO CONTINUE TO PROVIDE ADVERTISING-FINANCED PROGRAMMING 36 A. Audience Siphoning Would Be De JlThiimis 36 B. Subscription Television Would Not Pre-empt Any Significant Amount of Time Now Utilized By Adver- tising Sponsors 38 C. The Type of Box-Office Programming Shown During the Hartford Trial Demonstrates That Subscription Television Will Not Siphon Talent and Existing Programs From Conventional Television 42 IX. THE HARTFORD TRIAL HAS DEMONSTRATED THAT SUBSCRIPTION TELEVISION WILL RECEIVE SUFFICIENT PATRONAGE FROM THE PUBLIC TO MAKE IT AN ECONOMICALLY VIABLE BUSIN1~SS 48 X. MISCELLANEOUS ISSUES CLARIFIED BY THE HARTFORD TRIAL 50 A. The Modus Operandi of Subscription Television and Methods to be Employed 50 B. Technical Performance . 52 C. The Role of the Participating Broadcast Station Licensee 54 D. The Hartford Trial Has Established That There Are No Inherent Monopolistic *Features Arising From Subscription Operations 55 XI. SUMMARY OF PUBLIC INTEREST CONSIDERA- TIONS . 58 11 PAGENO="0248" 244 Index Continued Page XII. SCOPE OF RELIEF REQUESTED 6o 1. Whether Subscription Television Operations Should Be Limited To A Single Technical System Or Whether General Standards Should Be Provided Within Which A Number Of Systems Might Operate 60 2. Whether Subscription Operations In An Individual Community Should Be Confined To A Single Tech- nical System 60 3 Whether Nation wide Subscription Television Should Be Limited To Multi-Station Markets (Four or More Stations) or Whether It Should Be Permitted In All Markets, Including Single-Station Markets 61 4. Whether Subscription Television Should Be Con- fined to a Single Station in Any Individual Com- munity or Whether More Than One Station Should Be Authorized to Carry Programs 61 5. Whether Stations Should Be Limited in the Amount of Time That They Can Devote to Subscription Pro- gramming 62 6. Whether Subscription Television Should Be Limited to Only UHF Stations 63 7. Whether R.estrictions Should Be Placed Upon the Broadcast of Commercials During Subscription Programs 8 Whether Subscription Television Should Be Limited to Broadcasting Programs of a Box-Office Nature XIII. DESCRIPTION OF SUBSCRIPTION RULE PROPOSED BY ZENITH AND TECO 65 Proposed Subscription Rule 66 CONCLUSIONS 69 EXHIBITS 1. List of 599 Subscription Programs Shown During First Two Years of Hartford Trial by Program Category and Audience Rating 73 2 Average Weekly Program Expenditures by Subscriber In come Level .. 83 3. Average Monthly Program Viewing in Dollar Amounts ... 84 4. Top 100 Markets for 1964 Rated by Number of Television Homes 85 5. Suggested Notice of Proposed Rule Making 87 iii PAGENO="0249" 245 BEFORE THE Federal Communications Commission WASHINGTON, D. 0. 20554 In the Matter of: AMENDMENT OF PART 3 OF THE COMMISSION `S RULES AND REGULATIONS (RADIO BROADCAST SERVICES) TO PROVIDE FOR SUBSCRIPTION TELEVISION SERVICE Docket No. 11279 JOINT COMMENTS OF ZENITH RADIO CORPORATION AND TECO, INC. IN SUPPORT OF PETITION FOR NATION.WIDE AUTifORIZATION OF SUBSCRIPTION TELEVISION I. XNTROIMJCTION Zenith Radio Corporation and Teco, Inc. are filing these com- ments in support of their petition, filed simultaneously herewith, re- questing the Commission to adopt appropriate rules authorizing subscription television service on an extended nation-wide basis. In authorizing subscription television trial operations in its First and Third Reports, the Commission provided that the above-entitled proceeding would remain pending on the issue of whether subscription television service should be authorized or extended on a continuing basis until additional data were available from the trial subscription operations so authorized. The Hartford subscription trial being con- 1 PAGENO="0250" 246 ducted by RKO General, Inc., and its subsidiary, RKO Phonevision Company, in which Zenith and Teco are participating, is now in its third year of operation under the three-year authorization granted for that trial and has now reached a stage where meaningful data are available for analysis. In these comments, with the cooperation of RKO, we are making public1 the empirical knowledge gained during the Hartford subscrip- tion trial. Emphasis has been placed upon those factors which have a relationship to the public interest considerations and issues upon which the Commission reserved final decision in its First and Third Reports on subscription television until more operational data and demonstrable facts were available from appropriate trial operations. II. HISTORY OF THIS PROCEEDING The present rule making proceedings had their genesis in a petition filed by Zenith on February 25, 1952, as revised by a joint petition filed by Zenith and Teco, Inc. on November 29, 1954. Prior to this, Zenith, pursuant to an FCC authorization, conducted a successful three-month subscription television test with 300 subscribers in Chi- cago during 1951.2 On February 10, 1955, the Commission issued a notice of proposed rule making (Docket 11279, FCC 55-165) to elicit data and comments on questions of fact, law and public interest raised by the Zenith-Teco petition and subsequent petitions of other proponents of subscription television. As a result, voluminous comments were submitted by mem- bers of the television industry, motion picture interests and others, and over 25,000 letters and comments were received by the Comniis- sion from various organizations and individuals. On May 23, 1957, the Commission issued a notice of further pro- ceedings (FCC 57-530) in which it concluded that it has the requisite statutory authority to authorize the use of broadcast frequencies for subscription operations if it should find that it would be in the public interest tq. do so. It announced, however, that in the absence of a suitable trial demonstration of subscription television, it was unable to determine whether or not an authorization of that kind of television `Most of this information, of course, has been made available to the Corn- mission from time to time during the course of the Hartford operation. 2 Full details of the 1951 test have been previously filed with the Commission. 2 PAGENO="0251" 247 service would serve the public interest. It again formulated a series of questions to elicit appropriate conditions under which such trial demonstrations might be conducted and invited interested parties to comment. Again, numerous and extensive written comments were submitted. On October 17, 1957, the Commission adopted its First Report (16 BR 1509) in which it announced that it would accept applications by television station licensees to conduct subscription television opera- tions under certain prescribed conditions. On February 26, 1958, the Commission issued a Second Report (16 RB 153.9) temporarily defer- ring trial authorizations to afford Congress additional time to consider the then-pending legislative proposals on the subject. On March 23, 1959, the Commission issued its Third Report (16 RB 1540a) revising several conditions in the First Report. The Com- mission therein stated that it was prepared to give consideration to such applications for subscription television trials as migh~t be sub- mitted by broadcast licensees in conformity with the revised require- ments. On June 22, 1960, RKO Phonevision Company (then known as Hartford Phonevision Company) and RKO General, Inc., its parent company, pursuant to the terms of the Third Report, applied for authorization to conduct television subscription operations, using the Zenith Phonevision system, Over UHF Television Station WHCT, Hartford, Connecticut. Hearings were held before the Commission en bane from October 24 through October 28, 1960, and the Commission reached its final decision on February 23, 1961, in which it unanimously concluded that the grant of RKO `s application would fulfill the objectives of the trial subsciiption television operations established in the First and Third Reports. Application of Hartford Phonevision Co., 20 RB 754 (1961). Thereafter, the TJnited States Court of Appeals for the District of Columbia Circuit affirmed the Commission authorization of the Hart- ford trial. Connecticut Committee Against Pay TV v. FCC, 301 F.2d 835 (1962), cert. denied, 371 U.S. 816 (1962). Actual subscription trial operations by WHCT, Hartford, were commenced on June 29, 1962, with 188 subscribers, including 48 "test" subscribers and 12 "complimentary" subscribers-i.e., veterans hos- pitals, Newington Home for Crippled Children, local hospitals, etc. 3 PAGENO="0252" 248 In the first two years of operations, the number of subscriber homes steadily increased as indicated below: Date No. of Subscribers End of 26th week 1,729 End of 52nd week 2,743 End of 78th week 3,622 End of 104th week 4,784 At the close of the second year of trial operations, RKO decided to limit the number of subscribers to 5,000 for the remaining third year of the trial authorized by the Commission because business prudence and fairness to the subscribers did not warrant further substantial expansion without some assurance that the Commission would author- ize the trial beyond the third year. Thus, after more than twelve years of Commission proceedings, field tests and trials of subscription television, the time has come to give subscription television the opportunity to go into the market place on a nation-wide basis. IlL ISSUES PRESENTED The Commission, in its First and Third Reports, outlined the central issues concerning whether subscription television should be authorized on a nation-wide basis, upon which it was reserving decision pending the trials as follows: A. Jurisclictioual Issue ~ Whether subscription television should be classified as broad- casting under Section 3(o) of the Communications Act or whether it should be given some o~ther classification pending receipt of additional information which would be produced by subscription trials. B. Public Interest Issues 1. Whether subscription television would provide a beneficial supplement to the program choices now available to the public. 2. Whether subscription television would result in an in- crease of resources which would facilitate significant increases ` The Commission has already concluded that it has the statutory authority to authorize subscription television operations if it finds such operations to be in the public interest. 4 PAGENO="0253" 249 in the number of services available to the public under the pres- ent system. 3. Whether it would seriously impair the capacity of the pres- ent system to continue to provide advertising-financed program- ming of the present or foreseeable quantity and quality, free of direct charge to the public, and the related question: Whether sub- scription television would have a siphoning effect causing pro- gram producers, sports promoters, talent, writers, directors and stations to migrate to a disastrous degree away from the present system to subscription television, which would in turn frustrate any possible effort to continue to provide free television service anywhere near the present quantity or quality. 4. The degree of acceptance and support which subscription television might be able to obtain from members of the public in a position to make a free choice. 5. Subsidiary issues which the Coin-mission anticipated would be c~arified as a result of trial operations .authorized pursuant to * the First and Third Reports were:. (a) the modus operandi of * subscription service; (b) methods to be employed; (c) the nature of the programs offered; (d) technical performance; (e) the role of the participating broadcast station licensee; and (f) possible monopolistic features of a subscription service. We shall hereafter discuss. in detail each of these issues in light of the empirical knowledge gained during the Hartford subscription trial operation. Jurisdictional Consideration IV. THE COMMISSION HAS THE AUTHORITy UNDER THE COMMUNICATIONS ACT OF 1934, AS AMENDED, TO AUTHORIZE SUBSCRIPTION TELEVISION AS A "BROADCAST" SERVICE. It cannot now be doubted that the Commission has statutory authority to authorize subscription television. Both the Commission and the Court of Appeals have so held. The Commission, "after a painstaking review of the briefs sub- mitted in this proceeding and additional research by the Commission staff," first reached this conclusion in its 1957 notice of further proceedings (FCC 57-530). In its First l~eport the Commission unani- mously affirmed its prior holding. It discussed in detail the relevant ~ First Report, para. 20. ~ In the only dissent to the report as a whole, Commissioner Bartley sub silentio conceded that the Commission had the power to authorize subscription services, although apparently he would have held that such should be classified as non-broadcast. 16 RR at 1533, 1538. It should be noted that Commissioner Bartley concurred in the result of the Third Report. 16 RR 1540a. 5 PAGENO="0254" 250 sections of the Communications Act and pertinent legislative history, and stated that: "[lit is not reasonable to infer Congressional intent to prohibit charges for the reception of programs transmitted by broadcast stations, from language which makes no express reference to the question, and which in our opinion could be so construed only on a strained interpretation. Such a construction of the statute seems to us especially unwarranted in view of the fact that in the several respects, mentioned above,[6] in which Congress decided to impose specific limitations on the broadly defined licensing powers o.f the Commission, it did so in express, explicit language." (para. 29.) These sections of the First Report were "readopted and reaffirmed" in the Third Report (para. 7). In the subsequent appeal from the Commission's 1961 final decision authorizing the Hartford operation, the appellant Connecticut Committee Against Pay TV argued, i'nter cilia, that "the Commission lacks statutory power to authorize a tele- vision broadcast system which requires the direct payment of fees from the public . . . . "~ This contention was rejected by the Court in its affirmance of the Commission's decision. These decisions have since stood undisturbed by either the Supreme Court or Congress. Thus, no useful purpose would be served by prolonging this dis- cussion with detailed argument and citation, except to add that the Hartford trial has not disclosed any fact that would in any way alter these conclusions. The only jurisdictional consideration remaining open, then, is whether subscription television should be classified as "broadcasting" or under some entirely new category In its First Report the Com- mission, while rejecting any contention that the definition of "broad- casting" contained in Section 3(o) of the Communications Act per se bars the authorization of subscription broadcasting (para. 28) and, conversely, observing that "there would appear to be little basis for classifying the proposed kind of service as a common carrier service within the meaning of Section 3(h)" (para. 43), reserved a deci- sion upon its proper classification. We submit that the language of 6 Communications Act, as amended, Sections 311, 313, 315, 317, 325, 326. See First Report, para. 25. ~ Connecticut Conimittee Against Pa4J TV v. FCC, 301 F. 2d 835, 837 (D.C. Cir.), cert. denied, 371 U.S. 816 (1962). 6 PAGENO="0255" 251 the Act, in pertinent part and as a whole, the relevant legislative his- tory and case law, plus the results of the Hartford trial, demonstrate that subscription television should be classified as a broadcast serv- ice within the definition of Section 3(o). Section 3(o) defines broadcasting as "the dissemination of radio communicatio~is intended to be received by the public or by the inter- mediary of relay stations." It is clear from this statutory language that the "intent" of the "broadcast licensee" and the inherent nature of the signal he transmits are the criteria for the classification of the service he renders. And as the Commission itself has stated, "The primary touchstone of a broadcast service is the intent of the broad- caster to provide radio or television program service withottt dis- crimination to as many members of the public as can be interested in the particular program as distinguished from a point-to-point message service to specified individuals." 8 The Commission has also declared that under this definition sub- scription services "should properly be classified as a type of broad- cast service." ~ Subsequently, in its First Report (para. 28) the Com- mission stated that "the evident intention of any station transmitting subscription programs would be to make them available to all mem- bers of the public within range of the station." This has been corn- firmed by the Hartford trial. Of course, it is not the stated intention of a broadcaster that is of the utmost importance, but the intent that can reasonably be in- ferred from all the external circumstances. Certainly, however, the number of actual or potential viewers is not crucial. For instance, cer- tain multiple-address private telegraph messages might be received by more people than some broadcast programs, but this certainly does not place the private telegraph message iii the category of broad- cast, or the broadcast programs in the category of point-to~point. A color broadcast by a television station or a broadcast by a new UHF station in a VHF market or a broadcast by an "educational" televi- sion station are not classified as point-to-point, although disseminated with the knowledge that only a highly limited number of persons 8 Comments of the Federal Communications Commission on H.R. 6481, a Bill to Amend the Communications Act with Respect to its Application in the case of Subscription Radio and Television, FCC 54-601, May 6, 1954. (]~m. phasis added.) 9Ib~d. 7 PAGENO="0256" 252 possessing special equipment will receive the broadcast. And, as the Court of Appeals stated in Functional Music, liw. v. FCC, 274 F.2d 543, 548 (D.C. Cir.), cert. denied, 361 U.S. 813 (1958): "Program specialization and/or control is not necessarily deter- minative of this requisite intent, and therefore dispositive of broadcasting status. . . . Broadcasting remains broadcasting even though a segment of those capable of receiving the broadcast sig- nal are equipped to delete a portion of that signal," and vice versa. If the "functional music" services involved in this last case are properly classifiable as "broadcasting" (as the Court of Appeals held), surely subscription services are broadcasts. The potential func- tional music audience is much smaller: than that of subscription tele- vision. More importantly, functional music's audience is inherently limited in type to "restaurants, stores, schools and comparable in- stitutions." Id. at 544. In contrast, in the Hartford trial no limit was plaeed upon the type or number of subscribers until the third year when RKO limited the number to 5,000 for the reasons previously explained. Otherwise, besides the geographic and atmospheric limi- tations on range of reception, the only considerations preventing an individual from participating in the subscription services were either his own economic dictates or his own free choice to abstain. Each one of these considerations is equally applicable to any other type of "broadcasting." It is likewise true that the inherent nature of the signal trans- mitted by a subscription operation demonstrates that it is a "broad- cast" service. This signal is practically identical with that of any other broadcast station, the only difference being the specialized sig- nal and equipment necessary to scramble and unscramble the trans- mission. A similar signal and similar equipment were involved in the Functional Music case. Since most television broadcast stations derive their revenue from advertising and not from subscription charges, th~ argument has been made that Congress did not intend to authorize t~ubscription stations to be classified under "broadcasting." This arg~iment finds no sup- port either in the historical development of te1e'c~ision or in the leg- islative history of the Communications Act. As the Commission rec- ognized in its First Report: "When Congress debated the legislation whi~b emerged as the Radio Act of 1927, the practice of `free' broadcasting had become 8 PAGENO="0257" 253 established and was universally followed. This had not, however, resulted from any legislative requirement. it was the way radio broadcasting grew up. The Secretary of Oommerce_4he pre- decessor licensing authority_-was not limited to issuing broad- cast licenses only to licensees proposing free broadcasts. The practice of free broadcasting resulted from what at that stage was the voluntary choice of the industry." (para. 32.) Furthermore, the Commission, in the Muzak Corporation case, 8 FCC 5811, 582 (1941), and the Court of Appeals, in `Functional Music, ex- pressly decided that the procurement of station revenue by direct charges to the public is within the definition of broadcasting. The only remaining consideration, then, is whether a subscription broadcaster can comply with all of the Communications Act require- ments and Commission regulations and policies imposed upon other broadcasters. The answer is definitely yes.1° The Hartford trial dem- onstrated that a broadcast licensee supplying subscription television programs will have no difficulty whatsoever in meeting all of his ob- ligations if classified as a "broadcaster." indeed, the Hartford sta- tion (WHOT) experienced no dissimilarities in complying with these obligations during its hours of operation as a standard television broadcast station and those of a subscription broadcaster. We submit, therefore, that the broadcast licensee is clearly per- forming a broadcasting function, whether his signal carries a spon- sored, sustaining or subscription program. The fact that in the course of performing this ultimate task he employs services that are not in and of themselves broadcasting does not deprive his telecast of its real broadcasting character. He now uses the services of national net- works, regional networks, news services, film syndicates, telegraph companies, transportation companies, the U.S. Mail, and telephone companies to obtain entertainment and information that he intends to release to the public, but this does not deprive his final act of trans- mission of its basic character__broadcasting. From the above, it is clear that subscription television is broad- casting within the statutory definition. Any other conclusion would do violence to history, the background of governmen~~~ regulation, and the logical and reasonable meaning to be given to the plain words of the statute. It should be noted, however, that even if the Commis- 10 Allowing, of course, for the requisite subscription scramblIng of trans- mitted signals. 9 86-399 0 - 67 -17 PAGENO="0258" 254 sion should determine to place subscription television in a classifica- tion other than "broadcasting," this would not preclude the authori- zation of subscription television to licensed stations operating in the broadcast band. See First Report, para. 28; see also Muzak Corpora- tio~i, 8 FCC 581 (1941). Public Interest Considerations V. THE HARTFORD ,TRIAL HAS ESTABLISHED `THAT SUBSCRIPTION TELE- VISION WILL PROVIDE A BENEFICIAL SUPPLEMENT TO THE PROGRAM CHOICES NOW AVAILABLE TO THE PUBLIC ON CONVENTIONAL TELE VISION. During the first two years of the Hartford subscription trial, WHCT broadcast 599 different subscription features which were "box- office attractions "-i.e., programs which were not available on con- ventional television and for which the public would ordinarily pay. an admission charge at a theater, concert hall or sports arena. Since most of these 599 programs, such as current motion pictures, were given multiple showings, the time devoted to subscription program- ming during the first two years was 3,139 hours for 1,776 separate showings of these features. During this same two-year period, WHCT broadcast 3,623 hours of regular commercial programming. Attached hereto as Exhibit 1 is a tabulation showing the title of each of the 599 subscription features broadcast, by general program category, the number of showings and the number and percentage of subscribers viewing each such feature and showing. Table 1 on the opposite page is a summary of the detailed information set forth in Exhibit 1. The cost-per-listener advertising economics of conventional tele- vision prevent many types of box-office programs from being tele- cast because their cost is beyond the reach of the sponsor or the broadcaster. Other box-office programs such as sports events are often kept off the air because the broadcaster and the advertiser can- not sustain the economic burden of making up for the loss of box- office attendance.' Other events have become unavailable to the public over conventional television because neither the sponsor nor the tele~ caster is in a position to bid competitively against closed-circuit thea- ter television operators who charge a fee to the public. Each of the 599 subscription programs broadcast during the first two years of the Hartford trial falls into one or `another of the above categories of programs which are not available on conventional television. 10 PAGENO="0259" TABLE I No. of Features PROGRAM CATEGORIES FEATUPiE FILMS 1 First Run U. S. Films 116 First Subsequent Run U. S. Films (Shown Several Weeks &fter First Theater Run) 297 Older U. S. Films (Over 6 Months in - Theater Release) 414 Subtotal-All U. S. Films 18 Foreign Language Films (English Titles - or Dialogue Dubbed In) 432 Subtotal-Al] Films SPORTS 6 Championship Boxing 2 College Basketball 1 High School Basketball 21 Professional Basketball 5 College Football 44 Professional Hockey 79 Subtotal-All Live Sports 35 Special Entertainment Productions (Broadway and Off-Broadway Plays, Opera and BaIl$, Con- certs and Recitals, Variety, Nightclub and Cabaret) 30 Educajjonal Features 3 Medical Programs limited to 100 Doctor- - Subscribers 599 GRAND TOTALS* Percentage of Total Showings of Features Subscribers Viewing Average Average Average No. of Proportion No. Per ForAll Per Showings of Total Feature Showings Showing 2 0.1% 2.0 10.7% 53% 516 29.1% 4.4 27.3% 6.1% 958 54.0% 3.2 18.0% 5.6% 1476 83.1% 3.6 20.7% 5.8% 61 3.4% 3.4 10.1% 3.0% 1537 86.5% 3.6 20.1% 5.6% 6 0.3% 1.0 63.3% 63.3% 2 01% 1.0 13.6% 13.6% 1 0.1% 1.0 10.7% 10.7% 21 1.2% 1.0 6.6% 6.6% 5 0.3% 1.0 6.2% 6.2% 44 2.5% 1.0 5.3% 5.3% 79 4.5% 1.0 9.8% 9.8% 97 5.5% 2.7 8.7% 3.1% 57 3.2% 1.1 0.8% 0.7% 6 0.3% 2.0 18.7% 9.3% 1776 100.0% 2.96 16.4% 5.5% SUMMARY BY PROGRAM CATEGORIES OF ALL 599 FEATURES SHOWN DURING FIRST TWO YEARS (104 WEEKS) OF HARTFORD PHONEVISION OPERATION Cu Cu *T]ljs reflects a cumulative total of 4,998,033 separate and precisely measurable home exposures of 1776 separate showings. PAGENO="0260" 256 A. Motion Picture 1~iimS Feature films made up approximately 86% of the first two years of Hartford subscription programming, which is in accord with previ- ous estimates submitted to the Commission by RKO Phonevision and Zenith that a dominant portion of the proposed subscription televi- sion programming would consist of current motion picture feature films. Of the various subscription television program categories, cur- rent motion pictures produced the highest cumulative average audi- ence rating, with the single exception of heavyweight championship boxing. This, of course, is not surprising, since motion picture ad- mission expenditures have in recent years constituted approximately two-thirds of the public's expenditures for spectator amusements, in- cluding legitimate theater, opera and spectator sports.11 It is relevant to note the cooperation which RKO received from motion picture producers and distributors during the Hartford trial. As the Commission knows, as soon as it authorized RKO to conduct the Hartford trial, various theater owner organizations attempted to induce motion picture producers and distributors to refrain from supplying their feature film product for the Hartford trial. Despite this theater opposition, all of the major 12 and a number of inde- pendent producers and distributors have supplied motion picture product for the Hartford trial. Except for one film, the producers and distributors have refused to supply film on a "first run" basis. However, they have supplied product on a "first subsequent run" basis, i.e., several weeks after first theater run, which corresponds to the time when pictures are released to neighborhood theaters. In our opinion, any nation-wide subscription system could, if it were deemed important, obtain "first run" pictures day-and-date with their show- ing in first run theaters, since a principal cause of the lack of avail- ability of first-run and certain outstanding film features was the fact that the Hartford operation was on a trial basis. In the absence of any assurance that the Commission would extend subscription television 11 Statistical Abstract of the United States, Table No. 283, p. 208 (1964). 12 In March of 1964 RKO General instituted an ant!trust suit against two of the major motion picture producers (20th Century-Fox and Universal Pic- tures) since neither company had been willing up to that time to provide any films for the Ilartford trial. These suits were settled out of court in June of 1964; and as the second trial year ended, both companies were providing an excellent selection of older and "first subsequent run" ifims at prices com- parable to those of the other major distributors who had been cooperating with the Hartford trial. 12 PAGENO="0261" 257 to a nation-wide basis, some film producers and distributors did not desire to release their best or newest product. B. Spor±s Events Champioiiship Boxii~ig. Six heavyweight championship fights, con- sisting of approximately 0.3% of the first two years of Hartford's sub- scription programming, were the most popular subscription programs presented. These fight programs had an average audience rating of approximately 63% of all subscribers. Prior .to the commencement of the subscription trial in Hartford, no heavyweight championship boxing matches had appeared on con- ventional television for over ten years. The promoters of such fights had found it much more profitable to distribute them to closed cir- cuit theater outlets rather than to conventional television. Except in Hartford, where these six fights were available on subscription tele- vision, any other member of the public desiring to see these fights either had to attend them at the arena or view them on closed circuit theater television. The economic benefits flowing to the public from the televising of these fights may be highlighted by the following example. The Liston-Clay championship fight held in Miami in February of 1964 was carried live by WHOT in Hartford. 3,637 subscribers (83% of all subscribers) tuned in this program at a per-program cost of $3.00. A survey conducted by RKO Phonevision revealed that there were an average of nine viewers per tuned-in-subscriber home, The 3,637 tuned-in-subscriber homes represented a total viewing audience of approximately 32,733. This same fight was available to the public via closed circuit television at several local Hartford theaters at a charge of $5.00 per person. Therefore, an average of nine subscription tele~ vision viewers were able to watch this fight over WHOT at a total cost of $3.00, rather than a cost of $45.00 if they had attended the theater. In terms of total viewers, 32,733 persons were able to see this fight over WHCT at a total cost of $10,911, while, if this same number of persons had viewed the fight at the theaters (assuming the theaters had seats to accommodate them) it would have cost them $163,665. Thus, the Hartford public viewing this fight over WHOP ac- crued a net saving of $152,754 over what they would have been re- quired to spend if they had seen it at the local Hartford theaters. This difference serves to emphasize the economic benefits which can flow to the public from the distribution of box-office events to homes via 13 PAGENO="0262" 258 over-the-air subscription, as contrasted to the more expensive closed- circuit theater outlet. It is also noteworthy that 8,297 persons attended the Liston-Clay fight at the Miami Arena at admission prices scaled from $20.00 mini- mum to $250.00 ringside. The limited HartfQrd trial produced almost 4 times as many viewers for this fight than were present at the Miami arena. College Sports. Five college football games and two college bas- ketball games, making up approximately 0.4% of the first two years of Hartford subscription programming, were broadcast. It should be emphasized that under the restrictions placed upon the broadcast of college football games by the National Collegiate Athletic Associa- tion (NOAA), none of these games could have been broadcast by conventional television stations. The NCAA during the 1964 season gave the right to NBC to broadcast fourteen college games, including three Bowl games on January 1. The games were limited to national games on nine dates and four regional games on each of five dates. The NOAA's restrictions which, in substance, limit the number of games available to the public in any part of the country to one game per week during the football season, were adopted to protect all col- lege football teams from loss of gate receipts. Of necessity, these NCAA restrictions work some hardship on the public. For example, the public on the Atlantic seaboard may only have available to them the college game of the week selected by NCAA, which may be between two Pacific league teams, although the public in the East may have a vital interest in an important conference game between two Eastern teams. Or the public in the mid-West may be deprived of an impor- tant conference title game between two Big Ten teams because the game of `the week, which is oftentimes selected before the season begins, is between a team from the Southwest conference and a team from the Pacific Coast conference. Since subscription television would protect the gate receipts, it would be possible for subscription tele- vision stations to carry local and regional games in which `there is a strong local interest without being restricted to the so-called "game of the week" now permitted by NCAA. Similar rules have been adopted by the NCAA restricting the broadcast of college basketball games by conventional television. Miscella~neous Sports. Twenty-one professional basketball games and forty-four professional hockey games were broadcast, making up 3.7% of the Hartford subscription programs carried during the first 14 PAGENO="0263" 259 two years. The professional basketball games had an average audience rating of 6.6%, and the professional hockey games an average audi- ence rating of 5.3%. None of these games were available on conven- tional television. As an experiment we also carried one high school basketball game which had an audience rating of 10.7%. There are no major league professional baseball or football teams in Hartford. However, we believe that one of the major sports pro- gram supplements which subscription television could provide in other cities having major league professional baseball or football would be the broadcast of home games. Professional football home games are blacked out in both the American and National Football Leagues. The broadcasting of major league baseball home games are blacked out in many cities or their number restricted. Several professional football teams, such as the Chicago Bears and the Detroit Lions, have entered into agreements permitting clGsed circuit theater operators to carry home games, since the seating capaci- ties of the stadiums are generally sold out.13 There are indications that the carrying of professional football home games by theater television will increase in the next few years. Subscription televi- sion, of course, can provide a much wider audience for home games than can the theaters. Thus, since these home games are already blacked out from conventional television, the public would receive a beneficial supplement if these programs could be carried by over-the- air subscription television as well as by theater television. C. Special Entertainment Programs During the first two years, 35 special entertainment programs, making up 5.5% of the total programming, were broadcast. These special entertainment programs had an average audience rating of 8.7%. They included the following: Concerts 4 Opera and Ballet 4, Drama (Broadway, British, and Off-Broadway Plays) 11 Variety 7 Night Club and Cabaret 6 During the first year RKO experienced some difficulty in securing the cooperation of producers, writers and talent in connection with 13 Broadcasting, Vol. &7, No. 6, August 10, 1964, p. 28. 15 PAGENO="0264" 260 obtaining special entertainment productions primarily because of their ignorance of the purpose of the Hartford trial. However, during the second year, RKO was able to obtain better cooperation because of the steadily increasing subscription audience, the greater knowledge concerning subscription television brought about by the subscrip- tion operation in Hartford, and the realization by producers and talent that the type of subscription television programs produced for the Hartford trial could be of great value in the future. The economic limitations inherent in a single market test with a limited number of subscribers precluded a continuous supply of plays then showing on Broadway. The asking price, including the price of putting such shows on videotape, plus certain uneconomic demands of some local New York City unions, often made impractical the sub- scription broadcast of such shows beyond a limited number for test purposes. However, these economic problems, which flowed primarily from the limitations inherent in the trial, would be eliminated if there were a number of subscription stations bargaining from a broader economic base for such Broadway plays. The special subscription entertainment programs carried during the Hartford trial were all of box-office nature; i.e., programs not otherwise available unless the viewer went to the theater, night club, concert hail, etc., and paid an admission charge. D. Educational and Instructional Programs Fifty educational and instructional features, approximately 3.2% of the first two years of the Hartford subscription programming, were broadcast. These educational and instructional programs had an aver- age audience rating of 0.8%. Although the educational institutions in the area fully cooperated with RKO, one of the principal problems was to find sufficient product of box-office caliber, since the limited operation did not justify the production of much original educational programming. In our opinion, subscription television's major contribution to edu- cational programming will be the fact that a subscription system, once installed in a community, may be utilized by noncommercial educational television stations as well as commercial television stations. The basic economic support for such a system in any community will undoubtedly come from the commercial stations and from programs of a non-edu- cational category. However, once the system is installed, the educa- tional stations will be able to use the subscription facilities for the purpose of obtaining support for their own programs. Thus, for 16 PAGENO="0265" 261 example, it will be possible for an educational station to give over- the-air class lessons for college credits by making per-program charges and limiting reception-as well as checking "class" attendance-of such programs to persons who pay the per-program charge. We do not mean to imply that commercial television stations will not carry regular subscription programs of an educational or instruc- tional type. However, it is likely that such programs will be in the form of very special in-depth programs produced at considerable cost, as contrasted to the much less expensive day-to-day type of class- room program often carried by educational stations. Of particular significance has been the introduction of program~ ming specially obtained for presentation to physicians in the Hartford area. By restricting the use of decoding information to any given group, the Zenith subscription television system makes it possible to broadcast programs of medical information to which only physicians can subscribe. This type of programming was commenced in the early part of 1964 with a small number of physicians participating. Since that time, approximately 15 such programs, each shown three times, were broad- cast. The entire project was supervised by a noted physician who is well known for his efforts in using the medium of television in con- nection with the study and practice of medicine. Some of the programs in this series were specially produced in institutions such as the Mayo Olinic. As an auxiliary to this service, a particular program on the subject of "Smoking and Health" was produced which is scheduled to be presented, without charge, to all subscribers. It is felt that subscription television, in this unique application, serves an important need. It allows physicians to learn of new ad- vances in medicine in the privacy of their own homes or offices without inconvenience, loss of time, or significant cost. The above mentioned programs are offered to physicians at only a $1.50 charge each. This medical project, as a part of the over-all subscription tele- vision operation in Hartford, has enjoyed considerable professional support from officials connected with such organizations as the Con- necticut Academy of General Practice; the American Academy of Gen- eral Practice; the Hampden District Medical Society, etc. Formal accreditation of credits to doctor-subscribers who participate in sub- scribing to this series of programs further attests to the importance of this endeavor. 17 PAGENO="0266" 262 Although this project is presently limited to the medical pro- fession, it is conceivable that similar series could be organized for other professional groups. In doing so, subscription television can perform, as it already does in Hartford, a very valuable and unique public service. Certainly, a nation-wide subscription system, although receiving its primary economic support from other types of programs, would offer a convenient and economical way of distributing educational programs on the college level, including adult education seminars di- rected to the various sciences and professions. E. Charges for Subscription Programs Set forth below are the highest and lowest per-program charges for each category of programming carried during the first two years of the Hartford trial. Feature Films $1.50 $ .50 Sports Events $3.00 $1.00 Opera and Ballet $2.00 $1.25 Educational and Instructive $1.00 $ .25 Concerts and Recitals $1.50 $1.00 VarIety $2.00 $1.50 Night Club and Cabaret $1.50 $1.25 Drama $2.00 $ .50 Medical Programs for Doctors Only $1.50 $1.50 The average charge for each of these program categories during the second year of operation was Feature Films $1.03 Educational and Instructive $ .71 Sports Events $1.37 Opera and Ballet . $150 Concerts and Recitals $1.50. Lectures $ .71 Variety $1.50 Night Club and Cabaret $1.44 Drama $1.62 Special Medical Programs $1.50 The average over-all charge per hour for all categories of subscrip- tion program was 59 cents. 18 PAGENO="0267" 263 All subscribers, on the average, apportioned their program expendi- tures among program categories as follows: First Run U. S. Films .07% First Subsequent Run U. S. Films 40.75% (Shown Several Weeks After First rilijeater Run) Older U. S. Films (Over 6 months in Theater Release) 40.52% Foreign Language Films 2.57% (English Titles or Dialogue Dubbed In) Subtotal-All Films 83.91% Championship Boxing 7.31% College Basketball .17% High School Basketball .03% Professional Basketball 1.22% College Football .30% Professional Hockey 2.34% Subtotal-All Live Sports 11.37% Special Entertainment Productions 4.60% (Broadway and Off-Broadway Plays, Opera and Ballet, Concerts and Recitals, Variety, Nightclub and Cabaret) Educational Features .09% Medical Programs Limited to 100 Doctor-Subscribers .03% 100.00% In the final analysis, subscription programs must supplement, rather than duplicate, the program choices now available to the public on conventional television. It is the box-office program, which the pub- lic would otherwise have to pay to see, which will induce the public to pay a subscription fee. Subscription television can show box-office attractions while con- ventional television cannot. The reason is not that subscription tele- vision will necessarily have more money available for program pro- curement than conventional television. The reason lies primarily in other economic factors. A conventional television program has only one source of eco- nomic support-the advertising sponsor. The extent of the sponsor's 19 PAGENO="0268" 264 support is controlled by the cost-per-thousand economics of adver- tising. On the other hand, box-office attractions have several sources of economic support, including revenues derived from theater release as well as revenues derived from later use on conventional television. Subscription television exhibition can be combined with simultaneous theater release without significant loss of box-office revenue by pro- gram producers and distributors. The combined amount of these box-office revenues will ordinarily exceed what sponsors can pay for a single conventional television release which largely exhausts all residual value of the feature. Furthermore, subscription release will have little effect on the residual value of motion picture film when ultimately released to conventional television. In short, subscription television and theater box-office release are compatible while conventional tele- vision and theater box-office release are incompatible. VI. THE HARTFORD TRIAL HAS DEMONSTRATED THAT SUBSCRIPTION TELE- VISION PATRONAGE IS NOT LIMITED TO HIGH.INCOME SUBSCRIBERS BUT PRIMARILY ATTRACTS MIDDLE-INCOME SUBSCRIBERS It has always been difficult to understand how the competitive sale of any product or service, including subscription television, could be limited only to high-income homes in a nation where the vast ma- jority of people have substantial amounts of discretionary income to apportion where they please. In fact, the Hartford trial has demon- strated that not only will subscription attract all people possessing discretionary income, regardless of their income level, but it will be predominantly utilized by people earning between $4,000 and $9,999. The actual subscriber response to the programming discussed in Point IV, supra, is tabulated on Exhibit 2. This detailed study of subscriber groupings among income levels and expenditure levels was initiated at the end of 92 weeks, when the operation had substanti- ally attained its maximum planned size for purposes of the trial. Therefore, Exhibit 2 is limited to the 4633 current subscribers at the end of those 92 weeks and divides them into groups falling within each 10 cent bracket of average weekly expenditures. As could be expected, the ranges among income levels and program expenditures of these 4633 individual subscribers are as varied as their collective response to the 599 individual programs tabulated in Exhibit 1. Analysis of this actual subscriber response demonstrates that subscription television is not the rich man's toy, as so often charged. The basis for this conclusion is demonstrated by the following tabu- 20 PAGENO="0269" 265 lar comparison of all U.S. families with these 4633 Hartford sub- scribers: TABLE 2 4633 HARTFORD SUBSCRIBERS Proportion Proportion Average of Total U.S. of Total Weekly Progran Income Levels Families* Subscribers Expenditure 0- $3,999 29.1% 1.5% $0.99 $4,000-$6,999 32.5% 40.8% 1.25 $7,000 - $9,999 21.0% 43.3% 1.23 $10,000 and Over 17.7% 14.4% 1.18 Totals (rounded) 100.0% 100.0% (avg.) $1.22 * Statistical Abstract of the United States, 1964, Table No. 457, p. 338. As shown by the above table, 85.6% of the Hartford subscribers had incomes of less than $10,000 per year and 42.3% had annual in- comes of less than $7,000. On the other hand, only 14.4% of the Hart- ford subscribers had incomes of $10,000 or more. Certainly, this Hart- ford concentration among middle-income groups in itself refutes the argument that subscription television is a "Cadillac" television serv- ice which only the wealthy can afford. This refutation is reinforced by the fact that the average program expenditures for all income levels above $4,000 are approximately the same. 2163 of these 4633 subscribers can be characterized as lower-than- average viewers, in that their weekly program expenditures all aver- aged less than the overall $1.22 per week. It is particularly signifi- cant that the remaining 2470 above-average viewers were even more concentrated In the middle-income levels. This is particularly notice- able in the $4,000-$f~,999 level as shown by the following table: TABLE 3 Average Program Expenditures Per Week Annual Income Level Under $1.21 $1.21 to $2.50 Over $2.50 0- $3,999 1.9% 1.3% 0.5% $4,000 - $6,999 37.2% 42.3% 52.1% $7,000-$9,999 43.8% 43.5% 39.5% $10,000 and Over 17.0% 12.9% 8.0% Totals (rounded) 100.0% 100.0% 100.0% Total Subscribers 2163 2042 428 21 PAGENO="0270" 266 Although the middle-income groups constituted the great majority of subscribers at all 3 expenditure levels, the above Table 3 again re- flects the slightly higher average expenditures of subscribers in the $4,000-$6,999 income level shown in the preceding Table 2. Tables 2 and 3, which average the 92-week statistical period, do not indicate trends. However, the same ~)2-week analysis further established that, as the number of subscribers increased, by far the greatest penetration was at the $4,000-$6,999 income level. This trend is shown by the following table listing new subscribers added during appropriate time segments of the 92-week period: TABLE 4 Percentage of Subscribers First 26 27th-52nd 53rd-75th 79th-92nd Income Levels Weeks Weeks Weeks Weeks 0-$3,999 1.1% 1.0% 2.1% 2.1% $4,000 - $6,999 27.5% 35.5% 45.0% 54.6% $7,000 - $9,999 49.9% 46.8% 40.6% 38.8% $10,000 and Over 21.4% 16.7% 12.2% 4.5% Totals (rounded) 100.0% 100.0% 100.0% 100.0% rlihe proportion of new subscribers in the $4,000-$7,000 income level steadily increased from 27.5% during the first 26 weeks to 54.6% during the last 14 weeks. On the other hand, the importance of the $7,000-$10,000 income group steadily declined from 49.9% during the first 26 weeks to 38.8% during the final 14 weeks of the period. The $10,000 and over income group showed the greatest decline, from 21.4% of the total subscribers in the first 26 weeks to 4.5% in the last 14 weeks. The small percentages of subscribers with incomes of less than $4,000 a year in Tables 2, 3 and. 4 are not surprising, since a $3,000 annual family budget has been described by President Johnson as the boundary below which any family must be considered to live in poverty and to which the nation's anti-poverty program is being directed. This so-called poverty segment of our population unfor- tunately does not provide a market for any goods and services beyond minimal shelter, food, clothing, and medical care. Eco'nomic Report of the President, transmitted to the Congress January 1964, pp. 58-59. A considerable portion of those in this poverty classifica- 22 PAGENO="0271" 267 tion may also represent that 8% of TI. S. families who do not own television receivers. The demonstrable facts established by the Hartford trial, as tabulated above, all strongly support Zenith's and Teco `s earlier theo- retical arguments that the economic benefits of subscription television are of equal or greater importance to the lower and middle income groups which can least afford the greater per-family cost of viewing box-office attractions outside the home. These demonstrated facts also effectively refute the argument that subscription television will appeal only to the 18% or less of American families who have incomes in excess of $10,000 a year. Instead, the Hartford trial has now estab- lished that subscription television appeals to families at all economic levels except the 20% which, by governmental definition, are poverty stricken. It follows' that subscription television has reasonably dem- onstrated in Hartford its potential economic value for up to 80% of U. S. television homes. VII. THE HARTFORD TRIAL ESTABLISHES THAT SUBSCRIPTION TELEVISION WOULD RESULT IN AN INCREASE IN ECONOMIC AND PROGRAM RE. SOURCES WHICH WOULD FACILITATE SIGNIFICANT INCREASES IN THE NUMBER OF TELEVISION SERVICES AVAILABLE TO THE PUBLIC UNDER THE PRESENT SYSTEM. As a preliminary matter, it is appropriate to review the need for further expansion of the number of television services available to the public if the Commission's public interest objectives and priori- ties for a fully developed nation-wide television system are to be achieved. The essential elements of a national competitive television system are technical capacity, programs and revenue. The Commission has provided technical capacity by its television allocation plan. How- ever, the Commission does not have the responsibility for supplying either programs or revenue to sustain such a plan. These essential ele- ments of a successful national competitive television system must be provided by private enterprise. While the Commission has the duty of encouraging private enterprise to provide these essential elements, it does not have the power itself to supply them or to require others to supply them.' The Commission, as of January 1, 1964, has allocated 1,942 dom- mercial UHF and VHF television channels and 346 educational UHF and VHF channels to 1,206 communities. As of January 1, 1964, there were 564 commercial television stations in operation in 271 markets (476 VHF and 88 UHF). As of this same date, there were 30 VHF 23 PAGENO="0272" 268 and 61 UHF construction permits in the hands of permittees. There were also 85 educational stations on the air and an additional 28 edu- cation construction permits outstanding. In the period between the lifting of the freeze (1952) and Janu- ary 1, 1964, 15 VHF and 108 UHF stations went off the air. In the same period, 71 VHF and 262 UHF construction permits were sur- rendered or cancelled. During 1963 alone, one VHF station and two UHF stations went dark. The Commission `s release of final television broadcast financial data for the year 1963 (the most recent available) reveals that 17% of the VHF stations (77 stations) and 42% of the UHF stations (33 stations) reported losses. As related to the Commission's priorities for the development of a nation-wide television system set forth in its Sixth Report and Order on Television Allocations,14 approximately 45% of the present communities having television stations have only one station, approximately 25% are two-station markets, approximately 20% are three-station markets, and slightly less than 10% have four or more stations. The Commission, as part of its program of fostering UHF devel- opment, has proposed a revised allocation plan for UHF channels which, among other things, has attempted to provide at least one com- mercial channel to any community with a population of 10,000 or more, with both UHF and VHF channels being utilized in reaching that goal. The Commission also sponsored the all-channel television receiver legislation, which will undoubtedly assist in the future devel- opment of UHF. However, the Commission recognized that this leg- islation was not the sole answer to the problem of UHF development.15 Additional economic support and program sources must be developed. `IPhe Commission has at this point done perhaps all that its regu- latory power permits to encourage the development of UHF and to encourage the achievement of all goals established in its priorities for a nation-wide competitive television service except to promote more economic support and program product through the authoriza- 14 Para 63, released April 14, 1952 (FCC 52-294). - ~ See Statement of Newton N. 1V[inow, then Chairman of the Federal Com- munications Commission, in Hearings on HR. 8031 and related bills, Before the Committee on Interstate and Foreign Commerce, House of Representatives, 87th Cong., 2d Sess., pp. 123, 151-194; see. also Statement of Commissioner Robert E. Lee, id. at pp. 199-207. . 24 PAGENO="0273" 269 tion of subscription television. It may be conceded that advertising- sponsored television is making available a valuable type of television service to a substantial portion of the American public. However, numerous compromises are still being made with television `s full po- tential. Box-office type television entertainment is simply not avail- able to the public. While the Oommission has allocated sufficient channels to provide for a competitive television system, such competi- tion is often limited under present circumstances. The public has no direct voice in selecting the programs which it may desire to see. Television's need for additional revenue and programs must also be viewed in the perspective of these relevant factors. A. Business Projections Based on Hartford Trial Experience Neither Zenith nor RKO anticipated that it would be possible in the limited three-year trial period to establish a profitable subscrip- tion operation in Hartford. Indeed, RKO estimated in the subscrip- tion hearing on its Hartford application that even under optimum trial operating conditions the Hartford trial would lose in excess of one million dollars during the three-year trial period, and RKO committed to spend from two million dollars to ten million dollars during the trial.16 The Hartford trial, however, has accomplished what it was designed to do; namely, the gaining of empirical knowledge and the obtaining of significant and reliable data which would serve as a basis for appraising the potentials of subscription television in other types of circumstances. The experience so gained and the demonstrable facts so developed offer for the first time the parameters for reason- able business projections of the potentials of subscription television to provide additional economic and~ program resources which would facilitate significant increases in the number of television services available to the public. Utilizing the facts established by actual Hartford operating ex- perience, Zenith and Teco have prepared business projections for various size subscription systems. Four such projections are set forth in Tables 5 through 8 at the end of this section, covering sub- scription operations at the level of 20,000, 40,000, 75,000 and 100,000 subscribers, respectively. Each of these pro forma profit and loss analyses projects the financial results which would occur at three different levels of annual 16 Application of Hartford Phonevision Co., 20 RR 754, 759 (1961). 25 86-399 0 - 67 - 18 PAGENO="0274" 270 program expenditure per subscriber: annual program expenditure per subscriber at $65, $70, and $75. The $65 program expenditure figure approximates the average program expenditure per subscriber dur- ing the first two years of the Hartford trial.17 In our opinion, the $70 and $75 annual per-subscriber program expenditure columns are equally realistic, since it is reasonable to assume that an expanded subscription system operating in a number of markets would have available a greater quantity and, in some respects, an improved qual- ity of box-office attractions over that which it was possible to develop during the short period of the hartford single-market subscription trial. Thus, it is assumed that first run and hard ticket feature films, more and better Broadway plays, etc. will become available. While the assumptions which we have utilized in making these projections are based primarily on actual Hartford operating experi- ence, we have made several revisions to reflect policy changes and operating improvements resulting from the experience gained during the test. We have also incorporated cost factors resulting from sev- eral recent technical improvements in decoder design developed as a result of experience gained in Hartford. The more significant of these revisions may be summarized as follows: (1) For the purpose of generating a significant number of sub- scribers at the outset of the Hartford trial, RKO adopted a policy of offering the service free of the equipment rental fee during the first three months and certain summer vacation months. While this policy has been continued throughout the Hartford trial, it is the opinion of both RKO and Zenith that further continuation of this policy will serve no useful future business purpose if subscription television is extended on a nation-wide basis. This change of policy is reflected in the financial studies set forth in Table 5-8, inclusive. (2) We have incorporated into our cost projections the assump- tion that subscription television programs will be broadcast in color and that the Phonevision subscription equipment will include all com- ponents necessary to encode and decode subscription programs in both color and black and white. The cost savings which will result from 17 The $65 program expenditure figure has been adjusted to eliminate certain subscriber discounts allowed during Hartford Trial. Average annual program expenditure per subscriber during the first two years of the Hartford trial wa~ $62.16. Exhibit 3 attached hereto sets forth the average dollar program expendi- ture by month for the first two years of the Hartford trial and also shows the total amount spent, on programs for each month during this period. 26 PAGENO="0275" 271 other technical improvements are also reflected in our pro- jections.18 The basis for the other estimates contained in these projections is as follows: All projections set forth in Tables 5-8, assume a going concern of 20,000, 40,000, 75,000 or 100,000 subscribers. The basis for the projected annual program expenditure per subscriber has been described above. In addition, it is assumed that each subscriber will pay an annual decoder rental fee of $39, which is the rental fee which subscribers are paying in Hartford.19 Decoder installation charges are estimated at $10 per installation-the charge made during the Hartford trial. The price which subscription television operators will pay to pro- gram producers and distributors for carrying their programs on sub- scription television is estimated to be 35% of the total subscriber pro- gram expenditures. This 35% figure is based upon the experience in Hartford. It also conforms to the percentage which motion picture producers and distributors, with a few exceptions, have traditionally charged motion picture theaters. It also represents a reasonable busi- ness allocation of total subscription income which will permit the tele- vision station and the subscription system operator to make a fair profit on the essential subscription functions which they will provide. For the purpose of illustrating the economic viability of subscrip- tion television, we have assumed an expense for station time utilized for subscription programming of $300,000 a year for systems having 20,000 and 40,000 subscribers, and $400,000 a year for systems hav- ing 75,000 and 100,000 subscribers. Naturally, these station time charges will be subject to private negotiations and may vary upward or downward depending upon the profitability of the business. The particular time charges illustrated in the projections have been selected primarily because they represent an amount which, in most cases, 18 A further discussion of the technical performance during the Hartford trial and information concerning technical improvements which Zenith has de- veloped as a result of experience gained during the trial is set forth ~nfra at section X of these comments. 19 The Commission, in its Third Report and Order, supra, 16 RR 1540a, 1540b. required decoders to be rented rather than sold to the public during trial operations in order to protect the public from obsolescence in the event the trial was not extended beyond three years. We believe that if subscription television is euthorized on a definitive nation-wide basis, practical business considerations will lead to the continuation of the practice of renting decoders rather than sell- ing them to the public. On the other hand, we do not believe that any regulatory purpose is served by continuing this policy, and the Commission, therefore, might consider permitting subscription operators the flexibility of either selling or rent- ing decoders to the public as business requirements may dictate. 27 PAGENO="0276" 272 would exceed the annual direct operating costs of a typical TJHF station Thus, assuming that a UHF station had no other source of in- come, such as from conventional advertising-sponsored programs, the time charges allocated to stations in our projections would cover the direct operating costs of such stations. This estimate receives support from the fact that the direct operating costs of WHOT in Hartford for the twelve months July 1963-June 1964 (except for cer- tain conventional film library amortization which was atypical rather than representative) were $225,639. Further, an analysis of the UHF construction permits outstanding or pending before the Commission as of February 7, 1964, as listed in Television Factbook, 1964 Edition, page 858b, et seq., discloses the following estimated operating expenses for UHF stations being submitted by applicants for various size markets: Number of Average Operating Market Size UHF CP `s Expense 100,000 or less 2 $146,500 100-200,000 3 115,000 200-300,000 3 186,000 300-400,000 1 140,000 400-500,000 7 254,000 500-600,000 4 404,000 600-700,000 3 207,000 700-800,000 1 410,000 800-900,000 3 431,000 900-1,000,000 4 380,000 1,000,000 and over 29 341,000 These estimates, which have been accepted by the Commission in de- termining UHF applicants' financial ability, indicate that UHF sta- tions in markets up to 500,000 may operate at an annual expense of $300,000 or less and that in markets above 500,000 operating expenses of $400,000 are adequate.2° 20 The above estimates of operating costs set forth in UHF applications pend- ing with the Commission must be further weighed in light of the method of pro~ jection which we have utilized herein. The estimates of operating expenses set forth in the UHF applications include the cost of obtaining program product. In our breakdown, we have allowed a cost equal to 35%of gross program revenue as the cost of program product, which would be in additio% to the payment for station time. Thus, the time payments which we have allocated to stations re- present an even more favorable spread than that reflected by simple comparison of the allocated time charges a~d the estimated operating expenses contained in UHF applications pending with the Commission. 28 PAGENO="0277" 273 We have assumed that any subscription system operator will pay a franchise or royalty fee of five percent of gross revenue to those providing this system and the necessary technical and other services in connection therewith. This amount is currently being paid by RKO in connection with the Hartford operation. The basis for estimating technical expenses, including maintenance and repairs and installation and detachment costs, is predicated upon the following factors: Service calls are estimated at .89 per subscriber per year; decoder repair material has been estimated at $1.00 per year per subscriber; home service calls can be made at the rate of 10 per repairman per day; the service shop repair rate will average 12 decoders per man per day.2' Experience in Hartford, plus certain decoder improvements re- cently developed by Zenith which will greatly simplify future installa- tion of decoders, indicate that decoders may be installed in subscribers' homes at the rate of 10 per man per day and may be detached at the rate of 16 per man per day. As the number of subscribers increased in Hartford, a cost factor long experienced by telephone companies and similar businesses, which provide service and rent equipment on a mass basis to the public, became apparent; namely, that, in order to maintain any relatively static number of subscribers, allowance must be made for a detach- ment-attachment turnover. This turnover results from such factors as subscribers moving from the community (the average American family moves once every five years), discontinuing service during ex- tended vacation periods, credit delinquencies and related economic reasons, such as loss of employment, insufficient use by customer to justify expense, etc. Based upon our experience in Hartford and anti- cipated changes in operating methods and practices we have allowed for an annual 20% attachment-detachment turnover in projecting our 21 In most instances during the Hartford trial, repair of the Phonevision equipment was not performed on the premises of the subscrThers; rather~ the defective unit was removed, replaced and repaired in the decoder service shop; and the cost projections herein assume a continuation of this practice. On all service calls where the trouble was in the television receiver itself, as contrasted to the decoder, the subscriber was requested to contact his own TV serviceman for receiver repairs or adjustments. During the Hartford trial, a contractual relationship was entered into with approximately 120 TV dealers and servicemen in the greater Hartford area and they were paid a commission for each installation generated by them. 29 PAGENO="0278" 274 costs for the four subscriber levels set forth in Tables 5 to 8, i~sfra. We are also advised that this attachment-detachment turnover ratio is comparable to the 15-20% "disconnect-connect" annual turnover experienced by telephone companies in many markets. In our cost projections we have estimated the cost of decoders at ~125 per unit, plus $2 per unit for freight and $4.38 use tax, for a total of $131.38. The equipment investment required for a subscription system, in- cluding decoders (1% spares), repair shop spare parts inventory, trucks, office furniture and fixtures, estimated for the four projected subsc~ber levels is as follows: 20,000 subscribers $ 2,711,500 40,000 subscribers $ 5,393,400 75,000 subscribers $10,087,000 100,000 subscribers $13,441,000 Depreciation has been computed on a five-year straight-line basis.22 22 From 1942 to 1962 the Bureau of Internal Revenue, in Bulletin "F", suggested four years for depreciation of television station equipment. In its revised guidelines for depreciation adopted in 1962, it has suggested six years as the proper basis for depreciation of television station equipment. (Revised Procedure 62-21, 1962-20B427.) Thus, a five-year rate for depreciation of new equipment, such as subscription television decoders, would appear appropriate not only from a business viewpoint but also from a tax depreciation viewpoint. 30 PAGENO="0279" 275 TABLE 5 BUSINESS PROJECTION OF SUBSCRIPTION TELEVISION OPERATION AT 20,000 SUBSCRIBER LEVEL & THREE PROGRAM INCOME LEVELS 20,000 Subscribers Prog. Inc. $65.00/Yr. Prog. Inc. $70.00/Yr. Prog. Inc. $75.00/Yr. Income Gross program income Rental fees Decoder Installation $ 1,300,000 780,000 40,000 $ 1,400,000 780,000 40,000 $ 1,500,000 780,000 40,000 Total $ 2,120,000 $ 2,220,000 $ 2,320,000 Direct Costs Station Time Commissions Program Product Subscription Franchise ASCAP and BMI Fees Lines and Facilities Fee $ 300,000 16,000 455,000 104,000 18,000 32,400 $ 300,000 16,000 490,000 109,000 18,000 32,400 $ 300,000 16,000 525,000 114,000 18,000 32,400 Total $ 925,400 $ 965,400 $ 1,005,400 Gross Profit $ 1,194,600 $ 1,254,600 $ 1,314,600 Indirect Expense Sales Program Technical General and Aclmin. $ 147,000 23,000 158,600 864,900 $ 147,000 23,000 158,600 865,900 $ 147,000 23,000 158,600 866,900 Total $ 1,193,500 $ 1,194,500 $ 1,195,500 Profit before Tax $ 1,100 $ 60,100 $ 119,100 Profit after 48% tax Percent of income Cost of Equipment Depreciation Cash flow from profits and depreciation Percent of equipment cost $ 600 0% $ 2,711,500 541,900 542,500 20.0% $ 31,300 14% $ 2,711,500 541,900 573,200 21.1% $ 61,900 27% $ 2,711,500 541,900 603,800 22.3% 31 PAGENO="0280" 276 TABLE 6 BUSINESS PROJECTION OF SUBSCRIPTION TELEVISION OPERATION AT 40,000 SUBSCRIBER LEVEL & THREE PROGRAM INCOME LEVELS 40,000 Subscribers Prog. Inc. Prog. Inc. Prog. Inc. $65.00/Yr. $7000/Yr. $75.00/Yr. Income Gross program income $ 2,600,000 $ 2,800,000 $ 3,000,000 Rental fees 1,560,000 1,560,000 1,560,000 Decoder Installation 80,000 80,000 80,000 Total $ 4,240,000 $ 4,440,000 $ 4,640,000 Direct Costs Station Time $ 300,000 $ 300,000 $ 300,000 Commissions 32,000 32,000 32,000 Program Product 910,000 980,000 1,050,000 Subscription Franchise Fee 208,000 218,000 228,000 ASCAP and BMI Fees 18,000 18,000 18,000 Lines and Facilities 32,400 32,400 32,400 Total $ 1,500,400 $ 1,580,400 $ 1,660,400 Gross Profit $ 2,739,600 $ 2,859,600 $ 2,979,600 Indirect Expense Sales $ 284,000 $ 284,000 $ 284,000 Program 23,000 23,000 23,000 Technical 277,000 277,000 277,000 General and Admin. 1,536,800 1,538,800 1,540,800 Total $ 2,120,800 $ 2,122,800 $ 2,124,800 Profit before tax $618,800 $736,800 $ 854,800 Profit after 48% tax $321,800 $ 383,100 $ 444,500 Percent of income 7.6% 8.6% 9A3% Cost of Equipment $ 5,393,400 $ 5,393,400 $ 5,393,400 Depreciation 1,078,900 1,078,900 1,078,900 Cash flow from profits and depreciation $ 1,400,700 $ 1,462,000 $ 1,523,400 Percent of equipment cost 26.0% 27.1% 28.2% 32 PAGENO="0281" 277 TABLE 7 BUSINESS PROJEOTION OF SUBSCRIPTION TELEVISION OPERATION AT 75,000 SUBSCRIBER LEVEL & THREE PROGRAM INCOME LEVELS 75,000 Subscribers - Prog. Inc. $65.00/Yr. Prog. Inc. $70.00/Yr. Prog. Inc. $75.00/Yr. Income Gross program income Rental fees Decoder Installation $ 4,875,000 2,925,000 150,000 $ 5,250,000 2,925,000 150,000 $ 5,625,000 2,925,000 150,000 Total $ 7,950,000 $ 8,325,000 $ 8,700,000 Direct Costs Station Time Commissions Program Product Subscription Franchise ASCAP and BMI Fees Lines and Facilities Fee $ 400,000 60,000 1,706,300 390,000 18,000 32,400 $ 400,000 eo,ooo 1,837,500 408,800 18,000 32,400 $ 400,000 6o,ooo 1,968,800 427,500 18,000 32,400 Total $ 2,606,700 $ 2,756,700 $ 2,906,700 Gross Profit $ 5,343,300 $ 5,568,300 $ 5,793,300 Indirect Expense Sales Program Technical General and Admin. $ 413,000 23,000 428,000 2,698,900 $ 413,000 23,000 428,000 2,702,600 $ 413,000 23,000 428,000 2,706,300 Total $ 3,562,900 $ 3,566,600 $ 3,570,300 Profit before tax Profit after 48% tax Percent of income Cost of Equipment Depreciation Cash flow from profits and depreciation Percent of equipment cost $1,780,400 $ 925,800 11.6% $10,087,000 2,018,800 2,944,600 29.2% $ 2,001,700 $ 1,040,900 12.5% $10,087,000 2,018,800 3,059,700 30.3% $ 2,223,000 $1,156,000 13.3% $10,087,000 2,018,800 3,174,800 31,5% 33 PAGENO="0282" 278 TABLE 8 BUSINESS PROJECTION OF SUBSCRIPTION TELEVISION OPERATION AT 100,000 SUBSCRIBER LEVEL & THREE PROGRAM INCOME LEVELS 100,000 Subscribers Prog. Inc. $65.00/Yr. Prog. Inc. $70.00/Yr. Prog. Inc. $75.00/Yr. Income Gross program income $ 6,500,000 $ 7,000,000 $ 7,500,000 Rental fees 3,900,000 3,900,000 3,900,000 Decoder Installation 200,000 200,000 200,000 Total $10,600,000 $11,100,000 $11,600,000 Direct Costs Station Time $ 400,000 $ 400,000 $ 400,000 Commissions 80,000 80,000 80,000 Program Product 2,275,000 2,450,000 2,625,000 Subscription Franchise Fee 520,000 545,000 570,000 ASCAP and BMI Fees 18,000 18,000 18,000 Lines and Facilities 32,400 32,400 32,400 Total $ 3,325,400 $ 3,525,400 $ 3,725,400 L~ross Profit $ 7,274,600 $ 7,574,600 $ 7,874,600 Indirect Expense Sales $ 542,000 $ 542,000 $ 542,000 Program 23,000 23,000 23,000 Technical 591,000 591,000 591,000 General and Admin. 3,527,600 3,532,600 3,537,600 Total $ 4,683,600 $ 4,688,600 $ 4,693,600 Profit before tax $ 2,591,000 $ 2,886,000 $ 3,181,000 Profit after 48% tax $ 1,347,300 $ 1,500,700 $ 1,654,100 Percent of income 12.7% 13.5% 14.3% Cost of Equipment $13,441,000 $13,441,000 $13,441,000 Depreciation 2,690,900 2,690,900 2,690,900 Cash flow from profits and depreciation 4,038,200 4,191,600 4,345,000 Percent of equipment cost 300% 31 2% 32 3% 34 PAGENO="0283" 279 B. Conclusions Which May Be Drawn From Business Projections On the basis of the foregoing business projections a number of conclusions may be reached concerning subscription television `s poten- tial to increase the economic and program resources, thereby facilitat- ing significant increases in the number of television services available to the public. First, as indicated by Table 5, supra, a 20,000 subscriber system appears at this stage of the art to be the smallest subscription system which would be economically feasible. Taking the conservative esti- mate that subscription television could attain at least a 10% penetra- tion of television homes, this would mean that subscription television would be economically viable in any market having 200,000 or more television homes.23 Thus, at 10% penetration subscription television would be a prudent business venture in approximately the top 100 markets as ranked by Television Magazine in its "Telestatus" report as of March 1964.24 If penetration in excess of 10% is achieved, the profitability in markets at the 200,000 level would, of course, be increased from that shown in Table 5*23 Further, if a penetration in excess of 10% is realized, operations in markets with less than 200,000 subscribers would become economically possible; e.g., a 20% penetration would permit an economically viable operation in the approximate top 170 markets having 100,000 or more television homes, and a 50% penetration would make a subscription operation feasible in the approximate top 200 markets having 40,000 or more television homes. It is reasonable to anticipate that various markets with approxi- mate ranking will, for various social, economic and geographic reasons, achieve different degrees of penetration. We submit, however, that a minimum 10% penetration, which is certainly weighted on the side ~ Factors bearing on public acceptance are discussed at Sections VI and IX, of these comments. ~ Television Magazine, Vol. XXI, No. 3, March 1964, p. 66. Under the "Telestatus" ranking, 91 of the top 100 markets J1ave 200,000 or more television homes. The 92nd through 100th markets range between 194,500 and 171,600 television homes and would, therefore, require an 11% or 12% penetration to produce 20,000 subscribers. For convenience, the "Telestatus" ranking as of March 1964 is attached hereto as Exhibit 4. 25 For example, if a 20% penetration was achieved in markets having 209,000 television homes, the profitability would be reflected by Table 6, supra, which projects a subscription operation at the 40,000 subscriber leveL 35 PAGENO="0284" 280 of conservatism, serves to support a rational conclusion that subscrip- tion television could provide the support for additional television sta- tions in approximately the top 100 markets or preserve the service of existing stations in such markets which have for a number of years been, and are now, suffering substantial financial losses. Subscription television thus has the reasonable potential of supporting 91 or more stations, in addition to the 454 stations which operated profitably in 11963. This would increase the present system by at least 20%. Such an increase would, indeed, make a valuable contribution to the devel- opment of a nation-wide competitive television system and to the achievement of the Commission's priorities. Whether subscription television may make an even greater contri- bution than indicated by the above projections can, of course, only be determined in the market place. But in carrying out its duty and responsibility to develop and encourage new broadcast service to the public, the Commission's determination of what is in the public interest must also take into account and give appropriate weight to broad considerations of future welfare. Such an approach, of necessity, must be predicated upon future estimates as well as present facts, since it is keyed to future goals.26 VIII. THE HARTFORD TRIAL DEMONSTRATES THAT SUBSCRIPTION TELE- VISION WOULD NOT IMPAIR THE CAPACITY OF THE PRESENT SYSTEM TO CONTINUE TO PROVIDE ADVERTISING-FINANCED PROGRAMMING. In comments filed with the Commission in this proceeding prior to the Commission's Third Report and Order, supra, Zenith predicted that two factors would preclude subscription television from siphon- ing audience, television programs, and talent away from conventional television. These are the limited number of available box-office pro- grams, and the budget limitations on the amount of time and money the public would spend on a recreational spectator activity such as subscription television. The existence and the precise scope of these parameters have been more definitively established during the Hartford trial. A. Audience Sipho~~ing Would Be De Minimis During the first two years of the. Hartford trial, the average sub- scriber purchased approximately t out of an average of 5.7 different program features available weekly, and the a~rerage viewing time per 26 See Anu3ricon Airlines Inc. V. Civil Aeronautics Board, 192 F.2d 417 (D.C. Cir. 1951). 36 PAGENO="0285" 281 subscriber was approximately two hours per week. The average U. S. television home now views approximately 38 hours of television per week.27 Therefore, it is obvious that 2 hours of subscription viewing will not satiate the public's appetite for the 38 hours of television programming which it now views. Indeed, two hours of subscription viewing a week represents only slightly more than 5% of the 38 hours of programs the public now views on television. In terms of a nationwide audience, even this 5% loss of audience by conventional television could occur only in the unlikely circumstance that every IL S. television home was a subscrip- tion television subscriber-a 10% penetration by subscription tele- vision would result in maximum "siphoning" of only 1/2 of 1% of the audience available to conventional television.28 This minimal % of 1% weekly "siphoning" would necessarily be decreased to whatever extent subscription viewing becomes additive rather than subtractive of the time now devoted to viewing conventional television programs. When one considers the fact that even during peak prime evening viewing hours between 35 and 50 percent 29 of television homes do not have sets in use, it is not unreasonable to assume that subscription viewing will have some additive effect by bringing back a portion of those set owners who often ignore conventional television programs. The de minimis effect which subscription television would have upon conventional television program viewing may be further demon- strated by individual program ratings developed during the Hartford trial. Thus, the 599 different program features carried during the first two years of the Hartford trial involved 1,776 separate program broad- casts, because about 95% of the subscription programs were broadcast more than once. The average per-program-showing audience rating was 5*5%,30 This means that an average of only 5.5% of all sub- 27 Average viewing per television home per day for 1964 is estimated at 5 hours 25 minutes. Broadcasting Magazine, Vol. 67, No. 20, Nov. 16, 1964, p. 51. 28 The average network program has a rating (Nielsen) of 19 which means it delivers approximately 10 million television homes. A siphoning effect of 0.5% natienally, therefore, would decrease the 10 million viewing homes by only 50,000. 29 Television Magazine, Vol. XXI, No. 2, Feb. 1964, p. 43. 30 The only marked departures from this average were r~presented by the phenomenally high audience rating achieved by championship boxing matches (63.3% rating), on the one hand, and the very low rating of educational and instructive programs (0.8% rating). See Table 1. 37 PAGENO="0286" 282 scriber homes were watching a particular subscription program at any given time during the entire first two years of the trial. This 5.5% average audience rating again demonstrates the inherent limitation upon the amount of subscription television viewing the public will support. Projected on a national basis, even if we assume that an average of 5.5% of the viewing subscribers were "siphoned" from the com- mercial television audience at any given time, such "siphoning" would certainly have a minimal effect. It still would leave 94.5% of the television homes available to watch conventional advertising-spon- sored programs. Here again, however, the "siphoning" factor would be limited solely to those television homes (a) which are sub- scribers, and (b) which would have watched conventional television had the subscription program not been available. In the final analysis, as the Commission recognized in its decision authorizing the Hartford trial, the nature of subscription programs is such that the viewing thereof "is at least as likely to replace theater-going as conventional television viewing." As further recog- nized by the Commission, "Since commercial programs would not be broadcast during subscription hours . . . we can reasonably assume that there would be no adverse effect on existing area stations through direct loss of advertising support." 32 B. Subscription Television Would Not Pre-Empt Any Significant Amount of Time Now Utilized By Advertising Sponsors During the first two years of the Hartford trial, 599 different pro- gram features were broadcast, embracing 1776 program showings and requiring 3,139 hours of subscription station time. Thus, WHCT devoted an average of 30 hours per week to subscription broadcasts. Some increases in the quantity of subscription programs and hours devoted to subscription broadcasting may be reasonably anticipated if the business is permitted to expand. We believe, however, that the Hartford experience is relatively typical of the amount of subscription programming and the time which will be devoted to subscription broad- casting which can be absorbed by any market, due to the limited number of box-office attractions and the size of the recreational budget. 31 Conversely, if box office attractions are viewed at home rather than at the theatre, there is no net loss of audience available to conventional television. 32 Application of IIa~rtford Plionevision Company, 20 RR 754, 770-71 (1961). 38 PAGENO="0287" 283 We further believe that the Hartford trial establishes that such over- all limitations would apply whether one or several television stations in the same market carry subscription programs. In short, several stations carrying subscription programming would have to divide the available box-office program product and share the public's subscrip- tion recreational budget in a manner which would result in little more subscription programming or time devoted to it than if only one station carried subscription programming. In terms of the total number of broadcast hours available, it is quite clear that subscription television will not be in a position to pre-empt any substantial percentage of the total number of conven- tional broadcast hours now utilized by advertising sponsors for the purposes of bringing conventional programs to the public. For exam- ple, in Hartford, the total weekly hours of telecasting by the other stations serving that market is approximately 570 hours. Added to this are the hours of conventional television (30) broadcast by WHOP itself. Certainly, if subscription television used 30 to 40 hours a week for broadcasting its programs in the Hartford market, this would leave adequate time available to advertising sponsors. Further, a typical television station broadcasts from 115 to 120 hours of conven- tional programming a week. Thus, in multiple-station markets having three or more stations, subscription television at most could not absorb more than 10% to 15% of the total broadcast time available. In other words, the total nnmber of broadcast hours available in the vast major- ity of television markets from all stations could not conceivably be filled with subscription programming, not only because of the shortage of box-office attractions but also because the public's recreational budget will not allow it to absorb sufficient programming time to deprive advertising-financed programming of its present broadcast time. The Hartford trial also indicates the probability that television stations will be either dominantly subscription or dominantly conven- tional in their programming because of such factors as the demands on prime time by both types of programming, the necessity of con- ventional television stations to maintain network clearances, continuity of audience and, finally, because those stations now carrying conven- tional programming, particularly if they are network affiliates, may not find it advantageous or prudent to exchange their present substan- tial profits for the more speculative profits of subscription television.33 ~` Most network affiliates are VHF and profitable. 39 PAGENO="0288" 284 This latter consideration may be illustrated by considering the Washington, D. C. market. Washington is the tenth television market, with 934,000 television homes and has five commercial stations. The total broadcast revenues of these five stations for the year 1963 was $15,346,304, and their combined profits before taxes were $3,707,900.~~ It is certaiiily unlikely that these five stations, or at least the three network-affiliated stations, would abandon their multi-million dollar business in order to devote any significant portion of their operations to subscription television~ Washington, with a 10% subscription pene- tration of television homes, would produce an approximate 100,000 member subscription system which, as reflected in the business projec- tions set forth in Table 8 of Section VI, snpra, would not produce the aggregate revenues or profits now enjoyed by the Washington stations. In the absence of any indication that advertisers will not still desire to use television to carry their advertising messages in the future, it is inconceivable that more than one of these stations would devote any substantial amount of its broadcast time to subscription television. Because of the doubt that existing network affiliates would con- sider deserting conventional television broadcasting for subscription broadcasting in the foreseeable future and because of the strong prob- ability that stations will either be dominantly subscription or domi- nantly conventional, it is most likely that subscription television will have to support the establishment of new television stations in the vast majority of markets in which it will operate if it ever expects to get off the ground. In light of the allocated channels available for new stations in most markets, the creation of such new stations will, of necessity, redonnd to the benefit of UHF development. Stations thus supported by subscription television certainly cannot be accused logically of siphoning time that would otherwise be available to con- ventional television. Rather, such new stations will add to the total amount of conventional programming now available ~o the public, since they will carry conventional programming as well as subscrip- tion programming. The Limited Suppy of Box-Office Attractions. Throughout these comments reference has been made to numerical limitations of box- ~ TV Broadcast Financial Data-1963, FCC Pub Not.-B, No. 54732, July 23, 1964. At an average programming expenditure of $65 per subscriber- the Hartford average-a subscription system in Washington would have to achieve in excess of 25% penetration of Washington TV homes to produce the same dollar amount of subscription revenue as the broadcast revenues ($15,346,304) now obtained by 5 Washington stations. 40 PAGENO="0289" 285 office attractions as being one of the more important factors which must be considered in determining the possible effects that subscrip- tion television might have upon conventional television. It may be appropriate at this point to briefly review these numei~ieal limitations. Current feature-length motion pictures will tend to be the dominant box-office attractions which subscription television will offer to the public. The total number of TI. S. and foreign motion pictures released in the Tlnited States for the year 1963 was 420. Other box-office attractions, such as Broadway plays, opera, heavy- weight championship boxing matches, etc., are also relatively few in number. For example, over the past few years the number of Broad- way and off-Broadway productions have ranged between 75 and 100 per year. The Metropolitan Opera produces between 20 and 25 differ- ent operas per year. There are perhaps no more than a dozen sym- phony orchestras and ballet companies which have sufficient national repute to be considered as box-office attractions, and the total seasonal repertoire offered by these companies is highly limited. Concerts and recitals by artists of national atid international repute would probably not embrace more than 25 to 50 additional box-office attractions in related entertainment fields. There were only 6 heavyweight championship boxing matches dur- ing the first two years of the Hartford trial. Subscription broadcasts of sporting events not available to conventional television, such as professional football home games, local and regional college football and basketball games, provide a source of program supply which would probably not exceed an additional 50 to 100 box-office attractions per year. The foregoing establishes the known boundaries of box-office pro- grain supply. These box-office attractions represent the type of enter- tainiñent which is not now available on conventional television and for which the public pays by attending the theater, the concert ball and the sports arena. While subscription television itself may provide the economic support for a greater quantity of these types of box-office attractions, the limitations of the family recreational budget will serve to place very realistic limitations on the total supply of box-office attractions which will be available to subscription television or to any other medium. While the quantity of box-office attractions now gen- erally available in this country is sufficient to support a subscription system and would offer a valuable supplement to the program choices now available to the public, it is readily apparent from the above that 41 86-399 0 - 67 - 19 PAGENO="0290" 286 the number of such box-office attractions is sufficiently limited in supply that no significant percentage of the total number of conventional broadcast hours now available to the public could be absorbed by subscription television. C. The Type of Box-Office Programming Shown During the Hartford Trial Demonstrates That Subscription Will Not Siphon Talent and Existing Programs From Conventional Television The same 599 different box-office attractions shown during the Hartford trial could also have been shown nationwide. None of these programs were available on conventional television. Thus, current motion pictures shown in Hartford were not available to conventional television anywhere in the country. Prior to the six heavyweight championship boxing matches shown during the Hartford trial, such championship bouts had not been seen on conventional television for approximately 10 years. The college football games carried during the Hartford trial would not have been available for conventional television broadcasting under the restrictive college sports broadcast- ing policies adopted by the NCAA. Current Broadway plays are not shown on conventional television except on very rare occasions.35 Two-hour concerts and recitals by internationally known artists have seldom, if ever, been shown on conventional television, since under the cost-per-thousand economics of advertising, sponsors are unwilling to sponsor this type of cultural program regularly on television. Further, it is a well-known fact that stars, producers, directors, and writers often work in more than one medium even though one may pay more than the other. There is no reason to believe that sub- scription television would siphon talent from conventional television any more than there is reason to believe that the motion picture industry siphons talent from conventional television at the present time. Talent often works for both media. For example, top stars appearing in many of the motion pictures shown on subscription tele- vision in Hartford also appeared on conventional television during the period of the trial. Since subscription television merely substi- tutes the home television receiver for the motion picture theater for the release of feature-length motion pictures, there is no reason to believe that motion picture talent and writers wouki not still continue ~ Thus, Westinghouse announced plans several years a~go for carrying certain Broadway plays On conventional television. These plans apparently fell by the wayside. Broadcasting, VoL 63, No. 8 Aug. 20, 1962, p. 73. 42 PAGENO="0291" 287 to work for conventional television as they now do. The same would be true of producers, talent, and writers working for other media such as the Broadway theater. The more talented generally refuse to give any one medium-the theater, motion pictures, and television-the exclusive right to their services. Indeed, it is not unusual to find talent appearing on conventional television programs during a period in which they are starring in a Broadway play and simultaneously there- with appearing in a motion picture in current release. The same applies with reference to producers and writers. The charge is sometimes made that subscription television would siphon from conventional television those programs which now have high ratings and are available to the public without charge and convert them into subscription fare. This presumption that the public would pay for entertainment features of the caliber that it currently receives on television is clearly not borne out by the Hartford experience. Indeed, offered only box-office attractions during the Hartford trial, the subscribers viewed approximately one subscription program a week out of the average five offered to them weekly. Thus, the Hartford trial demonstrated that the public is selective even where the program fare is limited to box-office attractions, e.g., first subsequent run feature films had a cumulative audience rating of 27.3% compared to a rating of 18% for older films 6 months in theater release. Under this circum- stance, it takes tortured reasoning to reach a conclusion that the public, with the alternative of purchasing box-office attractions on subscrip- tion, would apply their subscription recreational budget for the pur- pose of paying to see the type of program now seen on conventional television-particularly when programs of the conventional type could always be seen on some other station free, since such programs are within the cost-per-thousand economics of advertising sponsors. Further, the average rating (Nielsen) for the programs of the three networks is 19. This means that on the average, 80% of the more than 50 million television homes refused to watch the average network conventional television program even though available with- out charge. The average Nielsen rating for the 40 top-rated network entertainment p~ograms during the Fall season is 24.86 Thus, even in the case of the 40 top-rated network programs, an average of 76% of the television viewing public refused to watch them even though they were offered free of charge. One may well imagine what would ~` Nielsen Report for the two weeks ending November 22, 1964, Broadcasting Magazine, Vol. 67, No. 24, December 14, 1964, p. 27. 43 PAGENO="0292" 288 happen to the rating of these programs if anyone attempted to charge the public to see them.37 No one can expect the public to pay for what someone else provides free. Further, as the Commission recognized in authorizing the Hart- ford trial, "a charge for a commercial program or a program being seen elsewhere without charge might very well build in subscribers a resentment of serious financial consequence" 38 to the subscription operator. Certainly, the future operators of subscription television iiiust be credited with some business acumen. It is pertinent in this regard that the operators of closed circuit theater television have never been naive enough to attempt to "siphon" away for their theater box- office any of the 40 top-rated network television programs. They have been content with box-office attractions not available on conventional television such as heavyweight championship fights, home games of professional football teams, etc. The contention that subscription television could or would siphon all major sports events now seen on conventional television incorpo- rates an economic fallacy which ignores the limitations of the public's recreational budget. For example, a nationwide subscription system operating in the top 175 television markets and achieving a 20% saturation of all TJ.S. television homes would have approximately ten million subscribers. If each such subscriber would spend an average of $65 per year on programs-the Hartferd average-such expendi- ture would produce $650 million annually in subscription program revenue. Based upon Hartford trial experience and the historical business patterns of program procurement costs in analogous fields, such as the motion picture industry, 35% of this amount-$227,500,000-would be available for nation-wide subscription program procurement. The remaining 65% would be required to support the maintenance and operation of the subscription technical systems and to pay for the time of subscription television stations. ~ The presumption that current network programs would have a value as subscription programs also ignores the high mortality rate of these programs. Thus, the mortality rate for new prime time programs introduced in the 1963- 1964 season was as follows: CBS-TV (82%), ABC-TV (50%) and NBC-TV (67%). Sponsor, Vol. 18, No. 22, June 1, 1964, p. 41. 38 Application of hartford Phonevision Company, 20 RR 754, 769 (1961). 44 PAGENO="0293" 280 The $227,500,000 thus available for subscription program procure- ment would be allocated among the various types of program product in a ratio corresponding to the quantity of each such type of program product utilized and the public's expenditures on each type of pro- gram. It is reasonable to estimate that the ratio of the public's expenditures on various types of subscription program product, such as iiiotion picture films, legitimate theater, opera and sporting events, will show a close correlation to the ratio of expenditures now existing. Table 9 set forth below, therefore, allocates the $227,500,000 available for subscription program procurement among various types of pro- gram events in accordance with the average percentage of total public admission expenditures for the spectator events specified. TABLE 9 Average Percentage of Dollar Allocation of Total Public Admission Subscription Revenues Expenditures to Specified Available for Purchase Spectator Events* Of Program Product Motion Pictures 67% $152,425,000 Legitimate Theaters and Opera and Entertainments Of Nonprofit Institutions (F~xcept Athletics) 19% $ 43,225,000 Spectator Sports 14% $ 31,850,000 Total 100% $227,500,000 Averages for 5-year period 19584962 inclusive. Statistical Abstract of the United States, 1964, No. 283, p. 208. As is apparent from the above figures, by far the greatest per- centage (86%) of the amount available for program procurement will he spent on entertainmenb other than sports. The fact that the public spends only 14% of its recreational dollar on spectator sports shows some correlation to the Hartford trial experience where (a) 13% of ftc box-office attractions during the first two years (79 out of 599) were live sports events, and (b) the subscribers allocated 11,4% of their expenditures to these sports events. if we apply time percentage of the public's spectator event recrea- tional dollar which is spent on sports (14%), this would allow a national subscription television system, under the above assumptions, $31,850,000 a year for acquiring sporting events. But this amount is 45 PAGENO="0294" 290 only 60% of the approximate fifty million dollars that conventional television is now paying to the promoters and owners for the television rights to the following top sporting events: (1) AFL professional foot- ball gaines, including championship and all-star games; (2) NFL pro- fessional football games, including title games; (3) baseball, including local, regional, network, weekend, world series and all-star games; (4) NCAA college football games, including Sun, Orange, Bose, Cotton, Gator, Bluebonnet, East-West Shrine and Senior Bowls; (5) Kentucky l)erby, Preakness and Belmont Stakes; and (6) Masters playoff, U.S. Open arid PGA Championships. In addition are the amounts which conventional television is now paying for specially staged golf tourna- iiienfs, professional basketball, track and field events and numerous other special sport attractions such as the U.S. Olympics. Nor do the amounts which the networks and local television sta- tions now pay for sporting events represent the limit of their financial ability. Sporting events are now considered one of the best sponsor- ship buys available to advertisers.39 Recent competition for sporting events between the three networks, which has resulted in bidding up the price of certain such events as professional football games tenfold, reflects the financial ability of the networks to acquire this type of sports programming arid the ability of sponsors to pay for it. For example, during the 1963 season, ninety national advertisers spent a total of more than $68 million for network time and programs covering 65 sports events and shows.4° Thus, excluding the millions spent by local and regibnal sponsors of sporting events, these ninety national sponsors spent twice as much for these 65 spOrts events alone as subscription would have available for its entire sports budget under the above conditions. To repeat, we believe that subscription television's major contri- bution to sports fans will be the making available of those events such as heavyweight championship boxing matches, home professional foot- ball and baseball games and the vast number of college football games which are now kept off conventional television by the owners thereof because of fear of the drastic effect conventional television may have upon box-office attendance. The public's recreational budget is simply not large enough to make it possible for subscription television to "TV Sports: How High the Boom?" Television Magazine, Vol XXI, No. 4, April 1964, p. 65 et seq. 407d. at p.74. 46 PAGENO="0295" 291 acquire sporting events at prices higher than conventional television can now pay, if we assume that the public will still desi:re to spend some part of its subscription recreational budget on such box-office attractions as current motion pictures, Broadway plays, operas, etc. Since the public for some years has been spending approximately 86% of its spectator event recreational dollar on current motion pictures, Broadway plays, operas, etc. and only 14% on spectator sports, it is reasonable to assume that sports will never dominate the program fare of subscription either in terms of quantity of product or in terms of revenue received. The economic fallacy that subscription television could or would convert all present network conventional entertainment programs into subscription programs is even more pronounced. There are just too many programs of the conventional entertainment type available to permit economic absorption by the public's subscription recreational budget at a rate higher than sponsors will pay. In the final analysis, it would not only be contrary to our national policy which encourages competition, but also impossible as a practical matter for the Commission to erect a fence around conventional tele- vision which would protect it from all competition for talent or for audience. When people now go to the theater, concert hall or sports arena to see events which are not available on conventional television, they have been diverted from television viewing during the time that they see these box-office events. The motion picture industry, the theater industry, and the record business now compete with television for talent. This competition will continue whether or not subscription television exists. In addition, closed circuit theater television, in competition with conventional television, has taken over many types of programming, such as championship boxing matches, the Indian- apolis Speedway races, and the home games of some of the teams in the professional football leagues. Finally, despite wired subscription television's misadventures in California, other such projects are re- ported to be well beyond the planning stage. The Commission is in no position to protect conventional television from these sources of competition which, in the long run, may be far more devastating in their competitive effect upon conventional tele- vision than would broadcast subscription television, which can be inte- grated into and made a part of our national television broadcast system, and operated under the public interest standard of the Corn- munications Act. Certainly, it is an exaggeration of advocacy for 47 PAGENO="0296" 292 anyone to contend that advertising-supported conventional television, which currently represents an industry receiving approximately two billion dollars a year in revenue, will be in serious jeopardy if it is subjected to even minimal competition from subscription television. The converse is far more likely true, since subscription television will provide a new source of revenue which will supplement the advertising revenue now received by the broadcast industry. IX. THE HARTFORD TRIAL HAS DEMONSTRATEb THAT SUBSCRIPTION TELEVISION WILL RECEIVE SUFFICIENT PATRONAGE FROM THE PUB- LIC TO MAI~E IT AN ECONOMICALLY VIABLE BUSINESS. The Hartford trial commenced on June 29, 1962 with 188 sub- scribers. By the close of the second year of the trial there were 4,784 subscribers, and the number of subscribers has hovered between there and 5,000 since that time because of the self-imposed test limita- tion of 5,000 subscribers. At the close of the second year RKO decided that it was not prudent business or fair to subscribers to increase the number of subscribers during the third year without any assurance that the trial would be extended beyond that time. RKO also con- cluded that a 5,000-subscriber sample was sufficiently representative, statistically, to provide meaningful information of the type that the test was designed to elicit.41 Thus, no attempt was made during the Hartford trial to obtain the maximum number of subscribers possible. RKO `s policy was one of planned growth and experimentation con- sistent with the best use of manpower and facilities. As discussed more fully in Section V, supra, of these Comments, subscriber acceptance of subscription programs was widespread, as reflected by the average audience ratings for such box-office attrac- tions as current motion pictures, championship prize fights, Broadway and Off-Broadway plays, etc., individually tabulated on Exhibit 1. The high and low range of such ratings by program categories is set forth on Table 10 on the opposite page. None of these 599 subscription features were shown on commercial television in Hartford or else- where, and their ratings were obtained in full and open competition with programs furnished without direct charge to Hartford viewers by affiliates of all three networks and by independent stations. 41 The Hartford statistical sample for the first two years of the trial re- flects a cumulative total of 4,998,033 separate and precisely measurable home exposures of 1776 separate program showings. The 5,000 subscriber-homes making up the sample. are approximately 5 times the sample Nielsen uses for its National Television Index, H.R. Rep. No. 193, 87th Cong., 1st Sees., p. 127 (1961). 48 PAGENO="0297" TABLE 10 RANGE OF VIEWING PERCENTAGES BY PROGRAM CATEGORIES OF ALL 599 FEATURES SHOWN DURING FIRST TWO YEARS (104 WEEKS) OP HARTFORD PHONEVISION OPERATION FEATURE FILMS 1 First Run U. S. Films 116 First Subsequent Run U. S. Films (Shown Several Weeks After First Theater Run) 297 Older U. S. Films (Over 6 Months in Theater Release) - 18 Foreign Language Films (English 61 33.1% Titles or Dialogue Dubbed In) SPORTS 6 Championship Boxing 2 College Basketball 1 High School Basketball 21 Professional Basketball 5 College Football 44 Professional Hockey 35 Special Entertainment Productions (Broadway and Off- Broadway Plays, Opera and Ballet, Concerts and Recitals, Varie1~y, Nightclub and Cabaret) Educational Features Medical Programs limited to 100 Doctor-Subscribers 50 57 8.0% 0.1% 4.5% 0.1% 3 6 32.0% 10.0% 16.0% 5.0% 599 GRAND TOTALS* 1776 82.9% 0.1% 82.9% 0d% ~ This reflects a cumulative total of 4,998,033 separate and precisely measurable home exposures of the 1776 separate program showings. No. of Features Program Categories Cumulative Percent Percent Viewing For All Showings Any Separate Showing Highest Lowest Highest Lowest No. of For Any For Any For Any For Any Showirgs Feature Feature Feature Feature 2 10.7% 516 81.1% 958 71.2% 10.7% 5.1% 3.7% 1.6% 27.1% 10.7% 3.7% 2.9% 2.2% 0.9% 5.3% 16.2% 19.8% 8.0% 82.9% 15.5% 10.7% 10.9% 12.7% 8.3% 29.3% 6 82.9% 2 15.5% 1 10.7% 21 10.9% 5 12.7% 44 8.3% 97 43.0% 5.3% 1.7% 1.1% 0.5% 27.1% 11.6% 10.7% 3.7% 2.9% 2.2% 0.8% PAGENO="0298" 294 The high-low range in the ratings attracted by the 1776 showings of 599 subscription features, of course, varied no less widely than ratings attained by network affiliates and other commercial stations. More importantly, Hartford subscribers selectively viewed an average of approximately one such subscription showing per week and spent an average of $1.20 per week on the subscription showings selected. The average annual expenditure of subscribers, including program expenditures ($62.16) and decoder rental ($39.00),42 was $101.16. Subscribers in Hartford or elsewhere obviously would not regu- larly and willingly pay these average amounts over a 2-year period unless they found enough of these subscription programs to be suf- ficiently more attractive than alternative no-charge television pro- grams. Since the same network programs-and substantially the same programming on independent commercial stations-were avail- able throughout the U. S. during the same two-year period, there is no apparent reason to believe that the competitive ratings. and revenues attracted by Hartford subscription programs would have been sig- nificantly different in other predominantly middle-income U.S. markets. Thus, the public in Hartford, given a free choice, has viewed sufficient programs and spent sufficient money to demonstrate that subscription television in Hartford and other U. S. Television markets can be an economically viable competitive business to the extent previ- ously shown in Section VI of these Comments. X. MISCELLANEOUS ISSUES CLARIFIED BY ThE HARTFORD TRIAL. The Commission, in its First and Third Reports, anticipated that a number of subsidiary issues would be clarified as a result of trial operations, including the modus operandi of subscription service, methods to be employed, technical performance, the role of the par- ticipating broadcast station licensee, and possible monopolistic features of a subscription service. These subsidiary issues will be discussed hereafter. A. The Modus Operandi of SubscriptLon Television and Methods to be Employed. From a commercial operating viewpoint, there are three functional organizations necessary to supply subscription television services. (1) A local franchise organization to scramble pictures for stations; 42 The $39.00 annual decoder rental fee does not include an allowance for Iree rent allowed for the first 3 months of the trial and for certain vacations `uring trial period. 50 PAGENO="0299" 295 to provide for the installation, servicing and maintenance of subscriber decoders; to provide programming decoding information to the public; and to collect and disburse box-office revenue. (2) A television station licensee over whose facilities the subscription programs are trans- mitted. (3) Program sources which supply subscription programs directly to broadcasters. During the Hartford trial, RKO General, Inc. performed the functions of a local franchise holder, and its subsidiary, RKO Phone- vision Company, the licensee of WHOP, Hartford, performed the functions of a television station over whose facilities the subscription programs were transmitted. As the subscription franchise holder, RKO could have provided the same services as it provided to WHOT to other stations in Hartford if any had been authorized to carry subscription programs. As a matter of business convenience, RKO General, as franchise holder, paid its subsidiary, RKO Phonevision Company, at card time rates for the time devoted by WHOT to sub- scription programming. This, as shown below, is one of the various business methods which might be followed in allocating revenues be- tween the subscription franchise holder and television stations. Subscription programs were obtained from a wide variety of sources, including motion picture producers and distributors, sports promoters, producers of Broadway plays, etc. In short, RKO went out into the program market place and acquired box-office attractions by private negotiations with the various owners of such attractions. Subscription programs were obtained by WHOP in a manner com- parable to the methods now followed by conventional television stations in obtaining program product from the networks, program syndicators, A. nation-wide subscription system could be operated within the framework of the modus operandi followed in Hartford. The three basic subscription functions decribed have universal application. One possible qualification might be noted-in Hartford, RK:O and its subsidiary, RKO Phonevision, served the dual role of franchise holder and television station licensee. While there is no apparent business or public interest policy reason why a television station should not par- ticipate in ownership of a franchise subscription system, there un- doiibtedly will be a number of markets where there will be little or no ownership relationship between the subscription television station and the franchise system. One apparent reason for this may be that the capital investment required for the operation of a subscription fran- 51 PAGENO="0300" 296 chise system is so substantial that it could not be met alone by many television stations. Thus, it is almost a certainty that sources of capital for the construction and operation of a subscription franchise system will have to be obtained from outside investors who may have no owner- ship interests in television licensees. We believe that it is unnecessary to speculate at this time on the precise make-up of subscription fran- chise system ownership as it may evolve in different markets. So long as any subscription franchise operator provides subscription service to all stations authorized by the Commission to carry subscription pro- grains in a particular market, it would not appear to make any dif- ference whether one or more of the television stations in a market had an ownership interest in the franchise operation or whether the franchise system was owned completely by non-broadcasters. Other aspects of the modus operandi and methods to be employed have been explained throughout these comments. B. Technical Performance. The Hartford trial established that the Phonevision subscription system can meet all of the technical requirements established by the Comniission in its Third Report; namely, (1) the Phonevision opera- tion in Hartford did not cause interference either within or without the frequency employed to any greater extent than is permissible under the present rules and standards of the Commission; and (2) the Phonevision operation in Hartford did not cause perceptible degrada- tion in the quality of the video or audio signals on any receivers during either a subscription program or a non-subscription program. In addition, the Hartford trial established the following technical points: The Phonevision decoder may be installed on all makes and models of television receivers now in the hands of the public, where such receivers are otherwise in good operating condition. Further, the Hartford trial established that the Phonevision system provides adequate protection against reception by non-sub- scribers. There have been no known instances of decoding of sub- scription television signals in Hartford by unauthorized persons or through the use of privately-built equipment not of Zenith Phone- vision design. During the Hartford trial, the Zenith Phonevision system at all times permitted an accurate allocation of the per-program charges to the individual programs viewed by subscribers as required by various program distributors. Thus, the monthly billing not only reflected the 52 PAGENO="0301" 297 total charges incurred by the subscriber, but broke down this total into the specific individual program components making up such total charges. Contrary to speculative allegations advanced prior to the Hartford trial that entertainment must be sold to the public on a cash rather than on a credit basis, the Hartford trial established that a credit system is not only well received by the public bift is also a sound business approach. The bad debts written off for the first two years were approximately 0.17% of total billing receipts, which is well within the bad debt ratio absorbed by many other types of businesses.43 Further, periodic audits of the sealed magnetic billing tapes installed in subscribers' decoders revealed no attempts by subscribers to cheat with regard to billing. The Hartford trial also established that the Phonevision equip- ment will function satisfactorily with a minimum of service calls. Upon the basis of recent improvements, it is estimated that home service calls will average .89 per subscriber per year. Many service calls did not involve defects in the subscription decoder. It was discovered that many defects were in the television receiver itself rather than in the decoder. In such cases the subscriber was required to contact his own TV serviceman for repairs or service. Other false service calls resulted from degradation of received UHF signal (inher- ent with UHF reception) because of weather, terrain, poor built-in antenna and the critical adjustments required for UHF-type tuners. Such service calls, of course, cannot be charged againat subscription television equipment. As a result of technical experience gained in the Hartford test, Zenith has re-evaluated the design of the subscriber instrument and has determined that a number of changes and simplifications should be introduced. Consequently, a new model decoder has been designed and developed and is now being production-engineered at Zenith. In comparison with the decoder presently employed in Hartford, the new instrument will differ in the following respects: 1. It can accommodate color as well as monochrome signals. 2. It can be connected to the antenna terminals of a receiver, in- stead of connected to inside wiring of the television set. ~u Bad debt ratios of some other businesses: Comnnmunieations (0.24%); Electric and Gas Utilities (0.19%). Table 2, Income Statements by Major Industrial Groups, p. 22, Statistics of Income, 1950-1957, Corporation Income Tax Returns, Internal Revenue Service. 53 PAGENO="0302" 298 3. The billing function of the new decoder is to be greatly simpli- fied, to reduce cost and to facilitate operations on the part of the subscriber. It will remain, however, a credit-type system. In addition, a number of circuitry changes are being made in an effort to reduce cost and further improve reliability. C. The Role of the Participating Broadcast Station Licensee. RKO, as the licensee of WHOP, had sole responsibility for operat- ing that station during the Hartford trial. It had ultimate control over the selection of all subscription programs broadcast during the trial, the selection of the time such programs were broadcast and the selection of the charges to be made for the programs. We believe that these functions will always be the primary responsibility of the operating television station not only as a matter of regulatory policy governing licensee responsibility for programs, but also because practical busi- ness considerations dictate that the broadcast station maintain such ultimate control. Based upon Hartford experience, it is reasonable to assume that the participating broadcast station, either separately or jointly with the franchise holder, will make arrangements with various program distributors, such as motion picture companies, producers of Broad- way plays, sporting events, etc., for the procurement of programs of box-office quality. The broadcast station will share in the ultimate program receipts with the program producer and the subscription franchise holder upon a basis to be reached by private negotation. Such divisions of income may take various forms, such as a mutually agreed upon division of fixed percentages of gross among the franchise holder, the program distributor and the television station. In other cases, the franchise holder and the television station may join together in a cooperative effort to obtain subscription program product from program distributors, with the revenues over and above program costs to be divided between the franchise holder and the station on a mutually agreed basis. Finally, particularly at the outset of nation- wide subscription operations where it may be necessary for a prospec- tive franchise operator to induce parties to construct new television stations to broadcast subscription television programs, the franchise holder may agree to buy time from the television station at a so-called subscription card rate and the station will broadcast programs sup- plied by the franchise holder in a manner somewhat similar to the methods now followed by networks and their television station affiliates. 54 PAGENO="0303" 299 During the Hartford trial, it became apparent that, depending upon the particular circumstance, any one of the above methods of allocating program receipts among the television station, the program suppliers and the subscription franchise operator might be effectively used as a sound business basis for private negotiations. It is not unlikely, there- fore, that all three of the above variations may be used in combination in the future. D. The Hartford Trial Has Established That There Are No Inherent Monopolistic Features Arising From Subscription Operations. The degree of competition between television stations in a given market in supplying subscription television service to the public will, of course, be under the regulatory control of the Commission. From a technical viewpoint, any Phonevision franchise system operating in a community may be used by either UHF or VHF stations and is completely compatible and can be used with the NTSC color system as well as black and white. The Phonevision system can serve more than one station. The subscriber will require only one Phonevision decoder to receive VHF, UHF, color or monochrome programs from one or more stations. Thus, any television broadcast licensee au- thorized by the Commission to carry subscription programs can be serviced by a franchise holder using Phonevision subscription equip- ment. Zenith is not herein requesting that the Commission adopt tech- nical standards for subscription television which would limit subscrip- tion operations, on a nation-wide basis, to the use of the Zenith Phone- vision system. We believe that, under the policy of the Communica- tions Act which encourages competition, the Commission should adopt general technical standards for subscription television, such as those adopted in its Third Report, and that any system which meets such general standards should be permitted to operate. If there is more than one system which can meet these standards, Zenith has no objection to taking its chances in free and open competition with other systems either nationwide or even in the same market. It is perhaps unlikely, as a practical matter, that there will be any inclination or desire on the part of more than one wireless subscription system to operate in the same market. However, there is a probability that wired and wireless systems might compete in in the same community. There are, of course, already in existence many distributors and producers of program product of all kinds and types which may be 55 PAGENO="0304" 300 appropriately used by subscription television. Thus, the 599 different subscription programs shown during the first two years of the Hart- ford trial were obtained from over 50 different program producers and distributors of motion picture features, sports events, dramatic plays, etc. Because of the legal and business considerations involved, Zenith and Teco are effectively precluded from entering into any arrangement or tie-in with a local franchise holder giving any program supplier exclusive use of Phonevision facilities. Zenith itself, of course, does not contemplate that it will engage in the distribution or production of programs for release on subscription television. During the Hartford trial, there was no centralized distribution control over the programs selected by RKO for subscriptiin broad- cast. RKO has been free to negotiate with any distributor of any kind of program which is of box-office quality. Contrary to the wild and speculative charges made in some 1955 comments filed in this proceed- ing and during the Hartford Phonevision case, supra, neither Zenith nor Teco, Inc.44 has exercised any control over the distribution or selection of programs utilized during the Hartford trial. EKO as- sumed and maintained sole responsibility during the trial for selecting al] subscription program material, including responsibility for choosing among program sources, rejecting programs, negotiating the terms of acquisitioii, and determining the number of program showings and the amount of program charges. Neither Teco nor Zenith had any responsibility in the foregoing respects, although both assisted in negotiating some of the arrangements with film distributors and other program suppliers when such assistance was requested by RKO. Most programs broadcast during the hartford trial (90%) were obtained from program suppliers upon a basis whereby RKO agreed to pay a fixed percentage of subscriber receipts from all viewers of the particular program. A small percentage of subscription programs, such as Broadway plays and special variety acts, required cash financ- ing, which IRKO requested Teco to provide from time to time and ~ Teco, Inc. will serve a twofold function. First, it will be primarily responsible for the promotion of the use of Phonevision equipment in various communities and the granting of local franchises to interested and responsible parties. Second, Teco may assist in obtaining appropriate high-quality pro- gram product necessary for subscription operations. However, the program activities of Teeo will not be tied in with its arrangement with the local franchise holder or the latter's arrangements with local broadcasting sta- tions in any manner which would give Teco an exclusive position against any other owner or distributor of subscription television programs. 56 PAGENO="0305" 301 Teco generally accommodated such requests. No such financing, how- ever, was committed by Teco unless and until RKO had previously requested acquisition and use of the particular program and had negotiated the terms of its acquisition. Each such program was gen- erally acquired and paid for in the name of RKO, and Teco. was in no way involved in determining the subscription fee to be charged by RKO or the time or times when such a program was to be broadcast by RKO. Thus,. Teco's role in connection with these special programs was essentially limited (a) to reimbursing RKO for the cash acquisition costs that Teco had previously agreed to pay and (b) to receiving from RKO an agreed percentage of subscription fees ultimately col- lected from viewers thereof. Zenith's role in obtaining programs was limited primarily to using the personal contacts of Zenith to facilitate RKO `s negotiations with certain program suppliers with whom Zenith had long been in contact. Such assistance was furnished only on the request of RKO. Zenith also supplied limited financial assistance to Teco so that it could acquire additional programming of the type described above. Such program financial assistance as was extended by Zenith and Teco to RKO was for the primary purpose of extending the scope of the type of programming which could be offered to the public during the Hartford trial. Zenith does not contemplate that it will continue ex- tending such financial assistance if subscription is operating in a number of markets on a continuing basis. From the foregoing, it is clear that in the area of production and distribution of subscription television programs and in their release by broadcasting stations over local subscription television systems, there will be full, fair and free competition. The business relation- ships which will exist among program producers, subscription franchise holders and television stations will logically flow from the business circumstances under which it is anticipated subscription television will operate, pursuant to limitations imposed by existing law. We believe that the Hartford trial fairly represents the form and method of any subscription television system-Phonevision or otherwise. In the final analysis, monopolistic conditions in any business gen- erally result either from the intent of the interests engaged therein to establish such conditions or from the fact that the natural economic forces affecting the business tend inevitably towards monopoly. Zenith and Teco have no intent to acquire monopolistic control over the subscription television broadcast business in the United States. Nor 57 86-399 0 - 67 - 20 PAGENO="0306" 302 can any broadcast' station owner obtain such a monopoly under the multiple ownership policies of the Commission already in effect. While it is difficult to forecast all of the natural economic forces which might tend to mold the business forms of subscription television, it is im- possible for us to conceive, under the operating proposals discussed herein, any immediate or reasonable' prospect of monopolistic evils which would require governmental regulatory action. If, after the full play of the natural forces of competition, a condition now unfore- seen should arise at some time in the future which would indicate any trend towards monopoly detrimental to the public, the Commission can always exert its present regulatory power to eliminate any anti- trust problems that may possibly arise. XL SUMMARY OF PUBLIC INTEREST CONSIDERATIONS. As a result of the Hartford trial, the Commission now has before it significant and reliable data which serve as a basis for appraising the potentials of subscription television in other types of circum- stances. The reasonable proj~ctiofls of subscription television `s potential, as set forth herein, based upon the facts adduced during the Hartford trial support a rational premise that subscription television has the potential of making substantial contributions to our national television system. At the same time, the empirical knowledge gained during the Hartford trial serves to refute many of the wild speculations ad- vanced by uninformed and biased opponents of subscription television during the previous stages of this proceeding-e.g., that it is technically impossible, that the public will have no interest in it, that program charges will be exorbitant, that subscription programs will not differ from conventional television programming, that it will siphon away present conventional programs which are now available to the public without charge, that it will destroy free television and that, at best, it will be little more than a plaything for the very wealthy. Thus, the only remaining problems involving subscription television are pri- manly business and marketing problems, as contrasted to regulatory public interest problems. In the last analysis, our proposal is simply to let the public itself evaluate subscription television in the market place. When the Commission acts under the statutory mandate to en- courage new service, the new service contemplated by it~ regulatory action is not to be frustrated by the fact that no one can prove beyond the peradventtire of a doubt exactly how far the new and untried 58 PAGENO="0307" 303 service will develop. Thus, the Commission has the statutory obliga- tion to authorize subscription television if it determines, upon the basis of the rational premises supplied by the Hartford trial, that subscription television holds a future potential of satisfying a public need. The Commission, of course, has adequate regulatory power to take care of any future unforeseen problems as they may arise. It is noteworthy that, even if subscription television were au- thorized on a nation-wide basis, its growth and expansion will most likely develop gradually over a period of five or more years rather than overnight. Each potential subscription market would require franchise holders willing to make substantial capital investments in a new business. In many markets persons will have to be induced to apply for UHF channels so that these stations can be utilized as sub- scription outlets, and further time will be required for such persons to receive a grant from the Commission and to construct such stations. Subscription equipment manufacturers will have to tool up for mass production. It is not unlikely that the expansion of subscription television will parallel to some extent the gradual growth of television stations during the pioneer period 1946-1950. Thus, our national system started in 1946 with ten television stations. In 1947, the second year, there were twelve stations operating in eight cities, and in 1948 there were thirty stations on the air in seventeen cities. At the end of 1948, there were only 460,000 television sets in circulation. By 1950, the fifth year, there were 107 television stations operating in 63 cities and there were approximately 12,500,000 receivers in the hands of the public. Ever since 1950, our national television system has shown gradual rather than overnight growth. While subscription television may have a somewhat more rapid growth and development due, among other things, to the fact that a vast majority of the American public already have television receivers in their homes which could receive subscrip- tion programs, its basic problems will be similar to those faced by the infant television industry. Risk capital ventures cautiously into new and untried businesses and momentum is gathered only after the first 10 or 20 pioneers have forged the business feasibility of the new business in the crucible of the market place. The gradnal growth which may be reasonably anticipated will undoubtedly give the Com- mission time to view subscription's nationwide growth in an orderly manner, which will permit it to adapt the regulatory process as the need niay arise, long before subscription television achieves any major nationwide penetration. 59 PAGENO="0308" 304 XII. SCOPE OF RELIEF REQUESTED. A number of questions have been raised by the Commission in the past concerning the possible composition of a nation-wide subscription television system embracing such considerations as whether or not subscription television should be limited to a single technical system, ~rhether or not it should be limited to multiple-station markets, whether or not it should be limited to UHF, etc. Since varying answers to each of these questions would substantially affect the type of authorization the Commission might grant for a nation-wide extension of subscrip- tirni television, we are setting forth hereafter our views in connection therewith. In the interest of clarity we will follow a question and answer form in the following discussion. 1. Whether Subscription Television Operations Should Be Limited to a Single Technical System or Whether General Standards Should Be Provided Within Which a Number of Systems Might Operate. In our opinion, the underlying policy of the Communications Act of encouraging competition dictates that the Commission adopt gen- eral technical standards within which more than one system might operate. These general standards could be limited to the following requirements: (a) The system should be compatible with existing television service (both VHF and UHF and both monochrome and color) so that the millions of receiving sets now in the hands of the public and the transmitting equipment of existing broadcast stations can be used in this service. (b) The system should not cause interference or have other un- desirable effects within or without the assigned frequency band. (c) Subscription service should result in no perceptible degrada- tion of the quality of the video and audio signals received during either a subscription program or a non-subscription program. 2. Whether Subscription Operations in an Individual Community Should Be Confined to a Single Technical System. We believed that it is very unlikely, as a practical matter, that more than one over-the-air subscription technical system would operate in an indivi4ual community. We see no reason, however, why the Commission should employ such a restriction by rule. From a regula- tory viewpoint, the Commission's primary interest should be in the relationships whici' exist between franchise subscription systems and 60 PAGENO="0309" 305 television broadcast licensees, regardless of whether there is one franchise system or several operating in the community. It must also be recognized that there is a possibility that wired subscription systems and over-the-air subscription systems may operate in the same community. 3. Whether Nationwide Subscription Television Should Be Limited to Multi-Station Markets (four or more stations) or Whether It Should Be Permitted in All Markets, Including Single-Station Markets. The underlying policy of Section 307(b) of the Communications Act, which requires the Commission to make a fair, efficient and equitable distribution of broadcast service among the several "com- munities," would appear to dicate that subscription television be made available in all markets. In short, if there is a demand for subscrip- tion service, the public in all markets is entitled to its benefits if some- one is willing to supply it. Subscription television itself has the potential of generating the construction of many new stations. To the extent that it achieves this, it should not matter whether the new station is the first station in the market or the second, third or fourth. As previously discussed in these comments, there is a strong probability that present stations in two-or- three-station markets would not carry any significant amount of sub~ scription television programs at the outset because this would conflict with their present highly profitable network commitments. Thus, subscription television will have to support the creation of new UHF stations in such markets at the outset if it is to have adequate outlets. In our opinion, issues involving whether subscription television should be permitted in markets with varying numbers of stations can best be handled on an ad hoc basis. For example, if subscription tele- vision could lead to the construction of a first television station in a community, it is difficult to conceive of any public interest considera- tion which would justify a restraint on the creation of such a new station. 4. Whether Subscription Television Should Be Confined to a Single Station in anjr Individual Community or Whether More Than One Station Should Be Authorized to Carry Programs. - The policy of competition sponsored by the Communications Act and the Commission's policy of encouraging competitive multiple tele- vision service should, in logic, extend to subscription programs as well 61 PAGENO="0310" 306 as to conventional programs. It would be contrary to these policies to limit subscription television programs to one station per community, although this issue might be considered under appropriate circum- stances on an ad hoc basis. As we have previously discussed, however, it is unlikely in the immediate foreseeable future that all stations in a community would apply to carry subscription programs. To repeat, the Hartford trial indicates a strong probability that stations will tend to be either dominantly subscription or dominantly conventional in their pro- gramming. It is also unlikely that network affiliates, the majority of which are VHF stations, will carry subscription programs because of the necessity of maintaining network clearances and continuity of audience. Nor is there any present indication that it would be more profitable for them to do so. Another consideration is that there may be cases where it will be essential to authorize more than one non-network station to carry sub- scription programs, where more than one is available, in order to obtain sufficient time clearance to justify the installation of a subscription system. 5. Whether Stations Should Be Limited in the Amount of Time That They Can Devote to Subscription Programming. In our opinion, it would be unduly complicated to limit the amount of time that any station can devote to subscription programming, except for a requirement that it broadcast the minimum hours of con- ventional programs required by Section 73.651 of the Commission's Rules. In many instances, particularly at the outset, there may be no more than one station carrying subscription programs. In such a case the station must be permitted to carry sufficient subscription programs to support the subscription system. Otherwise, no one will make the substantial capital investment required to install a subscription system in a community. As previously discussed in detail, where more thaii one station in a community is authorized to perform subscription operations, there are practical considerations which will effectively restrict the total amount of subscription programming which can be carried by such stations; namely, (1) the limited quantity of box-office attractions and (2) the limited nature of the public's subscription recreational PAGENO="0311" 307 budget. These restrictions apply equally whether the programs are carried by one or more than one station. Another practical limitation on the time which can be devoted to subscription television in any com- munity arises from the improbability that network affiliates will desert their present and profitable network programming in order to carry any appreciable amount of subscription programming. 6. Whether Subscription Television Should Be Limited To Only UHF Stations. While we have no doubt that UHF stations will be the greatest beneficiaries of expanded subscription television operations, we believe that subscription television should be made available to both UHF and VHF without discrimination. There is a possibility that if this is not done, some markets might be deprived of the benefits of sub- scription television. There are only thirteen communities out of the top 100 markets, as listed in Exhibit 4, which have more than three VHF channels allocated and/or in operation.45 In the remaining 87 of the top 100 markets having three or less VHF channels available, the stations operating therein are all affiliated with one of the three networks. For reasons previously discussed, it is highly unlikely that any of the existing VHF stations operating in these 87 markets would be willing to surrender their profitable network affiliations in order to carry any significant amount of subscription programming. Indeed, many of the so-called non-network stations operating in the above-mentioned thirteen markets. are presently operating profitably and as a result may not desire to carry any significant amount of sub- scription programming. On .the other hand, 95 of the top 100 television markets have, in the aggregate, 228 UHF frequencies available. This pool of 228 UHF frequencies represents the principal source of possible future station outlets for subscription television. It is also noteworthy that if any VHF channel in a market with three or less VHF channels should decide to give up its profitable network affiliation in order to carry subscription programs, such profitable network affiliation would be- come immediately available to some new UHF station, since, as . we "~ New York City; Los Angeles, California; Chicago, Illinois; San Francisco- Oakland, California; Washington, D.C.; St. Louis, Missouri; Minneapolis-St. Paul, Minnesota; Indianapolis-Bloomington, Indiana; Miami, Florida; Seattle- Tacoma, Washington; Lincoln-Kearney-Ilastings-North Platte, Nebraska; Port- land, Oregon; Denver, Colorado. 63 PAGENO="0312" 308 have already noted, it is most likely that stations will either be domi- 11 antly conventional or dominantly subscription in their programming because of the demands of both types of programming on prime time and the necessity of network affiliates to maintain time clearances and continuity of audience. 7. Whether Restrictions Should Be Placed Upon the Broadcast of Commercials During Subscription Programs. While the Commission did not place any restrictions upon the broadcast of commercials during subscription programs in its First and Third Reports, RKO committed to carry no commercials on sub- scription programs during the Hartford trial and has not done so. In our opinion, the Commission should, in any nation-wide authori- zation of subscription television, specifically restrict the broadcast of commercials during subscription programs. While the major ap- peal of subscription television programs may be that they are of box- office quality, we believe that au additional appeal involves the absence of commercials. To combine commercials with subscription programs would merely serve to detract from the best that both subscription television and conventional television offer to the public without offer- ing any countervailing benefits. It is not inconceivable that if com- mercials are prohibited on subscription programs, this will serve as a quality yardstick for sponsors in selecting conventional program- iiiing of a quality which could more effectively compete with subscrip- tion programmmg. 8. Whether Subscription Television Should Be Limited to broadcasting Programs of a Box-Of1i~e Nature. We recognize that it is difficult to precisely define by rule what is or what is not a box-office attraction for subscription purposes with sufficient clarity to cover all situations. Generally defined, a box- office attraction embraces any type of program which is not seen on a regular or frequent basis on conventional television and for which the public would ordinarily pay an admission charge. Since neither of these criteria is necessarily static, it may be undesirable to attempt to classify all types of programming into a rule. However, we re- quest the Commission, in any decision authorizing subscription tele- vision on a nation-wide basis, to make clear that it will expect sub- scription programming to be of a box-office nature rather than dupli- cative of conventional programming. 64 PAGENO="0313" 309 XIII. IDESCRIPTION OF SUBSCRIPTIO~j RULE PROPOSED BY ZENITH AND TEc~O. For convenience, we are incorporating at the end of this section a copy of the rule~ which we have, in our petition, proposed that the Commission adopt for the purpose of permitting subscription tele- vision operations~ on an extended nationwide basis. This proposed rule incorporates the answers to the questions set forth immediately above. A further description of the specific rule provisions proposed is set forth hereafter. Scope. The rule proposed by Zenith and Teco to permit sub- scription operations on an extended nationwide basis, would not, with- out more, automatically authorize all television stations to broadcast subscription programs. Rather, under the Zenith-Teco proposal, any television station desiring to broadcast subscription programs would have to first file with the Commission an application for sub- scription television authorization. The grant or denial of mdi- vidual applications for subscription television authorization would be decided on a case-to-case basis in light of the public interest con- siderations which might be involved in the particular case. Zenith and Teco submit that such a case-to-case approach under a subscrip- tion television rule would provide flexibility which would better serve the ultimate public interest than would an approach whereby the Commission attempted by rule to restrict subscription operations to a particular type of station or to particular markets. A brief description of the other specific provisions in the rule proposed is as follows: (a) Section 73.641. This section contains definitions of the terms used throughout the proposed rules. (b) Section 73.642. This section rovers the filing of applications for subscription television authorizations and the procedures which will be followed by the Commission in determining whether such ap- plications should be granted or denied. (c) Section 73.643. This section sets forth certain licensing poli- cies which will be applied by the Commission in granting subscription television authorizations. These policies are designed primarily for the purpose of making certain that the television station broadcasting subscription programs will retain ultimate control over its operations 65 PAGENO="0314" 310 in a manner which will at all times permit it to fulfill its duties and responsibilities to broadcast in the public interest and to prevent monopolistic growth of subscription television in the fields of station operation and program distribution. (d) Section 73.644. This section provides that no commercial advertising announcements shall be carried during subscription broad- casts. It also provides that charges, terms and conditions of service to subscribers shall be applied uniformly: provided, however, that subscribers may be divided into reasonable classifications and that different conditions may be applied to subscribers in different classi- fications. It further provides that television stations authorized to broadcast subscription programs shall also broadcast conventional programs. This section also establishes the procedures which may be followed by the manufacturers of subscription television equipment in obtaining advance type approval and type acceptance of their equipment. PROPOSED SUBSCRIPTION RULE SUBSCRIPTION TELEVISION OPERATIONS § 73.641. DEFINITIONS. (a) Television station. The term "television station" means any UHF or VHF licensee or permittee or applicant for a UHF or VHF construction permit. (b) Approved subscription television system. The term "ap- proved subscription television system" means any technical system utilized in subscription television operations approved by the Com- mission upon a finding that (1) the system will not cause interference or have any undesirable effects within or without the assigned fre- quency band; and (2) the system will not cause any perceptible deg~ radation in the quality of the video or audio signal received during either a subscription program or a non-subscription program. (c) Television market. The term "television market" means any community which has or may have a UHF or VHF channel allocated to it. (d) Subscription program. The term "subscription program" means any program broadcast over an approved subscription tele- vision system in such a manner that the program cannot be viewed by members of the public without incurring a charge or fee. 66 PAGENO="0315" 311 (e) Subscription broadcast. The term "subscription broadcast" means the period during which subscription programs are scheduled and broadcast, which shall include all times during which a television station is transmitting an approved subscription television signal. (f) Commercial advertising announcement. The term "com- mercial advertising announcement excludes station promotions of future subscription programs at the beginning and ending of subscrip- tion broadcasts. § 73.642. APPLiCATIONS AND AUTHORIZATIONS. (a) Any television station located in a television market and de- siring to engage in subscription television operations shall first file with the Commission an application for subscription television au- thorization in such manner and form as the Commission may here- after prescribe. (b) If the Commission, upon examination of such application and upon consideration of such other matters as the Commission may officially notice, finds that the public interest, convenience and neces- sity would be served by the granting thereof, it will grant such appli- cation. In the event it is unable to make such a finding, the Commis- sion will then formally designate the application for subscription television authorization for hearing and proceed pursuant to the pro- visions of Section 309(e) of the Communications Act and the Com- mission `s Rules and Regulations applicable thereto. The Commission may impose such conditions upon the grant as may be appropriate, based upon the circumstances prevailing in each television market. (c) Applications for subscription television authorization shall be accompanied by a statement signed by the patentee, licensee, man- ufacturer or franchise holder of an approved subscription television system that such party will commence installation of an approved subscription television system in the applicant's television market within one year after the grant of the television station's application for subscription television authorization, unless such a system is al- ready installed in applicant's television market. (d) A subscription television authorization will ordinarily be issued for a period which will be coterminous with the regular license period of a television station. § 73.643. LICENSING POLICIES. (a) No subscription television authorization shall be granted to a television station having any contract, arrangement or understand- ing, express or implied, with a patentee, licensee, manufacturer or franchise holder of an approved subscription television system which 67 PAGENO="0316" 312 gives such station the exclusive right to use such approved subscrip- tion television system in its television market, or which prevents the use of such approve.d subscription television system by other tele- vision stations which have been authorized by the Commission to broadcast subscription programs in the same television market; nor shall a subscription television authorization be granted to a television station having any agreement or understanding which would prevent it from using any other approved subscription television system which may operate in its television market. (b) ~NTo subscription television authorization shall be granted to a television station having any contract, arrangement or understand- ing, express or implied, which prevents the station from (1) reject- ing or refusing any subscription program which the station reason- ably believes to be unsatisfactory or unsuii~able or contrary to the public interest; or (2) substituting a subscription or conventional program which in the station `s opinion is of greater local or national importance. (c) No subscription television authorization shall be granted to a television station having any contract, arrangement or understand- ing, express or implied, which delegates to any other person the right to schedule the hours of transmission of subscription programs; pro- vided, however, that this rule shall not prevent a television station from entering into an agreement or arrangement whereby it agrees to schedule a specific subscription program at a specific time. (d) No subscription television authorization shall be granted to a television station having any contract, arrangement or understand- ing, express or implied, which prevents the television station from making a free choice of subscription programs, whatever their source. (e) No subscription television authorization shall be granted to a television station having any contract, arrangement or understand- ing, express or implied, which deprives the television station of the right of ultimate decision concerning the maximum amount of any subscription program charge or fee. § 73.644. GENERAL OPERATING REQUIREMENTS. (a) No commercial advertising announcements shall be carried during subscription broadcasts. (b) Charges, terms and conditions of service to subscribers shall be applied uniformly: provided, however, that subscribers may be divided into reasonable classifications, and the imposition of different sets of terms and conditions may be applied to subscribers in dif- ferent classifications. (c) Any television station authorized to broadcast subscription programs shall broadcast, in addition to its subscription broadcasts, 68 PAGENO="0317" 313 the minimum hours of programs required by Section 73.651 of the Rules. (d) Except as they may be otherwise waived by the Commission in authorizations issued hereunder, the rules applicable to regular television broadcast stations will be applicable to subscription tele- vision operations; provided, however, that no television station pro- posing to broadcast subscription television programs over an approved subscription television system will be required to request or receive any waiver of any technical rule of the Commission which might other- wise prevent the transmission of the type of scrambled audio or video signal which is essential to subscription operations. (e) Advance approval of subscription television equipment will be made by the Commission pursuant to the "type approval" and "type acceptance" procedures now established by Part 2, Subpart F-Equipment Type Approval and Type Acceptance-of the Commis- sion's Rules and Regulations. CONCLUSION The only new facts developed concerning broadcast subscription television since the Commission concluded in its First and Third Re- ports that it would reserve its ultimate judgment until suitable trial demonstrations of subscription television could be held are those available from the Hartford subscription trial. These facts have now been published in detail so that they may be examined by the Commission and all other interested parties. The Commission held in its rirst Report that when meaningful data were available from trial subscription television operations, it would conduct further rule- making proceedings in which all interested parties would have full opportunity to submit information, data and views on the issues re- maining to be answered in reaching a decision as to whether the au- thorization of a subscription television service on some extended or continuing basis would serve the public interest. The three-year Hartford trial period is now drawing to a close. The information which can be obtained from that trial is now avail- able. The time has come, therefore, for this rule-making proceeding to go forward in the manner contemplated by the Commission. For illustrative purposes, we are attaching hereto as Exhibit 5 a suggested Notice of Further Proposed Rule Making in this proceed- ing which the Commission might issue in order to place the remaining issues concerning nationwide authorization of subscription television in proper focus for an expeditious final determination. 69 PAGENO="0318" 314 On the basis of the foregoing premises and all the facts of record, it is respectfully submitted that the Commission should find that the public interest, convenience and necessity will be served by the grant- ing of Zenith's petition for further rule making filed simultaneously with these comments. Respectfully submitted, ZENrrE RAmo CoRPoII.&TI0N By W. THEODORE PIERSON VERNON 0. EOHLHAAS WILLIAM S. GREEN W. THEODORE PIERSON, JR. PIERSON, BALL AND DowD 1000 Ring Bldg. Washington, D. C. TEoo INC. By PHILLLE' G. LOUOKS LoucKs AND IMLAY 1317 F Street N.W. Washington, D. 0. Of Counsel: FOB ZENITH RADIO CORPORATION GREGGAR P. SLETTELAND For Teco, Inc. GEORGE E. HOWELL TENNEY, BENTLEY, GUTHRrE & HOWELL Chicago, Illinois March 10, 1965 70 PAGENO="0319" 315 EXHIBITS 1. List of 599 Subscription Programs Shown During First Two Years of Hartford Trial by Program Category and Audience Rating. 2. Average Weekly Program Expenditures by Subscriber Income Level. 3. Average Monthly Program Viewing in Dollar Amounts. 4. Top 1QO Markets for 1964 Rated by Number of Television Homes. 5. Suggested Notice of Proposed Rule Making. 71 PAGENO="0320" to M ~ ~Iw ~ ~jI1 to 0 I p~. ft I_s to ~` 1~i ~ To 19 jL~. PAGENO="0321" ,~ C' 0 ~! I1~ ~ ll~ ~ to hO ~ ~`4 PAGENO="0322" .~ ~ LJ~~J~ ~~ot-'ui at ~ -~ ~ ~ ~ ~R: I ~ ~ cwwwM~~~-1o I2~$ c~i ii PAGENO="0323" `4 ~4~Z~X `~ ~ ~`4 ~ ~ ~ I ~ ILl I~k~ !~ ~ ~ :~ a,4 ,,, It'i ~ Ix ~ PAGENO="0324" fO ~ - ~ w~1-~j !I~ I ~LTZ `U ft PAGENO="0325" t~1 ~ ~ I ~ i:m ~ 11~ ~ ~WW 3~31Ob3t W3~t~fO( ~ ~ ~ ~ PAGENO="0326" 8 8 (DAD~A)Q ~ 8 t~ ~ ~ ~it1~A ~ ~ ~ f A)A AD AD 8 AD AD AD p p. I ~ z~ ~ O~(A)WtA) ~oc~-.~ro0 ~ (A) ).`)-~)~ 1~ I~, tA) (A) (A) tA)(A)U)U) ~ ~ ~ a~io ,-~ow'o-~-~ (A) ~IA) ~ ~ t~ I~ ~ a~ c~ 1c~ e~ ~ 0 ~ I N 0 OOD W~2t~t~ r ~ r'*1 P I~ t!~t~ ~ c3cx*.J~ 18 CAD A~ ~ ~ HHO ~ 1EAA) ~A())QQ~~D z C) p P . . A ~J~-30t) CD A~. 0 PAGENO="0327" ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4~4~4~ ~ ~ ~ri t~r~t i * sz~~t s.~i~i I~i~i ~ ~ s~1s ~ II ~I * I ~3~* l~* II I~0I*~* I CI3I~~&*~* I I~* ~ tD~ 0I~()~ ~tti~~ W3~Q~ ~ )~ Z~ 000 000*i Od0QO0~0~Odoooeooooootd.*o,omo ~`~oId t~i HW to p. .4 ~ 0cP~O ~0 ~ ~0~O ~0 ~0 0 ~0 ~ ~øO 0~ O~I d0s~ to 04 ~ 0 O~ ID 140 *0 ~ 14 rI~ 0~* L~ IE ~ !~h ~jj lot t~3i~tC PAGENO="0328" 324 TA2ULtTION OF 1.8 F000ION-LOOS0025 FILMS iSO 35 IFLCIAI.LY 50001)200 EOTIRTAI2000T OF HARTFORD S0002012ION 002007105 PE4TOSOS 80o5Ot~0U8I0G TOE FIRST TWO YE5R~ WE01T~802 ALL~2OOWINOA) 1)00108 is oioo0 OF E!~Li1~tl Page 9 TITLE OF F001100-L000SAOE 11)014 (Sobbed in IugIIeUo Dinlogoe ox' English sub-titles) 0001)0 SHOWN AVORAGE NO. OS' OU2000I200 HOMES FOR AU. OATHS 0200UL ~ IOTA) NO, OP VIOLINS SUOOCRIB002 FOR SIC. DATES SHOWS 528C09DAOS CUMULATIVE)! 1110)518(0 ~ACL 800j53P09._ HO. OP 353303NMS 011011800 P0800811000 VOEWIOS 5589 Bncoangio 70 100 4725 15610 33.1% 5 6.6% The Pour Dqe of Naples The Bridge 60 610 3128 3307 7~ 7 23.~ 21. 3 3 8.0% 7.1% SAndaye end CFbele Acoy Number Con Win SqOare nO Violence Stoosanny in the 007 The Letter Toot Woe NeverHeat 61 9 71 73 01 ~1~T 7 5 3373. 3 5 3689 817 01 427 ~0 8 16.2% 12.7% 12.7% 11.0% 300% 3 3 3 5.4% ~.2% 8% 3.7% 3.3% Cinderella HoOd In the Trap Ehe Cowoterfeitere nO Paris Two Daughters Sound of Troopete The Ltttle Ruophanked Horse Lady with the Dog Marrtege nO Figure The 14oe08 Room Horning Star 73 07 65 83 85 `115 35 07 ~ 3410 4236 2~or ~ ~52? ~ 1& 3 3~ 151 208 216 163 13~ ~ 1 ,~ 2:9% 2.0 9% 3~ 3 ~ 3 ,.5 3.3% 2, A ~ 1.3% 1.5% 0.~% 0. 6 0.6% ~ 20103. (18 films) .~& TITLE OP SF001010! PRODUCED EMTERTAI2MON7 P252285 The Ilingeton Trio 11 Mx 30 3ii412 535 43.0% 5 8.6w Omeriexfl Pegeent of Arti Beet of the Holahod. 22 5 3525 .32 `slid 140 2 . 1 1 2 Mute tIp Darling Show OLrl An Evening with 20411 Base Eddie Fisher Out Las Vegas Ice Chips Tchto-Tch000 P. Part)! The CollegIate MatInS 59 83 30 63 1. 06 588. 67 40 77 8. 99 20 8. 33 35 2. .40 ~4W1 77~ 35 3167 2068 4019 16700 2118 650 893 59. 509 300 553 223 200 18.9% 18.7% 16.9% 16.1% 14.6% 13.8% 13.7% 12.3% 5 3 . .2% 2% ç0~ 2, % ~7% MwCluOre SOeters Riloegarde Streets nO New Tnrk Upstairs at the A Country Soeodol. Thu Roowom nO Ted Ch8ef Spoon River Evening wIth Canine Montopa The Ltmeltters Pieide a 0000000)! The Consul Cord Lawrence at the Plana Boyenihaxu Phtlt5pina Dencers The ltaoroue Plea Hodda Onbbler The Affair Androolse end the LIeu Old Old Personal Appearsnaee - Kdsobrnugh The Father Piano Renital - Lateiner Personal Appearanoe - RockweLl Pereonol ARpearanoe - Mtddletoxt Joan Sutherland 26 a 42 17 0. 34 78 ~ 92 82 14 54 28 14 66 68 37 32 8. 69 76 ~ 302 33 nO 70 90 ~O 0 32 52 53. 53 1~l~ 1 ~6l6 2i~ 4649 11089 0652. 3353 353e 2592 2029 191~ t73_ ~n3 50 ~6~O 0390 4049 18200 2619 0089 0703 187 139 327' 23 17. 37~ 31 ~ 2 2~2 1 10 126 93' 220 183 ~ 127 130 e3 ~5 0 43, 52 ..M 926% 9.6% ~.o% .9% 8.2% 8.2% 7.~% ~ 7.3% 7.1% ~.1% 2% 5:2% ~h6% `.4% ~ 3.5% 2.0% 2.6% 2.3% 2.2% 1.6% 0 9% ~ ig 10 3 ~ 2 3 ~ 3 2 2 2 0~ 3 2 ~ 3 3 1 3 1 1 3. .2 5.5% 2,4% 3,0% ~ 2.7% 2,6% ~ ~ 3 3.1% 1.3% 8 5% 2:0% ~ 2.6% 0.5% 0.8% ~ 1.6 0.9% ~ TOTAL (35 features) 3.az~ 81 PAGENO="0329" 1i~ ~ § ~ ~ ~ ~ 00 ~ I~ i ~ 1~ L.~ ~ C) 10 JIoo 0 00 00000000000 0000 ~ ~ !~ 1~ ~ p ~C4 ~.. lot I C) t) C) 121 .I~CCI. C) I ~ i~ h~ ~ 0Q~! PAGENO="0330" 326 EXHIBIT 2 NUMBER OF CURRENT SUBSCRIBERS WITHIN EACH BRACKET OF AVERAGE WEEKLY PROGRAM EXPENDI- TURES FOR 1ST 92 WEEKS OF HARTFORD PHONEVISION OPERATION NUMBER OF SUBSCRIBERS INCOME LEVELS Program Expenditure 0 $3,999 $4,000 - $6,999 $7,000 - $9,999 Over $10,000 TOTAL 0 10 94 43 8 155 $.01-$.10 4 3 7 .11- .20 1 15 14 7 37 .21- .30 2 23 28 9 62 .31- .40 4 40 41 22 107 .41- .50 4 58 63 27 152 .51- .60 2 62 80 29 173 .61 - .70 4 63 92 33 192 .71 - .80 2 73 112 50 237 .81- .90 4 105 97 40 246 .91-1.00 1 93 135 56 285 1.01-1.10 5 82 130 44 261 1.11 - 1.20 3 93 109 44 249 1.21-1.30 1 97 108 44 250 1.31-1.40 5 90 112 32 239 1.41-1.50 3 93 104 37 237 1.51-1.60 2 88 80 27 197 1.61 - 1.70 3 65 70 23 161 1.71 - 1.80 2 86 75 23 186 1.81-1.90 69 64 18 151 1.91-2.00 1 58 64 13 136 2.01-2.10 5 44 50 7 106 2.11-2.20 2 47 48 10 107 2.21-2.30 1 48 46 7 102 2.31 - 2.40 1 36 34 8 79 2.41-2.50 43 34 14 91 2.51 - 2.60 1 29 26 7 63 2.61-2.70 23 17 2 42 2.71 - 2.80 21 16 4 41 2.81-2.90 18 18 2 38 2.91 - 3.00 15 15 6 36 3.01-3.10 8 9 2 19 &11-3.20 8 10 2 20 3.211. - 3.30 20 8 2 30 3.31-3.40 10 3 13 3.41-3.50 1 15 6 1 23 3.51-3.60 6 3 9 3.61-3.70 8 5 3 16 3.71-3.80 3 2 1 6 3.81-3.90 1 4 5 .3.91-4.00 4 2 1 7 4.01 and over 34 25 1 60 TOTALS 70 1,892 2,005 666 4,633 83 PAGENO="0331" 327 EXHIBIT 3 AVERAGE PROGRAM VIEWINQ* Average Program Viewing Per Average Total Subscriber Number of Program Subscribers Viewing Month Annual Bate July 1962 304 $ 2,098.00 $6.90 $82.82 August 612 3,325.25 5.43 65.20 September .855 6,932.25 8.11 97.29 October 1,190 7,276.25 6.11 73.37 November 1,436 8,835.50 6.15 73.83 December 1,631 9,399.00 5.76 69.15 January 1963 1,799 10,255.00 5.70 68.40 February 1,900 9,435.50 4.97 59.59 March 2,039 11,434.75 5.61 67.30 April 2,110 7,904.25 3.75 44.95 May 2,217 10,624.25 4.79 57.51 June 2,516 10,538.00 4.19 50.26 July 2,920 17,342,00 5.94 71.27 August 3,125 14,299.75 ` 4.58 54.91 September 3,283 14,788.25 4.50 54.05 October 3,356 12,476.75 3.72 44.61 November 3,460 11,558.50 3.34 40.02 December 3,5,73 15,039.75 4.21 50.51 January 1964 . 3,784 18,303.25 4.84 58.04 February 4,209 33,622.00 7.99 95.86 March 4,566 21,653.25 4.74 56.91 April 4,738 22,264.00 4.70 56.39 May 4,734 21,098.50 4.46 53.48 June 4,775 18,255.25 3.82 45.88 Average Annual Rate 62.15 Average Weekly Rate 1.20 *Exclusive of certain discounts to be discontinued in future operations. 84 PAGENO="0332" 328 EXHIBIT 4 TOP 100 MARKETS FOR 1964 RATED BY NUMBER OF TELEVISION HOMES TV TV Homes Homes 1 New York 5,620,800 26 Buffalo 589,700 2 Los Angeles 2,829,600 27 JohnstowmAltoohla 582,200 28 Lancaster 3 Chicago 2,342,300 Harrisburg- 4 Philadelphia 2,125,800 York-Lebanon 577,500 5 Boston-Manchester 1,831,700 29 Grand Rapids- 6 Detroit 1,634,500 Kalamazoo 564,900 7 San Francisco- 30 Houston 530,800 Oakland 1,448,900 31 Dayton 513,600 8 Cleveland 1,324,200 32 Tampa- St. Petersburg 506,300 9 Pittsburgh 1,257,600 33 Memphis 501,400 10 Washington 934,000 34 Columbus, Ohio 492,900 11 St. Louis 867,700 35 Portland, Ore. 481,600 12 Providence 867,300 36 Syracuse-Elmira 470,300 13 Baltimore 806,900 37 Steubenville, Ohio- 14 Dallas-Ft. Worth 783,600 Wheeling, W. Va. 453,200 38 Greenville-Spartan- 15 Cincinnati 765,900 burg-Asheville 451,600 16 Minneapolis- 39 Nashville 450,700 St. Paul 764,700 40 Birmingham 447,200 17 New Haven- 41 New Orleans 446,400 Hartford-New 42 Albany-SchenectadY- Britain 740,400 Troy 430,200 18 Indianapolis- 43 Charleston- Bloomington 701,000 Huntington 430,100 19 Miami 689,800 44 Louisville 427,000 20 Milwaukee 658,700 ~ Flint-Saginaw- Bay City 402,000 21 Kansas City 621,500 46 Greensboro- 22 Charlotte, N. C. 618,700 Winston-Salem- 23 Sacramento- High Point 400,900 Stockton 616,000 47 Toledo 397,200 24 Atlanta 605,100 48 Denver 388,700 25 Seattle-Tacoma 604,700 49 Portland- Poland Spring 378,600 85 PAGENO="0333" 329 TV TV Homes Homes 50 Lansing-Onondaga 374,500 76 Phoenix 265,800 51 Durham-Raleigh 358,800 77 Mobile-Pensacola 264,900 52 Wichita-Hutchinson 356,500 78 Madison 252,600 79 Knoxville 249,500 53 Oklahoma City 353,000 80 Little Rock 240,000 54 San Diego 352,800 81 Cape Girardeau, 55 San Antonio 352,600 Mo.-Paducah, Ky.- 56 Orlando- Harrisburg, Iii. 239,600 Daytona Beach 343,800 82 Binghamton 237,700 57 San Jose-Salinas- 83 Columbus, Ga. 234,700 Monterey 337,000 84 Columbia, S. C. 230,700 58 Davenport- 85 Sioux Falls, S. D. 225,600 Rock Island-Moline 335,100 86 Greenville-Washing- ton-New Bern, N. C. 222,900 59 Rochester 333,300 87 Evansville, md.- 60 Champaign-Spring- Henderson, Ky. 218,200 field-Decatur 330,500 88 Rockford, Ill. 214,200 61 Tulsa 330,400 89 Chattanooga 212,100 62 Roanoke-Lynchburg 329,600 90 Lincoln-Kearney- 63 Omaha 328,300 Hastings~ North Platte 209,300 64 Norfolk 315,900 91 Augusta, Ga. 203,500 65 Green Bay 314,600 92 Fresno 194,500 66 Richmond 311,400 93 Bristol, Va.- 67 Cedar Rapids- Johnson City- Waterloo 308,900 Kingsport, Tenn. 191,800 68 Shreveport- 94 Tallahassee,Fla.- Texarkana 300,900 Thomasville, Ga. 187,000 69 Baton Rouge 295,500 95 Terre Haute 184,400 70 Scranton- 96 Springfield-Holyoke 183,600 Wilkes-Barre 292,900 97 Austin 71 Des Moines-Ames 287,500 Rochester, Minn.- 72 Salt Lake City 282,600 Mason City, Iowa 183,300 73 Jackson, Miss. 276,100 98 Youngstown, Ohio 178,000 74 Jacksonville 275,500 99 Erie, Pa, 174,100 75 Spokane 267,800 100 Albuquerque 171,600 Source: Television Magazine, Vol. XXI, No. 3, March 1964, p. 66. 86 PAGENO="0334" 330 EXHIBIT 5 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D. C. 20554 Docket No. 11279 In the Matter of Amendment of Part 3 of the Commission's Rules and Regulations (Radio Broadcast Services) to Provide for Subscription Television Service Notice of Proposed Rule Making 1. Notice is hereby given of rule making in the above-captioned matter. The text of the proposed rules is set forth as an Appendix to this Notice. General 2. The Commission originally issued a Notice of Proposed Rule Making in this proceeding on February 10, 1955, in which it invited comments on questions of fact, law and public interest concerning the authorization of subscription television. Voluminous comments were submitted by members of the television industry, motion picture interests and others. As a result of these proceedings, the Commis- sion concluded that it had the requisite statutory authority to au- thorize the use of broadcast frequencies for subscription operations if it should find that it wQuld be in the public interest to do so. It reserved its ultimate judgment, however, as to whether the public interest would be served by the definitive establishment of a nation- wide subscription television service until suitable trial demonstrations of subscription television could be held, in order to obtain more useful information concerning what subscription television could offer, how the public would respond to what is offered and how the service would operate in practice. The Commission, in its First Report,1 as amended by its Third Report,2 announced that it would accept appli- cations for three-year trial subscription operations pursuant to cer- tain conditions set forth in such Reports. 3. We provided that the present proceeding would remain pending on the issue of whether subscription television service should be an- - `lGRR 1509 (1957), 2 16 RR 1540a (1959). 87 PAGENO="0335" 331 thorized on an extended or continuing basis until additional data was available from such trial subscription television operations as might be authorized pursuant to the First and Third Reports. Recent de~ velopments, such as the growth of wire subscription television, CATV systems and the fact that the RKO Phonevision subscription opera- tion in Hartford, Connecticut, is now in its third year of its trial operation, in our opinion, make it desirable to now give further con- sideration to authorizing subscription television on an extended na- tion-wide basis. 4. The IJartforcl Trial. On June 22, 1960, RKO Phonevision Company (then known as hartford Phonevision Company) and RKO General, Inc., its parent company, pursuant to the terms of the Third Report, applied for authorization to conduct subscription tele- vision operations over television station WHC'T, Hartford, Con- necticut, using the Zenith Phonevision system. After hearings held before the Commission, en bane, the Commission reached its final decision on February 23, 1961, in which it unanimously concluded that the grant of RKO `s application would fulfill the objectives of the trial subscription television operations set forth in the First and Third Reports. The United States Court of Appeals for the District of Columbia thereafter affirmed the Commission's authorization of the Hart ford trial.3 Actual subscription operations by WHCT, Hartford, were commenced on June 29, 1962. Since that time the Commission has been kept fully informed concerning the operation of the Hart- ford trial and has had access to all pertinent operational data con- cerning this trial.4 5. The Zenith-Teco Petition. Zenith Radio Corporation has been one of the progenitors of subscription television proposals before the Commission. The instant proceeding had its genesis in a petition filed by Zenith on February 25, 1952, as revised by a joint petition filed by Zenith and Teco, Inc., on November 29, 1954. Zenith Phonevision equipment is being utilized by WHOP in the Hartford subscription trial. in 1965., Zenith and Teco filed a further joint petition request- ing the Commission to adopt appropriate rules authOrizing subscrip- tion television service on an extended nation-wide basis. The peti- tion states that after approximately two years of operation the Hart- ~ connecticut Committee Against Pay TV V. FCC, 301 F.2d 835 (D.C. Cir.), cert. denied, 371 U.S. 816 (1962). ~ The only other subscription trial authorized by the Commission was granted to Channel Two Corporation (KCTO, Denver) on October 3, 1962. KCTO subsequently abandoned its plans for this trial. 88 PAGENO="0336" 332 ford trial has now reached a stage where it has supplied meaningful data and information. It is alleged that the operational data and information so far produced by the Hartford trial give the Commission for the first time a factual basis for appraising the potentials of the service in other types of circumstances. 6. Available data from the Hartford trial include the technical performance of the Phonevision subscription equipment, the modus operandi of subscriptiOn service, methods to be employed, the nature of the programs offered and the role of the participating broadcast station licensee, which were factors which the Commission indicated in its Third Report it hoped would be demonstrated and clarified by a trial operation. Zenith and Teco contend that the Hartford trial has proven that subscription programs may be provided to the public which supplement rather than duplicate conventional television pro- gramming; that the public will respond to and support such subscrip- tion programming; and that ~ubscription television offers a potential source of revenue which would iticrease the nuuiber of broadcast serv- ices now available to the public, in furtherance of the achievement of the Commission's television service priorities as established in its Sixth Report and Order. The petition further asserts that, in view of the growth of unregulated wire television, the use of CATV for pay tele- vision purposes, the Commission's continuing problem of TJHF de- velopment and related problems of increasing the nmnber of stations and the amount of program service available to the public, the time has come for further consideration by the Commission. Without here attempting to reach a final conclusion on all of the contentions ad- vanced by Zenith and Teco in their petition, we have concluded that changed circumstances and new facts now available since our Third Report was issued in 1959 warrant a further appraisal of subscrip- tion television. 7. Preliminary Legal Considerations. In our First Report, as readopted and reaffirmed in the Third Report, we concluded that we have the statutory authority to authorize subscription television oper- ations if we find that such operations would be in the public interest. Our conclusion in this respect is supported by the Court's affirmation of our power to authorize the Hartford trial, wherein the Court ex- plicitly rejected arguments " that the Commission lacks statutory power to authorize a television broadcast system which requires the direct payment of fees by the public."5 ~ Connecticut Committee Against Pay TV v. FCC, 301 F.2d 835, 837 (D.C. Cir.), cert. denied, 371 U.S. 816 (1962). 89 PAGENO="0337" 333 8. In our previous reports we also explicitly rejected arguments that the definition of "broadcasting" in Section 3(o) of the Com- munications Act, per Se, bars the authorization of subscription broad- casting, stating: "The evident intention of any station transmitting subscription programs would be to make them available to all mem- bers of the public within the range of the station."6 (First Report, para. 28.) However, we reserved the question of whether subscrip- tion television should be classified as "broadcasting" or should be classified under some entirely new service classification until trial experience would furnish a better basis upon which we might de- termine the answer to this question. (First Report, para. 43,) In- formation available to us from the Hartford trial lends support to our previous conclusion that subscription television should be classi- fied as "broadcasting" within the meaning of Section 3(o) of the Act. The Hartford trial has not only demonstrated that the subscrip- tioii television station operator intends to make subscription programs available to all members of the public desiring them, but it has further demonstrated that a broadcast licensee carrying subscription pro- grains will have no more difficulty in complying with all pertinent requirements of the Communications Act and those provisions of the Commission `s Rules and Regulations applicable to television broad- casting than a station broadcasting non-subscription programs. Thus, the proposed rule contemplates that subscription operations will be generally classified as "broadcasting" within the meaning of Section 3(o) of the Act. Comments on the proposed rule may also be directed to our proposal to so classify subscription television operations. 9~ Scope. It should be emphasized that the proposed rule which would permit subscription operations on an extended nation-wide basis (Toes iiot, without more, automatically authorize all television stations to broadcast subscription programs. Rather, the proposed rule re- imres any television station desiring to broadcast subscription pro- grams to first file with the Commission arm application for subscrip- tion television authorization. The grant or denial of individual appli- catioiis for subscription television authorization will be decided on a case-to-case basis in light of the public interest considerations which may- be involved in the particular circumstances. We believe that such a case-to-case approach under the rule will provide a flexibility which will better serve the ultimate public interest than would an 6 We also (Olleluded that "there would appear to be little basis for classify- iimg time proposed kind of service as a common carrier service within the meaning of Section 3(h)." (First Report, para. 43.) 90 86-399 0 - 67 - 22 PAGENO="0338" 334 approach whereby we attempted by rule to restrict subscription opera- tions to a particular type of station or to particular markets. Discussion of Specific Provisions 10. Section 73.641. This section contains definitions of the terms used throughout the proposed rules. 111. Section 73.642. This section covers the filing of applications for subscription television authorizations and the procedures which will be followed by the Commission in determining whether such ap- plication should be granted or denied. 12. Section 73.643. This section sets forth certain licensing policies which will be applied by the Commission in granting subscrip- tion television authorizations. These policies are designed primarily for the purpose of making certain that the television station broad- casting subscription programs will retain ultimate control over its operations hi a manner which will at all times permit it to fulfill its duties and responsibilities to broadcast in the public interest and to prevent monopolistic growth of subscription television in the fields of station operation and program distribution. 13. Section 73.644. This section provides that no commercial ad- vertising announcements shall be carried during subscription broad- casts. It also provides that charges, terms and conditions of service to subscribers shall be applied uniformly; provided, however, that subscribers may be divided into reasonable classifications and that different conditions may be applied to subscribers in different classi- fications. It further provides that television stations authorized to broadcast subscription progranis shall also broadcast conventional programs. This section also establishes the procedures which may be followed by the nianufacturers of subscription television equipment in obtaining advance type approval and type acceptance of their equipment. 14. Comments. Pursuant to the procedures set forth in Section 1.4.15 of the Rules and Regulations, interested parties may file cohi- ments on or before , 1965, and reply comments on or before , 1965. All relevant and timely comments and reply comments will be considered by the Commission before final action is taken in this proceeding. In reaching its decision in this proceeding, the Commission may also take into account other 91 PAGENO="0339" 335 relevant information before it in addition to the specific comments invited by this Notice. 15. As we noted in our First Report, previous comments filed in this proceeding offered no fixed guideposts either in past experience or in crystalized future plans, and previous debate therefore was necessarily conducted more on the grounds of potential implications of subscription service than on the ~basis of demonstrable facts. We believe that since reaching that conclusion in 1957, there are a number of demonstrable facts available, such as the development and growth of wire subscription television service, CATV, and, of course, facts developed during the Hartford trial. Thus, the Commission will ex- pect parties filing comments to make use of such facts to the extent possible. Naked assertions unsupported by facts are of little help to the Commission in reaching a decision. We, of course, recognize that any appraisal of subscription television must necessarily be predi- cated in part upon future estimates and projections as well as present facts, since it is keyed to future public interest goals. However, if such projections are to be of help to the Commission, they should be predicated upon methods of economic and market an~dysis which are within the realm of rational deduction and inference. 16. Further, in our First and Third Reports we outlined what we believed to be the central issues concerning whether subscription television should be authorized on a nation-wide basis. In summary these issues were (a) whether subscription television would provide a beneficial supplement to the program choices now available to the public; (b) whether subscription television would result in an in- crease of resources which would facilitate significant increases in the number of services available to the public under the present system; and (c) whether subscription television would seriously impair the capacity of th~ present system to continue to provide advertising- financed programming of the present or foreseeable quantity or quality, free of direct charge to the public. We are still of the opinion that these are the central issues to which conunents should be directed. 17. Authority for the amendments proposed herein is contained in Sections 3(o), 4(i), 301, 303(b), 303(e), 303(g), 307 and 309 of the Communications Act of 1934, as amended. 18. In accordance with the provisions of Section 1.419 of the Rules and Regulations, an original and 14 copies of all comments, replies, pleadings, briefs or other documents filed in this proceeding shall be furnished the Commission. 92 PAGENO="0340" 336 Mr. WRIGHT. Now, this is the box that we currently put on the sub- scriber's set in Hartford. This is the program book that is sent to the subscriber. Anyone within the range of channel 18, a UHF station in Hartford, can subscribe. When he subscribes, this box is placed on his set. You will notice in examining this program booklet which I would like to pass up to you, if you will turn to the back of the program book you will notice that channel 18 broadcasts for anywhere from 3 to 5 hours of every day of normal ordinary television programs You will notice from a list of them, the Merv Griffin Show; Notre Dame Foot- ball Highlights; Afternoon News Report; Forecast with Chris Ryclel; World with Ray Somers; and Willie Pep, and so forth. If you will run down this, you will see the TV programing much re- sembles the programing generally that you will find in any station in the area. In addition to the programs that are normal advertising supported programs, there are subscription programs. You will notice that one of the subscription programs in that particular week is "In the Heat of the Night" As a matter of fact, it is on the cover This is the current booklet. "In the Heat of the Night" is one of the greatest box office attractions that is playing in the theaters right now. As a matter of fact, it is playing here in Washington. Here are some pictures taken outside of RKO Keith's Theater just the othei~ day showing lines of people who are waiting to get into this theater at $3 a seat to see this picture. In Hartford, this picture is on subscription TV on channel 18 for a dollar and a half a family, and you can have your friends in, too. There is no restriction about that. So, this is really what we are talking about. We are talking about a new electronic development in the distribution of box office entertain- ment that makes it technically possible to bring this kind of thing that the networks can't buy and won't be able to buy for several years to show on television, free television. By the way, I wince every time I hear that statement "free televi- sion." Mr. Preminger yesterday told this committee that "commercials" were so good because they cost $25,000 to $30,000 to produce but he didn't tell all the story. We are one of the big TV advertisers in this country and we pay from $60,000 to $70,000 a minute to run one of those $25,000 to $35,000 commercials, for just 60 seconds. Furthermore, usually about April or May of every year, I am sit- ting in my office and our advertising sales department comes in and they say, "Our agency tells us that if we don't commit by tomorrow morning at 9 o'clock for $10 million of commercials, four on `Saturday at the Movies,' and two on the `Jerry Lewis Show' and two on some new show we never heard of and four on something else, that we may not be on television this fall." Mr. VAN D~iu~IN. You are talking to men who advertise every 2 years and in addition to these disadvantages must put up cash in advance. Mr. WRIGHT. I am sure we have a lot of the same problems, Mr. Van Deerlin. You mentioned that you have to go to your voters next year. We have to go to our voters who are our customers every day with our PAGENO="0341" 337 products. We have a lot of people who are sitting around trying to design a new radio or new television set and we have some new ideas, maybe for a space command or remote control or for a new kind of tape recorder or something. We will go into an analysis of the problems that are involved in getting in the market and what we will be faced with and how much it will cost us and how long it will take us to do it and what it will sell for and whether the public will buy it. Then we have a hard de- cision as to whether we are willing to spend that money and take a chance. When we do, we have to go out and have an election with that new product. We have a new product usually every May and we have a new product line every December. We bring all our distributors in from Boston, San Diego, Denver, all over the country, and we show them that new line, what we have been working on for 2 or 8 years. They are usually enthusiastic. It is easy to get them to be enthusiastic about something. Then they go out and show it to the dealers. These dealers; of course, are also being worked on by Motorola, Radio Corp., and General Electric and the Japanese people and everybody else. Some of those models that we make are a real smash and we have done a great job and everybody is happy and some of them are dogs and we have to spend a couple of years in disposing of them. But you know this competitive system is a wonderful thing, really. We wouldn't have it any other way. It keeps us on our toes. It keeps us working hard. It has brought the price of our merchandise down in a descending curve, and it is better merchandise, because we are in one of the most highly competitive businesses that there is in this country. Really, this is what is so frustrating to us about subscription tele- vision. We worked on something and made a substantial investment in it because we thought we had a way of bringing a new product, a new service, to the country, that would sell. It would be something that they would want. Ordinarily with that sort of thing we would just go ahead and spend our money and do it and that is what I wanted to do on this. But our lawyers prevailed on me that ma~ybe we had bet- ter not do that, that the Federal Communications Commission will be very upset if you do that. So, let us go down and ask them for per- mission to expand this service. Well, it really hit the fan at that time. I had no idea that the three networks would spend the amount of time and the amount of effort in trying to kill this thing off that they have. We certainly expected that the theaters would. This is a direct competition with them and we knew they would fight it. But the whole sum and substance of the opposition to our having a chance to introduce this new service is that the networks say that "If it is approved, it will be so popular, it will be so much better than anything we have got, that it will give these people so much money that they can go out and outbid us and take every good program we have off the air, so we are going to have to close our doors." Now, this is the basic question, really. This is the one thing that stops people about subscription television. I am sure all of you are in agreement that the congressional policy and the national policy ought to be to encourage more and better programing on television and more PAGENO="0342" 338 and better things that the public want. Right now, the commercial television has a revenue of around $3 billion. Walter Scott, chairman of NBC, predicted just the other day that within 10 years that is going to increase to $~1/2 billion. Now, incidentally~ more than 50 percent of that current $3 billion is accounted for by the networks, themselves, in their 0. & 0. stations. Now, we are starting out in Hartford and we have about 5,000 to 7,000 subscribers. Let us assume now that the Commission lets us go ahead with this thing and issues an order tomorrow to say that we can go ahead with it. It is going to take us at least 2 or 3 years to get started in a major city in terms of having anything like 10 percent of penetration. There are only 29 cities under the Commission's present order that we could Operate in, in the first place, which have five stations that would make this possible. Before we would have the kind of money that would make it possible for us to even talk about taking programs like "Petticoat Junction" and "Ed, the Talking Horse," away from the networks, we would be down the road 3 or 4 years. Now, I want to assure this committee and I want to say this as loud and as long as I can, we have no intention of trying to arrogate to our- selves the existing programs of the networks. As long as we have any- thing to do with it, we will have nothing to do with the world's, series; we will have nothing to do with the Rose Bowl games. We will have nothing to do with the "Ed Sullivan Show" or witTi "Bonanza" or with "I Spy" or with "Peyton Place" or any of these other shows. I assure you this is not the area in which we want to operate. This is not the area where `people can build up a business by bringing to the public things for which they will pay. These things are not box office. These things are built in and ingrained into free television and we don't want to touch them. Now, they will probably tell you that these rules that the Commis- sion has suggested are outrageous, that either they are unconstitutional or that they won't be effective. I cannot say that I care too much for those rules, either. But we are perfectly willing to acc~pt the proposi- tion that this Congress and the FCC acting under the Communications Act has a perfect right to take whatever regulatory steps are necessary to make sure that what we say the service should be is the way it actu ally is. And if these rules aren't effective in keeping this within bounds, then you certainly have the power to suggest and make any other rules that will. Now, I cannot understand the networks' theory that we are going to wreck the system because it presupposes, first of all, that we are a bunch of crooks who want to go out and gouge the public and deceive them. Believe me, General Tire Co., who started out the. same way as Zenith did, as a small tireshop some 50 years ago, and Zenith have not made their business this way. The whole key to our business is to bring something to the public that enhances our image and that the public is willing to pay for in competition with the other things that are available. Other companies that have affiliated with us, at least in preliminary arrangements to go forward with this thing are Kaiser Aluminum on the west coast and Field Enterprises in Chicago. It is unthinkable `that we would be engaged in a gigantic conspiracy here to deprive the pub- lic of free television. PAGENO="0343" 339 The second thing that it presupposes is that their product is so bad that people are going to watch subscription TV and not watch the net- works at all to the point where they are powerless. Now, I know David Sarnoff very well and I know William Paley and I know Leonard Goldenson. We have had a lot of competitive go- arounds with these people and I have the lumps to prove it, too. If you think that they are going to sit around and let us take their audience and take over this medium, this is the most ridiculous suggestion I have ever heard. I know what they are going to do. They are going to throw against subscription the best programs that they can possibly get and if it means losing money for the whole network for a year, if it could put us out of business and keep up from getting going on this thing, I am sure they would be very well tempted to do it. Now, if we lose that kind of competitive battle, we certainly have no quarrel at all, This is perfectly all right. This is the good old Ameri- can way. If they can do such a good job with the network programing that nobody is going to watch subscription TV and we can't get the kind of programs that people pay for, enough to support the thing, fine; we are wrong. We have been wrong before about products and we probably will be in the future. That is perfectly all right. But then it also presupposes that, in addition to these other things happening, this committee and the FCC are just going to sit here and let it happen. I think that is insulting. It insults this committee and it insults the FCC. You obviously have the jurisdiction to see to it that these bad things do not happen. Now, there is one other matter tha I would like o emphasize, this question of jurisdiction. You gentlemen have raised the point that the FCC acted here without coming to Congress and that there was in the past some committee resolution that requested them to hold up action on a regular basis on this matter until Congress had a chance to act on it. In 1952 when this matter first came up, I was assistant general coun- sel of Zenith and had occasion to go into the legal aspects of it. I am no communications lawyer but we consulted three top law firms who are real experts in this matter as to what was the Commission's juris- dictional basis for handling this thing. Should we go to Congress and ask for an amendment of the law or should we go to the Commission and ask for authorization? In every case, counsel advised us that while there were arguments both ways, there was no question in their mind that the Commission had authority under existing law to authorize this service, that under the way we had proposed it, it was broadcasting and under their pow- ers to encourage new use of radio and to classify different services and to make whatever regulations they needed to make, that they had the power to do this, So, we proceeded on that basis. Now, it is possible that the lawyers are wrong on that matter. If the FCC should issue such an order there is no question but what it would be appealed in the court of appeals and probably the issue would finally be determined in the Supreme Court of the United States, whether under the existing act this is a broadcast service that the Commission has the right to authorize. May I say that should it happen that way, we will then be in a sit- uation where~ if the Court should turn us down, then obviously we PAGENO="0344" 340 would have to come back to this Coxigress for legislation on the matter. If, on the other hand, the Court should say that the Commission did have jurisdiction in this ~thing and this was a proper service, this could only happen at the earliest, I would say, a year from now if the Commission should act next week on this matter. In the meantime, this service could hardly have gotten started, even in one city. There would be every opportunity for this Congress and for this committee, if they wanted to intervene, to take the matter up and to either suggest amendments to the act that would provide a proper regulation as to whatever proper regulation Congress thought necessary or even prohibit it altogether if it should be determined in actual use of the system that it was against the public interest. But I do not see, really, how this can happen if we are talking about the public interest. If this is not something that the public really wants, it is going to fall on its face You gentlemen don't have to do a thing about it nor does the FCC. This will be completely aborted unless the public really wants it. Now, if the public really wants it to any large extent, isn't that the argument that the public should have it provided that it can be regulated so that it keeps in its proper place in the spectrum of com- munication? I think it would be a tragedy if this service should be killed off be- fore it really gets a chance because to do that you have to say, "Well, we are satisfied with the service that the commercial television now provides. We are not worried about all the unlighted UHF stations and the other stations that are struggling for an audience, that are struggling for revenue and who, many of them, are marginal stations." This communications business was not built that way. This business was built on innovation and change and growth. It would be a real tragedy if now for the protection of one service we stop growth in this area. Let me say that the technology, the technological revolution that is going on in the laboratories and in the background of this business make me doubly positive that you should not adopt a restrictive atti- tude in regulating it. Our engineers and research people showed us a year ago a wall dis- play using a laser. They had found a way of converting the signal from an ordinary TV set coming in off the air through transducers to sound waves which were then made to impinge on a laser beam as it went through a tube. By some very complicated circuitry they were able to interact the sound with the oolength light of the laser so here was a beautiful picture-it happened to be a red and black picture because it was a ruby laser that we were using. This portends we could have the possibility of wall television projected with one or two lasers that would give you a new dimension in this thing, that would stimu- late the public's interest in having home entertainment of the kind that they have never had before. This is just only one of the things that is in the offing. We are working with solid state devices that I am sure are going to enable us to get away from the limitations of this monstrosity of a cathode ray picture tube which means really what you have to do is to put the picture on the inside of a light bu~ib. The limitations on the size and structure and shape of that light bulb, of course, are very serious. PAGENO="0345" 341 By usc of lasers, by solid state array devices that I know are going to be part of this spectrum in the next 5 to 10 years, this is going to create more of a demand on the part of the public that the limitations on what they can see in their own home will be removed, I appreciate very much the time you have granted mc on this mat- ter. I have not followed my prepared statement but I would like it to be put in the record, if I may. Mr. MACDONALD. Without objection, it is so ordered, * (Mr. Wright's prepared statement follows:) STATEMxNT or Josurir S. WiuGuT, PBESIDENT, Zzxmr RADIO CORP. Mr. Chairman, I am Joseph S. Wright, president and chief executive officer of Zenith Radio Corporation We are grateful for this opportunity to appear before you today Our company pioneered in the development of broadcast subscription television systems beginning in the 1930's, and has been the leading proponent of this new box office programming distribution system during the past 15 years. In this statement I will present briefly the principal reasons for our long inter est and heavy investment in this new service, and comment on the proposal cur- rently under consideration by the FCC. [Amendment of Part 73 of the Commis- sion s Rules and Regulations (Radio Broadcast Services) to Provide for Subscription Television Service-Docket No. 11279.1 I will be glad to try to answer any question that members of the Committee may have. With me are three gentlemen who have been closely identified with our subscription television activities. They are intimately acquainted with the subscription operation in Hartford, Connecticut: Mr W Theodore Pierson, senior partner of Pierson, Ball & Dowd is well known, I am sure, to members of the Committee. He has been bliP counsel in this matter for over 15 years. Mr Pieter van Beek president of Teco licensee of Zenith Plionevision Sub scription Television Systems and for many years assistant to the president of Zenith in charge of subscription TV activities Mr Keigler Flake is General Manager of UHF station WHCT Channel 18 Hartford Conn which is operated by RKO General a subsidiary of General Tire & Rubber Co. Mr. Flake, as manager of the station, which operates as both a commercial TV station and a subscription outlet can answer questions about how this new service actually works in Hartford; what it means to subscribers; and what Its potential is for independent TV stations. By way of background, may I just briefly tell you something of our company and its interest in this whole subject of broadcasting Zenith was started out 49 years ago by two young men building radio receivers on a kitchen table. This was several years before most people had even heard of this new gadget called radio. The company has grown and prospered over this span of years, and enjoys a leading position in the field of consumer electronics products. We have more than 20000 employees more than 50 000 stockholders and many plants and laboratories throughout the United States and in a number of foreign countries. The growth of the company has come about through our ability to innovate and produce and sell products and services which have won broad public accept- ance in one of the most intensely competitive industries in the world. Our main business is producing and selling radio and television receivers and high fidelity instruments, so that it is natural for us to have a direct interest in the widest possible development of broadcasting-to do everything we can to encourage the best possible radio and television service to the American public You would be amazed at the effect new and exciting TV or radio programming has on the public's willingness to buy radio and TV receivers. When the new fall programs premiere-\vhen there is a world series, top pro football games, popular new shows-our industry's sales go up in a soaring curve. In the summer re-run dog days they bottom out. From this you can see that a producer of TV receivers will necessarily be hurt by any development adversely affecting the quality and character of broadcasting available to the general public. By the same token, our interests will be favorably affected by any development which increases the public's interest in television and which adds new dimensions to the medium. PAGENO="0346" 342 We became concerned many years ago about the problem of how television programming would receive the financial support required to reach its full po tential as the most dynamic new communications medium in the world. We asked our cleverest research people to work on ideas which would make it technically possible for the viewer to share in the cost of programs, box office events which might otherwise not be available because an advertiser could not afford to sponsor them. Over the years, we have developed a number of different systems which would make this possible We actually experimented with such a system in field use with a limited sample of 300 customers in Chicago for three months in 1951. Based on the knowledge developed in the limited test, we asked the Federal Communications Commission in 1952 to appeove a subscription TV system for nationwide use, as a supplement to existing broadcasting. You are undoubtedly familiar with the fact that the Commission authorized, on an experimental basis, a commercial operation of the service in the City of Hartford; Connecticut, wliich~got under way late in June, 1962.. This trial opera- tion has been conducted by RKO General, a subsidiary of the General Tire Company. On the basis of the results of that operation, REO General and Zenith petitioned the Commission in March 1965 for a nationwide authorization. I need not recount the most recent developments before the Commission, which have been covered in previous testimony. It is very difficult to say anything about subscription television which hasn't already been said before-there have been more words written about it, one way or the other, than anything which has been before. the Commission since its creation. The operation in Hartford Conn has produced the only new and significant data which is based on actual day to-day operating experience A wide variety of box-office-type programs have been made available to the subscribers in Hartford over the years of its operation. A detailed analysis of our experiment in Hartford was filed with the FCC in support of our petition for a permanent nationwide authorization, and I have copies available here for the subcommittee's study. In brief, `this document shows that, despite all of the limitations that were naturally incident to such a small scale operation, the service was a popular one. It provided first-run motion pictures and other box office entertainment in the home, for the entire family, at a price no more, and usually less, than a single ticket at the theatre, or hail, or stadium, where the same entertainment was being offered at or nearly the same time. I would like to stress that the Hartford operation shows the American public to be highly selective in what it will pay money to see on Subscription TV. One outstanding fact emerges from our experience-any attempt to charge for second, third or fourth-rate old movies or for situation comedies, or the other thihgs that unfortunately make up such a large part of current commercial television, would be doomed to financial disaster The main problem that will be faced in large scale operation of this new medium is how to encourage and develop the production of new box office entertainment in sufficient volume to attract customers to spend the dollar or two a week that is necessary to make it a commerc!ally feasible proposition. Our opponents have argued long and loud that if subscription television is permitted on a wide scale the effect will be to siphon away programming and talent from "free" TV and to attract away so many viewers that so-called "free TV" would be seriously weakened. Incidentally, this argument principally origi- nates with the groups of motion picture theatre owners who would be most pleased if somehow or other all of television would dry up and blow away- groups that have persistently fought and, indeed, have gone so far as to attempt boycotts of motion picture producers and distributors who have made old movies available to advertising-sponsored television Regardless of their motives in making this argument, the Hartford experience shows us that the average subscription customer spends approximately three hours per week-~--or less than 10%-of his average viewing time watching sub- scription programs. Above all, he is very discriminating and selective in what he is willing to pay for. First-rate theatrical productions that are of timely and current interest; high quality motion pictures that are achieving box office sue- cess in the. theatres; and things like heavyweight championship fights which have been black out on television achieve success at subscription TV's home box office. Motion pictures and other box office entertainment that is of lesser quality per- form just as badly for subscription TV as they do in the theatre. PAGENO="0347" 343 S In its proposed Fourth Order and Report `the Commission has laid down a great any restrictions which are designed to meet the objections which the theatre wners and the networks httve raised. The FCC is proposing them to Insure that he service will not be authorized except under conditions where there will be at all times a substantial number of free television facilities available to the pros- pecti~e customer. Under the rules of the game, as the Commission has laid them down, we must find programs which are so attractive to our viewers that they will be willing to pay cash money to see them in competition with four other stations in the market. Subscription TV-Hartford has shown-starts off right away with a handi- cap of having to sell a product in competition with what the three networks "give" away. (Right here I would like to say parenthetically that I always wince when I hear the present medium described as "free" television since we are asked to pay $1,000 per second-as much as $70,000-for a one-minute commercial.) Under the proposed rules, sporting events which have been on advertiser- sponsored TV in the preceding two years are denied to subscription TV. We can- not compete for the reruns of old movies that make up such a major part of advertising sponsored TV programs-films that have been out of theatrical re- lease for more than two years. (An exception is made for a limited number of more than two-year-old features which are held out for later theatrical re- release and not available to "free" TV.) There are a number of other rules all designed to make sure that we do not pre-empt the programming and talent sources that make up the' existing system-even if this were economically sound or legally possible, which it Is not. I have no doubt that If these rules are not wholly effective in accomplishing this purpose, the FCC and the Congress will do whatever else may be necessary to insure that subscription television operates in the' public interest as a valuable supplement to conventIonal TV. We recognize that the Commission and the Congress have duties and respon- sibilities to see to it that television reaches its full potential in a sound way; that no one company or group of private interests should be permitted to follow a course of action that would deprive the public of the best possible service. We accept the burden that subscription television must provide a popular and useful service, as a supplement to our existing broadcasting. We are cer- tainly anticipating that in the event the Commission issues its proposed order and the service becomes a reality, there will be many occasions for scrutiny by the FCC or the Congress of its practices, the service it renders the puhile, and its impact on other areas of the medium. We do not subscribe to the rather arrogant suggestion of the movie theatre opponents of this service that the Congress and the FCC, with their broad powers to regulate broadcasting, are going to sit idly by and watch subscription TV develop in such a way that it will wreck the structure of the existing advertising- sponsored system. Nor d'o we subscribe to the equally arrogant suggestion that the public cannot be trusted to know what it wants; that somehow Americans must be insulated against having anything to say about this new service, or even to have a chance to see how it works on a national basis. We cannot emphasize strongly enough that our interest in subscription television' is in providing a snpplenm~ental service whIch will add to and not detract from the existing system. I am not one of those people in our industry who is constantly harping about the bad job commercial TV is doing. I think television has done remarkably well in bringing entertainment, news and other features to the home; but there are certain obvious limitations to the existing economic support of advertiser- sponsored television which frustrate the maximum potentla1 of the medium, and particularly the development of a viable and vigorous UHF system. We believe subscription TV can overcome- these limitation's, and can provide proW grams and revenue sources for many marginal television stations which are now struggling to stay on the air. We are not asking for any protection or subsidy in this venture-all we are really as'king for is the opportunity to compote against all three of the television networks and all of the theatres and all other places that sell box office enter- tainment-and to do this while bound by the most restrictive rules that have ever been imposed on any new, legitimate business in the United States. I wonder if those who express fears about subscription TV's impact on' the present system really believe that General Sarnoff and William Paley and Leonard Goidenson are going to sit by and let subscription television take away PAGENO="0348" 344 a major part of their viewing audience. These gentlemen have not built thei empires by encouraging competitive newcomers-an(j we have the lumps to prov it. They will undoubtedly use all the talent and ingenuity at their comman to make the network programming supported by advertising commercials s attractive and so worthwhile that the number of people watching subcriptio television will be kept to a minimum. If our competition makes there better, how can the public lose? I suspect that the real thrust of the network opposition is that this new service might make It possible for independent stations to prosper without having to depend on a net- work affiliation for survival. Subscription television, even under the proposed rules, can put many now va- cant TV channels on the air, lighting up new transmitter towers and adding service to the public where now there are only dots on an allocation map. The fact is that over 600 commercial TV channels are now unlighted, or about half of those allocated. Most of these Idle channels are in the ultra high frequency band where now 15 years after the allocations were made and more than 3 years after the all channel law to require manufacturers to put UHF on sets as standard equipment, only 130 commercIal UHF stations are operating about half of them at a loss More than 100 UHF stations have gone off the air for lack of programs and revenue. By utilizing only part of each day for box office programming, new sta- tIons on unused channels made possible by 51W can provide local programming during the rest of the broadcast day without charge-locally sponsored commer- cial shows, public service features, news and discussion of local issues. Despite the tough competition it will encounter from the networks, subscription TV can help make our TV service more truly local by programming for local needs and in the process encourage along with greater diversity in programming, greater diversity of ownership and control of this dynamic medium. In short, subscription TV has the potential ability to do two very worthwhile and useful things: (1) It can add-as a 8upplement-a new dimension of current box office programming which Is not otherwise available to television. (2) In providing this new source of programs and revenue it can help accomplish the objectives of our national policy formulated by Congress and `the FCC, by sup- porting the widest number of local television stations. This can only be done if we conduct ourselves within the letter and the spirit of the Commission's rules and of the Communications Act; and, more importantly, only if we provide a dis- tinctive new service which the public wants and is willing to support. While the principal benefits to the public of a subscription system would be to Increase the number and kind of TV serv1ce~box'office programs and additional TV stations-this service has another other important benefit that is closely related. The Hartford experience has shown that subscription `TV brings the enjoyment of top box office entertainment to middle and lower income families. This segment of the population that earns less `than $10,000 annually, comprises about 70 per cent of all U.S. families. In Hartford 84 per cent of subscribing families have annual incomes of less than $10,000, and nearly half earn $7,000 or less; only 14 per cent are in the over $10 000 per year category which makes up about 30 per cent of all American families. But these statistical comparisons don t really tell the whole story because it Is a family story. The real appeal to families can be best illustrated by the experience of one of our subscribers in Hartford with an annual income falling at the lower end of these statistics. This family has 15 chIldren, varying in age from 2 to 17 years. The father and mother work hard to provide a good home and a wholesome family life for their children. But as all of us as parents want to do, they want to give their chilclrep the things that others enjoy. And one of the things that kids love to do i~ to go to the movies on Saturday afternoons with their friends. ~ A Saturday afternoon of fun at the movies transportation parking refresh ments etc could run up a tab of up to $10 A family like this one couldn t afford a movie treat but once in a blue moon. But Channel 18's Saturday Matinees on subscription TV, at 50 cents to a dollar for the whole family-and as many young friends as can crowd around the set-makes this treat possible frequently-__at real savings. More than that, it brings a kind of recreation and social life to the family that they could not have if there were no subscription service. PAGENO="0349" 345 I might add here that this subscriber doesn't have a bank account. She can't afford it, so she comes in regularly and pays her bIll at Channel 18 in cash. Every time, she tells the people at the station what this service means to her children and to her husband and herself. The Executive Council of the AFL-CIO recognized this potential last month when it adopted a resolution supporting the proposed FCC order that would permit development of subscription TV. The resolution generally expressed the belief that the development of new programming resources would be in the inter- est of the viewing public, as proposed by the Commission's Subscription TV Com- mittee recommendation. Offering economy to subscribers results from the basic nature of the service: Subscription TV is a highly efficient method of distributing great box office events. It brings the stage and the concert hail, the arena and the motion picture theatre to the home rather than transporting the audience to the event. It was conceived as a way of adding a new dimension to TV by making It possible for the sub- scriber's home to become part of the theatre, just as the motion picture brought the stage via the medium of film to thousands of local communities far from pro- duction and cultural centers. A good example of this economy is the Liston-Patterson heavyweight champion- ship, blacked out to conventional TV and piped into movie theatres. In Hartford over 80 per cent of all subscribers viewed it and there was an average of nine viewers per set. The total cost for the nine viewers was $3. At a closed circuit presentation in Hartford this group would have paid $45 at the box office for the privilege of going from their homes to view It in a movie theatre. No wonder the theatre owners are upset and want to "protect" the home viewers! We at Zenith have felt very frustrated at times by the specious arguments that the public needs to be protected from subscription TV. For nearly fifty years we have struggled in our business to develop and build products for sale to the public. We have literally hundreds of people In our marketing and engineering and research departments who spend most of their waking hours analyzing public tastes and preferences and designing new products to build and sell. Every day we ship an average of two million dollars worth of radios, phono- graphs, TV receivers, hearing aids and the like to our distributors and dealers. Every day these products stand alongside the goods of our competitors, and thousands of people in the stores decide whether to buy a new TV set, instead of some new furniture, or new clothes, or a new car. If they decide on a TV set, they choose between ours and a dozen or more other brands. If our product is styled right and priced right and has the features the customer wants, and if he trusts our reputation for quality and Integrity, he buys our product. When we get an idea for a new product or service, we analyze it care- fully in terms of cost, investment and-most important-whether It will be one which the public will want and buy. When we do our homework well, ths company grows and prospers only because we can make something the public wants, and at a price it will pay. When we guess wrong about our prices or styling or features, we find out right away, because the public is quick to let you know where you stand. This Is the great strength of our American free market system which accounts for our economic growth, and in great measure for our personal liberty. I deplore the attitude that the public can't be trusted to decide this Issue for itself-in free and open competition with the networks and the theatres and all the other leisure-time attractions for Its entertainment budget. Zenith developed a subscription TV system because we believe the American public, when given the opportunity, would pay a modest fee to see high quality box office programs In their homes. We believe this servIce will make their TV receivers more useful to them, by providing a service that conventional TV Is unable to do. The FCC has before it now a proposal for nationwide authorization, de- veloped after many years of careful study and audience testing in Hartford. We believe this plan will enable us to launch this new service, and allow It to develop over a five year period Into a nationwide TV distribution system for the finest box office programming. ~ This new service will be launched under the most severe competitive conditions and strict limitations and restrictions ever to face a new business. It will require the Investment of millions of dollars and hard, creative effort on the part of hundreds oflndjviduals andorganlzations; PAGENO="0350" 346 We can live within these limitations. We believe we can meet the competition and get underway and put this new service to the test of the free market-as we do with other new products every day of our business life-and risk acceptance or rejection by the public we are trying to serve. This has always been the ultimate test in our free market system. We believe that the viewing public can be trusted to make this decision, We have a deep faith that the public will find subscription television a valuable service and, like the people of Hartford who have pioneered this concept in their homes, will support it with their patronage. In summary, Mr. Chairman, we believe that the American public should have the opportunity to view motion pictuers and other box office entertainment on subscription television, while they are new and fre8lv and witkont ootmst~ess eo~n- merc~4Z snterrnptwns-and still have the choice of seeing these pictures two or three years later on advertising sponsored television w~tIi~ commercials when the features' theatrical potential has been exhausted. The competition between the two types of television service would have a bene- ficial effect on conventional television, since the competition for audience could motivate advertising-sponsored television to cut-down on commercial clutter, because of audience support of a subscription service without commercials. It seems to me that the nub of the network's argument is a real fear that there will be a great public demand for a box office television service without corn- inercials. This is reflected in the Inconsistency of their evaluation of the Hartford op- eration. They charge on the one hand that Hartford has proved there is no sub- stantial public demand for subscription televlsion-on the other they argue that public demand will be so great that it will cripple the multi-billion dollar adver- tising-sponsored television system. It seems perfectly clear the networks and movie theater owners do not Want the public to have this choice and will use any means to deny it to them. Mr. WRIGHT. If there are any questions, I will be delighted to try to answer. Mr. MACDONALD. Thank you for a very fine statement on behalf of subscription television. I do have a few questions about your ad lib comments. One of them, of course, relates to the experiment in Hartford. We are told that most of the programing in Hartford that people paid to see were either movies or sports. Am I correct in that as- sumption? Mr. WRIGHT. Yes; for the most part, that is absolutely correct. Mr. MACDONALD. I am sure you have read the Commission's "Fourth Report and Order" in detail. Mr. WRIGHT. Yes. Mr, MACDONALD. One of the regulations that they put forth bothered me a great deal and that is the one relating to sports because sports occupies a large part of the public's thinking. You know the world series are in Boston today. As I have read their report, it seems to me, and I asked Mr. Hyde about this, as I read their regulation it said that if commercial TV- and I think you have fallen into the trap of saying "free TV" because I agree with Mr Preminger that it is not free-but if they are willing to forego 2 years of commercial revenue that they receive now-I am talk- ing about the major leagues, I am not talking about the world series; that is a special event just like the Olympics which would be a separate thing, of course, under the 2-year regulation-~but is it not very pos- sible that if they were willing to forego commercial revenue for 2 years, thereafter pay TV would have all the sports that are now on commercial TV locked up completely and if you wanted to see any sports event, football, baseball, hockey, you name it, you would have PAGENO="0351" 347. to pay money into the box to get it under the regulation that they suggested? Mr. WRIGHT. Mr. Chairman, if you assume the hypothetical case which you have, that regulation, there is never any change in that regulation, that regulation says static and subscription TV, say, would get started at the end of 1968 and that at some point there-now, I don't know what the price is on baseball as far as television; I think for pro football the networks give about $40 million a year. For a 2-year deal, that would be $80 million at these current prices for the pro football games. Of course, you cannot assume that these things are static, either. This is $80 million in 1967 when the contract was made. It could be $100 million or $120 million in 1969. I suppose it is theoretically possible that if subscription got to the point where it just absolutely mushroomed and where we got to where we had from three to six and a half billion dollars of revenue, that we could think in terms of, well, could we offer them a hundred million dollars just to keep their games off television for 2 years and then offer them more than that $100 million or whatever millions they were going to have in years after. I don't think that is likely. Mr. MACDONALD. Mr. Wright, you were just through saying they were tough competitors, the networks, and that they would like to put you out of business. Don't you think it would get to be a bidding thing between pay TV, which would be a monopoly, in my judgment, which is the second question I want to ask you. Is it not just economi- cally feasible to have just one subscription network? Mr. WRIGHT. We have always taken the position that we were not urging anybody to just freeze on our system and say that this is the preferred system like they have with the NTS signal and so forth. We have said we are perfectly. willing to compete with anybody else in this area. So that, whether there is room in any market now for more than one system. in a single market, I don't know. Time would have to tell that. There is nothing certainly that I know of that would prevent that- sort of competition except that I would think that if one operation or service got fairly well established in a market, it would make the second one think hard before he went in, not because there was any- thing wrong about doing it, but we have also envisioned that there would be this service with these boxes and with this coding thing and it would be available without discrimination to any station in that market who was authorized by the FCC to use it. Now, they have said in this Fourth Report and Order that they are only going to permit one station in the market to use it. So, under that regulation there would be obviously one station in that market which would be using it. I cannot believe that this rule has any great practical effect because it is going to be very difficult to get enough of the kind of things that people are willing to pay money for and that are real box office things to keep more than one station active. After all, Hollywood only produces 75 or 100 motion pictures that are really worth much in the course of the year. That is only two a week of new motion pictures. What do you have, a dozen Broadway plays, new ones? Mr. MAcDONALD. That is why I think it is a cliche that everyone talks about the arts and ballet and that sort of thing. PAGENO="0352" 348 As Mr. Brown yesterday pointed out several times, we have al- ready put out quite a good deal of money from the taxpayers to do that sort of thing. So, I would think from your experiment in Hart- ford and others that I would judge that it would come down to movies or sports events. As far as movies are concerned, and I am not taking a side one way or the other, but a lot of times I turn off a movie just because I get tired of the commercials. As far as the sport thing, they don't interrupt that often and you can always go out and have a beer or a sandwich or something else. But this talk that they use in the fourth report about siphoning off programs, would that not go frequently to sports events? Mr. WRIGHT. Mr. Chairman, you can dream up-I should not use that expression-you can always conjecture about things here in this sort of area with extreme possibilities. This is not an area where we want to operate. We pledge that this is our position and we think this- Mr. MACDONALD. Are you pledging that you would not buy out the rights for sports events just by paying people not to broadcast for 2 years? Mr. WRIGHT. Obviously, that is what I am saying. We are not going to take off the world's series and the Rose Bowl games. We are not going to make any deals with baseball or with hockey or with any of these other sports that say if you go off now for 2 years we wiB make it worth your while. Mr. MACDONALD. But you could make it worth their while. Mr. WRIGHT. How could we? Mr. MACDONALD. Because it is the single biggest attraction, I think, that television offers. Mr. WRIGHT. Mr. Chairman, where is our growth going to come from and at what point in time would we be in a position to offer professional football? Mr. MACDONALD. Two years after they didn't commercially broad- cast. Mr. WRIGHT. A hundred million dollars to stay off the air for the next 2 years? Mr. MACDONALD. You have invested a good deal of money and I am not going to press you about what you have already invested but I would think that would be throwing good money after perhaps bad money; I don't know. Mr. WRIGHT. May I say, Mr. Chairman, that we have absolutely no intentions of doing anything like this and I can pledge you that this is the policy we are going to operate on. I am saying to you that we will accept any kind of regulations that the Commission or this Congress wants to make that will be sure that we carry out this pledge. Mr. MACDONALD. They do have the regulations or at least they promulgated a regulation that said that after 2 years of noncom- mercial, and I don't want to belabor the point, but they did make that as a part of their order, that after 2 years of noncommercial dissemina- tion of these sports events, then it could go to subscription TV. Mr. WRIGHT. Mr. Chairman, if the baseball people announced that they were going off television and they were going to take their product away from television, they have to keep it off 2 years in order for us PAGENO="0353" 349 to get it. If they were going to keep it off, didn't say anything more about it, just take it off television, I know what would happen. The baseball people would be down here in front of this committee and the FCC and we would be down here and the question would come up, what is going on? Why is this going off the air?. I am sure that if that happened it would cause the greatest hue and cry and be the greatest black eye that subscription television and/or baseball could get. I can't imagine anybody wanting to be a part of anything like that. Mr. MACDONALD. Many industries take black eyes. You know, the oil depletion allowance is a concrete example; it gets a black eye every time Herbiock or somebody wants to portray a cartoon about taxes. But they take the black eye and also take the 27.5 depletion allowance. So, I can see where somebody who is commercially minded as ob- viously anyone who is in a business has to be, could take the black eye and then make trillions of dollars once you have locked up major league baseball, football, and for my area, at least, hockey. Mr. WRIGHT. Mr. Chairman, this assumes that this committee is off some place and has no more interest in what is going on in this field and that the FCC- Mr. MACDONALD. That won't be the case. Mr. WRIGHT. I agree it won't be the case. If they took baseball and football and these major things off tele- vision that have gotton on now this would cause the greatest outcry and you gentlemen would have sacks of mail that I am sure would overwhelm you and there would probably be a special session of the House as a result of it. Anybody that was involved in that sort of deal would, I am sure, rue the day. I know you can do something effectively about it. Mr. MACDONALD. I don't want to use more of my time than I should have but the networks don't seem to have that same attitude. They black out sports events in certain areas and the Congress has not done anything about that yet although I hope we do. Mr. WRIGHT. That is another question. I am no expert in sports. I know that George Halas of the Chicago Bears is not about to let those Bears games be telecast on free TV in Chicago. Mr. MACDONALD. Why do you keep saying free TV? It is commer- cial TV. Mr. WRIGHT. I accept your correction, sir. I wish the stenographer would amend it wherever I have said it and change it to commercial. Sure, their park is full most of these Sundays when these teams are hot. But there come years, you know, that get a little lean. Mr. MACDONALD. Not in the NFL. They sell out those parks whether lean years or fat years. Mr. WRIGHT. I don't know how it is in Washington any more; I - haven't lived here for years; but in Chicago the season tickets are inherited. They go down the line from grandfather to grandson. Mr. MACDONALD Even in Washington where the Redskins are not the best team, tickets are hard to get. Mr. WRIGHT. We have people who get special trains organized to go from Milwaukee or some place and they spend $50 a head to see those Bear games. What is wrong with putting those Bear games on at home with pay TV for a dollar if they can't get them any other way? 86-899 0-67-23 PAGENO="0354" 350 Mr. MACDONALD. That is why it js in the back of my mind that you would be willing to invest and pay them not to go on commercial TV fpr 2 years so that you would hav~e the right to have people in Boston watch the game on TV instead of in freezing weather, where it snows a lot, as in Buffalo, watch it in the comfort of their homes with their friends. Mr. WRIGHT. Mr. Chairman, I am a great free enterprise man. I really believe in the free enterprise system. I think if George Marshall or whoever owns the Redskins doesn't want to sell the home games- Mr. MACDONALD. My question is, You say you are not going to do that; is that right? Mr. WRIGHT. That is right. Mr. MACDONALD. My second and last question is that yesterday we heard a lot of talk about the charges, that you could put a quarter in the slot and watch a movie and I guess it went up to 50 cents, but the top thing about seeing a first-run movie was 50 cents. That was the talk. I am just saying that was the testimony given to us. They said put a quarter in the box, or 50 cents in the box. I was interested if you have any idea, and you don't have to answer it if you don't want to, but what are the charges contemplated for the first-run movie or a good play? You know, you can only show "My Fair Lady" onetime, if at all. Mr. BROTZMAN. If we could have him explain how this is going to work mechanically and how the billing is to be done, it would be help- ful. Mr. MACDONALD. There are three systems. He has only one. Mr. BROTZMAN. He just touched on it. If we could have that, it would help a lot, I think. Mr. WRIGHT. The program book that we showed you has the price of each of the programs that are listed in there. There is one motion picture, Wednesday matinee, for 50 cents, and the evening showing is $1.50. That is a first-run current motion picture. "In the Heat of the Night" was $1.50. "Barefoot in the Pa~rk" is 50 cents for a matinee and $1.50 for the evening show. Now, it is my recollection that the charges that have been made in Hartford for motion pictures have ranged from as little as 25 cents up to $2 top. The way the decoder works- Mr. MACDONALD. There are three systems, as I understand it, Zenith's, Skiatron, and `somebody else. Mr. PIERSON. Four, Telemeter `and Telecon. Mr. MACDONALD. Four systems? Mr. WRmirr. Right. There is a program number in the booklet, Mr. Brotzman. There is a dial here which is like an odometer. Using this dial, the customer can dial the number for this `program at the proper time. He is tuned in to channel 18. He has this switch over here turned to PV, which is phonovision. He dials this number. When he finishes dialing the number, `he shuts this cover which has in it a switch. There is a correlation circuit involved `here which, in effect, checks out everything to be sure; it has some memory `things in it and checks it out. If everything is all right and working, then a red light goes on on the front of the set. When that red light goes on, the picture clears up and he gets a clear picture and sound. PAGENO="0355" 351 This also makes a record on a billing tape which i~ inside the machine. The billing tape prints, when he uses the program, the number of the program and the price. So that, at the end of the period he can dial a certain combination, open this little gate and pull out a paper tape. The paper tape comes out and it has on it the numbers of the programs and the price. The customer can simply add them up, send in his check, or bring it in and square his account. Now, there is an audit ta:pe, a billing tape, in that that can be used in case there is dispute about whether anybody saw it. It can be checked up. Now, we have a new generation of these decoders ~rhich have been under development for several years. We would propose in our first commercial operation to go in with a new and improved version of this decoder which has a number of advantages in terms of convenience and better cost for the operator, reduce the cost of the system, and customer convenience. May I make one point that I forgot to make? This has been charged as being something for the rich. The suggestion was even made before the FCC that this would add to the riots in Detroit and Chicago be- cause it would set apart the underprivileged and the poor people from the rich people. In Hartford, more that 50 percent of our subscribers make less than $7,000 a year. Am I not correct in that, Mr. Flake? Mr. FLAKE. That is correct. Mr. WRIGHT. The biggest appeal for this service so far as we have found in Hartford is for people who have a lot of children who can't afford to send them Saturdays to movies. We have people with from 10 to 15 children who don't even have a bank account who come in with their cash at the end of the month to pay for it and say: Thank you. You know, we have 10 kids and we can all have them around here and se~e what is showing at the neighborhood movie, and all their friends, for 50 cents, and it would cost us $10 if we sent them there. This is not for people who buy Cadillacs or three-way color TV combinations. This is for the people who can't afford to spe.nd that kind of money at the box office. Mr. MACDONALD. Thank you very much. Mr. Kornegay. Mr. KORNEGAY. Thank you, Mr. Chairman. Mr. Wright, let me express my appreciation 1~o you for coming and appearing here and giving us the benefit of your views on this matter. I looked over your program, your STV magazine, for Sept~mber 30 through October 13. You put one of these out every 2 weeks I take it? Mr. WRIGHT. That is my understanding; yes, sir. Mr. KORNEGAY. It is mailed directly to your subscribers. Mr. FLAKE. That is correct. Mr. WRIGHT. By mail, yes. Mr. KORNEGAY. Is this a rather typical 2 weeks' scheduling of programs? Mr. WRIGHT. I believe it is. It depends on the motion pictures and the other things that happen to be available, that General Tire or RKO. General can secure for programing in that week. PAGENO="0356" 352 Mr. KORNEGAY. What I mean by that, the type of show is rather typical? Mr. WRIGHT. I believe we have had many other shows, the kind of shows which are not shown in this 2 weeks. We have had heavyweight championship fights. We have had some ballet. We have had some cultural programs. We have had. some off Broadway theatrical productions. We have never been able to afford to put on a Broadway show because it has been too expensive for us. Mr. KORNEGAY. I note here that this program for 2 weeks consists of 10 what appear to be movies-I am not familiar with all of them. I take it they are recent or first-run movies. Is that right? Mr. WRIGHT. I think you will find most of those are running right here in Washington at our principal theaters right now as well as in Hartford. Mr. KORNEGAY. It looks like every one of them is either for adults or mature young people. Mr. WRIGHT. Yes, sir; a great many of them are, there is no ques- tion about that. Mr. KORNEGAY. Take your book here starting with "Fathom," which is the first one. That one is for adults and mature young people. The next one is for adults and mature young people. Then "Georgy Girl" is adult entertainment. "The Hired Killer" is adult entertain- ment. The "St. Valentine's Day Massacre" is adult and mature young people. Mr. MACDONALD. And also a bomb. I have seen it. Mr. KORNEGAY. And then the next one, "The Fortune Cookie," for adults, mature young people. "Made in Italy," you have the same. And then "Arrivederci, Baby", adult entertainment. Of course, they start in the evening at 8 o'clock or 8:30. `What is the problem that is created in the home of parents who do have some concern over what their children watch when this is an hour when the average child is still up, 8 or 8:30. I am talking now about the ones under 12. Have you had any repercussion from that kind of thing from your subscribers? Mr. WEIGHT. I would have to ask Mr. Flake as to whether he has any but before I do that, Mr. Kornegay, I would like to say that in subscription you know you can control this because if papa or mama has control of this box, nobody is going to watch it until the head of the house or whoever is running that approves it. As it is now you have four or five TV sets `around the house and when Melina Mercouri and shows that are on free TV now, that are in the same category, are on `there is virtually no control. Mr. Flake. Mr. FLAKE. I have a copy of our STV magazines for the past year. It has been difficult for us on some occasions to obtain childrens programing that you would describe for children. However, I think you will find that a considerable amount of the children's type pro.- graming will be found in these magazines in that record for the past year. "Snow White and the Seven Dwarfs," "The Absent Minded Profes- sor," this type of programing that specifically we attempt to obtain. PAGENO="0357" 353 Since Walt Disney's death and the prthlem in this area of obtaining specifically children's type of programing, we have had some difficulty but we do obtain every item that is available in this area. Mr. KORNEGAY. In other words, this then is not a typical week of your programing? Mr. FLAKE. It is typical of the availability of the programing for that specific time. We normally attempt to obtain the license for a movie 2 to 3 weeks ahead of time. That is what was available to us for this~particular 2-week period. Mr. KORNEGAY. Of course, this is more your business than mine in a certain sense btit you know there is a crowd in this country that is now putting up a tremendous fight to take cigarette smoking off television. Certainly if they meet with much success in their endeavors, then the antisaloon people are going to come in and say take liquor or drinking off television. Then you are going to move from there to taking the killing off television. Finally I guess you get down to taking sex out of television. Mr. WRIGHT. You will have nothing left but commercial television. Mr. KORNEGAY. What do you have left? My point is if there is any moral to the story at all that somebody could make out a pretty good case for those who are certainly con- cerned with what is being fed into the American home. I am inclined to disagree with you somewhat over the fact that papa has complete control of that box because with the smart children we have in the homes today it would not take my boy long to work that and quicker than I could. An example of this is when they got direct dialing. I waked up one morning to find I had an enormous telephone bill. I found out he had been direct dialing his friends while he was up here in Washington. He did not realize it cost anything. They won't realize this costs any- thing. All they will do is go turn on the set and see all the shows that are in here. I just thought I would make a point of that for whatever it is worth. I guess my time is up, Mr. Chairman. Let me ask him one other question. I am glad that you corrected the record on the question of how many places in the United States would be eligible for your service because the Commission apparently doesn't know. They gave me the answer of 83 on Monday when I asked the Chairman as to how many commu- nities would qualify under their proposed Fourth Report and Order. You say now it is 29. Mr. Wiucn~. That is what I have been advised by counsel on it. Where there are already four stations in existence- Mr. KORNEGAY. Five. Mr. WRIGHT. You would have to bring a fifth one on to do this. Mr. PIERsoN. I think the difference in the figures, Mr. Kornegay, arises from this fact. Of course there must be five allocations and at the time subscription starts there must be five operating stations. The Commission said there wete 29 communities in which there were operating stations. The difference between 29 and 83 is addi- tional communities in which "there is some activity," meaning an application on file or construction permit outstanding. PAGENO="0358" 354 But just taking the market today there are only 29 that would qualify. Mr. KORNEGAY. Thank you very much. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Broyhull. Mr. BROYHILL. I have no questions, Mr. Chairman. I just wish to welcome Mr. Wright before the committee. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN DEERLIN. The question of disconnections in the Hartford experimental area occupied some space in the Commission's recent fourth report and order. The disconnects seem to affect about 40 percent of the installing operations up there. I was wondering if this had prompted any concern at Zenith and what the explanation was. Mr. WRIGHT. It has been a matter of some concern. Let me say that one of the problems that channel 18 has had in Hartford is that when we started off with this service and designed the equipment for it this was designed purely for black and white and that is all that this station has had available. That is all its trans- mittrng equipment is and that is all that these decoders are equipped to handle. Color has come along at such a tremendous pace that I think color has affected some of the operation in Hartford. Now we have designed and plan to produce in this next generation of decoders a box that doesn't really know whether it is black and white or color, it can ac- commodate either just as well. Of course, if the service were to be continued on a regular basis this is the kind of equipment that it would be. Frankly, we have had a real battle, I must say, in programing Hartford.. After all, we are dealing with a service where we only had equipment for 5,000 sub- scribers. When you go to a motion picture distributor who has a movie that he has put $20 million in and you start bargaining with him on what it is going to cost you and what you can put that on for a potential audience of only 5,000 people, you are limited somewhat. We found the same thing when we tried to deal with the theatrical producers over Broadway shows. By the time we got through with 18 unions each of whom wanted a percentage of the gross and a lot of guarantees and all, for a 5,000-subscriber thing it was just impractical to program it. We know if we had a million certainly we could get something like "My Fair Lady," or "Sound of Music" while it was on Broadway. Mr. VAN DEERLIN. Does this, in your opinion, account for the reluc- tance of certain of your potential competitors to take part in the experimental stage? Mr. WRIGHT. Mr. Van Deerlin, I really don't know what was in the mind of some of our competitors. You know, most of our competitors have always thought of this in terms of a cable system. I don't really know whether any of them have worked on and solved the problems of an air system. It is a tremendously complex thing technically to do this. No one aside from Zenith has really put on a successful, technically, airborne system that I know of. There have been cable systems. PAGENO="0359" 355 Mr. VAN OBERLIN. Does your prepared statement include a break- down of the audience by economic levels? Mr. WRIGHT. Yes, in terms of 14 percent of that audience was over the $10,000-a-year-income bracket. In this presentation to the FCC, this blue book which we have handed you it has a very full breakdown of the kind of audience. Mr. VAN DEERLIN. And I gather from those statistics that the level excluded by reason of money is only about 30 percent of the popu- lation? Mr. WRIGHT. On page 21 of the blue book it shows that we only had 1.5 percent of our subscribers in the zero to $3,999 class; 44.8 percent were in the $4,000 to $7,000; 43.3 percent were $7,000 to $10,000, and 14.4 were in the $10,000 and over. Mr. VAN DEERLIN. Do you agree with the Commission's ban on ad- vertising? Mr. WRIGHT. We suggested it. Mr. VAN DEERLIN. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Harvey. Mr. HARVEY. Thank you, Mr. Chairman. Mr. Wright, I am sorry that I missed the first part of your statement. We have a very important Republican conference taking place at the same hour that this hearing is taking place. That accounts for the fact that we have been trying to alternate here. I first of all want to associate myself with the remarks of my col- league on the other side of the aisle, Mr. Kornegay, and say that I share the words he expressed completely. I would say after looking over your STV magazine for September30 to October 13 that you have almost unsold me with regard to any feelings I had with regard to STY before that time because this is the poorest bill of fare I think that I have seen and I would hate to think that this is what STV is going to be in the future. I would even go further than that, and say that I think what the motion picture makers have been foisting on America is almost a national disgrace. If this is going to be the lot of television viewers as well, I think that this committee ought to consider very, very seriously'what we are doing. I would hate to see this magazine come into my household and I would hate to see it passed around, among my chilth~en. I would share the view that I do not control that television set, nor does my wife. These children today know how it operates and operate it very well. There is not only one TV set in the household but in the majority of households there are two or three, even four in many households. I just think that the STY industry certainly should give that great concern which apparently it has not given to date. There is another thing that bothers me and that is I notice you mention in your statement there would be no siphoning of talent. Let me ask you this: Aren't stars in the category of-I mentioned the other day Richard Burton and Elizabeth Taylor, let us take Frank Sinatra-aren't those stars themselves the ones who control whether they appear on STY or whether they appear on commercial TV? Mr. WRIGHT. Yes, sir; there is no question about that. That is the way ~t always has been a~4 I assume it will always be timt way. PAGENO="0360" 356 Mr. Harvey, most of these people appear in all three mediums, or they appear only in one; but that is a matter of personal choice to them. Mr. HARVEY. They are going to appear on the medium that offers them the greatest monetary reward, isn't that correct? Mr. WRIGHT. I would say the tendency would certainly be that way. There might be an exception of a man who absolutely doesn't like the stage or he doesn't want to be on the stage or he doesn't want to be on a weekly television show. He may just like the movies. Or another man does not like making films. He may want to be just on weekly television shows. I would not know how to answer that. Generally speaking, the big stars, the people who have been big names on free television, have always been big names in the motion picture business, they have been big names in other forms of entertainment. Mr. HARVEY. Assume you would make a reasonable penetration of the market, which I think you would, I don't think 20 percent is unreasonable at all-I have heard that figure tossed around-it would seem to me then that the big stars who already, like Frank Sinatra, make $5 million a year, would find STV to be a bonanza for them because they can hold out for even larger sums. I can see the "Ed Sullivan Show" being depleted completely of any possibility of getting stars on it in the future. Mr. WRIGHT. Mr. Harvey, it is hard to project what might happen in the future. Mr. HARVEY. I know. That is the concern of this committee. Mr. WRIGHT. The networks have an income of $3 billion in revenue and they have not been able to make deals with these people that would keep them, for instance, out of motion pictures or out of night- clubs or out of theaters. I can't imagine any reason why they would. We couldn't do it. Mr. HARVEY. I have seen on televesion the "Frank Sinatra Hour" andl have seen a couple of them that have been very, very good. I can't imagine this man doing this on commercial TV in the future when he can do it on subscription TV and realize a tremendously greater sum for it. Mr. WRIGHT. We have had top stars make special programs for us in Hartford. We have not been able to afford anybody quite like Frank Sinatra. But we have had them make special programs. It has been difficult because we had 6,000 subscribers. Mr. HARVEY. I agree with Mr. Preminger yesterday that I don't think your Hartford experience is worth a tinker's damn. I don't think it is illustrative of anything that will happen in the Nation when this particular program is adopted and permitted. I think you will see totally different results than you have seen in Hartford. I think you will see results just of the nature we are talk- ing about here. I think you are going to see a shift of people going where their service will bring the most. That is only human nature. Mr. WRIGHT. Mr. Harvey, we have found that this program will iiot~sell. People are glad to watch it on commercial TV but we have found a very small penetration in terms of people being willing to spend money for an evening with Joan Baez or someone like that. Mr. HARVEY. If you take stars like Frank Sinatra or Dean Martin, whose programs have the highest viewing audience on television, PAGENO="0361" 357 where their name on the marquee of the theater is enough to fill it up and where their name on the door of a nightclub is enough to bring people in it, when you have those sorts of people appearing only on STV it seems to me this is what you are going to find, that that is where your audiences are going to go and this is where they are going to go because it means the most to them. I think it is a fact of life we ought to consider. I am not saying we should be against STV for that reason but I am just saying it is a fact of life that we must face. Mr. WRIGHT. I can't say that it is not possible. The only thing is that we have had several different kinds of entertainment media in the past and we have them now and this has never happened. These people make motion pictures, they are in Broadway plays. They are on TV shows, Cyril Ritchard, Rex Harrison, they have been in all these media. I just don't believe that anyone would ever suggest to them or that if it were suggested to them, that they could ever sell it, saying we tie them up exclusively so that their services are only on I can't conceive of such a situation. May I say in connection with the motion pictures, this is a 5,000 to 7,000 subscriber experiment, we have to take what comes along in terms of the motion pictures that are available. We obviously don't have the bargaining power or the economic strength to really have any influence on the kind of product that is made for the motion picture theater and that is, of course, what these things were made for. Mr. HARVEY. If this is to be S'TV this is a disgrace. I would not be proud of this in the least. Mr. WRIGHT. There will be a lot of pressure exerted on the kind of entertainment that is shown in the `home and there should be. Mr. MACDONALD. I would just like to say that I think what Mr. Kornegay and Mr. Harvey have said about movies have absolutely no connection with STV. It is a condemnation of the movies that people pay to see. I am sure that you are in the `business of trying to make the most people use your services and' as Mr. Preminger said yesterday, movies never had it so good. If this is the type of movie that is being turned out I really don't see any difference between having it in the home or letting the children, who are the greatest moviegoers that I know of, go downtown to watch the movie. You know, I am. not trying to `be on the side of sin or bad movies or anything `but I don't think it is your fault. Mr. WRIGHT. We turned down two of the top 35 pictures of last year because they were too blue. In other words, channel 18 decided, in exercising their public responsibility as a `broadcaster, and they have that responsibility, that even though these pictures were available and the top 35 pictures were the ones that grossed more than $4 million, we showed 28 of them in Hartford, two of them. we're turned down as too blue; in other words, they were not the kind that channel 18 wanted to show at home. Five of them we couldn't get bec~iuse they were hard ticket things that were going around on a reserve seat basis `and we could not possibly get them. PAGENO="0362" 358 Mr. KORNEGAY. Mr. Chairman, let me comment on that briefly. I was not being personally critical of Mr. Wright or his associates but in connection with the movie business, that is right. It is a question of fact that they `have no other choice. I am no expert in this business but I think there are enough people in America to make a good high class, high level, inspirational, clean movie to go over if it is done and done well. But you just don't get that choice. Mr. BROWN. Walt Disney made a fortune out of that but not everybody goes to see Walt Disney movies. Mr. MACDONALD. If you will look at the STV magazine for the week before you will see that they did show over STV "Snow White and the Seven Dwarfs." You can't get that every week obviously. Mr. VAN DEERLIN. I note they took "Virginia Woolf." I am curious to know which of the two they rejected. Mr. WRIGHT. Mr. Flake, can you answer that question? Mr. FLAKE. One was ~"Beach Party Bingo" and another such type of movie that had considerable nudity. Of the 35 movies that grossed over $4 million last year, only seven were not shown in Hartford. The two that we turned down specifically were because there was too much nudity. We had considerable thought with regard to "Virginia Woolf." On the other hand we had considerable numbers of our subscribers who asked specifically if we were going to have "Virginia Woolf." Finally we decided that we would, when it came and was released from Warner Brothers, show "Virginia Woolf." We showed it at a time slot wherthy we had the greatest hope that no children would see it, at a 10 or 10:30 time slot in the evening. We do this for `the most part in every movie where this type of thing does occur. In our business we cannot censor. We do not cut the movie in `any way. We show it exactly as it is released to us by the distributor. As a result we are on occasion given an opportunity to show this type of movie. On the other hand, with the Walt Disney, the productions of "The Absent Minded Professor," this type of thing that we showed for children, we tried to show it as frequently as we could. During Christmas and Easter vacations we attempt to obtain every possible children's product that we can for a matinee in the afternoon. As a result, we were very successful and I think if you would take a look at our book for the Christmas period-last year during Christ~ mas vacation-you will find that this matinee was one thing that we did do for the children. We subscribed to the theory that we should very carefully point out to parents that these movies are for adults or for adults and mature young people. When we say family entertainment, that is the only time that they should allow the children to see these movies. We are very careful in this respect. Mr. MACDONALD. The time of the gentleman has expired. I yield to the gentleman `from Pennsylvania. Mr. R00NEY. I feel badly with all due respects to my colleagues, Mr. Kornegay and Jim over there; I have seen most of those movies. I thought they were quite clever. Mr. HARVEY. How old are your children? PAGENO="0363" 359' Mr. RO0NEY. That is the one I worry about because he gets that dial and calls Seattle or San Francisco and he is only 2 years old. Mr. MACDONALD. Will you yield? I mean this very much. I have never seen cruder, worse things in any movie theater than I have seen, say, on the Ed Sullivan Show. I hope the laws of libel cover committee hearings as well as on the floor. I have seen some acts that he has put on his show that were just as crude and rude as anything could be. I feel like telling my children to leave the room. Therefore, I don't see why STV is any worse than commercial TV in this respect. I yield back. Mr. ROONEY. I just want to get to the mechanics again. Do you lease this set to the home or is it like the Bell Telephone System, you provide it and they pay as they use it or how is it done? Mr. WRIGHT. We made these boxes and supplied them to RKO Tele-Radio. They install them in the customer's set. The customer does not buy them. They charge him an installation fee I believe for it. Mr. R00NEY. How much? Mr. WRIGHT. The installation `fee was $10. Now this is a fairly com- plicated installation with this particular decoder. Our new decoder is an antenna lead thing clipped on the back of the set. The installation is no problem at all. You have a problem on this. You hate to tie up an expensive piece of equipment with somebody who is not using it at all. This is just ridiculous. There was a 75 cents a week rental charge I believe. This is something `that RKO decided. Now they varied that from time to time. This is an experimental thing. They would give credits to a customer `for his rental if he viewed a certain number of shows. I think this has varied from time to time. I don't have in mind all the details. But if he just had it in his home and didn't use it I believe the rental was 75 cents a week for the most part. Mr. ROONEY. What does the annual subscriber pay? Of the 5,000 subscribers in Hartford what is the average monthly billing approx- imately? We often hear this is so exorbitant and the American family cannot afford it. Mr. WRIGHT. $8.50 per month is the average. This is right around $100 a year altogether. That includes everything. Mr. ROONEY. That is about 50 percent more than the CATV sub- scribers would pay. Mr. WRIGHT. Yes. I guess their `charges would run anywhere from $3 to$5 or $6. Mr. ROONEY. I yield to my colleague from Ohio. He wants to ask a question. Mr. BROWN. My comment referred to something said earlier. Apparently strong language is stronger than the skin in Hartford. Mr. VAN DEERLIN. It means it doesn't matter what you have to say if you say it over a high neckline. * Mr. MACDONALD. The time of the gentleman has expired. Mr. Brown. Mr. BROWN. I am surprised that somebody has not `suggested that the children will have to have money to watch TV and, therefore, this PAGENO="0364" 360 could encourage child labor because the children would want to have more money to watch television. Is it possible under the system that commercial television stations that are on the air now in markets where it would be permitted could have pay TV programs? Mr. WRIGHT. Yes, sir. In other words, it is technically possible, Mr. Brown, that if we had this set in Chicago and CBS which owns "My Fair Lady" wanted to put "My Fair Lady" on subscription TV we could process that signal out of a CBS system. Of course, under the Commission rules that they have laid down, only one station can operate on a subscription service but it is tech- nically possible- Mr. BROWN. I don't know the name of the stations in New York but WNBC is an NBC affiliate in New York. Could NBC buy this system and use their present commercial station in New York to have pay TV programs part of the time? Technically now. Mr. WRIGHT. Technically it would be possible that everybody in the New York market could be equipped with this kind of box on their set. Technically now any station in the market could have its signal processed so that it could then be decoded by this box and a billing made for that program for that subscriber. Mr. BROWN. From this program schedule regardless of the sexy pictures in it, do I ~et the impression that a good part of the time you broadcast free television? Mr. WRIGHT. Commercial television, that is exactly right. Adver- tiser-sponsored things that are just the same sort of thing you find on the other stations in the Hartford market. Mr. BROWN. At 8 o'clock at night in the so-called prime time is when you go to a subscription television? Mr. Wiaowr. Yes. Mr. BROWN. And you are not selling commercial advertising? Mr. WRIGHT. That is right, sir. Mr. BROWN. With the financial resources available to the networks and the large television stations, the large broadcasters in the country, is there anything to prevent the networks or the large broadcasters from jumping into this if it is permitted so that they are the ones that go off the so-called commercial television into subscription television and the newer stations that come on take up the commercial market in those areas? Mr. WRIGHT. Mr. Brown, I have heard witnesses from ABC and from CBS and from NBC at various times in this controversy one just as recently as last week, that was a representative from ABd, say if this thing were approved it was going to take over all of free TV and make people pay for what they were getting free and if the sys- tem were approved that they, the networks, were going to get in it and presumably operate it in that fashion. We are not going, as far as Zenith is concerned, to license anybody to use our system if we can possibly help it, that has any ambitions to do this sort of thing. We are perfectly willing to accept a rule if the networks are the ones that say that this is the way they could operate it if they got in it, then that would bar them from this service. Mr. BROWN. Bar the networks? Mr. WRIGHT. Yes, sir. PAGENO="0365" 361 Mr. BROWN. Let me ask you about the financial needs of this sys- tem. What would it cost to convert a television station already on the air in Dayton, Ohio, to an STV type system? Mr. WRIGHT. We have some figures that have been given in the data on Hartford. We think that a UHF station operating like chan- nel 18 with part commercial television and the rest subscription, can be a profitable, going venture with 20,000 subscribers in the market. Mr. BROWN. The financial answer. How much does it take? Mr. WRIGHT. Twenty thousand subscribers-we are talking here about a possible investment of as much as $125 to $150 a subscriber, 20,000 subscribers, you are talking about $2 to $3 million. Mr. BROWN. You get that back from your subscribers? Mr. WRIGHT. Presumably over a period of years. One of the prin- cipal costs of it is your equipment cost and depreciation. Mr. BROWN. $2 to $3 million to get 20,000 subscribers, is it? Mr. WRIGHT. $2,711,500 is the projection we made on page 30 of this blue book. The cost of the decoders and the encoding equipment is a large part of that capital cost, yes, sir. Mr. BROWN. This is not going to be something that anybody goes into unless they have a little money behind them? It will have to be a fairly sizable investment, with a market survey and that sort of thing, to see if it is going to work, is the right? Mr. WRIGHT. And it is going to take time. If we got an authoriza- tion tomorrow we could not have a system of 20,000 to 30,000, say, in a city like Chicago in less than 2 or 21/3 years at the very earliest. This is not something that someone presses a button and all of a sudden some monster is full grown. Mr. BROWN. If this committee would decide, for instance, either to remain silent on this subject, which apparently would mean from the testimony we have heard from FCC that the FCC would go ahead and permit the expansion beyond Hartford of this system, or if the com- mittee would consciously say we will let you go ahead and develop this a little further and see what we think of it as it begins to move, what are we talking about in terms of time before the top 25 markets in the country have STV stations on the air if they found that there was a demand for it, which is another debatable area apparently. Mr. WRIGHT. I would say we would not be beyond the first five or six markets within 5 years and that to be in 25 markets with a sub- stantial subscriber penetration would take 10 years. Mr. BROWN. So we are not exactly talking about destroying free television over night if this thing is allowed to move? Mr. WRIGHT. We are certainly not, sir. We are certainly not. Mr. BROWN. Under the FCC regulation, you know, you read these things and they are subject to interpretation and I was surprised when the Chairman advised me it is five existing signals rather than four, but do I understand then that the FCC is saying that they can only have one STV station in a community? Mr. WRIGHT. That is correct. Mr. BROWN. Is it possible that if you were an STV subscriber and you had two or three station sources from which to get competing STV productions that you would be able to take a choice of those three selections so that if you did not want to watch Raquel Welch but* wanted to watch "Lassie" instead, that you could have that choice on STy? PAGENO="0366" 362 Mr. WIuGHT. Yes, you could certainly have that choice but I can't imagine that choice becoming available to you for at least 10 years be- cause that would mean that this service would have to become so well established and so popular that the Commission would then grant ap- plications by other stations than the first one they had permitted to come in' and broadcast on this medium. Mr. BROWN. It would not be available at all I gather under the present FCC proposal. Mr. WRIGHT. It would not be available at all. It would only be available if the FCC, after looking at this thing and having all the facts, would decide it was in the public interest to have a second sta- tion also operating. Mr. BROWN. You know, we are supposed to be trying to encourage the development of UHF stations so as to give the viewers in the country a wider number of opportunities to watch a choice of tele- vision programs. I gather this is one of the things that has sort of made cable television have some good points, that some people can get television signals, a variety of television signals that they otherwise might not be able to get or only one or two. Is it your anticipation and could you back it up, depending on what your view is, that if STV were permitted existing on-the-air station that made a lot of money in the commercia' market would be the first to go into it? Or, would UHF stations where, as Mr. Pierson says, there is some activity but they are not on the air yet, be the ones that would likely go into this? In other words, are we going to actually encourage more stations on the air or are we going to have commercial stations go into STV? Mr. WRIGHT. The only possible stations that can be in STV in the next 5 to 10 years, the w~y I see it, are either UHF- Mr. BROWN. Economically? Mr. WRIGHT. The way I see it economically and in the light of the Commission's order, both-are UHF stations in the large markets where those stations are either losing money or where they have maybe a construction permit and they are sitting on the edge of the chair wondering whether they should take the gamble and try to put this station on the air, knowing that it was going to lose a lot of money. Now you could not go to the fourth VHF station in the city of Chi- cago, WGN, which is an independentr-WGN makes so much money that for them to take on a subscription television service and to make as much money out of it as they do out of commercial broadcasting, we would have to have 500,000 subscribers in the city of Chicago. Mr. BROWN. The reason for this, though, is the advertising rates they are now charging on their stations. Mr. WRIGHT. It is so profitable to them. Mr. BROWN. They make more profit out of that than they would out of subscribers. Mr. WRIGHT. Right. Mr. BROWN. I gather what you are saying is that the people who would go into this business are UHF stations not now on the air be- cause they are afraid they cannot make it in the market selling their service for the advertising dollar? Mr. WRIGHT. You are absolutely right. We have allocated 634 com- mercial UHF stations and there are 122 of them on the air. A lot of PAGENO="0367" 363 them are marginal and losing money. I doubt that if we don't have sub- scription that many of those 122 will be able to survive. Mr. BROWN. One other point. I realize I am a little over my time but if there are four stations now on the air and a fifth station comes on and is an STV station, to what extent will he be competing for the advertising dollar in that viewing area? He won't be competing in prime time apparently for the advertising dollar. Mr. WRIGHT. No. He has to have a minimum of 28 hours a week that he puts on regular commercials and he will be competing then. Our experience in Hartford indicates that the subscription audience is a very small part of the total TV viewing time in that market and that it does not really take away a large chunk of the viewing time from the existing services. Mr. BROWN. Thank you. Mr. MACDONALD. Mr. Ottinger. Mr. OTTINGER. Thank you, Mr. Chairman. I am relatively sympathetic to the idea of permitting the pay TV system to go ahead and I think it is something that is going to come in the future and it has very exciting possibilities. However, I do have some reservations and feel there must be some controls to prevent abuses. Along with our chairman I am a real sports enthusiast. I share some of his concern about some of the practices that might take place whereby subscription TV might preempt sporting events. I don't buy for a minute your assertions of purity of heart with respect to preempting sporting events. I thought they were pretty shallow particularly in view of the fact of your association with RKO that in point of fact has been buying up sports events, particu- larly boxing championship fights, and excluding general television coverage of those events and putting them in effect on what is the existing pay TV system, in RKO-owned theaters. I understand, however, that the fight promoters rather than RKO are primarily responsible for the exclusivity of the arrangement. On March 22, a specific event came to our attention very dramat- ically where RKO, owning a proprietary interest in the Madison Square Garden, bought the Clay-Foley fight and preempted tele- vision of that fight in the towns of the origin of the two principal contenders. Why should we be at all sanguine that your associates, if not you personally, are not going to `do the same kind of thing with sports promoters on this pay TV medium? Are you going to outbid others on the sporting events or buy them up for 2 years as the chairman suggested and then exclude the public who would want to view the events on commercial television access to these events? And indeed you could go beyond sporting events and do the same kind of thing with other major large attraction event. Isn't this the' kind of thing that should be protected against by regulation? Mr. WRIGHT. There were several questions there and the answer to the last question is Yes, I think that the FCC and this Congress both have the power to control this medium and to see that it operates in the public interest. PAGENO="0368" 364 I think you certainly have the power to see to it that we don't do these things that you state. Mr. OTrINGER. But you haven't. Mr. WRIGHT. I don't know about the specific matter to which you refer on the Clay fight. Maybe Mr. Flake can enlighten us on that. Mr. FIAKR. I will be glad to. Mr. WRIGHT. Generally speaking, the only thing we have put on in Hartford in the way of sports are things that would not have been on otherwise on free television. I am aware of no instance where REO has taken something away from free television that would otherwise have been on it. Mr. OTTINGER. You show on your programing here on page 19 of this blue book that 7.31 percent of your programing in Hartford was championship boxing. Were those fights that you broadcast up there preempted from commercial television in that market? Mr. WRIGHT. Yes. My understanding is that they were not on com- mercial television anywhere because the promoters of the fights had put them on theater television and were charging people $5 a seat to go into a motion picture theater to see this on television. Apparently they felt they could get more revenue from the theaters this way than they could get from advertising television. So they elected to put it on that way. We had nothing, however, to do with that decision. Mr. OTTINGER. I don't care whether you had anything to do with it or not; if the end result is that the general public is excluded from these events it is a bad thing. You are saying you have nothing to do with it, your hands are clean. That does not help very much if your associates' hands aren't. Mr. WRIGHT. If you are suggesting really that the public has some right to see anything on free television regardless of whether the owner of that property wants to exclude it from television or not, you are suggesting something that goes pretty far under the present system. Mr. MACDONALD. Will the gentleman yield? Mr. OTTINGER. Yes. Mr. MACDONALD. Obviously you are overlooking the fact that the people who have the licenses to broadcast are only given these licenses by the Government at a very nominal sum in the interest of the public. Therefore, when you say the public does not have any right it is the broadcasters who don't have any right actually because they are operating under the regulations and the gift of the U.S. Government. Mr. WRIGHT. I agree. Mr. MACDONALD. Then your answer to Mr. Ottinger is absolutely incorrect. Mr. WRIGHT. What I am saying now is that your analogy about a particular heavyweight fight-let us go on now and look at My Fair Lady, which is a Broadway show. This is one of the greatest enter- taimnent events ever. CBS owned that show. Did it ever get on the CBS network? Of course, it did not get on the CBS network. They sold the right to make a motion picture out of it after a long Broadway and road show thing to Warner Bros. for $4.5 million. It is a great motion picture. That motion picture is not going to be on free television for 10 years: That is preempted from television. It is preempted by the eco- nomics of it. PAGENO="0369" 365 If you are suggesting that people who produce box office enter- tainment should be required to supply it to the networks under any circumstances, that just is- Mr. OTTINGER. I think there are serious questions of public policy. But there is no question in my mind when it comes to the airways, having a concern about blocking out certain areas for commercial pur- poses, it Seems to me that is an undesirable practice as was the case of this Clay-Foley fight. I believe that any agreement which excludes a public attraction from being shown on certain media or blocks out certain geographical areas is in restraint of trade and should be prohibited. Mr. WRIGHT. Mr. Ottinger, the only uses I know of of the airways that are purely public are perhaps educational television and Govern- ment service. Every other use of the airways that I can think of is purely commercial by people who are using `them to make a profit. When we talk about so-called free television it is a very profitable business. Mr. OTTINGER. I have no dispute whatever that what you say is so. I think Mr. Preminger made that point very dramatically yesterday. Still, the public does have an overriding interest in the use of the airways themselves. In the assertion of that public interest the Federal Government does exercise regulation by the FCC over the use of the airways, and I think it is a misuse of the airways to engage in the kind of blacking out that has taken place with. respect to sporting events. Mr. WRIGHT. Mr. Ottinger, I could not agree with you any more that the public has a tremendous interest in seeing these things. This is one of the purposes that we have had. Here is a way to bring these things that they otherwise would not get. Now they say, our opponents say, you can't let the public have it this way because you can't control this thing. Once you set this thing up it will become a monster that will eat everything up. I think that is specious reasoning. I think this `Congress and this Commission can stop it. Mr. OTTINGER. I think it is specious, too. I think it is eçiually specious for you to sit here piously and say under the regulation of *the FCC with respect to sporting events that you are not going, if you are capable financially, to preempt the market. If you can put ABC and NBC out of business I think you will. I think that is part of the system. I do think there is an important public interest in seeing to it that the commercial television will be able `to exist side by side with pay television, to give the public a maximum of choice. Pay TV will have to be regulated In my view, restrictive practices of the kind that RKO and sports promoters have practiced should be prohibited. This is particularly dramatic in the kind of case where the dis- tributor also owns the ampitheater, or owns the sporting team, the production of a play or wha'tever it may be, then you have a conflict of interest which can operate very detrimentally to the public. Mr. BROWN. I am not sure where this line is going but I don't remember seeing the `Clay-Liston fight on free `TV and I think the reason was brough't out by what Mr. Preminger or somebody said yesterday, that is, that the `theaters outbid whoever sponsored it on free television for the right to show it at the same time in those theaters. 86-399 O-67----24 PAGENO="0370" 366 This is a commercial thing. This is the whole point of what Mr. Preminger was talking about yesterday. If you can get $2 or $3 million or several million dollars out of subscribers to pay TV to buy "My Fair Lady" from CBS and outbid the movies, then CBS will sell it, otherwise you might be able to find some sponsor that would buy "My Fair Lady" for a substantial price, put it on free TV but that kills the movie's interest in it, does it not? Mr. OTnr~or~u. The situation I cited was somewhat different. It was the Clay-Foley fight that was seen on so-called free TV all over the country but it was blacked out in markets where it was felt more money could be made by selling only to the audience. Mr. BROWN. I gather it was seen on free TV because some sponsor was willing to pay the price to give it free, to make it a vehicle for their sponsored product, a price higher than anybody else was willing to pay for it through the theaters, or withheld for some other purpose. Mr. MACDONALD. To wrap this up, I think Mr. Brotzman yester- day, and who couldn't be here for the reasons he expressed earlier, because of the meeting of his party, asked about the success of other experiments, not just your own. I interrupted him at that time. He was asking Mr. Dingell who was a member of our full committee. I though Mr. Dingell did not have the information and I thought perhaps you would since your com- pany has very adventurously put this amount of money into this par- ticular experiment. Do you have any knowledge of how the other experiments succeeded? Mr. WiuGHT. I really don't have any inside knowledge, anything other than what I have read in the trade press and have heard about these operations, at Bartlesville, in Etobicoke in Canada and, I be- lieve, on the west coast. Mr. Pierson tells me that Telemeter made a complete statement of this on what Etobicoke thing showed and these other things which were filed with the Commission. We will be glad to supply it to you and it will give it to you in some detail. (The document referred to follows:) EXCERPTS FROM STATEMENT OF INTERNATIONAL TELEMETER CORP. IN SUPPORT OF RULEMAKING PETITION FOR AUTHORIZATION OF NATIONWIDE SunsciurTIoN TELE- VISION, FILED WITH THE FCC IN DOCKET No. 11279, MAy 25, 1965, SETTING FORTH FACTS CONCERNING THE Th~OBIOOKE (OANADA) EXPERIMENT * * * * * * * By achieving the technical capability of simultaneously transmitting multiple- programs through a single channel of the conventional television receiver Telemeter was able to add a new dimension to the techniques of closed-circuit transmission, thus opening unlimited opportunities for catering to the varied tastes of subscribers to a THEATRE IN THE HOME service. Furthermore developments in airlink transmission experiments had kept pace with the closed-circuit research and a single-channel broadcast-type Telemeter unit was achieved embodying patentable innovations for the security of uneoded trausmieslon. These, too, conform with the standards of good engineering prac- tice prescribed by the Commission. As a result, Telemeter moved in both directions. To ascertain the validity of successful laboratory experiments in its airlink system, Telemeter applied to the Federal Comunications Commission for an experimental station first In the VHF and later in the UHF band in order to test its broadcast system in Los Angeles, California. These applications were granted in 1961 (KM2XMR, Chan- nel 5) and 1962 (KM2XOG, Channel 83), respectively. PAGENO="0371" Telemeter's airlink system is the only one publicly demonstrated to date which requires no modifications whatever to existing TV receivers-no Internal con- nections. It also can receive color as well as monochrome signals. Its decoding equipment attaches externally to the antepna terminals of the television set No internal changes in the customer's set are necessary with Telemeter either in the cable system or the over-theair system, and all connections are made- at the antenna terminal of the sets. 2. Etobicoke Ewperiment In May, 1959, Telemeter entered into a franchise arrangement with Famous Players Canadian Corporation Ltd., owners and operators of a chain of motion picture theatres in the Dominion of Canada. A. municipality in Metropolitan Toronto, Ontario-the community of Etobi- coke-was selected by Famous Players as the site for its initial installation of Telemeter equipment. It contracted with the Canadian Bell Telephone Com- pany, an affiliate of the American Telephone & Telegraph Company, for con- struction of a cable system in that locality. An operating company-Trans Canada Telemeter-was created by Famous Players to build and operate the service. Since the franchise granted was the first to utilize the techniques and equipment developed by Telemeter, a coopera- tive relationship was established between Paramount Pictures Corporation and Famous Players, through Telemeter and Trans Canada Telemeter, to jointly participate in the first field test of the system. Accordingly, Telemeter actively engaged in all phases of system planning, system construction, development of programming concepts and in the estab- lishment of certain criteria deemed essential to assay properly the results of this pioneering effort into a new and untried form of visual communication Of prime consideration were (1) the technical capability and efficacy of the devices invented by Telemeter when subjected to rigid testing in the field; (2) an appraisal of the economic feasibility of operating a cable system supported solely through income of closed-circuit subscription television; and (3), of transcedent importance, a determination of the public's willingness to accept the principle of paying for entertainment in the home. In selecting an area for experimentation with subscription television, it was easily possible to make a choice where a majority of families are so interested in paying for selective entertainment in the home as to vitiate any conclusions. It was decided, instead, to choose an area where the odds against success were higher than the average community. Etobico'ke fitted the concept because: (a)~ Etobicoke is a residential community situated less than 10 miles from the center of Metropolitan Toronto with a moderate density of homes. (b) It is located In an area with a 9~% saturation of TV homes, but, unlike most communities In the U.S. and Canada, has access to six commercial tele- vision stations; three stations in Buffa'lo~ N.Y., offering programs of all three U.S. networks, plus three TV stations in Toronto and Hamilton, Out., includ- ing a key outlet on the network of the Canadian Broadcasting system This represents a choice of channels as great as the principal markets of the United States, New York and Los Angeles. It confronted the cable system with a competitive factor possibly higher than 6 to 1, since in addition to all the entertainment values arising from the programs of the three U.S. net- works, there existed the attraction of the Canadian-oriented OBC network and also Canadian independent commercial stations. In planning the cable system, Trans Canada Telemeter blocked out a section of 12,000 homes, embracing families in various Income levels, mostly of Scottish lineage. This ethnically homogenous populace of conservative fiscal habits is inward looking and less responsive to contemporary developments than the bulk of the other urban dwellers. Later the system was expanded to include an addi- tional 2,000 families in a contiguous area embodying some other ethnic groups. Average density of homes in Etobicoke is about 140 to the cable mile. Canadian Bell Telephone Company began construction of the cable system in the summer of 1959 which was to cover the initial 12,000 dwellings. This required 93 miles of grid, erected at a cost to Famous Players of $2,250 per mile, Including Installation of special high level amplifiers designed by the research laboratories ~f Telemeter especially for its cable systems. Under the arrangements between Famous `Players and Canadian Bell, the roie of the Telephone Company ceased with completion of the grid and installation and testing of the amplifiers. Drop-offs from the cable distribution system to PAGENO="0372" 368 homes of subscribers, installation of Telemeter units and maintenance of the amplifiers remained in the hand of Trans Canada Telemeter. Furthermore, Trans Canada Telemeter paid to Canadian Bell a monthly lease charge for the cable. Initially, the T~lephone Company fixed a charge of $25 per mile per month. However, within seven months `of completion of the cable system, Canadian Bell reduced its least charge to $10.56 per mile per month. The initial 93 miles of grid was completed by April 1960 Eighteen months later an additional 15 miles of cable were strung t'o reach 2,000 homes in an area immediately adjacent to Eto'bicoke. This brought the total number of homes within the range of Telemeter programs to 14,000. A studio site and operational quarters were selected at the center of Etobicoke's business area. The corner of Bloor Street and Royal York Road, geographically speaking, is also the direct center of Etobicoke's residential areas. A. one-story structure housed facilities for a film studio, "live" studio, control room, tape equipment, color tranamiter, sales department, collection department, servicing department and offices. On February 26, 1960, Trans `Canada Telemeter inaugurated its service to sub- scribers. Experience gained in all facets of closed-circuit, multi-channel trans- mission, over a period of five years o'f continuous, uninterrupted daily service, provides a valid, ample and proved basis upon which to project the pattern for the introduction and successful operation of Telemeter systems in the United States, Canada and abroad. These projections will be summarized below. As explained above, the Etobicoke market is unique in that extreme com- petitive forces in operation would put a subscription TV system at the maximum disadvantage. In fact, Telemeter altered its original sample after its' Initial studies by inaugurating an installation and annual service fee in addition to the per-program charge and by expanding into a less homogenous ethnic area. After the years of experience in and about Etobicoke, Telemeter has been able to come to certain meaningful conclusions concerning the technical efficacy of the system and concerning subscriber interest. It was felt that Telemeter had gathered practically all the significant data that the experiment could yield in light of the self-imposed limitation's. Therefore, it was decided to discontinue the Etobi- coke experiment as of April30, 1965. `With the notice of termination of Telemeter service, subscribers were sent a questionnaire asking for an expression of opinion on the types of programs they had enjoyed most, any other comments they might care to make, and whether they would like to see Telemeter return to the Toronto area. To date, over 20% of the_subscribers have responded and 96.9% of them expressed regret at the termination of service and urged Its early return. (See Appendix "A" for detail's.)' Based on its conclusions that `Telemeter `has a marketable system whose com- mercial operations on a regular basis would be feasible, Telemeter is now nego- tiating with a potential franchise holder in Montreal, Canada, for the establish- ment of a regular commercial cable subscription TV operation in that city. Arrangements have been made for similar franchises in the United States in Atlanta, Georgia; Miami, Florida; Dallas and Houston, Texas. B. REPORT ON EPOBICOKB 1. Audience Acceptance antI support (a) Pretinv(oiari, Publ~io Survey To determine the degree `of acceptance and support which subscription television is able to obtain `from `members `of the public in a position to make a free choice, the groundwork for Telemeter's studies was initiated by a survey conducted by Canadian Facts, `Ltd. in June, 1959. In that survey 400 Etobicoke families selected at random were asked about: 1. ExIsting TV viewing habits 2. Types of TV programs preferred 3. Awareness of prices paid for various forms of entertainment available in and around Toronto 4. Awareness of Telemeter and degree of interest in it 5. Willingness to pay for entertainment at `home and to what extent This initial servey revealed the following: (a) Nine of ten homes' were TV equipped (b) Fifty-one percent of the males and 29 percent of the females inter- viewed indicated an awareness of `Telemeter, although there had been little concentrated promotion up to that time PAGENO="0373" 369 (a) Forty-three percent of the respondents expressed interest in Telem- eter service (d) Seven of ten said they would pay $1.00 for current motion pictures in their homes (e) Two of three would pay $1.50 for a New York originated j~lay (f) Seven of ten would pay $1.00 for a musical from the Royal Alexandria Palace Theatre in Toronto (5) Audience Acceptance The actual field experiment which followed the survey passed through two stages of audience development before it settled into a pattern of stability from which meaningful results could be drawn. Initially, a promotional approach was adopted In achieving mass circulation in the shortest possible time. Service was offered to all corners at random at $5.00 per cable drop-off, including installation of the Telemeter unit and no service charge thereafter. Novelty, curiosity and a degree of over-zealous salesmanship brought a multitude of orders. About 5,500 subscribers were enrolled in lens than a year. When the novelty receded and curiosity gave way to casualness, it became evident that mass circulation for the sake of numbers bred indifference among a segment of subscribers who lacked genuine interest in this form of specialized service. In sum they became "sometime spenders." A second and more reasoned approach was initiated 18 months after the cable system was launched, when cable service was extended to a contiguous area-the community of Mimico-and 2,000 additional families were brought within reach of the Telemeter grid. An installation fee of $15 was requested of Mimico subscribers plus a com- niitment to pay $15 per annum thereafter as a service charge. Studies were launched to compare the response of the Mimico audience with that of the Etobicoke group and evidence mounted after due allowance for an extended period of novelty, that the new subscribers with a greater equity in equipment installed in their homes-plus the obligation of an annual service charge-were making more frequent use of Telemeter than those bound by no financial obligation. Thereupon, steps were `taken `to equalize both groups of subscribers. The $15 annual service charge was appended to contracts `of subscribers in Etobicoke- with a 90-day notice of change. The expected `defections followed among sub- scri'bers who had shown indifference to the `service. Telemeter's 2,500 families in Etobic'oke and Mimico, linked to the cable system, represen'ted a realistic audience of interested subscribers whose viewing habits and progran~ desires were carefully screened and respected. Their fre- quency of usage-selee~ive with programming offered-was far more `stable than during Initial stages of the Etobicoke experiment, a portent of what might be expected in terms of interest and average spending when subscription tele- vision service is expanded to `encompass vast numbers of homes and subscribers. In its five years of uninterrupted service, Telemeter luza establ48hecl, beyond question, that there is a large audience willing to pay for entertainment in the home on a continuing basis and, thus, has demonstrated that the TunArim Ix Tiiz HOME performs a service to members of the public who are unable, or find it inconvenient, to avail themselves of facilities away from home. Prime pillars of programming were motion pictures and "blacked out" `sports. The extent of subscriber interest in them was evident in a later `survey con- ducted for Trans Canada Telemeter by `Oanadian Facts Ltd. In response to a question among 400 subscribers' families as to the "best things about Telemeter," the poll showed: Percent (1) Good movies, current movies (64% men-70% women) 67 (2) Sports events (&~% men-27% women) 32 (3) No commercials (24% men-22% women) 28 (4) Being able `to see current movies at home; no baby sitters (9% men-10% women) (5) See good dramas; new plays (15% inen-13% women) 14 (6) Educational programs (8% men-13% women) - PAGENO="0374" 370 Audience penetration studies, based on taped information recorded in Tele- meter units confirm these findings. They show the following: 1. `ChoIce of film entertainment by Telemeter's Theatre In The Home audience parallels that of the regular theatergoer. Feature films that develop `box-o~ce resistance at conventional theatres or drive-ins invariably achieve low penetrations among Telemeter subscribers despite the convenience of being able to buy such attractions at home for a single family admission charge. 2. "Blacked-out" sports events with high topical interest attain excep- tional penetrations among home viewers. Conversely, sports attractions: with contenders whose fortunes may lag temporarily, win fewer pay TV devotees than teams, or contestants, with winning ways A striking example of parallel attitudes among Home Theatre subscribers and audiences patronizing theatres in their preference of identical entertain- ment may be found In figures published in Variety, the theatrical weekly, In January, 1962. At that time the trade publication estimated the anticipated total film rentals of highest grossing motion pictures released in 1961. The top five films shown on Variety's chart matched in exact categorical order the highest audience penelrations achieved that year among Telemeter subscribers: Picture Anticipated rentals estimated by variety Telemeter audience penetration (percent) Absent Minded Professor The ParentTrap Swiss Family Robinson World of Suzie Wong 101 Dalmatians $9, 300,000 9,100,000 7,900,000 7,300,000 6,400,000 42 35 32 28 22 ` Audience responsiveness to feature motion pictures `on Telemeter, It has been found, Is not related to the price of admission. A 25% increase In price for mo- tion pictures of high critical merit, has proved to be no deterrent. Most features on Telemeter were shown at $1.00 per subscriber family. About 25 percent of the total had been scaled at $1.25. Herewith Is a comparison of audience penetrations for motion pictures scaled at $1.25 and $1.00: $1.25 Admission $1.00 Admission Percent of Percent of audience audience penetration penetration Gy 10 GIgi 52 Whatever Happened to Baby Jane- 20 Ten Commandments 42 The Great Escape 26 The Interns 23 Hud 16 Mr. Hobbs Takes a Vacation 16 Days of Wine and Roses. 15 Period of Adjustment 14 Bye Bye Birdie 15 Barabbas 14 Come Blow Your Horn 14 Son of Flubber 26 The VIP's 25 New Kind of Love 12 Love With a Proper Stranger 15 Fun in Acapulco 20 - Sword and The Stone 17 Misadventures of Merlin Jones---- 16 Over a period of nearly five years, the away-from-home games of the Toronto Maple Leafs had achieved an astonishing average audience penetration of 27 percent-ranging from a high of 51% for one game to a minimum of not less than 17%. Here, again, fluctuations in price of admission bad no bearing `on the sub- scriber audience's willingness to purchase the events. During the 1960-61 hockey season, games were offered at $1.00 per subscriber home. Admission was increased to $1.25 the following year and thence scaled to $1.50. Audience penetrations re- mained uniformly the same. The nine professional football games of the Toronto Argonauts televised to subscribers In 1961 were scaled at $2.00 per home-and cumulatively averaged PAGENO="0375" 371 about 23% penetration. "Blacked-out" sports, it is clear are destined to be a bulwark in scheduling entertainment for the Home Theatre audience. Special Telemeter productions, integrated with motion picture fare and sports, achieved a high overall audience response. An example of this mixture of pro- grams with a diversity of viewer interest was demonstrated the week of April 2 to 8, 1901 when the stage musical, "Show Girl" was "piped" live from New York to Etobicoke and offered subscribers at $1.50 per home. Playing concurrently on Telemeter's two other Home Theatre channels were the then current motion pictures "Butterfield 8" starring Elizabeth Taylor and a popular British film "Doctor in Love," each scaled at $1.00 per subscriber home. The three presentations achieved a cumulative audience penetration of 7~%-30% for "Show Girl," 20% for "Butterfield 8" and 11% for "Doctor in Love." It is estimated that had hockey been in season at the time, total audience saturation undoubtedly would have been achieved. (c) Au~e~.uye Support As has been noted' above, audience responsiveness is in direct ratio to the stellar nature and to the volume of attractions offered. For example, during a specified test period, the amount of income generated in the Telemeter system depended solely on the amount and type of programming provided. Average in- come per week per customer fluctuated from about $2 weekly, with varied but limited programing, to about 80 cents per week with only hockey and a part of the motion pictures `then being currently released to the theatres in the area. Mr. WRIGHT. So far as I know this is the only airborne type of thing that was ever done. Most of the others were cable systems. Mr. MACDONALD. Would you conclude that this experiment was a success? Mr. WRIGHT. This experiment was a success because it gave us the information that we were looking for. I don't mean that an experi- ment on this limited basis was a financial success or it made money but it gave us the facts from which we could see that projecting this out it would be an economically viable useful thing that would be the kind of thing that could support a lot of UHF stations that otherwise are either going to be off the air or are not going to go on the air. Mr. MACDONALD. Do you feel that any further experimentation is necessary? Mr. WRIGHT, Mr. Chairman, I don't know what more experimenta- tion you could really have except this. Mr. MACDONALD. Mr. Preminger said that Hartford did not prove anything because it only involved 3,000 or 4,000 or 5,000 sets, There- fore what happened to the 5,000 or 6,000 sets is not really indicative of what would be the end result if it were done all over the country. Do you have any comment about that? Mr. WRIGHT. I did not mean to indicate that Hartford gave us all the answers. It by no means did. If the Commission would let us go ahead we would be going ahead to move in one large city on a large- scale basis, a much bigger basis than Hartford. We will learn an awful lot more about that before it goes to any other cities. It is entirely possible, we can't guarantee you that the competition that we are going to face in connection with this is not going to make TV tough for the thing to succeed. We can't guarantee that it is going to succeed. We are not sure of that. I will say this: that 8 years from now if the FCC lets us go ahead you will then see in a major city a large-scale operation of this. Before it is something that is spread over the entire country you will have ample opportunity to determine whether or not these regula- PAGENO="0376" 372 tions that the Commission has promulgated are proper regulations, whether they are adequate, whether they are unduly restrictive, or whether this thing is something that Congress should, by golly, pass a law and outlaw. Mr. MACDONALD. On that point, perhaps it is in this blue book, I have not had a chance to go through it but who do you think has the~ basic jurisdiction, this committee or the FCC? Mr. WRIGHT. The basic jurisdiction obviously is in the Congress of the United States. They passed the communications law. Mr. MACDONALD. Do you think the FCC had jurisdiction to do this in the first place? Mr. WRIGHT. Yes, sir; as I mentioned before, we got opinions of counsel that told us this question. I don't mean to suggest by that that this Congress cannot, at any time that it feels that the act needs amend- ing, change the Commission's jurisdiction, in any respect it does not have the full power and right to do it. Mr. O1'rINa~r~. Mr. Chairman, could I ask one more question? My feeling on the blackout situation is that any blackout is in restraint of trade and should not be permitted. How would you folks feel about a regulation prohibiting any kind of sale of exclusive rights? That is to say, you could buy the rights and put it on pay TV but you could not exclude the networks from competing and putting on the same show. Are you for that kind of competition? Mr. WRIGHT. I can't see any objection to that kind of thing. I can't imagine our making any kind of deal for a product that provided it would not be shown on free TV for a period of time. Mr. OTTINGER. Does that go for your associates in RKO, too? Mr. FLAKE. Yes; it does. Mr. BROWN. I want to ask another question on a completely different angle. If the amount that you are charging for having this little black box on the television set to provide the pay TV program is uniform for all receivers, how are you going to keep your friendly neighbor- hood bar from having the things on there and then charging every- body a quarter to walk in the front door or you have to come in and buy a beer in order to watch it, or, you know, enterprising Members of Congress might invite their friends over and charge them to watch their pay TV set in the living room, a sort of extension of commercial activity in this area? Mr. WRIGHT. We have not really had a~iy. problems that way, Mr. Brown, yet. We put it in the veterans' hospitals and things like that free. There is absolutely no restriction on the home subscriber. If he wants to have all his neighbors on the block in and he can afford to buy the beer and peanuts for them-maybe the fellow next door has a box, too, and they could take a turn with the box. One family will see it at this house one day and the other family will see it at the other house the next day. I would assume that if this box got to the point where people were taking it and using it commercially to charge admissions on any wide scale that we would have problems with the people who owned the copyn~hts of the things that we are showing because we are primarily showing this for home television viewing and that would get them upset and we might PAGENO="0377" 373 have a problem of trying to control that if it became a problem which so far as I know it has not. Mr. MACDONALD. Thank you very much, Mr. Wright, on behalf of the committee for coming here and giving usa lucidand well-thought- out presentation. Mr. WRIGHT. I appreciate your courtesy and interest. If there is any more information desired, we will be delighted to supply it. We have been working on this a long time. We have worked hard. We hope we will get a chance to let the public decide whether it is a proper service. Mr. MACDONALD. Thank you very much. The hearing is adjourned until 10 a.m. in the morning in this room. (Whereupon, at 12:15 p.m. the subcommittee adjourned, to recon- vene at 10 a.m., Thursday, October 12, 1967.) PAGENO="0378" PAGENO="0379" SUBSCRIPTION TELEVISION TRURSDAY, OCTOBER 12, 1987 Hotsi~ o~ REPRESENTATIVES, SUBC0MMITThE ON COMMUNICATIONS AND POWER, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2322, Rayburn House Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) presiding. Mr. MACDONALD. The hearing will come to order. We are honored this morning by having the dean of the Democratic Party here in the house to testify before us, the chairman of the Judiciary Committee, the Honorable Emanuel Celler of New York. It is a great pleasure to see you here. STATEMENT OF RON. EMANUEL CEILER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK Mr. CELLER. Thank you, Mr. Chairman. I thank the rest of the members of the committee. We usually say one man with courage is a majority. I can say two men with courage is a majority now. Gentlemen, I appreciate the opportunity of appearing before this committee which throughout this week has been earnestly probing the critical problems raised by H.R. 12435, a bill which would, by amend- ment of the Communications Act, preclude the FCC from authorizing the broadcast of pay television programs. The proposed fourth order and report transmitted by the panel of three FCC Commissioners constituting the Subscription Television Committee, recommends that the Commission establish an over-the-air subscription television-STV-service for the Nation and adopt cer- tain rules governing that service. This would entail authorizing the exaction of fees for program reception which could affect a potential 80 percentr-I repeat 80 per- cent-of the country's television set owners. I appeared before the full Commission and urged that it reject this departure from our traditional system of free, program reception, and leave inviolate the spectrum devoted to public broadcast frequencies. Just so, I appear here today and urge this subcommittee to approve the principle of H.R. 12435 which would prevent the inauguration and establishment of subscription TV. In my view, the developments of the past 12 years, since the FCC has been stewing over subscription television-including the experi- mental pay television broadcast operations conducted in Hartford, (375) PAGENO="0380" 36 C&nn., as well as the operations by wire in suburban Etobicoke, Toronto, Canada-fail to support, and in large measure contradict, the basic conclusions and recommendations advanced by the Subscription Television Committee. I note that the chairman of the FCC committee filed a caveat stat- ing that his agreement that the report be submitted to the full Com- mission did not imply his endorsement. Indeed, Commissioner Wadsworth, at the outset of the argument before the FCC last week, made clear his concern about the validity of some of the fourth report's basic premises. A decade ago, our House Antitrust Subcommittee, of which I am chairman, completed its extensive hearings and report on the major problems of achieving a truly nationwide and competitive system of television broadcasting, compatible with the avowed obj~ctives of the Communications Act of 1934. The vital issues before the subcommittee in these hearings have been a matter of particular and continuing concern to me for an even longer period. In this context, I was impelled in 1957 and again in 1960, to con- vey to the then Chairman of the Federal Communications Commis- sion, my evaluation of the added burdens and dangers which the introduction of experimental subscription television would create for the traditionally free television system authorized by Congress. In this connection also, I introduced legislation designed, as is the bill now before the subcommittee, to prohibit toll television charges for home receivers. On Tuesday, October 10, 1967, my good friend Otto Preminger, the movie maker, testified here in support of pay TV. According to the newspapers, his appearance was both entertaining and informative. I have long admired Otto Preminger, particularly his ability to make and distribute successfuly the movies that have earned him well-deserved fame. Do not be misled, however, by his geniality and by his enthusiasm. You know, and I know, why Otto Preminger appeared before this committee. He was not here to advance the forces of free enterprise. Otto Preminger was here because he wants to sell his movies. He has his own ax to grind. He is very successful in selling movies through movie theaters. Now he wants to move the movie box office to the living rooms of the United States. Why does he want to do this ~ It is because he knows he can make more money from his movies with the box office in 55 million living rooms than he can, through negotiation with the networks. Otto Preminger says that the television setup we now have is not "free." It is "Madison Avenue propaganda," he says. That may very well be but I ask you, gentlemen, did the people have to pay $2 to turn on the television set in their living room to look at the World Series ~ Did the viewers of the ABC network pay $2 or more to turn on their living room television set to see Otto Preminger's movie, "The Man With the Golden Arm"? ABC paid Otto Preminger $650,000 for "The Man With the Golden Arm," This was after a successful showing in the theaters of the United States. If 20 million people paid $2 each to see it in their living PAGENO="0381" 377 rooms, that would have made $40 million revenue from that one showing. Obviously, Mr. Preminger thinks under pay TV he could get a bigger slice than $650,000. He told you that the networks would not close down, that they would just work harder. I agree. They will work harder to get into pay TV. What then would happen to free competition? Otto Prem- inger would then cry with hindsight tears. On reviewing the voluminous fourth report submitted by the FCC Subscription Television Committee, I am convinced that today, more than ever, the major pitfalls to which I directed attention still threaten and would in no wise be eliminated by the restrictions or so-called "safeguards" with which the FCC Committee would hedge pay-tele- vision operations. Measured by any objective standard, the experimental test carried on at Hartford, Conn., over the past few years falls far short of pro- viding the meaningful and "significant demonstration" of trial oper- ations for subscription television, which the Commission deemed prerequisite for further action. To premise a full blown, untried, and highly complex pay-television system upon deductions drawn heavily from the shallow Hartford experience, is to erect a towering edifice upon a quicksand foundation. While recognizing the manifold inadequacies of the single Hartford trial as the "projected basis~" for a "new service" to be launched on a nationwide basis, the FCC Subscription Television Committee never- theless takes comfort in the view that it provides "some attachment to reality as opposed to mere conjecture that existed before." The phrase "some attachment" is rather flimsy as an argument. Be that as it may, there can be no justification for a reckless gamble on so tenuous a basis with a natural resource which belongs to and is so widely utilized by the people at large. Such an approach would be in derogation of "the overall public interest," which the Commission has affirmed must be the touchstone for reaching its decision in this matter. Insofar as demonstrating any public wish for pay TV, the Hart- ford test was completely negative. On a 3-year basis starting in 1962, less than 1 percent of the potential of 675,000 homes in the station's service area subscribed. In fact, fewer than 5,000 families, or less than three-fourths of 1 percent of the potential audience subscribed at any one time. There were also a substantial number who dropped out. The average ~subscription audience to any one program (from among all those who subscribed) was less than 6 percent. I have failed to find in the pages of the fourth report, or in any other quarter, any indication of an expressed public desire or pressing need for the institution of a pay television system. I am, therefore, at a loss to understand how an affirmative decision by the FCC on an issue of such magnitude and so fraught with risk, can be justified at this juncture. Where is this public demand? From Zenith? From Preminger and all those who have axes to grind? Tell me where the public demand is. What organizations throughout the Nation, credible organizations, have demanded, have come here and asked the Congress for pay television? PAGENO="0382" 378 We begin with the basic premise that today the programs of our present television system are free to the viewer, and that the sponsor pays the cost. It is now proposed that we jump headlong in a radically different direction. Let the viewer pay. In other words, it is advocated that a tax, a nongraduated tax, if you please, be imposed on the one who turns the knob. The television spectrum is (and this cannot be re- peated too often) a national resource belonging to the people. To put it bluntly, pay television is like unto wheat grown on my land, harvest reaped by others, with a demand made upon me for the payment of rent. Pay TV will affect every viewer in the land since we know well that the level of income has no bearing at all. upon ownership of a tele- vision set. There are some 55 million television homes in the United States. Over 90 percent of those in the $4,000-and-under income own sets. Let us ignore them, shall we? After all, what place do these viewers have in this argument? In- deed, let them eat cake. In other words, "the hell with them." Logically, then it follows our networks, as they have stated in the past, will reach into this field. This intention was reaffirmed by net- work spokesmen before the FCC last week. Agam assuming the success of pay TV, we are very likely to see a dismaying competition between sponsored television and pay TV for major sporting events, movies, leading personalities, et cetera, if indeed the networks have not by that time moved completely into that area. I say that to turn the cost-and I have said this before-of a tele- vision set into a mere downpayment to be followed by a lifetime of installment charges for the privilege of enjoying a public resource would be an act of complete irresponsibility and an utter disregard of the public interest. Sponsored TV is surely capable of "good" programs-and that, of course, is a value word-and that it has not done so is due certainly in part to the laxity and ineptitude of the Federal Communications Commission, partly to the apathy of the public, and partly to the short- sightedness of the networks. Instituting pay TV will unquestionably relax the responsibility placed on the Commission and the present broadcasting systems. Let us face the fact and face it squarely-that television for profit, whether free or toll, whether paid for by the advertiser or the viewer by a set fee, must remain a popular medium to succeed. The viewer at all times has a privilege of selectivity. The viewer who prefers the so-called cultural programs is by his very nature a highly selective creature. Hence, pay TV will not change the nature of the problem. The heart of the problem lies in the television industry itself, and, as I have said before, both in the viewing public and the regulating agency as well. When it comes to programing, I believe that the television industry is as much a victim of the rating practices as is the viewer, and whether there is or is not pay TV the level of TV will remain what it is unless the industry and the FCC assume the responsibilities with which they are charged. If pay TV is to be profitable the very same problems which beset the industry today will drown pay TV operations. PAGENO="0383" 379 It is interesting to observe that the Fourth Report recommends FCC regulation of programing of cash box TV. As Chairman Hyde has confirmed2 this is a new and brave concept-interfering with the nature and kind of telecasts, and ordering the stations to use this proportion of feature films and that proportion of sports events. Similarly, the FCC will say "no commercial ads." We are dealing with a powerful industry. How long would the Com- mission withstand the pressure of that industry to permit mercantile ads on STy? How long could the Commission ward off the blows to change the nature of the programs? It is interesting to note that for fear of being guilty of "censorship" and violation of section 326 of the Communications Act, the FCC in the past studiously avoided touching programing-e~ven a minimal of programing. If it had taken the plunge long ago and had really regulated in the public interest-had regulated and policed programs-we would have a far healthier free TV industry today. But it failed and refused to regiment or regulate programing and thus quality was sacrificed to quantity-quality of telecast was deemphasized in order to permit more programs with highest appeal to the lowest intelligence-with the greater cash box return. If we have pay TV I doubt that the Commission will remain fixed in a determination to regulate by controlling programs and prohibiting ads. I doubt that the Commission can succeed in this. The odds against it may be too great. Just as water constantly dripping on a stone can wear it down, so unremitting pressure of many sorts will wear down the Commission. The fact is that even now pay television enterpreneurs want the grand prize free of any restrictions, At the very threshold, they want no rules. They want to be utterly free to do everything and anything they wish with a public resource. We are told by the Subscription Television Committee that pay television will provide a beneficial supplement to conventional tele- vision programing; that the impact of subscription television on con- ventional television will be minimal; and that while some preempting of time and siphoning of programs from free television could occur to a degree contrary to the public interest, specially tailored regulatory safeguards will in the main be effective to protect free television (not- withstanding that some program siphoning from free television will occur in any event). The FCC committee also looks forward to "competition" between the two systems with beneficial programing results. Let us first take heed of where this might lead in terms of the tremendous built-in profit potential of pay television. An illuminating and, I believe, realistic insight is provided by the statement by the Association of Maximum Service Telecasters in the recent argument before the FCC. Once hegun, the potential revenues of STY are almost unlimited. The STY- report has very conservatively estimated that subscription TV penetration would be approximately 10 percent to 20 percent. On the STY report's figures, there Is a potential for STY being authorized in markets constItuting 80 percent of the nation's television homes or 45,100,000 television homes. At the 20-percent pene- tration rate, this would give nationwide STY a conservative total potential of approximately 9 million subscribers, or 16 percent of the total television homes. PAGENO="0384" 380 Assuming only this level of penetration and the report's low projected revenue of $105 a year for each subscribing home, this would give SPV at least potential annual revenues of $945 million. Or almost a billion dollars. Now those figures may be high but those are the potential figures. You can subtract from them if you wish but make as deep a cut as you want, you can see what "gold there is in them thar hills," gentlemen. As to programing, in years past, proponents of pay television pre- sented a most alluring picture with a promise of supplemental and superior programing to suit the divergent tastes of the discriminating viewer. This indeed was among their foremost arguments. It was claimed, as stated in the FCC's first report on subscription television that "sub- scriber financed broadcasts could and would provide a wider choice to members of the public interested in the fine arts, operas, educational and informative material and other similar kinds of programs." This is a thesis I never accepted. Some 3 years ago, I had occasion to write: A careful study of pay television broadcasting persuades me that the assign- ment of a segment of the television spectrum to a subscriptl~n service will merely increase viewers' costs and broadcasters' profits without producing any long-term improvement in programing. Merely because pay television would col- lect new revenues it does not follow, as its proponents predict, that it would produce programs of better quality. Actually, there is no dearth of programing resources, whether financial, technical, or artistic. Present-day television is capa- ble of presenting superlative programs, and sometimes does. All that is needed is producer confidence in the validity of the public taste. But pay television cannot be expected to devote itself exclusively or extensively to artistic or cultural pro- grams. It may reasonably be expected that pay television, much like present day commercial television, will be subject to the same pressures to cater to the mass audience for maximum profit. In precisely the same vein, the authors of the Fourth Report now conclude that the present "reality is that the major part of the sub- scription television programing, as opponents had argued will be of the kind that will appeal to a mass audience." (Fourth Report, para. 56.) I note that during the first 2 years of the Hartford trial, feature films constituted 86.5 percent of all television programing; "special entertainment such as operas, ballets, concerts and recitals constituted 5.5 percent; and educational features, viewed by only a handful of subscribers constituted only 3.2 percent of the total." Pay TV will again appeal to the lowest common denominator. If adopted, I predict it would become as former Chairman Minow said, a second "vast wasteland." I applaud the application of free enterprise to free TV. Free TV in nongovernmental hands is superior to any other system. There is no suggestion anywhere, I hope, which says the TV chains or networks or the separate stations must act as eleemosynary or philanthropic enterprises, Nor is there any edict anywhere that their profits must constantly reach skyward without any restraints or limitations whatsoever. They have a monopoly-limited in a sens&-yet a monopoly of the air waves. But as recommended in the FCC's fourth report there is to be no limit on profits for pay TV. It is well to remeniber that even the PAGENO="0385" ~81 Redwoods do not grow up to Heaven. Yet as to toll charges or toll TV, the sky is the limit The only restraint is in what the traffic will bear Diver~~fication in programing, insofar as the Hartford and Etobi- coke operations show, must be sought elsewhere. Hope lies in the rapid growth of free educational television service that has taken place such as in National Educational Television providing educational and ciii- tural programing. I am encoura~ed by projects such as the projected nonprofit Corpo- ration for Public Broadcasting, which would be financed by Govern- ment `and private funds. The reform is approached in the bill recer~tiy passed by the House, and referred to by Chairman Macdonald at the outset of these hearings. It has been stated that the corporation will probably concentrate on promoting cultural and public affairs programs, including operas, serious dramas, and documentaries. If we permit pay TV and pay TV fails, we will not only have indulged in wasted motion, but used that wasted motion to inhibit the progress of educational TV. While feature films were a mainstay of the Hartford programing- as they concededly would be in nationwide pay TV-it is well known to any television viewer that in recent years they have likewise taken an important place in conventional television programing. Nor is there any reason to assume that free television is not moving in the direction of more recent film showings since the, backlog of older films is being rapidly consumed. If pay television programing is to be justified on this basis, the case is weak indeed. With respect to sports, the case i~ weaker still. The plethora of sports events on free television over the past several years is a well-known fact The fourth report nevertheless stresses the occasional champion- ship boxing match or "blacked out" home games in football-re- strictions which have been imposed on free television broadcasts. This surely provides no "beneficial supplement" to the adequate sports programing the American public now receives For example, NBC on Sundays practically devotes all afternoon to football and baseball. Nor am I persuaded that the regulations against siphoning proposed in the fourth report, would in any sense be effective. The Subscription Television Committee concedes: Of the various arguments raised by subscription TV opponents, we find that of so-called selective program siphoning most persuasive It Is at least conceivable that a successful nationwide subscription TV system even though possibly n~t having as m~ich money as free television to spend for program product, could, by directing its purchase at select programs, e g the world S series or professional football gaIns, take them from free television and require the huge audience of those programs to pay to see them or not see them at all (fourth report, para.. 111.) I believe it is inevitable, for example, that despite the initial re- strictions conceived by the Subscription Television Committee, pro. fessional sports would sooner or later find a pathway to toll television, for the additional pot of gold at the end of the rainbow, which this multimillion-dollar mstitution hardly needs. I do not regard the regulations set forth in the fourth report as effective to prevent destructive siphoning of programs from free television. 86-899 0-67-25 PAGENO="0386" 382 In the event that pay television is successful on a nationwide basis, there is no guarantee that even the present regulations will not be eroded. This is understatement in view of FCC Commissioner Loevinger's observation at the recent oral argument to the effect that there is "general agreement among proponents and opponents" of pay TV that "the program supervision proposed" by the FCC Subscription Television Committee, "is impractical, ill-advised, unwise, illegal, and unconstitutional and a few other things." That comes from a Commissioner himself. You judge for yourself what that all means, gentlemen. Permitting subscription television would divide the viewing public along economic lines according to ability and willingness to pay. Ap- parently STV would in the main serve an affluent minority wishing to view at home relatively new movies or sports events not available on free television. The Subscription Television Committee, confronted with the con- tention of subscription TV opponents, "that 30 percent of the Nation would appear unable to afford STV" and therefore its authorization would not be in the public interest stated, fourth report, paragraph 75: We do not find their arguments convincing. Among other things, we did ob- serve that under the rules which we adopted herein, all those in the lowest income group who own television sets will be able to continue to see ample amounts of free television programing, so that they will not be deprived of anything while at the same time a substantial portion of the people will be given the opportunity to view STY if it so desires. At best, pay TV condones a discriminatory pattern thatruns contrary * to our philosophy. Almost one-third of the population of a given com- munity might be barred from programs utilizing public broadcast channels to which they might otherwise have had access. Worse yet, their free television service would be sub)ect to down grading and depreciation in view of the inevitable siphoning of talent by_pay television despite whatever restrictions are imposed. These direful results should stay the Congress from further inaction. We should promptly and effectively stamp out the false enthusiasm now generated by a small but powerful group of pay TV tycoons. By default we have allowed the investor's equity to control what is basically a public service industry Broadcasting has been treated as though it was some kind of 19th century mercantile enterprise in which property alone meant ownership. Thus spoke Fred W. Friendly in his book "Due to Circumstances Beyond Our Control." Well, TV is based primarily upon a Government franchise to use public property as a monopoly. As such and in return the licensee must render service in the public interest and welfare and the license is held only on good behavior It is not a property right The Government, the people have some interest Frankly in my opinion it is unreasonable for a station which, when originally fran- chised, was not expected to make much money, now makes $5 or $10 million a year. Should a license received originally for little or no outlay become a legacy with $20 or $30 million without the people who granted the license retaining an equity in it ~ (Friendly, id., p. 292) PAGENO="0387" 383 The Supreme Court, in construing the Communications Act, ruled that the license involved no property right. Yet there is no license holder who does not feel that he has a perpetual right in the license even though he must renew it every 3 years. That opinion is bolstered by the fact that no important station permit has ever gone unrenewed. Yes, there have been some small stations whose permits were not renewed but not a single important station. There have been derelicts of an extreme sort in many of those cases. Do not create, by refusing to pass the bill, another gargantuan mon- ster in the form of "coin-in-the-slot" television with assurance of stupendous profit. Just as the FCC could not or would not really regulate sponsored TV, they would not regulate properly pay TV. Thus the evils of sponsored TV would be duplicated in pay TV. Finally, as to the jurisdictional issue, I believe there is grave doubt whether the present Communications Act and its grant of authority contemplate or embrace the authorization of on-the-air pay television. I say this despite the views of the Communications Cormnission. This subcommittee has already explored the issue in depth in the course of these hearings, and I shall not belabor the point. Apparently the hand of the FCC will not be stayed even by the resolution of your parent committee-as well as that of the Senate Interstate Commerce Committee-that authorization of subscription television should not be granted unless and until the Communications Act of 1934 is appropriately amended. Chairman Hyde, at the conclusion of his testimony last Monday, testified that the Commission believes it is empowered to act on sub- scription television in the absence of amendatory action by the Con- gress. Favorable action on H.R. 12435 would clear the air once and for all. You have enough danger signals against pay TV. Heed them. To summarize, careful study has convinced me that the conversion of any segment of th~ television spectrum to the service of toll tele- vision would increase viewers' costs and broadcasters' profits, and this without any substantial hope of producing any long-range improve- ment in programs. Free television, as we know it, may be downgraded to a secondary and economically untenable position. The best existing programs the public is accustomed to receiving without charge may be drained off. The trend, noted by the House Antitrust Subcommittee, toward the monopolization of outstanding talent and program product will be accelerated. The television audience will be divided along economic lines. A method of broadcasting will be inaugurated that may drive free network television as we know it from the air waves. The foreseeable result is a television system in which we will all be paying for much the same TV fare which now comes to us without cost. That is my statement, gentlemen. Mr. MACDONALD. Thank you very much, Congressman Celler. As you were talking I was thinking, and once again you do not have to answer if you do not want to about this but I asked the ques- tion of the witness the day before yesterday and I know you are a true expert in this field. PAGENO="0388" 384 One of the problems that I think perhaps drives people to being receptive toward pay TV is the fact that in certain areas events are blacked out. The witness I asked said, and he represented on of the biggest net- works, there might be antitrust action lie if the networks agreed not to have blackouts in certain areas in which sports events are ocur- ring. He said that competition was fierce, as I recall his words, and if all three networks, the three largest networks, got together and agreed that they wouldnot submit to blackouts in any given area even though the participant in the sports event, a fight or football game or some- thing like that, asked for it in their contract, and I know you are an expert in this field and, of course, it will be a curbstone opinion and I will not hold you to it, do you think that antitrust action could lie when this is not a restraint of trade but rather a broadening of trade? Mr. CELn~n. Technically and on principle it is a violation of the antitrust laws for the networks to get together and to do just that but I doubt very much whether the Department of justice would prose- cute under those circumstances. It would be a simple matter for the networks to make arrangements with the Department of justice, the Antitrust Division, and get im- munization for those particular acts because they are worthwhile and they are really in the public interest. That has often been done in other lines of endeavor. Thus, there would be no danger at all, I am quite positive of that, of any prosecu- tion of the antitrust laws under such circumstances. Mr. MACDONALD. I am glad to have you say that because that is what I thought, myself. The second and last question is this. We had a bit of a run-in about the copyright problems on the floor, if you recall, on CATV. I was wondering if you could elucidate further about that. Do you think that CATV has changed the acceptance of pay TV? Mr. CELLER. When we had the copyright bill up we eliminated all provisions concerning CATV, awaiting further developments in CATV. What I have said this morning has nothing to do with CATV. CATV is quite essential in certain areas of the country which can't get reception at all because of the geography and nature and topo~- raphy of the country. This has nothing to do with CATV. That is perfectly laudable. Mr. MACDONALD. Thank you very much. Mr. Kornegay. Mr. KQRNEGAY. Thank you, Mr. Chairman. Mr. Celler, my colleague and good friend, it is certainly nice to have you before the committee. We appreciate your coming over and taking your time to express your views on this matter which, as you can understand, to the subcommittee is a very complicated and difficult sort of thing. I noted your statement and observation that pay TV would be for the affluents, the wealthy of the country, to the disadvantage of lower income families. Some of the testimony on the part of the pay TV people yesterday indicated that in the Hartford experiment 50 percent of the subscribers PAGENO="0389" 385 were families with less than $7,000 a year income, the theory and the reasoning behind it being is that these people could much better afford subscription television than they couid to take their entire family, particularly those with a large* number of children, to the movies or to the place that were being shown. on subscription TV. Mr. CELLER. The bulk of the Nation's families are not in that class. There are so many, many, millions, around $4,000 income, and they are the ones that would be hurt on this pay TV. You must remember, also, that as I indicated, I don't know if you were present, there is no limitation whatsoever on the cost that could be charged for pay TV. It could be 25 cents for a movie or it could be 50 cents for a movie, it could be $2 for a prizefight. The only limitation is what the traffic will bear. Once they get a foothold and they are able, as I indicated, to siphon off the best of talent, and the best of sports events, if perchance they could get all the World Series over pay TV and if they paid enough for it they could get it, the people probably would be likely to pay $2.50 to $3, maybe $5, to see the last game of the World Series. They would pay $5 to see the game in their home, you would and I would, too, without going to the ballpark to park the car, wait an hour for the car to get it unparkeci, take an hour to get to the ballpark and so forth. Here for $5 you could see the whole game with utter ease and comfort. Sure, you would pay $5 probably. Now that can't be paid by most of the owners of television sets and that would be duplicated, that kind of event, manifoldly. Mr. KORNEGAY. I agree that that is one of the problems and the question I have previously raised in the hearing is whether or not the Commission would offset the prices. Mr. CELLER. This would divide the Nation in two classes, those economically able and those uneconomicafly able to pay the toll. That is contrary to our American principle. Mr. MACDONALD. Will you yield? Mr. KORNEGAY. Yes. Mr. MACDONALD. I just point out that in the order it is stated that that can't happen with any program which has been broadcast pr&~ viously, and, therefore, the World Series would not come off. Mr. CELLER. As I said before also, the rules are ephemeral. It is a relatively simple matter to get the rules changed in the Federal Com- munications Commission. The Federal Communications Commission is of such a character, and I do not mean to attack anybody in particular, I am speaking of the institution generally and I would like this to be off the record- Mr. MACDONALD. Off the record. (Discussion off the record.) Mr. MACDONALD~ Back on the record. I yield back. Mr. KORNEGAY. Mr. Chairman, this is a littl~ bit unrelated, really not germane to our inquiry here, but I can hardly let the opportunity that we seldom have to have your wisdom on these matters to let the matter go by without asking you this. ~ PAGENO="0390" 386 We are presently scrutinizing in the Congress and in the country and in the press the method of carrying out and financing elections in the country. The Senate, you know, has a bill to provide for Federal revenues to pay for the campaigns of the President and Senators. The House has under consideration, I think the subcommittee of your full committee, election reform laws: The cost of running cam- paigns certainly is in the minds of those who run for pu~b1ic office. I just want to ask you your thoughts and opinions on this approach. You stated that television particularly was a highly profitable adventure. What would be your view on some requirement or re~ula- tion which required the television stations of the country to provide a certain amount of free time, a reasonable amount of free time, to candi- dates for public office? Now one of the causes for the tremendous increase in the cost of campaigning has been the cost of campaigning on television. If the television stations of the country as a public service could provide a reasonable amount of free time to the candidates for public office- Mr. CELLER~ I tried to get, for example-and J say this as a pre- liminary to answering your question-the profits achieved by the net- works and the stations. I was unable to get a breakdown; they would not give it to me. Maybe your committee could get it. You will pardon me if I dwell a bit on it before I finally answer your question. Mr. KORNRGAY. Yes, sir. Mr.. Or~u~. I asked for the television pretax profits. In 1960 the wholly owned and operated stations of the three chains-ABC, NBC, and CBS-had profits of $61.6 million. In 1966 it was $108.1 million. This is before taxes. In other words, it went from 33-the network profits were $33 mil- lion in 1960 and the network profits were $78 million in 1966, the three of them. I could not get a breakdown as to each one of the networks on that. Mr. BROrZMAN. What was that last figure? Mr. C1~r.LEIt $78.7 million. If you add the network stations and the network profits themselves it goes in 1966 to $187 million. Now I want to preface that statement before I answer your ques- tion. In view of those profits I do not think there would be much skin off the back of these stations to allow Members of Congress or the Senate or the candidates in presidential elections to have a reasonable amount of time to show their wares, as it were, to express themselves on the issues in the campaign. Mr. BROWN. Will the gentleman yield? I wonder if we could put in the record the percentage of profit that that amounts to on the volume of business. Mr. CEu~R. I will put those in the record if you wish. Mr. BROWN. Does that include the percentage that is to the total volume of business? Mr. CELL~a~.. These are expressions not in percentages; they are millions. I was wrong when I said percentage. `There are millions of dollars. PAGENO="0391" 387 (The following table was subsequently submitted by Mr. Celler:) TELEVISION PRETAX PROFITS tin milllonsi Wholly owned and operated stations Network 1960 1961 $61.6 62.4 $33.6 24.7 1962 74.7 36,6 1963 1964 1965 1966 79.9 96.3 102.2 108.1 56.4 60.2 59.3 78,7 Mr. BROWN. I am interested in what percentage of total volume of business the $33 million profit is or $78 million profit. Mr. CELLER. I do not have that. You can get that I am sure. You can get it easier than I can. You can get the splitup. Mr. Chairman, I think you can get that without any trouble. Mr. MACDONALD. We will certainly try. (The following information was obtained by the committee:) EXCERPT FROM FCO PUBLIC NoricE 5317, AUGUST 25, 1967 "TV BROADCAST FINANCIAL DATA, 1966" The networks and their owned and operated stations reported revenues of $1,166.3 million, expenses of $979.5 million, and pre-tax profits of $186.8 million. The three networks reported pre-tax profits of $78.7 million on revenues of $908.9 million (8.7 percent); network owned stations, $108.1 million on $262.4 million (41.2 percent) ; and the 593 other stations, $306.1 million on $1,036.7 million (20.6 percent). Mr. CELLER. Of course, they won't give it to a Congressman unless he keeps it for himself and he can't make it public. I did not want to take it because I would have to say something about it. But I got it from other sources. I will give you another sidelight on that if I may. Mr. BROWN. These are all public corporations are they not, Mr. Chairman? Mr. MAcDONALD. They are. I don't really understand what this has to do with pay TV. Mr. CELLER. Mr. Brown, I can give you some other idea of profits if I may. This is from Friendly's book "Circumstances Beyond Our Control" [reading]: A case record of profits with which I am familiar in a television station is Providence. In 1955 owners of the Cherry and Webb Department Store who were the operations of the radio station WPRB, went on the air for original investment financed by radio profits of a little more than $1 million. Channel 12 in Providence, a city of 200,000 people serves the State with a population of some 800,000 and part of nearby Massachusetts and Connecticut. Still because the Boston stations also carry to Rhode Island and because Providence has had difficulties with its economy, WPRO-TV comparably speaking could be called a bonanza. Yet in 1959 the Cherry and Webb interests sold their radio and television station to Capital Cities Broadcasting Corporation for $,- 500,000. Today its, president told me the franchise could not be purchased for $12 million. PAGENO="0392" 388 WPRO-TV's annual profit is something over $1,250,000, earns the 1959 pur- chasers more than 19 percent a year on their equity. But WPRO-TV is below average. The medium revenue of profitable VHF stations in 1965 was $1,490,000. That gives you some idea of the considerable profits here. Mr. MACDONALD. You had better identify the source. Mr. CELLER. This is page 267 of the volume "Due To Circumstances Beyond Our Control" by Fred W. Friendly, published by Random House. I think under those circumstances arrangements might well be made to allow free time or a modicum of cost to Members of the House and the Senate and the President. Mr. KORNEGAY. And the national ticket. I gather from what you say, Mr. Chairman, that the cost of that to the television stations would be so slight it would not have an appreciable impact on their financial situation. Mr. CELLER. None whatsoever. Mr. KORNEGAY. And, of course it would be very helpful to the candidate, particularly those of us who have limited resources with which to run for public office.. Mr. CELLER. It would be in the public interest. Mr. KORNEGAY. Thank you. Thank you for coming. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN DEERLIN. I hope we would not have to put it to a public vote whether they let 435 Congressmen and their opponents on every 2 years. Mr. MACDONALD. I am not sure how high th~ rating would be. Mr. VAN DEERLIN. I have a feeling I know. Mr. Celler, I arrived a little late for your prepared testimony. Do your objections to subscription television apply to subscription television in any form rather than just over the air? Mr. CELLER. Only over the air and into the homes. Mr. VAN DEERLIN. What about into the homes by cable? Mr. CELLER. By coaxial cable, no. My statement is not addressed to that at all. Mr. VAN DEERLIN. Is it not likely that many of the objections you raise to subscription television would apply regardless of the tech- nique of introducing the signal? Mr. CELLER. They might but I don't think that is the issue here, is it? Mr. VAN DEERLIN. Only insofar as you have raised it in your testimony. Mr. CELLER. I have not touched that at all. I personally do not think that my statements would indicate or could be spread to indicate opposition to coaxial cable television. Mr. VAN DEERLIN. Except that if coaxial cable television brought the World Series for $5 in the coin slot it would have the same effect as if the signal came over the air. The only question might be whether the FCC had the power to regulate. Mr. CELLER. Depending on the circumstances, that may be deemed purely intrastate. I question whether the FCC would have jurisdiction in it. That is a grave question. Mr. VAN DEERLIN. Thank you, Mr. Chairman. PAGENO="0393" 389 Mr. MACDONALD. Mr. Brotzman. Mr. BROTZMAN. Thank you, Mr. Chairman. I have just one question and I think your greatest competency to testify would be in this area, Mr. Chairman. Did I understand that it is your legal opinion that the FCC does not presently have jurisdiction over this particular matter? Mr. CELLRR. I think that is correct. Mr. BROTZMAN. You say that, having studied this proposition, is that correct? Mr. CELLER. What was that last? Mr. BROTZMAN. You make this particular assertion, having studied the legal propositions presented? Mr. CELLER. Yes, sir, and I think it is incumbent upon the House to act so as to remove all possibility of doubt. The FCC must have had doubt because, as I said before, for 12 years they have been stew- ing around with this question whether they should or should not. If there were clear-cut decision, their counsel, and they have counsel, would have told them to go ahead. But they have their doubts, too; otherwise they would have gone ahead long ago. I think all doubts should be removed by some affirmative action by Congress. I don't think Congress can any longer pass the buck, to use a word of common parlance. I think it is the duty of the Congress to say something now. Other- wise they are going to act. By your silence they will act. I don't think they have a right to act but they are going to act. Mr. BROTZMAN. I yield to the gentleman from Ohio. Mr. BROWN. Mr. Chairman, in the same vein, do you feel that the FCC has or has not the jurisdiction to regulate program content should we permit pay TV to go on the air? Mr. CELLER. I would not want to have the Congress determine that the FCC shall go whole hog on regulation of programing. That might be an undue interference but I think there should be some words placed in the statute to give them some minimal authority over what the traffic is. As I understand the Supreme Court decision on this matter, when the Supreme Court spoke of determining the composition of that traffic there ought to be some words there giving the FCC some authority. They have always shunned it. They have given the stations and networks almost free rein to do almost anything they wish. Mr. BROWN. Does this raise any questions with reference to the first amendment so far as you are concerned? Mr. CELLER. Yes, sir. I think we have to be very careful. You are walking a tight rope. Mr. BROWN. I would be interested in seeing language which would permit us to give them some control but not whole hog control over this delicate area of program content. Mr. CELLER. When you say regulate I think you involve in the word "regulation" some modicum of determination of what shall go over the airways. There must be something like that otherwise there is no regulation at all, they go hog wild on it, I mean hog wild in the sense of doing nothing. I think the time has passed for that. PAGENO="0394" 390 I think it is essential for this committee to work something out. I don't want to take on more burdens but we will be very glad to have our staff worl~ with your staff, if you want it, on words. Mr. MACDONALD. Mr. Rooney. Mr. RooNEY. Mr. * Chairman, I want to thank you very much for your very informative presentation here this morning and make one personal observation and that is your testimony was both informa- tive and entertaining. It is too bad that two friends such as you and Mr. Preminger can't get together and sort of compromise your views on this subject. Mr. CELLER. Did you hear my statement? I commented on Mr. Preminger's statement. Mr. RooNE~r. I know you did. All the testimony I have heard dur- ing the past few days have been either black or white, either for or against. Do you possibly foresee any way in which this pay TV can be compromised? Mr. CELLER. I do not see how the issue can be. You are either for or against pay TV. Mr. ROONEY. I have heard some good points about pay TV and you have pointed out the bad points. I just wondered whether or not there was some way in which it could be compromised. I have no further questions. Mr. MACDONALD. Mr. Brown. Mr. BROWN. Mr. Chairman, the reason I was interested in the percentage of profits versus just `the flat number of dollars was that while the dollars sound very impressive you do not have to go to $78 million to impress me, I am impressed with $33 million or even $1 million. But I do think that the s~stem operates on the percentage of profit the business makes and sometimes a large total number of dollars sounds very impressive whereas the percentage might not be quite as awesome. Mr. CELLER. You are correct but I could not get that information. Mr. BROWN. The other question I would like to ask you is this. I have some figures which I have not been able to establish with the FCC yet `simply because I have not had the opportunity, but I am advised that there are 1,239 total commercial station allocations made by the FCC~ 634 UHF, 605 VHF, and that there are now 616 of these 1,239 stations operating and another 163 which have re- ceived construction permits but which are not on the air. Presumably that leaves 460 or roughly a third of the allocated sta- tions either not operating or utilizing their construction permits, not on the air. If that is the case, will we encourage more television presentations on the available channels of everybody's television set by permitting pay TV, or can we expect that these stations will all go on as commer- cial stations drawing their support from the advertising dollar availa- ble in a community and therefore having an effect on the existing sta- tions on the air? In other words, I would presume there are so `many advertising dol- lars in every community, and if you add another station supported by PAGENO="0395" 391 advertising dollars, wouldn't you lower the quality of programing as you lower the potential for making a profit in a community? Mr. CELLER. I do not quite understand fully the question but I can probably answer it partially. The television rates are rather high, they are the highest of all advertising rates. I think they are too high. If they were in anywise lowered or could be lowered, if there were more competition, more stations, they probably would be lowered, it would give more oppor- tunity for the smaller merchants to advertise their wares and in that sense you might attract more advertising over the airways. Mr. BROWN. This is the problem I am citing. We have some 460 station licenses, allocations made, where the sta- tions have yet to go on the air for one reason or another. Now, I can imagine a lot of reasons. Perhaps they could not get the financing. But if it is such an attractive business based on the advertising dollar, I would think they would rush to get on the air, that bankers would be happy to finance such a profitable venture and we would have a greater opportunity to see more selections on free TV. Mr. CELLER. Of course, the spectrum is limited and it may be to put. too many stations on you blur the reception. Mr. BROWN. No, sir; that is not the issue. There are 12 available VHF channels on all the sets in my area and two or three communities that serve my congressional district that are communities of some size, half million, don't have more than two or three VHF stations and one or two UHF stations and there is an un- limited spectrum it seems. Mr. CELLER. It may be so that the additional TV would not pay in that area, I don't know. There may not be enough advertising. How would pay TV help? Pay TV has to go into a very large market or ma- jor market. Mr. BROWN. What I am suggesting, sir, and this is where I want. to get the response, is that if it is because they would not pay as com- mercial stations with sponsored programs, because there are only so many advertising dollars, it might be that we could get more stations on the air if we could put them on as a subscription station. Mr. CELLER. I don't think so. I think we would have the opposite because the market is not sufficient to be tapped to get enough to sup- port a pay TV operation It would not have an audience where there would be a mass appeal, not enough population probably in that area. Over-the-air pay TV, with its great initial investment, must appeal to vast numbers, large numbers, otherwise I don't think it would pay. Mr. BROWN. Thank you, sir. Mr. CELLER. And presently, I am told by my aide here, the fran- chises and potential applications for pay TV are in the leading major markets, not in the small areas. Mr. MACDONALD. Congressman, thank you very much for being here. We appreciate hearing from you. Mr. CELLER. Thank you, gentlemen. Mr. MACDONALD. We now have the gentleman representing ABC. PAGENO="0396" 392 STATEMENT OP EVERETT H. ERLICK, VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN BROADCASTING COS., INC. Mr. ERLICK. Mr. Chairman and members of the subcommittee, my name is Everett H. Erlick. I am vice president and general counsel of the American Broadcasting Cos., Inc. I appreciate the opportunity to appear before you today to express ABC's views with regard to pay television. The question of whether the public should be required to pay for radio and television service is by no means a new one. In the hearings which led to the Radio Act of 1927, industry leaders joined Commerce Secretary Herbert Hoover and others in opposing the establishment of the kind of systems in use in foreign countries requiring the "payment of a fee." Statutory provisions which might have been construed as authoriz- ing broadcasters to charge listeners a fee were eliminated in joint con~ ferences by the House and Senate. With these deletions, the leaders of the bills, which eventually became the Radio Act of 1927, were able to assure their colleagues that the legislation gave no authority to im- pose a fee and consequently there was no need to authorize the Com- mission to regulate rates charged to listeners. Ensuing developments-between the enactment of the Radio Act of 1927 and the incorporation of its principal provisions into the Com- munications Act of 1934-confirmed the views shared by Congress and industry that under the American system of broadcasting, the listener or viewer should not be charged a "fee" for the program he receives. This principle had become so well settled that in enacting the `Corn- munications Act of 1934, the rate or fee question was not an issue. Thus, by 1927, and even more convincingly by 1934, broadcasting in the United States had taken on a definite pattern-the cost to be borne by the sponsor and the broadcaster, with no charge to be levied on the public. This pattern, fully known and accepted by Congress, was a keystone of the regulatory concepts embodied in the basic 1927 and 1934 acts. In our appearance before the House Committee on Interstate and Foreign Commerce on January 22, 1958, ABC summarized its opposi- tion to the authorization of pay television as follows: 1. Pay TV will supply little, if anything, that the public does not receive today on free television-and with each succeeding season television expands its already rounded program service. 2. If pay TV succeeds, the programs now seen on free TV will move to pay TV. The public will be the loser, for it will be forced to pay for programs it now sees free. 3. Those who will suffer most will be people in the lower and middle Income groups, those who can least afford to pay. These are the ones to whom a tele- vision set is a means through which they caii bring their families into contact with everything which is most exciting in the whole field of entertainment, sports, news and information and, public affairs-indeed, the whole gamut of our activities as a nation. 4. The Federal Communications Commission was created by Congress to develop and foster our American system of free radio `and free television-not to author- ize or encourage another system which could lead to its destruction, without first ascertaining the will of Congress. ~. Irrevocable changes should not be made in the system which the Commission was established to aid and develop until the `Congress expresses its will. PAGENO="0397" 393 6. Commission experience demonstrates the difficulty of "turning the clock back" after interests become established, after the public has ~elied upon the `Oommission's action, and after substantial expenditures have been made. 7. Congress should not be by-passed on matters of basic national policy. In essence, the foregoing seven points are as relevant today as they were when we advanced them in 1958. These hearings come at a propitious time, a time when the Federal Communications Commission is considering the report of its Subscrip- tion Television Committee, which proposes the establishment of a nationwide pay television service. The Commission, in common with numerous other `administrative agencies, is an arm of Congress. The purpose of these agencies is not to make national policies but to implement policies Congress has enacted, No one can deny, in light of the record of the FCC proceeding, the many congressional hearings, and legislator and public expressions on this subject, that to impose a pay television service on the broadcast frequencies, as has been proposed, has become a highly controversial issue of national significance. Whether pay television should be authorized in any form-in broad scope as heretofore urged by its relatively few proponents or in re- stricted, and intensely regulated form as suggested by the report of the FCC's Subscription Television Ctmmittee, is precisely `the type of question which should not be resolved by an administrative agency, no matter how broad its general statutory powers. It is one which Congress alone should determine. It is common knowledge that the price which the free television system can pay for exhibition rights is determined principally by the value to advertisers of commercial messages associated with various programs. Assuredly, there is a limit to the price advertisers can and will pay for program sponsorship and, hence, a limit beyond which free television cannot bid for exhibition rights. However, the price which pay TV entrepreneurs would be willing to pay for exhibition rights is limited' only by the aggregate price which the viewing public is willing and able to pay to see the pro- gram. It is a virtual certainty that pay TV could afford to pay more for certain programing and could outbid free television for the most popular attractions. Consequently, it is clear that pay TV would have detrimental effects on the present free system. Given the opportunity, it would inevitably result in the "siphoning off" of attractions such as the world's series, professional and collegiate football games, as well as some of the most popular entertainment programs. While the siphoning might not occur overnight, in time much of the most popular fare on free television would be removed to pay TV. * Additionally, unrestricted pay TV, using existing television chan- nels, would deprive the public of significant numbers of hours of free television service and could threaten the operation of the national television networks. If all stations are permitted to engage in pay TV operation, people who reside in areas which receive signals from only one, two or three stations would suffer a substantial and real loss of service. PAGENO="0398" 394 Where stations which are network affiliates engage in pay TV operation, particularly during prime evening hours, network clearance of programing could be severely affected with serious effects upon the economic viability of network television. This problem is particularly sensitive for ABC, which has fewer primary affiliates, has the great- est difficulty in obtaining clearances for its programs, and is most likely to be hurt by any erosion of advertiser support. The FCC Committee's report relies on the very limited Hartford experiment and on the claims of prospective pay television entre- preneurs as justification for the conclusion that a system of pay tele- vision would serve the public interest. As ~to the Hartford experiment, the one thing that it established conclusively is that a pay television service cannot be developed on a national scale unless it acquires exclusive broadcast rights to the very programs now commanding the largest audiences on free television. Only the hit attractions of established popular appeal-motion pic- tures of unusual story and star value, sports of major importance, and variety shows with big names-drew meaningful numbers of subscribers. We should also point out that the claims of prospective pay tele- vision entrepreneurs have consistently proven wrong. When television was in its infancy, they claimed it could not possibly become econom- ically viable by relying exclusively upon advertiser support. When the experience of the late 1940's and early 1950's proved this incorrect, they shifted their ground. What is needed now, they claimed, is not a system to supplant free television, but rather a system which would supplement it. They then asked for an opportunity to experiment, and to prove that they could provide a service not then available on free television. Although pay TV's supporters originally urged that program di- versity, in the form of opera, ballet, symphony, and Shakespeare would be the kind of fare pay TV could and would offer-and the Commission in the past has considered such alleged diversity to be among pay TV's principal assets- the Hartford experiment demon- strated, and the Committee's report largely concedes, that such diver- sity is unlikely from pay TV. There is a very understandable reason for this. The public simply refuses to pay for such attractions on a meaningful scale. The FCC report now takes the tack that even if pay TV does not offer significant amounts of programing of a different kind from thai available on free television, it may still provide a beneficial supple- ment. ABC believes it is significant that the case for pay TV has fallen from the lofty heights of program diversity to the present level of whether the supplemental service is of such value of significance as to offset the anticipated adverse effects. The issue is not whether the public is to be denied a nightly diet of symphony and Shakespeare. The issue is simply whether access to a few more current motion pictures and limited additional sports ex- posure is of sufficient benefit to offset the tremendous destructive potential of pay television. The FCC's Subscription Television Committee report recognizes that pay television, unless sharply restricted and regulated, would drastically undermine free television. To avoid this pitfall, the report PAGENO="0399" 395 proposes to fix the age of feature films and the extent to which sports may be broadcast and to outlav~r for pay television use certain series programs with on-going plots or continuing casts. We are strongly of the belief that Congress has not given the Com- mission supervisory control of programs nor has Congress intended that it engage in excessive day-to-day supervision of broadcasters. Moreover, we know of no meaningful way in which rules or regula- tions could be devised which would afford free television effective pro- tection against siphoning. In an attempt to protect the public from loss of service and the free television system from serious impairment, the Commission's Sub- scription Television Committee also proposes to restrict pay TV to communities within the grade A signal range of five or more com- mercial television stations and to limit pay TV to one station in each community. Thus, pay television would be made available principally in the larger urban areas of the country. However well motivated, this would be discriminatory and unfair to the less-populated parts of the country. In the interest of protecting free television from the impact of pay TV, the FCC also proposes to limit the number of franchises in any community to one; but in so doing, it would create monopolies. The inequities are obvious. Having created monopolies, there is an obvious need for regulation of rates; yet the `Commission does not propose to regulate rates or to ask Congress for permission to do so. These examples demonstrate that the moment an attempt is made to reconcile the interests of pay TV with those of free television, one is caught in a chain of consequences approaching a dilemma. I should like to emphasize that we do not oppose pay TV because we fear competition. The FCC's policy of fostering competition was responsible for the creation of our company. The record will show that we have consistently supported competition in those areas which we believe are in the public interest. We supported the all-channel. receiver legislation which had as its purpose the long-range development of UHF stations, and expanded competition among licensees and networks. The Congress is also aware of our support for a public television corporation, which as an inde- pendent broadcast service will compete with us for audience. I am sure that all of us agree that constructive competition is the driving force behind the great forward movement of American busi~ ness. But no rule of policy we know of favors the acceptance of destructive competition contrary to the public interest. It is safe to assume that the advent of pay TV would affect the prof- itability of network operations. The ABC-TV network has been op- erating at a loss for several years. It would be unrealistic to' assume that a reduction in the profitability of network operations would not be accompanied by a contraction of network endeavors in the news and public affairs and other areas. It is indeed ironic that the issue of pay television, which' has been largely dormant in recent years as a result of the successes of free television and the failures of the pay television trials, should be resur- rected at a time when the American system of free television is on the edge of exciting new breakthroughs: The advent of the communications satellite had made international * television a reality and the era of global television lies just ahead; PAGENO="0400" 396 domestic satellites may soon be in use, enabling 24-hour network serv- ice to affiliates; "public broadcasting" legislation is close to enact- ment; the all-channel law has opened the way to many new stations and an everwidening program choice. At no time in television's brief history has there been less reason to turn back the clock and encourage the creation of a system which is both destructive and antisocial in its implications. We urge this committee to initiate and recommend appropriate leg- islation to prevent the establishment of pay television. Thank you, Mr. Chairman, for allowing us the opportunity to ex- press our views to this distinguished committee. Mr. MACDONALD. Thank you, sir. One question that has been going through my mind as I have lis- tened to all the testimony which has been given is that it seems to me the broadcasters are arguing on both sides. On the one hand you say that pay TV experiments have been a fail- ure and on the other hand you say what a bad effect it is going to have on so-called commercial TV. Now do you connect the two? If it is failure, then how can it possi- bly harm you? Mr. ERLICK. Mr. Chairman, I think what we are saying is that to date these experiments have proved unsuccessful. But we may be wrong and the next experiment may be very successful, in which case pay TV would be a springboard and the consequences would flow that I think we have outlined here. Mr. MACDONALD. You have to make up your mind whether they are a danger or not a danger. Mr. ERLICK. We think they are. The fact that they have not suc- ceeded to date does not mean- Mr. MACDONALD. Then they have been successful? Mr. ERLICK. No, sir; I don't believe they have but the fact they have not been to date does not mean that they won't be in the future. Mr. MACDONALD. You live on the public, not you, but the networks live on the public by sponsors because sponsors won't keep shows that they don't think influence buyers to purchase products; is that right? Mr. ERLICK. Yes, sir. Mr. MACDONALD. If they have been a nonsuccess, I am now talking about pay TV, how do they bother you? Mr. ERLICK. Mr. Chairman, I do not believe I can answer it in any way ~ther than the way I have. Mr. MACDONALD. It has not been a very successful answer. Mr. BROTZMAN. Will you yield to me for one question along the same line? Mr. MACDONALD. Yes. Mr. BROTZMAN. It seems to me in the first part of your statement, Mr. Erlick, you are talking about how bad it is and back here you state how the low-income people across the country are going to be ilis~riminated against by not having it. Do you understand the inconsistency? You say this is bad per se and back over here you say under the rules of the Commission as they are proposed a lot of small communities can't get it. Mr. ERLICK. Yes, sir. I agree there are two points. Mr. BROTZMAN. There is an inconsistency. PAGENO="0401" 397 Mr. ERLICK. I don't think there is an inconsistency. One makes one assumption and one makes the other. We have taken a position from two different assumptions. Mr. MACDONALD. I could not agree more with Mr. Brotzman who just picked up what I said. I don't see how you can argue out of both sides of your mouth. Mr. ERLICK. Mr. Chairman, we are making two different assump- tions. We are stating what we believe to be the consequences in both cases. Mr. MACDONALD. Assuming it fails, how does it possibly harm you? Mr. ERLICK. It does not, if it fails. Mr. MACDONALD. If it succeeds, you feel it will harm you? Mr. EBLICK. Very definitely. Mr. MACDONALD. I am not trying to paraphrase Mr. Preminger the other day but isn't that the whole basis on which our system works, that the people of America have the right to choose whether they want to pay to see something or want to watch a movie with x number of conimercjals in it? Mr. ERLICK. I think that perhaps is the crux of the argument here. Unless I misunderstand the issue, the choice the public would have would be whether to pay to see the event or not to see it at all if the event went to pay-TV. Now, that is not a very happy choice from the public standpoint. Mr. MACDONALD. I don't know about ABC and I am not picking on your network, but I have seen movies oh TV that are 15 to 20 years old. You can see John Wayne when he was an extra. Mr. ERLICK. I suspect, Mr. Chairman, that some of those movies were local rather than network and that they were perhaps late night attractions that were not originated by the network but by the local stations. Mr. MACDONALD. Do the networks have an agreement about how many commercials can be used during a movie that they purchase? Mr. ERLICK. There is no agreement between the networks; no sir. There is a code which the networks adhere to, the Code of the National Association of Broadcasters, which does outline certain limits in the number of commercials. * Mr. MAcDONALD. It depends on the movie I see. Mr. ERLICK. In a 2-hour movie, there are normally 14 minutes of commercial time. Mr. MACDONALD. Don't you think that is irritating to a lot of people? Mr. ERLICK. Perhaps it is, Mr. Chairman, but I would just point out this in response. Were it not for those commercials, the program services which the free networks provide for the American public would be impossible. To give you a rough idea of what we are talking about here and I have no figures from the other networks and only a rough figure from ours, but my guess is that the three program services of the three net- works, including entertainment, sports, public affairs and news, runs somewhere in the area of $450 millioii a year in cost. Mr. MACDONALD. You lose on the news programs? Mr. ERLICK. Yes; I was about to get to that if I might take 1 more minute. Mr. MACDONALD. Right. 86-399 0-67-26 PAGENO="0402" 398 Mr. ERLICK. That is the only way we can afford to present a pro- gram such as "Africa" which some of you gentlemen might have seen recently, a three and a half hour presentation which some individuals have said was probably the greatest program endeavor ever under- taken by the networks. We are also working with Jaques Cousteau on an underwater exhibition from which we expect to get some special programs on oceanography. We are presenting a well-rounded news and public affairs program over the course of the year which cost the network in essence $18 mil.- lion a year out-of-pocket loss. We spent $30 million, we recovered $12 million. We are losing $18 million a year on that service. The only way we can do that, Mr. Chairman, is to recover a sufficient amount from the commercial side of our operation to enable us to continue these efforts. Mr. MACDONALD. You make it sound reasonable. Mr. BROWN. Will the gentleman yield? Mr. MACDONALD. I yield. Mr. BROWN. Unless, of course, you go to subscription TV, which would provide some funds from people who want to see a specific item. Isn't this correct? Your only sourèe of revenue is your advertis- ing dollar; that is what you are saying? Mr. ERLICK. Yes, sir. Mr. BROWN. If you had another source of revenue, then you would be able to do something a little different because you would have a larger amount of revenue. Is that right? Mr. Em~IcK. I don't know that our source of revenue under those circumstances would be greater than our source of revenue under the present circumstances. Mr BROWN This is a contradictory argument you are making here You say, there is either too much or too little demand for pay-TV. We are faced with trying to find out which of these views is true. That is where the decision lies, `frankly. Mr ERLICK Of course, this is precisely where your decision lies I think, without attempting to evaluate it, myself, because that is the job of you gentlemen, I think you have to evaluate the risks which are Inherent and which so many have spelled out here in the establishment of a pay-TV system and in the gaining of a foothold by that system. Now, if those risks are of the magnitude which has been described, and we believe they are, then this is too great a risk to take, in our judgment, in terms of the destructive potential which obviously exists and which almost everyone admits, as far as the free system is concerned. Mr. BROWN. If the gentleman will yield further, I would like to pursue this business point a moment. It seems to me that if you are not selling an adequate amount of network time because you are a small network with fewer outlets than CBS or NBC, you would look for some way to get additional revenue- I find it difficult to phrase what I am thinking-well, you said you were losing money. Mr. ERLICK. On the network; yes. Mr. BROWN. If you are losing money on the network, I would thrnk you would `be coming in here and asking, "How about opening this thing up so that we can get in on subscription television and have PAGENO="0403" 399 another source of revenue besides advertising?" If you are the Avis of the outfit, would you not like to find another source of revenue to be able to expand your business and perhaps compete more viably with the largest systems? Mr. ERLICK. Not a source of revenue which would undermine the other half of our business which we are now in; no, sir. Mr. BROWN. I don't know that it would undermine because I am not paying as an advertiser if I pay to watch something; I am paying as a box office fan. I am using my money rather than-as Mr. Prem- inger said, and I am being the devil's advocate for a minute here- having to absorb the dog food commercials which I don't find as offen- sive as he does because I like dogs. Rather than absorb that, I might want to put down 50 cents or a dollar or a dollar and a half to watch "My Fair Lady" which would go to ABC rather than going to CBS or NBC because they could finance it with the dog food commercials. Mr. ERLIOK. If I might answer it this way, I can make it clearer. If there were an attraction on pay-TV on the market, say between the hours of 8 and 10 at night, the prime time, of great magnitude, then the audience is obviously going to be diverted to a substantial extent from the stations offering a free television service. Mr. BROWN. You have all those poor people who can't afford to watch, according to what was said here. Mr. ERLIOK. There are a number of those; that is true. But a sub- stantial portion of the audience, if the attraction is great enough, is going to be diverted. If today's game were on this afternoon, I don't think anybody in this room has any doubt that a substantial portion of the audience would be watching that game. If that is true, the audience remaining on the free station has got to be decreased and the price you would get from the advertiser is decreased. Consequently, the amount of money we can spend on public affairs and news pro- graming and other public service efforts is bound to be decreased so that the service is bound to be harmed. Mr. BROWN. That is only on one network, this game today. Mr. Em4ICK. Yes, sir. Mr. BROWN. So they got the advertiser to pay the top dollar to get that game. Mr. Eiu~IcK. Yes, sir. Mr. BROWN. If I want to watch it without commercials, I can't watch it, can I? If I can't watch it today, I may want to watch it tomorrow night sometime. It seems to me that if you got into this business, and I realize under the proposed FCC regulations you can't, you might wind up being Hertz rather than Avis. Mr. MACDONALD. How about National? Mr. ERLIOK. We have said that, should pay TV be allowed to be established and should it look to us as if it is going to become a goin enterprise, we certainly would get into it. We have never said we woul. not. We are saying now that we think it is in the public interest that it not be established. But should Congress decide that it should be authorized and the Commission so direct it, then I think we would take a very good look at it with the results I think I have just outlined in terms of the free service. Mr. BROWN. Thank you, Mr. Chairman. PAGENO="0404" 400 Mr. MAcDONALD. To continue and not to sound like Johnny One Note, but ABC more or less controls Cassius Clay, don't they? Mr. ERLICK. No, sir. Mr. MACDONALD. Who is that sports announcer who has him on all the time, the rather obnoxious one? Mr. ERLICK. I am not sure I know whom you mean. Mr. MACDONALD. If you work for ABC, you know very well whom I mean. Mr. ERLICK. Howard Cassell has interviewed Cassius Clay once or twice. Mr. MACDONALD. Have you carried Clay's fights all the times he has fought over commercial TV? Mr. ERLICK. We have, on a number of occasions. Mr. MACDONALD. Are you the network that blacked out Phoenix'? Mr. EIu~ICK. No, sir. Mr. MACDONALD. Who did that? Mr. ERLICK. I really could not say. We did not carry that fight. That question I knew came up and I did get some notes on it. I believe that fight originated in Madison Square Garden. I believe it was an RKO-owned event. Mr. MACDONALD. `They produced it but who carried it? Mr. ERLICK. They bought the rights and I think they sold it to theater television and probably to certain local stations. I really don't know how it was disposed of. We did not carry it. Mr. MACDONALD. No. 1,1 would like to compliment ABC for doing the great job in sports it is doing; the Wide World of Sports is a great program. I am sure you lose a lot of money on that; you go to a lot of places and it costs a lot of money. Mr. ERLICK. Fortunately, on Wide World, we do not; that is one of the events on which we manage to make a small profit. Mr. MACDONALD. What is your viewpoint on this blackout system? Mr. ERLICK. We are opposed to it. We would like to see it elim- inated. We have no brief for blackout. Mr. MACDONALD. I haven't talked to anyone who is for it. All I know, it happens. Mr. ERLICK. It happens be~cause it is a condition which is a part of the sale of the event. If you want the event, you must agree to that condition. The only alternative is not to buy the event. That is not a very happy choice. Mr. MACDONALD. What if the three networks said they were not going to go on with this blackout? Mr. ERLICK. If the three networks got together and made such an understanding, I think Mr. Ramsey Clark might have somethin~g to say about it. Mr. MAcDONALD. You just heard the chairman of the Judiciary Committee say just the opposite, in his judgment it would not hap- pen. That also happens to be my judgment. Mr. ERLICK. I would like very much to have some assurances from the Department of Justice that it would not happen. Mr. MACDONALD. If it is a practice that the three networks don't like, have you asked for an advisory opinion about it? Mr. ERLICK. No, sir; we have not. PAGENO="0405" 401 Mr. MACDONALD. Because it seems to me more in restraint of trade, that being a word of art, I suppose, to black out an area for com- mercial reasons and sell it for theater TV than just letting it be seen on regular commercial TV. Mr. ERLICK. Yes, sir. Mr. MACDONALD. It is not my position to make any suggestions to all the brains of the three networks, but I would think it would be a simple matter to just ask the Attorney General for an advisory opin- ion about it, if it is that irritating to the three networks. I somehow have the feeling it is not that irritating. Mr. ERLICK. Sir, t~s I say, it is something that we do not favor and do not want. There is no reason in the world why a network should want to black out any area of the country in terms of presenting any particular event. A college football game, there is no reason why we would want to black out the game in the hometown of the college involved. There is a very good reason why a college wants to do that because it does not want to hurt its attendance on Saturday afternoon. That is understandable to us. Mr. MACDONALD. Supposedly they are amateurs and therefore, you know, when they start talking dollars and cents and that sort of thing, I lose a good deal of sympathy for them about it although I can und~r- stand. But when something is sold out for months ahead of time- I use the example of here in Washington or in New York, where the stadium is sold out, fans support the team here; yet, you cannot see the game here. You have to watch some game, two teams playing whom you do not have any interest in. That does not seem to me to* be a fair thing. Does it seem fair to you? Mr. ERLICK. As I say, we would love not to have that condition. Mr. VAN DEERLIN. Will the chairman yield? Mr. MACDONALD. I yield. Mr. VAN DEERLIN. Before my esteemed chairman digs too big a hole here- Mr. MACDONALD. For whom? Myself? Mr. VAN DEERLIN. Possibly to fall into. Didn't Congress pass, about the 89th Congress, a bill which exempted from antitrust action any pro sport that did black out broadcasts? Mr. MACDONALD. Yes; I think that is right.. We also in our blihd day that day said that only the Redskins and no other team-AFL, by law can't come in and use the Coliseum down here; believe it or not. Mr. VAN DEERLIN. Thereby excluding the more glamorous circuit, the American Football League. Mr. MACDONALD. I was one who voted against it. I am not sure that everyone who voted for it understood what was in the bill, frankly. I will conclude by saying this. In your judgment, in addition to the inconsistencies that Mr. Brotzman and myself have pointed out,~ you know, your playing both sides of the fence, that pay-TV.is a threat and yet it is a failure at the same time, also you are just absolutely wrong about attractions which you say would be lost to the public si~ich as the world's series, because they can't be. Mr. ERLICK. I believe they can be, Mr. Chairman. Mr. MACDONALD. How? PAGENO="0406" 402 Mr. E-RLICK. Let me explain. Let us take the New York Giants, NFL football club. Mr. MACDONALD. Let us talk about the world's series. That is the question I asked you about. Mr. ERraCK. I have some specifics on that one; that is why I bring that up. Then we will talk about the world's series. The restriction is 2 years, the FCC proposal. The Giants get $1,- 750,000 a year now from free television rights. Twenty-eight million dollars a year, roughly, is what the league has paid. It is divided among the clubs equally, as I understand it, and the Giants would receive $134 million from free television. If the Giants elected not to make available their away schedule- Mr. MACDONALD. Let us get back to the world's series. Mr. ERLIc~K. I can show you economically how this is possible. Mr. MACDONALD. Let us talk about the world's series because specifi- cally in that fourth order and report, the world's series and that type of specific event, to use the language they use, can't be lost to commer- cial TV. Mr. EIU4ICK. I believe it can. There is nothing which says it has to remain on free television. Mr. MACDONALD~ Specific events such as, and they name the world's series. Mr. ERLICK. Not the way we read it, Mr. Chairman. Mr. MACDONALD. Well, read it again. In conclusion, you said that rates should be regulated for pay-TV. Mr. ERLICK. I didn't say they should be. I said under the proposal there was nothing to prevent rate gouging. Mr. MACDONALD. What would your position be if the FCC told ABC what rates they can charge? Mr. ERLICK. We are not charging the public, Mr. Chairman. There is a difference. Mr. MACDONALD. I know you aren't. You are charging the sponsors. Mr. EULICK. That is correct. Mr. MACDONALD. What if the FCC got into that act? Mr. ERLICK. I think they would have to get specific authorization from Congress to do so in either case. Mr. MACDONALD. I yield at this point. Mr. BROYHILL. Thank you, Mr. Chairman. I really don't have a question but a comment and part question. It seems to me we have here, among others, at least two basic issues. One, of course, is the argument whether or not the Federal Communi- cations Commission has authority over this. As I interpret it, this committee has over the years felt the FCC didn't have any authority over pay-TV. Of course, there are varying opinions about that. Then we have another issue as to whether or not subscription TV is in the public interest. You are maintaining it is not in the public inter- est. At the same time, you are saying if it is approved you are going to get into the business. Mr. ERLICK. We may. Mr. BROYHILLI This seems to be inconsistent. If it is not in the pub- lic interest, why are you going to be running to get into it? PAGENO="0407" 403 Mr. ERLICK. If the Congress and the Commission decide that this is a service which they want the public to be able to buy if they want to, then we are presented with a different set of facts than we are now and we would certainly take a look at it to determine whether it was in our interest to get into it or not. So far, that is not the case. The opposite is the case. The resolutions that I am familiar with in the Congress and the bills which I believe have `been introduced in `the Congress would indi- cate to me that Congress does not believe pay-TV is in the public interest. Mr. BROTHILL. In other words, it seems to me you are itiaintaining that if it is a profitable interest, you may want to get a part of it. Mr. ERLICK. Yes, sir. If Congress directs the Commission, if Con- gress decides that pay-TV should be authorized in some form, because that is where I think the authority has to come from, and the Commis- sion decides to follow through and pay-TV is established as a service, quite apart from how we might feel about it, what I am saying is that at that point and under those circumstances ABC will take a look at it as a business and decide whether we should be in it or not. I am not advocating that you do that. Do I make myself clear? Mr. BROYHILL. I have no other questions, Mr. Chairman. Mr. MACDONALD. Mr. Van Deerlin. Mr. VAN DEERLIN. I am indebted to Mr. Lishman for documentation of that matter we were discussing a few moments ago. This occurred* during the 87th Congress in which Mr. Brotzman, Mr. Broyhill and I were not serving. Mr. MACDONALD. And I voted against it. Mr. VAN DEERLIN. It permits professional football, baseball, basket- ball and hockey leagues to enter into package television arrangements without fear of antitrust prosecution. I presume, Mr. Erlick, frotn your testimony in regard to the loss of prime sports entertainment or the fear of a loss, that you are not en- tirely reassured by Mr. Wright's promises on behalf of the Zenith Corp. yesterday that they had no interest whatever in getting the Rose Bowl and the world's series. Mr. ERLICK. Let me say this, Congressman Van Deerlin. I have great respect for Mr. Wright and his company and I am sure he was very sincere in what he said. I would iiot doubt that at all. But Mr. Wright is not going to be president of Zenith forever and I do not believe he can commit his future management or his future board. Nor can he commit the hundreds of other pay TV entrepreneurs who might be interested in acquiring rights across the country. The mere fact that Mr. Wright stated what his present intention was does not give us any great comfort as far as others are concerned or even his own company in the future. Mr. VAN DEERLIN. Do you have any offhand estimate as to what would be required in the way of an investment to take one of those prime attractions off the air for 2 years? Mr. ERLICK. I was about to give a rough idea in the case of the New York Giants, and this is my own crystal balling. I can't vouch 100 percent for these figures but I think they are reasonably accurate. PAGENO="0408" 404 The NFL gets $28 million a year as a league from free television for the exhibition rights This is divided, as I understand it, equally among the 16 teams, which would mean that each team gets $1% million per year for its television exhibition rights. Now, if the New York Giants, for example, were to decide not to make available its away schedule to free TV, it could say, "I will sell my home schedule to pay TV, seven games." It could say that under these rules as we read them. Now, there are 5,049,000 television homes in the New York metro- politan area. Let us assume that 10 percent of those homes subscribe to this event. That is 500,000 homes. Let us assume a dollar per home per game. That would be 500,000 times seven, or three and a half million dollars. Let us assume further that half of that money goes to the team and half goes to the pay TV company. The Giants would receive then, net, the exact same amount of money under those circumstances and under the assumption I have just made that they would have received had they sold their entire schedule to free television. Therefore, there would be no loss to the Giants, moneywise, in keeping those games off free TV for 2 years. After that, as we read the rules, they would then be free to sell their entire schedule at the top price to the top pay TV bidder. In other words, under those assumptions, if they are reasonably ac- curate, that is how a team could afford to stay off free TV for 2 years while they were getting themselves free of the FCC's proposed restrictions. Mr. VAN DEE1u~IN. So that the restrictions that the FCC would im- pose in its rules wourd not provide a real protection at all, in your opinion? Mr. ERLICK. Not in our judgment; no, sir. Mr. VAN DEERLIN. Thank you, Mr. Chairman. Mr MACDONALD I will recognize Mr Brotzman in )ust a moment Are you sure you are right about that? Mr. ERLIOK. This is the way we interpret it, Mr. Chairman. Mr. MACDONALD. I don't have the language with me but the language says events that were usually shown. Mr. ERLICK. Within 2 years on free television. Mr. MACDONALD. Usually sold on commercial TV. Mr EiuiwK That is right All you have to do is stay off 2 years Mr. MAcDONALD. That would take the whole schedule, would it not? Mr. ERLICK. No, sir; just that event, as we read it. Now, to answer your question, the home gaines are not usually shown. So that, under both circumstances, they would be free of that restriction. Mr. MACDONALD. They are not shown in New York; yes, but you can see them in Boston. Mr. ERLICK. Right. Mr. MACDONALD. If it is being shown-there are no geographical boundaries in the regulation-if it is sold commercially and I can watch it in Boston, then I would think any lawyer could easily argue that it had been shown. Mr. ERLICK. I think you cOuld argue that. PAGENO="0409" 405 Mr. MACDONALD. Therefore, your argument about how it could be financed is specious. I don't think it is right. Mr. ERLICK. I don't believe so, Mr. Chairman. All I believe the restriction provides is that the event must not have been shown. Whether it was local or not, let us leave that aside for a moment. Whether it was shown on television within a period of 2 years, free television, that is the question. Mr. MACDONALD. If it is being shown in Boston and other places- Mr. ERLIcK. Under the circumstances I outlined to Congressman Van Deerlin, these events would not be shown on free television. Mr. MACDONALD. On commercial television. Mr. ERLICK. That is correct. Mr. MACDONALD. But they would have to cancel their entire program. Mr. ERLICK. That is right. They just won't make it available. Mr. MACDONALD. Yes, but what you were saying to Mr. Van Deerlin, as I understand it, was that they just cut off their home games for 2 years. Mr. ERLICK. I said assume they don't make their games available to free te.Ievision at all, period, and they do sell their home games to pay TV. Mr. MACDONALD. After 2 years? Mr. EIu~IcK. No; for 2 years, during that 2-year period, after which time they would be free to sell their entire schedule to pay TV. The question was, How can a team afford to stay out for 2 years? Mr. VAN Di~RLIN. How can pay television make it worth their while? Mr. ERLIOK. Right. Another way would be if a man decides that the world series, for example, is a big enough attraction and he has a big enough pocketbook, he could say to the baseball leagues, "I will give you x dollars for this year here and x dollars for year 2 and in year 31 will guarantee you x dollars." Mr. MACDONALD. Sir, I don't want to dispute you about that but the regulation specifically, the fourth order and report regulation, specifically excluded the world series. Mr. ERLICK. That was not the way we read it. Mr. MACDONALD. Check it out. Mr. ERLICK. All right, sir. Mr. MACDONALD. Mr. Brotzman. Mr. BROTZMAN. I have one question which relates to one statement you make here on page 5,. Mr. Erlick. You say, "It. is a virtual cer- tainty that pay TV could afford to pay more for certain programing and could outbid free television for the most popular attractions." I have heard discussions here about figures and I don't know what the percentage of profit is that you have, but we have talked about some pretty astronomical sums. I guess when we get down to talking about bidding for programs we get down to talking about dollars, is that correct? Mr. ERLICK. Yes, sir. Mr. BROTZMAN. What do you mean by that statement? Mr. ERLIOK. What I am saying is that for outstanding events such as the ones we have been talking about the price which a pay-TV busi- ness can pay for those events seems to us at least to be greater than the PAGENO="0410" 406 price we can pay for those events. For the reasons stated in the pre- ceeding sentence, that our ability to bid is limited by what we can reasonably expect to get back from advertisers. Their ability to bid is limited only by what the public can pay, what the traffic will bear as Congressman Celler said. We think that what the traffic will bear from the public is greater than what we can get from this as an advertising medium. That is the assumption which is inherent here. Mr. BROTZMAN.'What you are really saying here is that there is a tremendous public demand for this because this is where their money would have to come from. Mr. ERL1CK. For these particular events; yes, sir. There is a great demand, no question about it, for these events. Mr. BRYrZMAN. When you say "these events", what are you alluding to? Mr. ERLICK. Pro football, college football, world's series, outstand- ing movies, outstanding talent such as Sinatra, Bob Hope, and other people of this caliber. Yes; there is a great public demand for them. Now the public is getting it from free TV and they are not paying for it. The choice as I said a minute ago seems to be a rather illusory one as f~r as the public is. concerned. The public would be faced with the choice of paying for the world's series or not seeing it at all and I don't think that is a very happy choice. Mr. BROTZMAN. Thank you. That is all I have, Mr. Chairman. Mr. MACDONALD. Are there any further questions? Thank you very much. Mr. ERLICK. Thank you very much, Mr. Chairman and members of the committee. Mr. MACDONALD. The next witness is from the NatiOnal Association of Broadcasters. STATEMENT OP DOUGLAS ABELLO, COUNSEL, NATIONAL ASSOCIATION OP BROADCASTERS Mr. ANELLO. Mr. Chairman and members of the committee, my name is Douglas Anello2 counsel of the National Association of Broadcasters. Mr. Wasilewski, our president, had wanted to testify but, unfortu- nately, he is out of the city today and could not make it. Before I start with Mr. Wasilewski's statement, I would like to clarify a point that was made between you and Mr. Erlick. I refer to page 19 of the fourth report and order, paragraph 261. If I may, I would like to read the last sentence and I don't believe it is taken out of context: "This means that if for a period of 2 years baseball games of the week were regularly broadcast by free TV in a èommunity during the regular season and away games were not, STV~could then show the latter but not the former. The same would be true for professional football." If it is true that way, Mr. Chairman, I would say the reverse would be equally true, that if the home games were not shown but the away games were shown, then STV could bring the home games but not the away games. That is from page 261. PAGENO="0411" 407 Mr. BROTZMAN. Would you read that again rather slowly because I am trying to follow this and I am getting a little confused frankly. Mr. ANELLO. Paragraph 261 of the Commission's proposed fourth Report and Order. It has two sentences, It is a long paragraph and I don't believe the last two sentences are taken out of context. "This means that if for a period of 2 years baseball games of the week were regularly broadcast by free TV in a community during the regular season and away games were not, STV could then show the latter"-meaning the away games-"but not the former. The same would be true for professional football." I suggest that if it is true in that way, the reverse would be equally true, that if the away games were telecast and not the home games, then the home games would be available for subscription television. STATEMENT OP VINCENT T. WASILEWSKX, PRESIDENT, NATIONAL ASSOCIATION OP BROADCASTERS, READ BY DOUGLAS ANELLO, COUNSEL Mr. ANELLO (reading). Mr. Chairman, the National Association of Broadcasters is a nonprofit organization of radio and television broad- casters whose membership included as of October 4, 1967, 2,180 AM stations, 1116 FM broadcast stations, 514 television stations, and all of the national radio and television networks. We very much appreciate your courtesy in inviting us here today to present the views of the association on subscription television. The NAB stands firm in its belief that the public interest would not be served by permitting the use of the airwaves or exploitation of free programs by wired systems to bring pay television programs into the home. The American people receive free the best television in the world. Our television stations and networks offer the Americaii people more programs and a wider choice of programing than is avail- able anywhere. This has been accomplished in the traditional American pattern of free and open competition. We have succeeded or failed, as in any other free enterprise, but never either in success or failure has our industry levied I cent on the American people to see or hear our broad- cast performances. The only thing required of the American listener or viewer is that he have a receiving set. Pay television would now take this investment in receivers by the people as its takeoff point. It would convert a free highway into a toll road. It would require the public to pay for what they flow view for free. If pay television proposed the use of sets other than those existing in the American home so that the public could truly have a freedom of choice, it would be new but pay television proposes to use the result of an investment by the public over the years of more than $30 bllhion~ Its proponents realize that the roadway is already there-the receiver used for free reception by an audience created by free television. I submit this is not progress; rather, the antithesis of progress. The use of the airwaves for pay-TV purposes is diametrically opposed in concept to the present system of broadcasting. Its basic premise is that if you want to see, put a coin in the box. Its justifica- tion is based on the fallacious promise that through the revenues PAGENO="0412" 408 derived from this system the American public will receive a type of programing superior to that which it now receives free. An examination of the record makes it clear that the promise of pay-TV is more myth than reality. Pay-TV systems do not provide new and diverse types of program services. The Subscription TV Committee of the FCC virtually admits this fact in its report and the Hartford experiment certainly demonstrates the same fact. In 1961, the FCC authorized the Zenith Radio Corp. to provide a test of on-the-air pay television in Hartford. Zenith had stated that the "sole purpose of subscription TV" is to provide "programs of box office quality * * * which are not now available on free television." Accordingly, the subscription programing provided by station WHCT in Hartford as a result of the experiment should throw light on the desirability of the whole idea of subscription television. Zenith and Teco have provided a detailed listing of all programs made avail- able to Hartford subscribers during the first 2 years of the experiment. During that 2-year period, station WHCT broadcasts a total of 599 different subscription programs; most were repeated, so that the sta- tion provided 1,7'T6 separate presentations or "showings" during the 2 years. As was the case in previous pay-TV experiments in Bartlesville, Okla., and Etobicoke, Canada, the Hartford service was essentially a "movies-in-the-home" operation: 86.5 percent of the total number of "showings" were motion picture films. Sports broadcasts accounted for another 4.5 percent; educational features for 3.5 percent; and "special entertainment productions," including the operas, ballets, and Broadway plays promised by all of the major companies supporting pay television, for the remaining 5.5 percent of program offerings. This hardly satisfied the criterion of "not being available on free television." Television stations have made extensive use of theatrical feature films almost since the beginning of commercial television in this country. In the past several years there has been a notable increase in the programing of relatively recent films. The same is true in the increased coverage of sports events. This trend may be expected to continue unless these programs are siphoned away from free to pay. That the FCC Committee is concerned with this possible siphoning process is apparent from its statement that "It is at least conceivable that a successful nationwide STV system * * * could, by directing its purchases at select programs, take them from free TV and require the huge audiences of those programs to pay to see them or not see them at all. We would not consider this to be in the public interest." To assure a "wide variety" of programs not currently available on free TV the FCC Committee suggests "limiting" subscription TV to movies less than 2 years old and to sports events which have not been televised regularly in the community within the past 2 years. To make certain that there would be at least a minimum amount ~-~of cultural and educational programing, movies and sports could not exceed 90 percent of the whole. The futility of these suggested restric- tions is patent. If pay television is capable of even moderate penetration of free television markets, sports teams and pay television promoters would' PAGENO="0413" 409 be fully able to make the necessary adjustment for the required period in order to capture the rewards of a "box office" return. Professional football is an apt example. At present, the typical pattern is to broadcast "away" games of local teams, and when the local team is at home, to broadcast games of other teams. The rules would permit the pay television broadcast of "home" games not car- ried during the preceding 2 years. It would be relatively simple for professional football teams imme- diately to substitute the broadcast of "home" games on pay television for the broadcast of "away" games on free television. This wOuld provide professional football with substantial income during the in- terim 2-year period while leaving no professional football on free television. Thereafter, pay television could carry all the games, both "home" and "away" of the local team. Professional football would disappear as a free broadcast service. This could happen even though a small minority of the present viewing public chose to subscribe to a pay-TV service. For example, 5 percent of the 60 million TV homes in America today could by the simple expedient of paying $1 per game "outbid" the remaining 57 million. This sport is but one example of the ultimate fate of virtually all of the most popular kinds of programs now available on free tele- vision. The argument that pay-TV would provide a beneficial supple- ment" to free TV is a sham. All evidence available and the imperative of logic leads to the conclusion that pay-TV would seek to appeal to the greatest number of viewers to reap the maximum number of subscriptions and this it could do largely with sports and motion pictures. That many pay-TV advocates have been willing to accept what they consider to be very restrictive regulatory proposals should be cause for deep concern. Oiice the camel's nose is under the tent pay-TV would seek to circumvent, frustrate, or invalidate the restrictions. Indeed, the suggested regulations over programing raise serious questions under the first amendment. Furthermore, they are `so in- tricate as to be unworkable and would force the Commission inth a morass of administrative detail thereby compounding its already substantial administrative burden. In short, if the Commission cannot, consistent with the public interest, authorize pay TV without such regulations, then it should not authorize pay TV at all. In this connection, the NAB respectfully suggests that the Federal Communications~Commission lacks the jurisdiction to `authorize over- the-air pay television on a permanent basis. The only judicial consideration of the subject concerned itself with experimental operations. The court never addressed itself to the ques- tion currently under consideration by the Commission, that is, per- manent authorization. We suggest there is a much broader authority for the Commission to permit experimental `operations than exists for actions that would alter permanently the regulatory scheme. I shall not attempt to go into the legislative history which led to the present `Communications Act other than to stress the fact that PAGENO="0414" 410 we firmly believe it quite clear that Congress founded our present regulatory system in the clear context of free reception of programs by American listeners and viewers. We suggest that the proceeding now pending before the FCC en- visa~es such a basic modification of the American system of broad- casting that it should not be implemented withou the specific guidance of the Congress. We would take this position even if the act could be construed to grant general authority. In its current proceeding, the Federal Communications Commission is considering the use of the frequencies for pay TV purposes. Of equal or even greater importance is the possible development of a nationwide system of wired pay television through the interconnection of CATV systems. As you know, CATV picks up free broadcast signals and retrans- mits them to subscribers via cable for a fee. *There are numerous applications presently pending before the Commission to interconnect many of these systems. If there is a nationwide interconnected CATV network, it will be a simple matter to turn this into a nationwide system of wired pay TV. This is particularly true if there is no restriction upon program origination by CATV systems. In its traditional form the community antenna, as a community antenna, can be beneficial to many people and should `be encouraged. But if it is allowed to become a nationwide system of wire television, as it surely will if unchecked by the Congress and the FCC, it will be a `thorn `in the pocketbook of everybody. Broadcasters are dedicated to service of the public-the whole pub- lic-in their communities. Their programing, whether it be news, entertainment, sports, or public service, and whether it be of local or network origin, is supported by advertisers. Advertising, as we all know, is an essential element in the growth and health of our economy. It pays for itself many times over in the ex- pansion of markets, the stimulation of employment, and the develop- ment and improvement of new products and services. During the course of present consideration of pay television much has been said of the "public ~ Where does the interest of the public lie? What is best for all of the people, rural and urban, privileged and poor? We believe the public interest lies in a system of diverse local broad- casting outlets, free of charge and equally available to all, urban and rural, rich `and poor alike. Mr. MACDONALD. Thank you very much, sir. You know, those are ringing words and all that and, frankly, when I hear a witness testify for one side and then for the other it is a little confusing because all the witnesses have been persuasive. You say, where does the interest of the public lie? That is not a bad question. That is what the Congress is here to look out for. What is wrong, to take a concrete example-and I don't want to sound just sportsminded, but it keeps coming to my mind-what is wrong if the stadium in Boston today, which hold 35,000, is sold out and I want to watch the game and I can't get a ticket-what is wrong with my right to pay $2 or $3, and I agree with you that charges will be that, not the 25 cents or 50 cents we have been hearing about, will be what PAGENO="0415" 411 the market will bear, but what is wrong with my having the choice, if I want to, to stay home and watch it on pay TV and maybe have some friends in? What is wrong with my having the choice to pay $3 to watch it without getting pushed around by all the crowd? Is there something inherently indecent about having a choice to watch it at home if you want to? Mr. ANELLO. It is not inherently indecent, Mr. Chairman. If broad- casting had started out that way, there would be nothing wrong. But baseball is a national pastime. What makes the world series? It is the kid in San Francisco, in Tennessee, in Phoenix and in Chicago, being able to listen and view this series on a set which the `only cost is the price of the set. Mr. MACDONALD. That is him. That is somebody in Phoenix. I happen to come from Boston. I happen to dislike a lot of the com- mercials that come on, even though somebody said they were better than a lot of the programs. I don't happen to think so. some of them are not dog food, either, but more `basic things that they advertise- you know, it is fairly disgus'ting to have to listen to them and you hear them all `the time. If I choose to pay $3 not to have to listen to those advertisements, what is wrong with my having the choice to do it? Mr. ANELLO. Because you would be a minority then, imposing your tastes and your preferences upon the majority. Mr. MAODONALD. Yes; that is right. Mr. ANELLO. That is where the public interest comes in. Mr. MAcDONALD. What is wrong with that? Anytime I go to a movie, I am a minority of one. I go to the box office, I pay for the ticket, and I see it. Nobody makes me do it and they don't interrupt the Program 42 times while you are watching the movie. Mr. ANELLO. When you go to a movie, sir, you'choose to leave your home to go downtown, pay your 50 cents or a dollar and everybody else has the same choice. You are depriving nobody of anything. Mr. MACDONALD. How do I deprive the people in Phoenix, unless they have a blackout going in Phoenix, which we have been talking about? How, if I choose this pay TV thing, whatever system maybe is authorized, or whatever systems might be authorized, how do I deprive anybody of anything? Mr. ANELLO. Because you are siphoning off a program that is al- ready on television. Mr. MACDONALD. How do I siphon it off? Mr. ANELLO. Because'once you pay for it you don't think somebody is going to put it on for free, do you? Mr. MACDONALD. A lot of times they sell stuff, Dodge automobiles, the sponsor is trying to sell Dodge automobiles on this broadcast of the World Series. I don't smoke. They keep interrupting, telling you this cigarette is better and how long you make it, et cetera. You know, they are not selling me anything. How do I, `by exercising my right, willing to pay to see a game, how do I deprive anybody of anything? Because this market does not go up; I am not going to buy a Dodge; I am not going to buy a cigarette. So, they don't lose anything by losing me. Mr. ANELLO. Who doesn't, Mr. Chairman? Mr. MACDONALD. The sponsors. PAGENO="0416" 412 Mr. AN~Lo. Maybe the sponsor doesn't but you don't think that game could be broadcast on pay television in Phoenix and for free in Los Angeles. It would have to be one or the other across the board. Now, if the Red Sox or if the pay television entrepreneurs want to string a wire from Fenway Park into the local theater or into your home or into New York, that would be a horse of a different color. Even there you would still be siphoning off the game. But we are talking here about the use of broadcast frequencies, frequencies that are to be used by all the people to the greatest extent possible. Mr. MACDONALD. That is right; in the public interest. Mr. ANELLO. Precisely. Mr. MACDONALD. And for free. Mr. ANzLI~o. We feel that for free is in the public interest. That is our position. Mr. MACDONALD. If I want to pay a station in Boston that is using a free airway, how much do you suppose it would cost me? Mr. ANEIL0. Depending on which one, maybe $12 or $15. Mr. MACDONALD. How come the people who have been given these frequencies have the right to have that amount of money coming to them when it is something that they are doing allegedly in the public interest? Mr. ANEu1o. I do not think that the public interest and eleeinos- ynary institutions are necessarily synonymous. I think you can serve the public interest by making money. The automobile manufacturers make money They still serve the public in providing transportation The telephone company makes money; it serves the public by provid- ing telephone service. Mr. MACDONALD. But they are regulated. They are a utility. Mr. ANELLO. That is because they have a monopoly. Mr. MAcDONALD. How many networks are there? Mr. ANELLO. There are only three networks today but there may be a fourth or there may be a fifth in the future as we get more UHF stations on the air. If any monopoly exists, it is not because of the lack of frequencies, Mr. Chairman. There are plenty of frequencies there for an expansion of free television service. In Washington, look how many we have now. We have four VHF stations; we have three UHF stations. You can also receive Baltimore in a good many portions of the city. Why you get a high price for a station is a combination of circumstances: One, many of these people were pioneers in the business. They started when all was not gold and glory in television. Up until around 1951, Ithink 1951 and 1952 was the last year when the industry showed a deficit, a lot of these people took it on the chin. Now, through their business ingenuity, through their programing, through their network affiliations, through their acceptance in the local community, they have built up a good business. Mr. MACDONALD.' Certainly I do not want to be argumentative with you, but, say, when TV was starting, what if the radio broadcasters created a great furor saying that if permitted, TV was going to ruin radio. Isn't that somewhat synonymous? Mr. AN1~Lo. I don't think so, Mr. Chairman. There is one very substantial difference. When television came along the pike, there were no telvision sets. People had to start from scratch with a television PAGENO="0417" 41:3 station and a set. Today the sets are already there. The pay television people are now coming and saying, "Despite the fact that you paid $300 or $400 for this set in the expectation of getting free channels, we now want to take a channel away from you." Mr. MACDONALD. The whole point is that unless the public wanted programs that pay TV say they are going to put on, and I don't believe everything they say, either, but if the public doesn't want it, it is going to be a terrific waste of the money on their part, isn't it? Mr. ANELLO. This is true, Mr. Chairman. Mr. MACDONALD. Therefore, there has to be some public demand for it or else the companies that are involved will just go flat on their faces. Mr. ANELL0. Mr. Chairman, I haven't the slightest doubt in the world but there is some public demand for pay television, like there is some public demand for anything that is not commonplace. But our fear is that this small public demand, and as I indicated by my figures, 5 percent of the public could then dictate what 95 percent of the public hear and see because their pocketbooks could clearly outbid all advertisers and all sponsors, and that is the fear. It is like the chicken and the egg, Mr. Chairman. What comes first? Mr. MACDONALD. You know, it is a moot point, as they used to say in law school. It is a moot point that someone can outbid General Motors. Mr. ANELLO. I don't say it is moot. I say we don't know the answer because we are speculating. That is what we are doing. If you take 5 million sets at $1 apiece, that is $5 million. I don't know what they paid for the world's series, Mr. Chairman, but I am sure it was not $20 million. I am assuming a four-gam.e series. Thank God we had seven. Mr. MACDONALD. It starts in 25 minutes, too. Mr. ANELLO. I am well aware of it, too. Being a New Englander. I want to see your hometown win. Mr. MACDONALD. I certainly appreciate that. Mr. ANELLO. But it is this possibility, and I say we don't know for sure; of course not. If we were sure, our lives would be easier. Your task would be easier, so would mine, and so would all. But we believe firmly and sincerely and honestly that a small minority can start bid- ding for these programs. Once you get the program away from free, it will never go back there, and once you get one, then you get two and three and four and it is cumulative. Mr. MACDONALD. Well, as a concrete examnie, and this is really a statement, the gentleman representing the ABC referred to a program called Africa. "Africa" was a fantastic program, I thought. Having been there, I was very much interested in the subject, but my children were not able to see it. Now, I would personally pay to see a rerun of it just to have my children see it. I don't see really what is so terribly wrong with that concept. I am not saying whether I am for or against this thing. Actu- ally, this is what the hearings are all about_to try to work out some middle ground or to find out whether it is good or bad. But everyone who is opposed to this thing sounds so patriotic and, if you will forgive me, your ringing words sound so patriotic and if anyone should vote for it, you know, you are sort of a Benedict Arnold, taking from the underprivileged what they are entitled to. I just don't happen to feel exactly that way. 86-399 0-67-27 PAGENO="0418" 414 Mr. Ai~i1LLo. You are a lawyer, Mr. Chairman. You must realize that lawyers are advocates. I am certain that Zenith Radio is as patri- otic as NBC, ABC, or CBS. That does not enter into it. Perhaps we wax eloquently at times, but we are a little fearful of the possibility of these things happening. I agree with you. Why should you not be a~ble to pay for "Africa"? But I am certain that ABC will rerun it. I would hope so and I am confident they will. If you could limit it to that, it would be fine. In our judgment, it could not be limited to just that. Mr. MACDONALD. Why don't the networks take hints from the people who are just sick to death of being subjected, in order to see a movie, and I use the phrase which somebody presented, to 220 commercials? Obviously that is not so, but it seems that way sometimes. Mr. ANmJLO. I just came from a Code Board* meeting last week where we took the first step, and that is to limit the number of in- terruptions, two per half-hour. That does not mean that you can't have a cluster. Mr. MACDONALD. Mr. Preminger said the smartest thing, why don't they do it at the beginning and at the end? Mr. ANm~ro. I was going to say we are meeting again next month to determine whether or not we cannot, not only in addition to putting a limit On the number of interruptions, but also look at the possibility of sequential announcements. That is not as easy as it might sound, apart from any finances, because you have substantial legal problems when you limit it to one interruption and two sequential announce- ments. But we are not here to discuss that at this time. Some people find commercials quite amusing. Other people say it gives them the op- portunity to do other things. Thirdly, I guess the advertiser believes it sells his products, which is very important again, forgive me if I sound patriotic, but to help us to mor.e prosperity and progress. Selling products is a part of ad- vertising and it is a part of America. Mr. MACDO~ALD. I said the other one would be my last question, but this is my last question. It is funny that the Congress is now being asked to take down' all billboards, to beautify America. I don't know how many millions of dollars is going mto that. If billboards are abnoxious, how about bill- boards on your TV screen? I don't happen to think billboards are that obnoxious, but some highly placed people do. I suppose the program will go through You know, it does not seem consistent to me. Anyway, thank you very much for your testimony. Mr. ANELLO. Thank you, Mr. Chairman. Mr. MACDONALD. The hearings are adjourned until tomorrow at 10 a.m., in this room. (Whereupon, at 12:40 p.m. the hearing adjourned, to reconvene at 10 a.m., Friday, October 13, 1967.) PAGENO="0419" SUBSCRIPTION TV FRIDAY, OCTOBER 13, 1967 HoUSE op REPRESENTATIVES, SUBCOMMITTEE ON COMMUNICATIONS AND POWER, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Wa8hington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2123, Rayburn House Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) presiding. Mr. MACDONALD. The hearing will be in order. The first witness is Mr. Martin J. Gaynes, appearing on behalf of the National Association of Treatre Owners and the Joint Committee Against Toll TV. STATEMENT OP MARTIN J. GAYNES, COUNSEL, NATIONAL ASSOCI- ATION OP THEATRE OWNERS AND 1OINT COMMITTEE AGAINST TOLL TV Mr. GAYNES. Thank you, Mr. Chairman. My name is Martin J. Gaynes, of the law offices of Marcus Cohn, Washington, D.C., and I appear before you on behalf of the National Association of Theatre Owners and `the Joint Committee Against Toll TV. The National Association of Theatre Owners is a nationwide trade organization consisting of the owners of motion picture theaters throughout the United States. The Joint Committee Against Toll TV is a voluntary association which came together in 1955 for the purpose of expressing its opposition to the institution of over-the-air pay tele- vision, and which has participated in the proceedings before the Fed- eral Commimicatjons Commission during the past 12 years concerning p~y television. I thank the committee for the opportunity of appearing before it. I recognize that I come in at the end of a long and difficult week in which many of the arguments for or against pay TV have been put forth before the committee at great length. I will not, therefore, read my prepared statement, but I beg leave to include it in the record and have it reproduced as if it were read. Mr. MACDONALD. Without objection, it is so ordered. (Mr. Gaynes' prepared statement follows:) STATEMENT OF MARTIN J. GAYNES, COuNSEL, NATIONAL ASSOCIATION OF THEATRE OWNERS, AND THE JOINT COMMITTEE AGAINST Pou~ TV My name is Martin J. Gaynes, of the Law Offices of Marcus Cohn, Washington, D.C., and I appear before yc~u on behalf of the National Association of Theatre Owners and the Joint Committee Against Poll TV. The National Association of (415) PAGENO="0420" 416 Theatre Owners is a nationwide trade organization consisting of the owners of motion picture theatres throughout the United States. The Joint Committee Against Toll TV is a voluntary association which came together in 195ö ~or the purpose of expressing its opposition to the institution of ovcr4he-alr pay television, and Which has participated in the proceedings before the Federal Communications Commission during the past 12 years concerning pay television. It is the position of the National Association and the Joint C~smnittee that over-the-air pay television should not be adopted as a permanent medium and we respectfully request that this Subcommittee take whatever action It deems neces- sary to indicate to the Federal Communications Commission that: (a) the Federal Communications Commission does not have the statutory authority to inaugurate pay television as a nation-wide permanent medium and (b) that the institution of permanent pay television would not be in the public interest. We have filed extensive comments with the Federal Communications Com- mission outlining in detail the detriments to the public interest which would ensue if pay elevision were to be authorized. We will not repeat all of the arguments made in these comments in the time which the Subcommittee has graciously extended to us today, although we respectfully seek leave to place these comments into the record of these proceedings so that they will be available for Conunittee study. We wish today merely to point up the more pressing reasons why we believe that the institution of over-the-air pay television as a permanent medium Would be a disaster for the American public. I. THE FEDERAL COMMUNICATIONS COMMISSION'S CONCLUSION THAT IT HAS THE STATUTORY AUTHORITY UNDER THE PRESENT COMMUNICATIONS ACT TO AUPHORIZE PAY TELEVISION IS ERRONEOUS The Federal Communications Commission, in its First Report on pay television in 1957 (16 R.R. 1509, 15-14 at Pars. 20-44) concluded that it possessed the statutory power to authorize over-the-air pay television on a permanent basis. Although urged to do so many times, the Commission has never reevaluated that conclusion but has adhered to it in the Commission's March, 1959 Third Report,1 and again in the Commission's March, 1966 Further Notice of Proposed Rule Making and Notice of Inquiry. $imiiariy, this conclusion was not reevaluated by the Commission's Subscription Television Committee in its July, 1967 Report; the Committee merely noted the conclusion and indicated the Committee's agree- ment therein.2 We believe that the Commission's conclusion was erroneous. It cannot be emphasized too strongly that a system which demands direct payment of fees by the public in order to receive programs broadcast on publicly controlled broadcast facilities represents a major and drastic change in the nature of American broadcasting. Prior to the advent of pay television, com- mercial broadcasting had been supported solely by advertisers. There was, and is, no direct financial relationship between a listener and a broadcast licensee~ The absence of this relationship is more than just a matter of commercial choice. It represents an important feature distinguishing broadcasting from public utilities, and common carriers-a distinction which was explicitly recognized by Congress when it drafted and adopted the Communications Act.3 This single fact also sharply distinguishes pay television from other changes in broadcasting which have occurred over the years, such as color television, FM broadcasting, simplexing, multiplexing and functional music operations.4 It also distinguishes pay television from CATV, since in CATV there is no direct 116 R.R. 154(a). 2The Subscription Television Committee consists of Commissioners Wadsworth, Lee and Cox. On July 14, 1967, the Committee recommended to the full Commission that over-the- air pay television be authorized on a permanent basis. Commissioner Wadsworth, the Com- mittee Chairman, however, stated that, while he agreed that the issues involved should be brought to the attention of the full Commission, nevertheless, this agreement should not~ be construed as an endorsement of the Committee's position, upon which question Commis- sioner Wadsworth withheld judgment. See, e.g., the remarks of Senator Broussard who, during the debates on the Communica- tions Act of 1927, stated "radio makes no direct charges, whereas the others (telephone and telegraph.) are in the business of serving the public for direct pay." 67 Cong. Roe. 12~O4. See also PulitiZer Publishing Co. v. F.C.C., 68 U.S. App. D.C. 124, 12~, 94 F. 2d 24P, 251. 4 Although it i~ true that certain subscribers of functional music pay for the privilege of receiving material broadcast over the air, it is also clear that the general listening audience does not pay for this broadcasting. Stores, factoriesi and buildings which desire such operations purchase them so as to provide the public In those stores and buildings with background music as an additional service. The public is not simultaneously deprive4 of the service. PAGENO="0421" 417 financial relationship between a listener and a broadcast Ucen8ee. The relation- ship is between a listener and the CATV operator, who charges the listener for the use of wire lines which he has constructed so as to bring the programming presented by the licensee to the public.6 But a licensed pa~ television system permits the licensee to directly charge for the use of public facilities (the airwaves) without any governmental regulation of those rates,6 while at the same time depriving the public of the free service it previously enjoyed over the air. The Commission reasoned, in its First Report, that, although the Communica- tions Act of 1934 makes no specific or direct delegation of power to authorize such a major change in the concept of American broadcasting and the regulatory scheme surrounding it, nevertheless, it found that power in the rather broad language of the (lopimunications Act, particularly Sections 301 and 303 of the Act, which gives it broad powers over the uses of radio frequencies. And it is true, of course, that the Communications Act gives the Commission broad regulatory powers over the broadcast field. It is also true, however, and the Courts have so indicated, that these powers are not all encompassing and that matters regarding the manner in which stations derive their revenues as well as other internal business affairs were never conceived as being within the Commission's regulatory powers. See F.C.C. v. f~landers Bros. Radio station, 309 U.S. 47~ There is no provision in the Act which wOuld authorize the Commission to permanently establish a system so radically different in nature from the present American free broadcasting system, and with such a potentially destructive effect on that system. Even the Commission, itself, has consistently recognized the destructive potential which the institution of a permanent pay television system could have for gutting the free system of its ability to fulfill its function of informing an4 entertaining the American public. The need for additional legislation if pay television is to be authorized is made clear upon consideration of the regulatory scheme now included in the Communi- cations Act. That scheme was established in the absence of a direct financial relationship between the individual listener and the broadcast station. This scheme is totally inadequate to cope with the introduction of a direct financial relationship. Thus, if rates are to be charged the public for the privilege of using public facilities (the airwaves), the question arises as to whether and how these rates must be regulated. We are unaware of any instance where the government has allowed a private entrepreneur to use public facilities, and make his profit by charging members of the public for the right to use such public facility without at the very least, regulating the rates to be charged. Yet the Commission would follow this course with respect to the public airwaves without ever resolving the question of whether the present Act provides it with the necessary rate regula- tion authority to protect the public against gouging. And, of course, it should be noted that the proponents of pay television have continually urged that the Coni mission does not have the power to regulate rates. The pay TV proponents desire a free and unregulated ride at public expense! The need for additional legislation is made clear by the Report of the Commis- sion's Subscription Television Committee. The Committee recognized that the free system must be protected, if for no other reason than to keep faith with the millions of the American public who have invested billions of dollars Into the purchase of television sets on the implicit representation by the Commission and by the Congress that thereafter they could receive the benefits of the public airwaves on a free basis. The Committee fully recognized in ita Report the most obvious destructive effect which a pay television system would have upon the free service: that it would siphon popular programs and talent from the free service to the pay service, and render imch programs unavailable except for the payment of a per program fee. In order to prevent this from happening, the Committee pro- poses a series of restrictions upon the age, type and content of the programs which the Commission will allow to be shown over the pay television service, ~ It should be noted, of course, that, as was pointed out above, the CATV operator may, himself, originate programming, charging the public for It. Under these circumstances, CAJTV becomes quite similar to pay television, it is significant, however, that the Com- mission has specifically refused to hold that origination of programming by CATV systems on a permanent basis is in the public interest and has sought guidance from Congress on this matter. See ~eeond Report in Docket No. 148115 at Par. Lfi3(ii), 2 F.C.C. 2d at 787. "The Supreme Court appears to have indicated in F.C.C. v. sanders Bros. Radio S~tation, 309 U.S. 470, 474, that rate regulation of broadcasting is not encompassed within the present Act. PAGENO="0422" 418 including such restrictions as forbidding (with limited exceptions) the presenta- tion on pay television of movies more than two years old In general release, forbidding the presentation of "series type" of programs with interconnected plots, and forbidding the presentation of sports programs which have been on television on a regular basis for two preceding years. These types of restric- tions are unprece4ented in broadcast history, and there is a most serious ques- tion as to whether they are legal under the present Section 326 of the Com- munications Act which forbids the Commission to "censor" program material. Indeed, such restrictions have already been attacked by numerous commentators as Illegal. If these commentators are correct, then the Commission is powerless to enforce the very conditions which it deems necessary to protect the free service. Clearly, the present Act gives no guidelines on this point. We believe that the conclusion reached by the Interstate and Foreign Com- merce Committee in February 1958 is still valid and should be emphasized anew. On February 6, the Committee adopted the following resolution: "Resolved, that it is the sense of this Committee that the public interest would not be served by the granting of authorizations for subscription tele- vision operations `as contemplated by the Federal Communications Commis- sion in its First Report, adopted October 17, 1957, In Docket Number 11279, because- "(1) it has not been established to the complete satisfaction of this Committee that authority to license such operations comes within the power of the Commission under the provisions of the Communications Act of 1934 ; and "(2) such operations might lead at least to a partial blacking-out of the present system of television operations, with possible Injury to such present system In particular communities, if not throughout the United States. "Sec. 2. For the reasons stated above, it is the sense of this Committee that the Federal Communications Commission should not grant authorizations for subscription television operations as contemplated in such First Report unless and until the Communications Act of 1934 is amended so as to specifically em- power the Commission to grant such authorizations." At the same time, the Senate Commerce Committee reached a similar con- clusion and voted to recommend the adoption by the full Senate of the following resolution: "Resolved, that it is the sense of the Senate that the Federal Communica- tions Commission should not, without specific authorization by law, authorize or permit any television licensee or agent thereof to Impose a toll, fee, sub- scription, or other charge on the general public or any portion thereof, for the privilege of viewing television programs received over television receivers located in the home, with the exception of both community antenna systems and those programs transmitted by cable or wire or both." We believe that similar action should now be taken. II. THERE IS NO DEMONSTRABLE PUBLIC DEMAND FOR THE SERVICE The concerted drive by proponents of pay television for the institution of a pay television system has now been continuing for over 12 years; the proceeding before the Federal Communications Commission started in February 1955. Yet, throughout this entire period, there has clearly been no demonstration of public demand seeking the institution of pay television. On the contrary, the only outcry has come from the entrepreneurs who seek to profit from the medium.It can hardly be contended that the public has been besieging the Commission with demands that a permanent pay television system be estab- lished. To the contrary, in California, as this Subcommittee Is undoubtedly aware, the public voted down by a decisive margin the institution of a wired pay television system in the only public referendum ever held on this question.. And It is significant that only one test of a pay television system, pursuant to the First and Third Reports, has been conducted. It is at least reasonable to assume that if a real demand for such service were evident, it would be reflected in requests by numerous prospective pay TV proponents for authority to conduct experimental operatIons. No such public reaction has been evident. Indeed, the Hartford and the Canadian Etobicoke experiments clearly negate the existence of public demand. Although the Hartford pay TV proponents artificially limited the Hartford test to 5,000 subscribers and alleged that there PAGENO="0423" 419 Is a "back log" of demand, neither they nor any other proponents of pay tele- vision have demonstrated the existence of public clamor for such a system. In Hartford, less than 1% of the potential audience were subscribers and 42% cancelled subscriptions. The average number at any time of persons watching was 267, or only approximately 5% of the number of persons who subscribed. The Etobicoke test showed the same pattern, for during the Etobicoke experience, pay television subscribers actually declined more than 50% during the five-year test from an initial high of 5,500 down to 2,500 even at a time the pay TV op- erators were expanding their potential service area from 12,000 to 14,000. In the face of such `experience, how can It be contended that there is a pressing need or demand for the institution of pay television which as even its proponents on the Commission recognize, has such a potentially catastrophic effect upon the free service? III. THE DETRIMENTS TO THE PUBLIC FROM A PERMANENT PAY TELEVISION SYSTEM CLEARLY OUTWEIGH ANY MINIMAL BENEFITS WHICH MAY BE DERIVED The record, of course, h~s made it abundantly clear that the promises and siren songs of the pay television proponents have been demonstrably proven false. Pay television was first portrayed to the American public as a means by which television, programming fare would be diversified and improved through the presentation of high quality minority-type programming which was allegedly unavailable over the free system. The pay TV proponents promised that, as the Commission noted In its First Report, "subscriber-financed broadcasts could and would provide a wider choice to members of the public Interested in the fine arts, operas, educational and informative material and other similar kinds of programs." It is now clear that pay television will not, in fact, yield the benefits which were its original raison d'etre. The Commission's own Subscription Television Committee recognized the validity of what opponents of pay television have continually pointed out-that pay television will not, In any way, offer adcli- tional cultural and high quality diversified minority-type programming, but would program for the mass audience, and would create no long-term improve- ment In either the quantity or the quality of television programming. The COrn- mthtee itself has now recognized that whatever hopes might once have been held out for such programming by pay television, they can no longer be realis- tically entertained (see Report, Pars. 54-57). Thus, programming which pay television will bring to the public will be mainly motion picture films and sports events, and the only benefits involved are that (1) the public may see some motion picture films somewhat more quickly than these films would be shown on free TV, and (2) pay television can present certain sports events as `heavyweight championship bouts and other sports programs which are now, for one reason or another, "blacked out" on free TV. With respect to films, however, it should be noted that pay television does' not promise first-run features; the COmmission's Subscription Television Committee held that even the presentation of film.s from 6 months to 2 years old would be a sufficient justification to authorize a permanent pay television service. Yet the Committee never attempted to explain what the difference might be between a film, say, 18 months old and one 26 months old insofar as the public interest was concerned, nor did it attempt to explain why whatever small difference may exist was sufficient to authorize the permanent establishment of a system which could potentially destroy free television, and the billion dollar investment which the American `public has In it. Movies, indeed, are desired by the American public. Yet this Committee well knows that free television now presents a plethora of motion picture films, some of which are less than 2 years old. Moreover, the average age of movies presented on the free system has steadily been lowered during, the past 5 years, and each year more current films are presented. There Is no reason to suspect that this trend will not continue, although it certainly will not continue if pay television is authorized on a permanent basis. The best way of `destroying any advance in free television movies is to allow pay television to be authorized. And with respect to sports, it is well known that sports events on free tele- vision have `been proliferating at a rapid rate. Virtually every sports event known has been presented on free television, and, indeed, many critics have chided the networks for overemphasis on sports programing. To contend that the a'iring of the occasional blacked-out heavyweight championship fight or other PAGENO="0424" 420 sports programs is a `~beneficial supplement" sufficient to authorize the in- stitution of a pay television system, is to deprive these words of any realistic meaning. The potentially destructive effect which pay television might have upon the free system is obvious. It has been recognized by many opponents of the system and even by the members of the Commission's Subscription Television Com- mittee. The "benefits" to be derived from pay television are minimal at best, if they exist at all. The Hartford and Etobicoke tests were far too limited in scope to give any significant demonstration of the impact which pay television would have upon the public. There has been no public demand or clamor for the serv- ice. Under these circumstances, it cannot be seriously contended that the au- thorization of permanent over-the-air pay television at this juncture is in the public interest. Iv. THE AUTHORIZATION or A PERMANENT PAY TELEVISION SYSTEM WOULD IMPROPERLY DISCRIMINATE AGAINST THE POOR One final point should be emphasized for, in many respects, it is the most start- ling aspect of the institution of a permanent pay television system. The Hartford test yielded meaningful data in one respect: it made clear that the authorization of a pay television system would systematically deprive 30% of the nation (i e, the persons in the income level $0-3999) of the free use of public frequencies, which would instead be turned over to the pay television proponents to be used for the benefit of wealthier citizens. In effect, pay television systematically dis- criminates against the lower income level families and deprives them of the ability to use what heretofore have been recognized as broadcast frequencies available free to all parts of the population, regardless of income. Pay television would, for the first time in American broadcasting history, divide the viewing public along economic lines according to ability and willingness to pay. The Commission's Subscription Television Committee attempted to cope with this discriminatory pattern by contending that the lower income group "will be able to continue to see ample amounts of free TV programming, so that they will not be deprived of anything.. ." (Par. 75). Yet this reasoning is not impressive. It first assumes that the Commission will be effective in preventing the siphoning of free TV programming, a conclusion dubious, at best. But more importantly, it appears to set up a double standard of programming, one for the wealthy and a lesser standard for the poor. It urges, in effect, that the lowest income group has "ample" amounts of free TV programming, while, at the same `time it is argued that the free service is not "ample" enough for wealthier citizens so that pay television must be authorized to fill the gap. Such a double standard is unprece- dented in broadcast history. And it is strange indeed that the Committee is so satisfied with the quantity of free TV programming that it can conclude, even in cities with five or more stations allocated, that the loss of one station's poten- tial programming is a desired or non-harmful result. It needs no elaboration to demonstrate that television is perhaps the most suc- cessful and effective mass media which the world has even known. It has al- lowed the poorest citizen to obtain, in return for the mere purchase price of a television set, entertainment, information, and news of a quality and quantity unobtainable in the past by the richest prince or king. It is, in truth, the poor man's theatre; the benefits which it has brought redound most strongly to those persons and groups in the lowest income level. It is strange, indeed, that the Committee can so easily ignore this group, and seek to deprive them of some of the benefits of which television is capable. It Is even stranger when it is recalled `that, at this point in our history, the country as a whole is making the most determined efforts to bring to the lowest economic levels of our nation the full benefits of the American society as they are enjoyed by the more fortunate majority of our citizens. Federal and state gov- ernments have instituted far-reaching programs in urban development, open housing, work training, education, and a myriad of poverty programs so as to enrich the lives of the poor. The country has recognized the disparity in income which exists in our society, and has moved to correct it through massive Federal and state aid. It is anomalous that the Committee would now have the Commis- sion turn precisely in the opposite direction, and deprive the very portion of the nation which needs it most of the fullest opportunity to take advantage of the free service. The Committee, in essence, has created its own anti-poverty pro- gram-its program is directed aga4nat the poor. PAGENO="0425" 421 CONCLUSION We wish to conclude by citing the statement of Oongressnian Celler before the Federal O~mmunications Commission in the oral argument upon pay television recently concluded by the Commission. Congressman Celier has summarized the situation in prophetic words: "To summarize, careful study has convinced me that the conversion of any segment of the television spectrum to the service of tell television would increase viewers' costs and broadcasters' profits, and this without any substantial hope of producing any long-range improvement in programs. Free television, as we know it, may be downgraded to a secondary and economically untenable position. The best existing programs the public is accustomed to receiving without charge may be siphoned off. The trend, noted by the Antitrust Subcommittee, toward the monopolization of outstanding talent and program product will be accelerated. The television authence will be divided along economic lines A method of broad casting will be inaugurated that may drive, free network television as we know it from the air-w'aves. The foreseeable result is a television system in which we will all be paying for much the same TV fare which now conies to us without cost." We endoree Congressman Celler's statement and believe the points-made there- in should be adopted by this Subcommittee. Mr. GAYNES. I would like to speak very briefly about some of the points made in the statement and first of all point out that we have filed with the Federal Communications Commission a number of com- ments on the pay TV rulemaking proceeding, two of them particularly responsive to the blue booklet which Zenith filed about the Hartford pay TV experiment. Many of the arguments that we have made are contained within these comments. They also analyze the Hartford tests and indicate some of the weaknesses we find in it. I, therefore, beg leave to intro- duce these into the record as well. I have given to the clerk whatever extra copies I had and wish them to be introduced in the record at this time. Mr. MACDONALD. Without objection, it is so ordered. (The documents referred to follow:) PAGENO="0426" PAGENO="0427" 4766 BEFORE THE J~iIerat ~tuamuntcuttnnb WASHINGTON 25, D. C, In the Matter of: Amendment of Part 3 of the Commission's ) Docket No 11279 Rules and Regulations (Radio Broadcast ) Services) to Provide for Subscription ) Television Service COMMENTS SUBMITTED BY JOINT COMMITTEE AGAINST TOLL TV October 10, 1966 423 PAGENO="0428" 424 TABLE OF CONTENTS Page STATEMENT OF INTEREST ........ 2 II. BACKGROUND 2 A. Procedural History 2 B. The Instant Proceeding 4 III. THE HARTFORD TEST DID NOT PROVIDE THE DATA THE COMMISSION MUST HAVE FOR A PUBLIC INTEREST DETERMINATION IN CON- NECTION WITH A NATIONWIDE PERMANENT PAY-TV AUThORIZATION 6 A. Pay-TV Programming In Hartford Was Scarcely Competitive with, Let Alone a Beneficial Sup- plement to, the Program Choices Available to the Public on Free TV 8 1. Movies 8 2. Sports 9 3. Other Programs 9 4. The Contrast With Free Television 9 5. The Proponents Recognize that the Programming Left Much To Be Desired and Excuses Are the Order of the Day 11 B. Market Penetration Was Virtually Non-Existent. Pay-TV Did Not Attract Subscribers in Hartford. 15 1. The Statistics of Failure Are Not a Rational Basis for Estimating the Audience of a Successful System and Its Impact on Free TV . . 17 2. The Disconnect Rate Indicated Public Dissatisfaction 19 C. Pay-TV Excludes the Lowest Income Levels - 30% of the Population 20 IV. THE PROPONENTS MEASURE THE ALLEGED BENEFITS OF PAY-TV ON THE BASIS OF PROJECTIONS WHICH ASSUME A SUCCESSFUL SYSTEM. ITS IMPACT ON FREE TV, HOWEVER, IS MEASURED IN TERMS OF ThE HARTFORD FAILURE 21 PAGENO="0429" 425 A. There is No Evidence from Which to Conclude that Pay-TV Would Facilitate the Growth of New Television Stations 23 1. The Recent Growth in the Number of UHF Stations and Applications Suggests that the UHF Problem Was More a Lack of Receivers than Programming . 23 2. The Pay-TV System Which Proponents Allege Will Assist In the Development of New Stations is a Successful System, the System of Their Projections, and Not The Failure that They Produced In Hartford 24 B. The Deleterious Effects of a Successful Pay-TV System on Free Television Cannot Be Measured by the Statistics of Failure 26 1. The Extent of Audience Siphoning is Dependent Upon the Number of Subscribers and the Quality of Programs 26 2. The Time Pre-Empted by Pay-TV is Prime Time 27 3. The Experience in Hartford Does Not Provide a Basis for Evaluating the Extent to Which a Successful Pay-TV System Would Siphon Talent and Programs from Free TV 28 C. Conclusion 29 V. JURISDICTIONAL AND RELATED QUESTIONS . . 30 A. The Commission Does Not Have Jurisdiction to Authorize a Permanent Pay-Television System . . 30 B. The Commission Should Not Act Without Guidance from Congress 36 VL THE COMMISSION SHOULD DEFER ACTION UPON AUTHORIZATION OF A PAY-TV SYSTEM UNTIL THE IMPACT OF CATV UPON THE PRESENT SYSTEM IS KNOWN 41 A. The Extent of CATV Development 43 33. CATV as a Form of Pay-TV 45 C. CATV as an Adjunct to Free TV 49 D. Summary 51 PAGENO="0430" 426 Page VII. ASSUMING ARGUENDO THAT THE COMMISS]ON IS PREPARED TO AUTHORIZE A NATIONWIDE PERMANENT PAY-TV SYSTEM, ANY SUCH AUTHORIZATION MUST BE COUCHED IN TERMS OF A REGULATORY PAT~TERN DESIGNED TO INSURE THE SURVWAL OF FREE TELEVISION . . . . 52 A. Pay-TV Applications in the Top 100 Markets Will Be Granted Only After a Hearing 53 B. Subscribers Will Be Limited to a 10% Penetration . . . 55 C. No Pay-TV System Will Be Authorized Until It Has a Minimum of 2,000 Subscribers 57 D. Pay-TV Must Be Limited to Preclude Siphoning of Programs and Talent 58 E. Pay-TV Stations Should Be Limited to UHF Stations and to Communities Within the Grade A Contours of at Least Four Commercial Television Stations 62 F. Pay -TV Programming Should Be Limited in Total Hours of Operation and to Certain Segments of the Broadcast Day 63 G. Pay-TV Licensees Shall Be Prohibited from Engaging in Network Operations or Other Types of Multiple Program Purchase Agreements . . . . 66 H. The Commission Should Regulate Charges, Terms and Conditions Concerning Pay-TV Operation . . . . 67 I. CATV Systems Should Be Prohibited from Originating Programming or Carrying Pay-TV Programming 68 J. Pay-TV Licensees Should Be Required to Comply with All Commission Rules Imposed Upon Broadcast Licensees 69 CONCLUSION 69 APPENDIX A - Excerpt froz~i "The Economic Journal" June 1966 - The Redistributional Effect of Television Advertising A-i APPENDIX B - Proposed Rules B-i PAGENO="0431" 427 4766 BEFORE ThE J,Ii,rut Oimnmuntruftnrni ~nmmtiiMnn WASHINGTON 25, D, C. In the Matter of: Amendment of Part 3 of the Commission's Docket No 11279 Rules and Regulations (Radio Broadcast Services) to Provide for Subscription Television Service COMMENTS SUBMITTED BY JOINT COMMITTEE AGAINST TOLL TV The Joint Committee Against Toll TV (hereinafter referred to as "Joint Committee") by its attorneys, hereby submits its Comments in the above-captioned rule making. The Commission has requested Com- ments on a number of matters concerning Pay-TV, including the question as to whether Pay-TV should be authorized on a permanent basis and, if so, the nature of the rules and regulations which should be adopted con- cerning Pay-TV. The Joint Committee respectfully submits that the Commission should not authorize Pay-TV on a permanent basis, and should not adopt the proposed rules and regulations promulgated by the Commission in its March 24, 1966, "Further Notice of Proposed Rule Making and Notice of Inquiry~" In support, the Joint committee states: PAGENO="0432" 428 2 I. STATEMENT OF INTEREST The Joint Committee Against Toll TV (sometimes also known as the "Committee Against Pay-as-you-see TV") is a voluntary association which has previously identified itself in the above-captioned proceeding and which has indicated its interest in the subject of pay television by filing Comments in the above docket on June 6, 1955, and by participating thereafter. IL BACKGROUND A. Procedural History A review of the procedural background of the instant proceeding is necessary to place the instant Comments in proper perspective. In 1955 the Commission, in response to Petitions by a number of pay television proponents, instituted the instant proceeding to seek Com- ments on a number of issues, including the question of whether the Com- mission had jurisdiction under the Communications Act to authorize pay television operations without further legislation and, even if such power existed, whether the Commission could find that such operations were in the public interest.1 The Commission thereafter issued its First Re- port on pay television2 which concluded (a) that the Commission had the power to authorize pay television operations under the present Act, and (b) that the Commission, however, could not make the determination that a permanent pay television system is in the public interest without having before it the results of a technical trial or trials of pay television~ The First Report would have allowed trial operations of any pay television system in any of 20 major markets which received at least four televi- sion services. No one system, however, would have been permitted in 1 ~[atter of Subscrintion T~levision Servlce, FCC 55-165 (released Feb. 10, 1955). 2 16 R.R. 1509 (released Oct. 17, 1957). PAGENO="0433" 429 3 more than three markets. it was hoped that trial operations would shed some light upon the important policy questions Involved in the establish- ment of pay television as a permanent medium, particularly its effect upon the free system. The issuance of the First Report stirred much critical comment. The House Committee on Interstate and Foreign Commerce held hearings on the First Report and adopted a resolution stating that until the Com- munications Act was specifically amended to grant the Commission pow- er to authorize pay television operations, no such action should be under- taken. The Senate Interstate and Foreign Commerce Committee took similar action. The basis of Congressional apprehension was that so- called "trial operations," and the consequent investment of large sums of money in pay television systems by promoters and by the public, would virtually establish pay television as a fait accompli without specifió Con- gressional approval.3 In response to these fears the Commission Issued its Second Report which withheld the processing of applications filed un- der the First Report until the expiration of the 85th Congress.4 This policy was voluntarily continued by the Commission until the end of the 86th Congress. Upon the expiration of the 86th Congress, the Commission re- evaluated the matter and issued its Third Report.5 The Third Report readopted and reaffirmed virtually all the conditions for trial operations set out in the First Report, the only significant changes being that trials would be now limited only to any one of the 20 major markets which re- ceive four television stations, and that authorizations would be further See Remarks of Congressman Oren Harris, Chairman of the House Interstate and Foreign Commerce Committee, 105 Cong Rec. 5362. In addition, numerous bills have been Introduced in Congress which would have prohibited the Commis- sion from authorizing pay television operations. See, ~.g., H R. 586, 85th Cong. 1st Sess. (1957); H.R 166, 86th Cong. 1st Sess. (1959); H.R, 68, 86th Cong. 1st Sess. (1959); H.R. 3020, 86th Cong. 1st Sess. (1961); S. 2268, 86th Cong. 1st Sess. (1957); S. 591, 86th Cong. 1st Sess, (1959) Second Report, 16 RR. 1539. 16 R.R. 1~4~Oa. 86-399 0 - 67 - 28 PAGENO="0434" 40 4 limited to one system per market and one market per system (Third Re- port, par. 8, 16 R.R. at 1540b). The Commission also reaffirmed its de- cision in the First Report that when "sufficient and meaningful" data be- came available, it would hold public hearings to decide whether pay television should be permanently authorized. (See First Report, par. 92, 16 R.R. 1533). The Commission, in limiting the nature and scope of the proposed test operations, was explicitly recognizing the obvi'ous danger inherent in allowing extensive trial operations. The Commis- sion clearly indicated that the limitations were imposed precisely to forestall the possibility that trials would be "so extensive as to consti- tute the virtual establishment of a service about which final decisions on a number of important points must be reserved until later." (First Report, par. 63, 16 R.R. at 1524). More particularly, the Commission in its First, Second and Third Reports has consistently stressed the need for sufficient and meaningful data on the many questions which it must decide. B. The Instant Proceeding On March 24, 1966, the Commission instituted the instant Further Notice of Proposed Rule Making in which, the Joint Committee submits, the Commission abandoned its heretofore careful approach to the ques- tions at issue. Thus, the Commission In the instant Notice made a pre- liminary determination that "it appears that it may well be in the public interest to authorize such operations on a permanent nation-wide basis" (Further Notice, par. 10), and then shifted the emphasis of the proceed- ing away from what the Commission had previously indicated the next step in the procedure would be (i.e., public hearings in which the results of the Hartford test cotild be analyzed)~6 The Further Notice, instead, placed the emphasis of the proceeding not upon whether a permanent nationwide Pay-TV system should be established, but upon the specific 6 See First Report, 16 R.R. at 1533. PAGENO="0435" 431 5 rules and regulations which the Commission should adopt in authorizing such a system. The Joint Committee respectfully submits that the Commission gravely erred in making the preliminary determination that the author- ization of a permanent Pay-TV system is in the public interest, conven- ience and necessity. On the contrary, the Joint Committee asserts (and will demonstrate in the instant pleading) that the Commission's deter- mination in this regard was erroneous for the following reasons: (a) The Commission's determination was based almost com- pletely on the results of the Hartford test and those re- sults do not warrant any such conclusions. Pay-TV was able to attract less than 5,000 people over a three-year period of time in one of the major television markets in the country. The limited number of subscribers precludes any valid conclusions concerning the effect of pay televi- sion as a nationwide, permanent medium. The inability to attract more subscribers denotes failure, and the sta- tistics of failure provide no basis for evaluating the im- pact of Pay-TV on free television. (b) The Commission does not have jurisdiction under the present Communications Act to authorIze a permanent pay television system; assuming arguendo, that it did, the Commission should not do so without guidance from Congress in the form of statutory amendments to the Communications Act, particularly since pay television's proponents have not demonstrated any pressing public need or desire for the institution of a permanent pay tele- vision system. PAGENO="0436" 432 6 (c) The Commission should defer authorization of a perma- nent Pay-TV system until the shape of CATV activity throughout the country has been established and the ef- fect of such activity on the free local television service has been assessed. The impact of CATV activity, wheth- er It involves the importation of large numbers of distant television signals or the carriage of programs which originate with the CATV system, may have a serious impact on the free local servlce~ This type of CATV activity must be considered by the Commission before it can reach sound judgments with respect to the type of additional impact that a broadcast Pay-TV operation may have upon the free local television service~ (d) The most that is warranted at the present time is the continuation of the Hartford authorization in the hope that it will produce the data necessary for a valid public interest determination. (e) If, for any reason, the Commission does permit a permanent nationwide pay television system, it must be under the most careful regulatory scheme embodying conditions and provisions calculated to protect the free broadcast system. IlL THE HARTFORD TEST DID NOT PROVIDE THE DATA THE COMMISSION MUST HAVE FOR A PUBLIC INTEREST DETERMINATION IN CON- NECTION WITH A NATIONWIDE PERMANENT PAY-TV AUTHORIZATION Stripped of excess verbiage, the public interest inthe authoriza- tion of any Pay-TV test and, specifically, the Hartford authorization, was to determine essentially three factors: PAGENO="0437" 433 7 1. To what extent would the public pay for programs? 2. Does the service represent a potential for programming which is not otherwise available on free television? 3. What would be the impact of the service on free tele- vision? Stated otherwise: Will it work? What will it provide? And at what cost to the public? In requesting a nationwide authorization, the Pay-TV proponents7 have consciously interwoven what occurred in Hartford with excuses for what did not occur, relying upon the excuses to justify failures and the failures to justify speculation as to what would occur in the context of a nationwide authorization. A test can lead to valid conclusions only to the extent that those conclusions reflect the facts developed during the course of the test. Conclusions as to what might have occurred if things had been different are essentially conjectures. As will become evident hereinafter, the conclusions that flow from Hartford are not the conclusions suggested by the proponents. There were so few subscribers as to make the test virtually valueless. Pay- TV was a failure in Hartford in much the same way that it has failed wherever it has been tried. It did not provide programming which rea- sonably could be described as a supplement to free television. The pro- gramming that was presented did not attract an audience. The Commis- sion, consequently, knows as little now concerning the effect of Pay-TV on free TV as h did in 1955, unless it assumes that Pay-TV will continue to present the same unsuccessful programming and attract the same size audience in the future, Joint Comments of Zenith Radio Corporation and Teco, Inc~ In Support of Peti- tion for Nation-Wide Authorization of Subscription Television (dated March 10, 1965). PAGENO="0438" 434 8 We turn first to the programming that was offered in Hartford, programming which the proponents have characterized as proving that Pay-TV will provide a "beneficial supplement" to the program choices now available to the public on free television, a characterization which the Commission (par. 12) appears to have accepted without regard to the facts. A. Pay-TV Programmingin Hartford Was Scarcely Competitive with, Let Alone a Beneficial Sup- plement to, the Program Choices Available to the Public on Free TV The Hartford test was authorized by the Commission on the rep- resentation that: The subscription programs which the applicants propose to broadcast will be limited to box of- fice attractions, i.e., those programs which are not regularly available to the public without the payment of a fee. In this category are current releases of motion picture film, ligitimate [sic] theater plays, operatic performances, educa- tional programs and sports events for which fees are being charged as a condition to witness a performance 8 If this was meant to suggest movies, then the proponents complied with their representations. 1. Movies During the first two years of the test, proponents presented 432 motion picture films, 414 of which were domestic and 18 foreign. These films represented 86.5% of the total pay television programming. Dur- ing this entire two-year period, however, proponents presented only one 8 Exhibits submitted by Hartford Phonevision Company, RKO General, Inc., Zenith Radio Corporation and Teco, Inc. in connection with the application of Hartford Phonevislon for authority to conduct subscription television opera- tions over Station WHCT, Hartford, Connecticut (hereinafter referred to as Application Exhibits), Exb. 8, p. 1. PAGENO="0439" 435 9 first-run movie~ Far from showing current film, moreover, the major- ity of the films, 304 of the 432 (70.41%) were six months old at the time of showing. At least 149 of these films were two years old or older at the time of showing. Some, in fact, were over five years in age.9 2. Sports The sports programming consisted of six heavyweight champion- ship fights (0.3% of the programming presented during the first two years), five college football games and two college basketball games (0.4%), 21 professional basketball games and 44 professional hockey games (3.7%). 3. Other Programs The category "Special Entertainme~it" programs constituted 5.5% of the total programming and consisted of 4 concerts, 4 programs In the category "Opera and Ballet," 11 programs characterized as "Drama," 7 variety programs and 6 programs characterized as "Night Club and Cabaret." Programming characterized as "Educational and Instruction- al" accounted for 3.2% of the programming~ 4. The Contrast With Free Television To characterize such programming as a "beneficial supplement" to free television is to leave the phrase devoid of meaning. In essence, the people of Hartford were requested to pay for a diet of run-of-the- mill movies. If there was any benefit it was limited to the fact that some of the product was available earlier than it would have been on free tele- vision. A schedule showing the release date of each film and the month. and year the picture appeared on WHCT is attached to the Opposition of the Joint Committee. PAGENO="0440" 436 10 Conversely, during the same period, free television exhibited films of equal or superior merit. On a regularly scheduled basis, moreover, it presented all types of sports including professional football, profes- sional basketball, NCAA football and basketball and professional base- ball.10 During the same period the television audience.SaW, without charge, Barbra Streisand, Carol Burnett and a weekly Danny Kaye show. Free television is, in fact, growing in scope. Contracts have been entered into for the regular presentation this fall of professional hockey as well as professional basketball. ~ CBS has contracted for the presenta- tion of professional soccer for a period of 10 years at an estimated cost of one million dollars per year.12 The fall schedule includes ballets, new and old, among them "Beauty and the Beast"; operas and musical comedies including Ethel Merman in "Annie Get Your Gun" and Robert Goulet in "Brigadoon." And, if more were needed, the October 3, 1966, edition of Broad- casting magazine reports (p. 25) that the free television networks have or are about to acquire 93 million dollars worth of recent films. These purchases were motivated by the success of the three-hour presentation by ABC-TV of "Bridge on the River Kwai" which overwhelmed its pro- gram opposition. 13 Included in this total are an estimated 52.8 million 10 Championship fights were not then, but have since been, telecast by free TV. During the test period there were a total of six. championship fights presented by Pay-TV in Hartford (0.3% of the total programming) These two sports constituted the great bulk of the Pay-TV sports programs and 3.7% of the total programming. 12 Washingtop~~ Oct. 4, 1966, p. D-1, 13 ABC paid 2 million dollars for two TV showings Based on rating informa- tion, that was immediately available, ABC estimated that 60 million viewers across the country had watched the three-hour colorcast in whole or in part. According to Broadcast~g, "Ratings on `Kwai' proved to be more than `Bonanza and `Moore' [the other two network programs during the 9-10 p.m. slot] combined." PAGENO="0441" 437 11 dollar purchase by CBS-TV of 63 MGM films14 (18 of which are new features that MGM is preparing for full theatrical distribution prior to TV showing) and ABC-TV's acquisition of 17 motion pictures from 20th Century-Fox for 19.5 million dollars (e.g., "Cleopatra," The Longest Day," "The Magnificent Men in Their Flying Machines," and "The Agony and the Ecstasy") and 32 Paramount features for approx- imately 20 million dollars.15 The season has also witnessed a revival of interest in television drama inspired, perhaps, by the success of the CBS presentation of "Death of a Salesman" in May of 1966.16 ABC's fall schedule includes "Stage 67."~~ Trade reports also indicate an ABC "Sunday Night Theater," a Sunday afternoon "Experimental Theater" by NBC and a CBS "Play- house." 5. The Proponents Recognize That The Programming Left Much To Be Desired And Excuses Are The Order of the Day The proponents excuse their failure to provide programming as follows (p. 12): Except for one film, the producers and distributors have refused to supply film on a "first run" basis. However, they have supplied product on a "first sub- sequent run" basis, i.e., several weeks after first theater run, which corresponds to the time when 14 ~g., "The Sandpiper," "Cat on a Hot Tin Roof," "The Night of the Iguana," "The Glass Bottom Boat," "Yellow Rolls Royce," and "North by Northwest." 15 ~g, "Casanova's Big Night," "A Breath of Scandal," and "Appointment with Danger." 16 . . This fall the same sponsor will present The Glass Menagerie. 17 The opening program in this series was an original drama, Murray Schisgal' s "The Love Song of Barney Kempinski," widely applauded by the critics. PAGENO="0442" 438 12 pictures are released to neighborhood theaters. In our opinion, any nation-wide subscription system could, if it were deemed important, ob- tain "first run" pictures thy-and-date with their showing in first run theaters, since a principal cause of the lack of availability of first-run and certain outstanding film features was the fact that the Hartford operation was on a trial basis. In the absence of any assurance that the Com- mission would extend subscription television to a nation-wide basis, some film producers and distributors did not desire to release their best or newest product. This excuse could be accepted more readily were it not for the fact that the sanie theme runs through the representations made to the Commission prior to the time Hartford was authorized:18 Inasmuch as current motion picture releases for box-office exhibition have been considered by the applicant, and those in privity with it, to be a principal part of the program fare it would offer through subscription and inasmuch as the avail- ability of such product has been an important consideration in determining the feasibility of the test, extended efforts for the last two years have been made to determine availability of fea- ture motion picture films during the period of their distribution as box-office attractions. Ma- jor distributors and owners of such product were extensively consulted~ We, in general, found great enthusiasm among producers and distribu- tors for a test of Phonevision's feasibility. While, in no case, did a major distributor or producer state that current releases would not be made available, it was found impossible to obtain firm commitments. It was apparent to us that the wait- and-see attitude on the part of the major distribu- tors and producers was motivated by some or all of the following considerations: 18 Applicant's Exhibit 8, pp. 1 -3. PAGENO="0443" 439 13 1. Our proposals have inherent irremovable uncertainties until the requisite governmental au- thorization is obtained. 2. In view of the uncertainties, and until they have been cured, an agreement to furnish specific product on specific dates under specific conditions cannot be made sufficiently definite and precise to constitute a firm commitment. 3. Arrangements between the distributors and producers and their respective independent contractors and joint venturers that may be pre- requisites to commitments to the applicant are not feasible to undertake until the present uncer- tainties have been removed. 4. There seemed to be a natural unwillingness to upset or confuse existing business relationships so long as a public decision or position with respect to the tests could be postponed. * * * On the basis of its investigation of motion pic- ture box-office product and the fact that motion picture product has been made available to every subscription experiment to date, the applicant has concluded that there is sufficient promise of a sup- ply for the tests here proposed to justify proceed- ing to the point where the present disadvantageous uncertainties have been eliminated and where firm commitments can reasonably be expected or de- manded. The lack of Broadway plays and other special programs is excused as follows (pp. 15-16): During the first year RKO experienced some diffi- culty in securing the cooperation of producers, writers and talent in connection with obtaining special entertainment productions primarily be- cause of their ignorance of the purpose of the Hartford trial. However, during the second year, RKO was able to obtain better cooperation be- cause of the steadily increasing subscription audience, the greater knowledge concerning sub- scription television brought about by the subscrip- tion operation in Hartford, and the realization by producers and talent that the type of subscription television programs produced for the Hartford trial could be of great value in the future, PAGENO="0444" 440 14 The economic limitations inherent in a single mar- ket test with a limited number of subscribers pre- cluded a continuous supply of plays then showing on Broadway. The asking price, including the price of putting such shows on videotape, plus certain un- economic demands of some local New York City unions, often made impractical the subscription broadcast of such shows beyond a limited number for test purposes~ However, these economic problems, which flowed primarily from the lim- itations inherent in the trial, would be eliminated if there were a number of subscription stations bargaining from a broader economic base for such Broadway plays. Prior to the commencement of the test, the proponents stated:19 With respect to legitimate theater productions, the parties hereto have had numerous conferences with interests who participate in that field. The uncer- tainties heretofore mentioned and the multiple in- terests involved have made it impossible to obtain firm commitments at this juncture~ The enthusiasm exhibited by mOst of those participating in this field has led us to conclude that, once we have removed the indefiniteness in our proposals, we will be able to broadcast legitimate plays in current exhibition over the Phonevision system proposed here. We are less impressed by the actual loss of well over a million dollars in Hartford when we recall the prior representations of a willingness to invest between two and ten million dollars, the effectuation of which would have gone a long way toward eliminating "the economic limitations inherent in a single market test." 19 Applicant' s Exhibit 8, p. 3~ The paragraph concluded with the statement: We intend also to determine whether economic support for our proposed operations would support regular stock-company pres - entation of great plays over the medium We note that no such programs were, in fact, presented in Hartford. PAGENO="0445" 441 15 The Commission knows little more now concerning the alleged program potential of Pay-TV than it did prior to Hartford, Hartford showed programming that was incapable of attracting an audience - programming which pales in comparison with the ever-expanding hori- zons of free television. B. Market Penetration was Virtually Non-Existent. Pay-TV did not Attract Subscribers In Hartford. After three years commencing June 29, 1962, the maximum num- ber of subscribers in Hartford was 4,851. The breakdown as set forth in the Zenith-Teco Comments and in Appendix A of the Commission's Further Notice is as follows: Number of Subscribers at End Installed Disconnected of Year First Year 3,183 422 2,761 Second Year 3,394 1,386 4,769 Third Year 1,752 1,670 4,851 Three Year 8,329 3,478 4,851 Total It is to be noted that the number of subscribers was in no way limited by the Commission, Application of Hartford Phonevision Co., 20 R.R. 754, (1961). It verges on the ludicrous to suggest that the benefits of a nation- wide pay television system and its overall impact on free television can be determined on the basis of such a chance, unscientific sampling of so small a magnitude. The foregoing three-year pattern is now characterized by the pro- ponents as "planned growth and experimentation consistent with the best use of manpower and facilities" (p. 48). That this Is an afterthought is evident from the anticipations and representations made to the Commis- sion prior to the authorization of the Hartford test: PAGENO="0446" 442 16 The number of decoders that applicants will install depends, in the first instance, upon the demand for the service, which cannot be established with any de- gree of certainty except through the actual experi- ence of offering definite and specific service~ Ap- plicants intend, however, to commence operations after 2,000 decoders have been installed and to pro- ceed to increase such installations if there is a de- mand for at least 10,000 decoders by the end of the first year. The restrictions upon supply of decoders and the rate at which they can be installed limit the number of decoders that would be installed during the first year of operation, in any event, to approx- imately 50,000 installations. The desirability of in- creasing the number of such installations after the end of the first year of operation is left for deter- mination after a year of experience with the system.20 At another point, the proponents stated: Zenith Radio Corporation anticipates that it will be able to produce decoding units at the rate 1,000 per week; therefore, no more than 5,200 decoders could be supplied within the first year of operation. While the rate of installation equal to the rate of supply of decoders might be achieved, the minimum goal of the applicants will be to install at least 10,000 decoders during the first year of operation They will com- mence operation after 2,000 decoders have been in- stalled. The number of installations, therefore, that applicants anticipate during the first year of op- eration will vary between 10,000 and 50,000 depend- ing upon demand, feasible rate of installation and ex- perience with the system as operations proceed dur- ing the year~21 (Emphasis supplied.) The Commission itself was acutely aware of the failure to attract sub- scribers (Appendix A): The 4,851 STV subscribers at the end of the third year represented 0.6% of the net weekly circulation in the TV market or 4.5% of WHCT's weekly circu- lation prior to its STV operation. 20 Applicant s Exhibits, Introduction, p 1 21 Exhibit 5, PP. 4-5. PAGENO="0447" 443 17 The ARB net weekly circulation figure may be pertinent for pur- poses of comparing subscription television service with penetration prior to the commencement of Pay-TV operations. For purposes of de- termining the penetration of Pay-TV, however, it is even more appro- priate to note that the market in question contained 1,524,600 television households *22 The actual penetration, consequently, was in the order of 0.3%.23 1. The Statistics Of Failure Are Not A Rational Basis For Estimating The Audience Of A Successful System And Its Impact On Free TV The test, consequently, was conclusive evidence of public rejection and the Commission was sufficiently disturbed by this failure and the prior failures in Etobicoke and California to question the economic via- bility of Pay-TV (par. 17). Nevertheless, without identifying the failure as such or relating the limited penetration to the poor programming that was offered, the Commission conjectured concerning the overall impact of Pay-TV on free television. Thns, in paragraph 13 of the Further No- tice, the Commission recited the facts developed in Hartford - the pene- tration of less than 1% (.6%) of the market and an average per program audience of 5.5% of the subscribers; it thereafter concluded that even if the penetration were 10% and the average per program audience io% of the subscribers, this could have little or no effect on free TV since, at most, this would result in a penetration of 1% of the television homes in the United States. 22 Television Factbook, 1966 Edition, p. 38-a. 23 Even if the base be limited to the City of Hartford alone, the 4,851 subscribers represent in the order of 2.2% of the 220,000 television homes in the city (~j~- vision Factbook, 1966 Edition, p. 108-b). PAGENO="0448" 444 18 The tone of the paragraph suggests that ~e Commission regarded even a 10% penetration as being unrealizable and we agree, if one as- assumesth$ sarae q~iality of programming~ This, however, is an essential assumption and in its absence the figure relating to penetration is pure speculation totally unrelated to the test situation. If speculation is in order, it was just as reasonable to assume 2% or 20%. The proponents, in fact, treat a 10% penetration as an absolute minimum and their con- jectures include a 50% penetration as within reasonable expectation. As noted, in order to conjecture as to the effect on television generally, in addition to suppositions as to penetration, the Commis- sion indulges in suppositions concerning the average audience per sub- scription television program. A io% penetration is more than 16 times greater than the .6% penetration (4,851 subscribers) actually achieved in Hartford. Notwithstanding this, the Commission assumes that only 10% of this 10% penetration would constitute the average audience for any particular program. The second figure clearly bears no relation- ship to any fact derived from the Hartford test. A 16-fold increase in subscribers could be achieved only in response to a substantial and significant improvement in programming~ No assumptions can reason- ably be drawn concerning the average number of viewers per improved program. The fact that when programming was so unattractive as to produce only a 6% penetration, the average audience was very small -- 5.5% - is in no way related to what the audience would be for program- ming sufficiently attractive to result in a 16-time increase in the num- ber of subscribers. If Hartford proved anything, it was to the contrary. A review of the statistics contained in the Zenith-Teco Comments demonstrates that the 5.5% average resulted substantially from the lack of an audience f or old movies. When attractive programming was presented, the audience changed drastically - the Patterson-Liston fight showed an audience of 82.6% of the subscribers and all of the 6 boxing matches had an average audience of 63,3%~ PAGENO="0449" 445 19 The Hartford test was authorized in substantial part to determine the effect of a successful Pay-TV system on free TV. The test was un- necessary if the Commission were willing to determine the public inter- est in this regard solely on the basis of speculation. The test was, in fact, a failure and, as such, it provided no indication of what an econom- ically viable Pay-TV system would do to free television, The conclusions drawn by the Commission purportedly from the Hartford experience bear no relation to the facts in question and are as much pure speculation to- day as they would have been if offered in 1955. 2, The Disconnect Rate Indicated Public Dissatisfaction The Commission essentially ignores the number of disconnects although disconnects may be as significant in assessing the test as the fail- ure to attract additional subscribers, Of a total of 8,329 subscribers during the three years, there were 3,478 disconnects. During the third year the disconnects (1,670) virtually equaled the new installations (1,752). In the overall, disconnects constituted 40% of the total installations, There is no detailed explanation concerning the disconnects and it is never adverted to except in the context of explaining future projections. Thus, on page 29 of the Comments we are told that the proponents have allowed for a 20% disconnect rate in their projections and that this is comparable to the "15-20% `disconnect-connect' annual turnover exper- ienced by telephone companies in many markets." The fact remains, however, that the disconnect rate in Hartford over the three-year period was 40% and no clearer evidence of public disapproval is required. 86-399 0 - 67 - 29 PAGENO="0450" *Statistical Abstract of the United States, 1964, Table No. 457, p. 338. Unbelievable as it may seem, 4,633 subscribers are urged as estab- lishing that Pay-TV is not limited to high income groups but primarily attracts middle income subscribers. If this Is established by this data, then it also establishes an even more significant fact - that Pay-TV ex- cludes the bottom 30% of the population. The proponents cavalierly dis- pose of this group with the comment that this segment "unfortunately does not provide a market for any goods and services beyond minimal shelter, food, clothing and medical care" (p. 22). This is the very group, however, that is dependent upon free television for its principal source of entertainment. To the extent that this group is incapable of providing a market for more than minimal needs, it is being subsidized by free television and it is least capable of absorbing any loss of this subsidy. 446 20 C. Pay-TV Excludes the Lowest Income Levels - 30% of the Population We have been provided with the following Information as to the income level of subscribers:24 Proportion of Proportion of Total Average Weekly Programs Total U. S. Subscribers Expenditure Income Levels Famlhes* 0-$3,999 $4,000-$6,999 $7,000-$9,999 $10,000 and Over 29.1% 32.5% 21.0% % i.s% 40.8% 43.3% 14.4% $0.99 1.25 1.23 1.18 Totals (rounded) ioo.o% ioo.o% (avg.) $1.22 24 Joint Comments of Zenith, et al., p 21. PAGENO="0451" 447 21 The consequence to the lower income groups of a shift from free to pay television was considered in a recent study entitled "The Redis- tributional Effect of Television Advertising."25 The authors, F. A. Lees and C. Y. Yang of St. John's University stated: Our study reveals that in 1963, under the present commercial television system, all income groups in the United States experience a redistribution of income slightly in excess of one-quarter of 1 bil- lion dollars, Conversion of the commercial system to an alternative system of pay television would result in a complete or nearly complete elimina- tion of the benefits of this redistribution currently enjoyed by families with a disposable personal income of less than $6,400, If a metered system of pay television were adopted the entire redistribu- tional effect would be removed. If a flat-fee system were used a small amount of redistribution would continue to exist, but the size and direction of such redistribution would depend on the viewing pattern of subscribers. Conversion to a government- supported system could be expected to alter the redistributlonal effect, the extent of which would depend upon the relationship between viewing pattern and progressiveness of the tax structure, IV. THE PROPONENTS MEASURE THE ALLEGED BENEFITS OF PAY-TV ON THE BASIS OF PROJECTIONS WHICH ASSUME A SUCCESSFUL SYSTEM, ITS IMPACT ON FREE TV~ HOWEVER, IS MEASURED IN TERMS OF THE HARTFORD FAILURE From the very outset the Joint Committee has believed that Pay-TV would fail. Its continuing concern had a two~fold motivation: a) There would be a period of Pay-TV operation prior to Its collapse during which the public interest - including the broadcast and theater industry - could be drastically affected, 25 The Economic Journal, Vol. LXXVI, June 1966, pp. 328-336. A copy of the article is attached hereto as Appendix A. PAGENO="0452" 448 22 b) A successful Pay-TV system is essentially incompatible with free TV. In the competition for audience and pro- duct, Pay-TV would endanger free TV and would achieve its greatest success with the destruction of free TV. The public interest could not, consequently, and should not be determined solely on the basis of an assumption of failure. The public interest required a careful eval- uation of the impact of a successful Pay-TV system on the economy and, specifically, on free television. The inability of the proponents to attract subscribers in Hartford, we believe, demonstrated that Pay-TV was a failure. We are also of the opinion that the test itself was a failure in that the number of subscrib- ers was too small to produce any probative evidence concerning the nationwide impact of Pay-TV on free TV. Certainly it produced no evi- dence concerning the nationwide impact of a successful Pay-TV system on free TV. Nevertheless, the proponents urge upon the Commission that con- clusions on this subject can be based on the test, and their contentions are made in such a manner as to intertwine success and failure beyond logical recognition. The benefits alleged to follow from Pay-TV are measured on the basis of "Business Projections," projections which assume a successful system. The impact of Pay-TV on free TV, how- ever, is assessed in terms of what actually happened in Hartford. PAGENO="0453" 449 23 A There is No Evidence from Which to Conclude that Pay-TV would Facilitate the Growth of New Television Stations 1. The Recent Growth In The Number Of UHF Stations And Applications Suggests That The UHF Problem Was More A Lack Of Receivers Than Programming Before attempting to sustain the assertion relative to the benefits that will flow from Pay-TV, Zenith stops to review the allocation data to establish the need for a further expansion of the number of television services. In this context it is appropriate to compare the allocation data supplied bythe proponents as of January 1, 1964, with comparable current allocation data. Thus, the proponents stated (p~ 23): The Commission, as of January 1, 1964, has allocated 1,942 commercial UHF and VHF television channels and 346 educational UHF and VHF channels to 1,206 communities. As of January 1, 1964, there were 564 commercial television stations in o;eration in 271 mar- kets (476 VHF and 88 UHF)~ As of the same date there were 30 VHF and 61 UHF construction permits in the hands of permittees~ There were also 85 edu- cational stations on the air and an additional 28 edu- cation construction permits outstanding. As of January, 1966, the Commission had allocated 1,756 VHF and UHF channels to 792 cities. Of this total, 615 are reserved for educational use (107 VHF and 508 UHF channels) and 1,141 are unreserved (551 VHF and 590 UHF) channels.26 There are now some 230 metropolitan markets.27 As of September 29, 1966, there were 605 commercial television stations (490 VHF and 115 UHF) in operation; 28 VHF and 139 UHF construction permits (not on the air) outstanding; and 124 educational stations in op- eration and 34 educational construction permits outstandtng~28 As of July 31, 1966, there were applications pending for 95 channels (4 VHF and 91 UHF). 26 Fifth Report and Memorandum Opinion and Order, FCC 66-137, 2 FCC 2d 527, 551 (adopted February 9, 1966). 27 1966 Television Factbook, pp. 38 -a-43 -a 28 . Television Digest, October 3, 1966, Addenda to Television Factbook PAGENO="0454" 450 24 Between January 1, 1964, and September 29, 1966, the number of UHF stations increased from 88 to 115 and the number of VHF stations from 476 to 490. During the same period of time the number of con- struction perwits Increased from 30 VHF and 61 UHF to 28 VHF and 139 UHF. This phenomenal growth occurred without benefit of Pay-TV. It suggests that the principal problem confronting UHF television in 1964 was conversion and that the basic solution was contained in the enactment of the All-Channel Bill. The mere enactment of the Bill did not place UHF receivers in the hands of the public. As the months pass, however, and old sets are replaced by sets capable of receiving UHF, the interest in the construction of new UHF stations increases and this is reflected in the foregoing statistics. 2, The Pay-TV System Which Proponents Allege Will Assist In The Development Of New Stations Is A Successful System, The System Of Their Projections, And Not The Failure That They Produced In Hartford Zenith's review of television allocations was for the purposes of establishing a need for additional programs and revenue, a need which allegedly will be met by Pay-TV. The Pay-TV which will meet this need is not the Pay-TV of the Hartford test - the Pay-TV which had less than 5,000 subscribers, a 0.6% penetratIon, In three years - but a successful system with a mini- mum of 20,000 subscribers and including 40~000, 75,000 and 100,000 subscribers (p. 27, 35) and a penetration characterized "conservatively" as a minimum of 10% (p. 35) and ranging up to 50%. PAGENO="0455" 451 25 There is little point, consequently, in analyzing the projection~, in detail. They have no greater validity than similar calculations offered to the Commission in 1954. They cannot be tested or measured any more now than they were then. One point is of academic interest -- the assertion (p. 27) that pro- gram producers and distributors will be paid 35% of the total subscrib- er program expenditure; that this is based on the Hartford experience; and that "It also conforms to the percentage which motion picture pro- ducers and distributors, with a few exceptions, have traditionally charged motion picture theaters." If this is the purchase price, it will guarantee little more than the programming that failed in Hartford and a consequent .0.6% rather than 10%-50% penetration, Exhibitors compete with each other for the purchase of film, Quality product will bring as high as 90% for first-run exhibition in New York or Los Angeles, "Front" money or a guarantee to the producer is also a frequent prerequisite to securing top product, First quality films frequently pay 50% or more even for subsequent neighborhood runs ("Who's Afraid of Virginia WcrnLr"'), Theater television can anticipate paying 50%-6o% of the gross, The economics of theater distribution result in product being sold where it will produce the highest return. Pay-TV is competing for pro- duct not only with exhibitors but with free television, The proponents notwithstanding, free television has demonstrated that is is capable of paying two million dollars for the right to telecast "Bridge on the River Kwai" twice - one million dollars per showing. The recent film ac- quisitions which were adverted to earlier demonstrate that this was not an isolated instance, The cost-per-listener economics of free television are not nearly as limited as the Pay-TV proponents have asserted, PAGENO="0456" 452 26 Any exhibition of a film or a play before a large audience, whether in theaters, Pay-TV, or free TV, dilutes the markeL With respect to film, theater exhibition i~ a'nown quantity and free-TV has demonstrated its capacity to pay~ Pay-TV will secure the product only where it can demonstrate that Pay TV exhibition alone or in conjunction with a diluted theater market will produce revenues equal to or in excess of revenues that will be available from theater exhibition and free television. Par- ticularly at the outset, Pay-TV will need current and quality films to at- tract subscribers and a substantial number of subscribers to obtain cur- rent and quality films. This circle was never broken in Hartford~ If it can be broken, it will require the expendithre of large sums of money in the form of cash guarantees to producers or enlarged percentages, or both~ The 35% figure isn't even close. B. The Deleterious Effects of a Successful Pay-TV System on Free Television Cannot Be Measured By the Statistics of Failure Although, as we have noted, the beneficial effects of Pay-TV are set forth in terms of a successful Pay-TV system, the ability of Pay-TV to impair free TV is measured in terms of the actual events in HartforcL 1. The Extent Of Audience Siphoning Is Dependent Upon The Number Of Sub- scribers And The Quality of Programs There is little doubt that the loss of 267 people (5~5% of the 4,851 subscribers) would have little siphoning effect on a market with a net weekly circulation of about 8OO,OOO~ This would be true whether the group watched two hours per week or ten hours per weekS This is not what the test was intended to demonstrate; nor is it likely that a system which attracted an average audience of 267 people out of an 800,000 po- tential would remain in existence for long~ PAGENO="0457" 453 27 The proponents postulate a minimum penetration of ten percent to and including 50%. To determine the impact of Pay-TV on free TV in the Hartford market, the subscriber potential must be assumed to range between 80,000 and 400,000, If programming were available in a quality and quantity to attract a group of this size how many would watch a particular program? Would the average viewing time be two or ten hours per week? These are the questions which must be an- swered to determine the audience siphoning effect of a successful Pay- TV system and these are the questions that Hartford doesn't even fur- port to answer, The 82.6% that constituted the audience for the Liston- Clay fight would have had a disastrous impact on free television on the night in question if the subscriber group had been between 80,000 and 400,000 rather than less than 5,000, 2. The Time Pre-Empted By Pay-TV Is Prime Time The next assertion is that Pay-TV would not pre-empt any signi- ficant amount of time now utilized by advertising sponsors, In this con- nection, it is urged that the average time utilized in Hartford was 30 hours per week, that assuming 30-40 hours a week of Pay-TV there would still be ample time in multiple station markets for advertising, Conveniently overlooked is the fact that the 30 to 40 hours in ques- tion are the prime listening hours, Also overlooked is the fact that the proponents do not propose to be limited to multiple station markets. The 30 to 40 hour limitation derives, we are told, from the limited amount of "box-office" programming available and limitations inherent in the family recreational budget. ~The latter is a convenient limitation since it is incapable of measurement. The former, the availability of programming, was a limitation in Hartford but not quite in the context suggested by the proponents. Good programming required money that the proponents were unwilling to spend. Moreover, they specifically committed themselves not to present programming to the exclusion of PAGENO="0458" 454 28 free television that was available on free television - a commitment that is not now being made. 3. The Experience In Hartford Does Not Provide A Basis For Evaluat.ing The Extent To Which A Successful Pay-TV System Would Siphon Talent And Programs From Free TV Every program which is suitable for Pay-TV is suitable for free TV. The exhibition of a movie on Pay-TV dilutes the potential free tele- vision audience and vice versa. In this context any use by one affects the other. Talent useful to free television is also useful to pay television and vice versa. Although, absent contractual restriction or limitation, talent could work for free and Pay-TV, it cannot do so at the same time. If the talent in question is a performer rather than an author, he or she may be subject to the same problems of audience dilution as the movie. Stated otherwise, the two techniques, free TV and Pay-TV, are di- rectly and actively competitive for talent and progratus as well as audi- ence. Obviously people will not pay for what is available free, but this is axiomatic only as long as the program remains free. The word "box-office" is not susceptible of any real meaning. It is used as a magical incantation to create an illusion of a difference that the proponents know does not exist. One episode of "The Man From UNCLE" constitutes a television program. Two episodes tied together constitute a movie for which people are now. paying at neighborhood theaters throughout the country. The availability of the Yankees on free television did not deter Pay-TV, the Los Angeles Dodgers and the San Francisco Giants from contracting for the exclusive presentation of Dodger and Giant games on pay television to the exclusion of the home audiences. The competition for product and talent is obvious. The purpose of a test was to determine whether a successful Pay-TV system would de- stroy free TV. In this context Hartford was of no value whatsoever. PAGENO="0459" 455 29 C~ ~ The Further Notice cannot be reconciled with the Third Report. The Third Report postulated a test situation for purposes of determining the benefits and evils inherent in a different distribution technique - Pay-TV. The essence of the test was that this new technique was so inherently competitive to and with the existing system of free television that it could not be authorized on a nationwide scale until the Commis- sion had facts upon which it could determine the public interest -- the benefits to be derived and the effect of the system on existing television. Every use by Pay-TV precludes a simultaneous use of a scarce com- modity - broadcast frequency space - at the same time, and such use could be authorized only if the benefits conferred were substantially superior to the detriment that could result. The only conclusion the Commission can draw from the Hartford experience is that Pay-TV is a total failure, If the proponents, in fact, invested as much time and effort as they claimed and, in so doing, pro- duced so few subscribers, then no further authorizations are warranted. The Further Notice recognizes the failure - it questions the economic viability of Pay-TV. Notwithstanding this, the Commission appears to be prepared to ignore the failure and undertake a permanent nationwide system on the basis of supposition rather than fact~ If the Coliimission can properly determine `the public interest on the basis of conjecture and supposition, then the entire test procedure was a farce. The Commission had before it in 1955 evidence of a mag- nitude comparable to what it now purports to rely upon. The Hartford test does not, under any circumstances, justify a nationwide authoriza- tion. If the Commission is not persuaded of the fact that the system is a failure, the most that Hartford warrants is an extension of the existing test authorization, PAGENO="0460" * 456 30 V. JURISDICTIONAL AND RELATED QUESTIONS A. The Commission Does Not Have Jurisdiction to Authorize a Permanent Pay-Television System The Commission has stated in its First Report, and reiterated in the Further Notice of Proposed Rule Making here at issue, that it pos- sesses the statutory authority to authorize nation-wide permanent pay television. Moreover, the Commission asserts in its Notice that the Court of Appeals, in Ccnnectkut Committee Against Pay Television v. Federal Communications Commission, 391 F.2d 835 (D. C. Cir.), cert. denied, 371 U. S. 816 (1962), concluded that the Commission possessed such statutory authority. The Commission has asserted that if (as the Court held in Connecticut Committee) it possessed the statutory author- ity to authorize a test, then, of necessity, the Commission possesses the statutory authority to authorize pay television on a permanent basis (Notice of Further Rule Making, Par. 19). The Joint Committee respectfully submits that the Commission's reading of the Court of Appeals' opinion is erroneous Although the ap- pellant in Connecticut Committee urged that the Commission did not have the power to authorize pay television on a permanent basis, nevertheless, the Court refused to decide this question in its decision in that case. The Court never addressed itself to whether the Commission possessed the power to authorize pay television permanently. The Court held mere- ly that the Commission's power to provide for experimental uses of fre- quencies constituted a sufficient basis for the trial authorization there in issue. The Court's opinion was explained and justified exclusively by the experimental nature of the authorization, and the Court went to great lengths to emphasize the experimental nature of the operation as the basis for its decision, stating (301 F.2d at 837): PAGENO="0461" 457 31 The distinguishing characteristics of the Federal Communications Commission? s authorization of subscription television in this case is the experi- mental or trial basis upon which the system is to operate for the duration of its three years authority~ The Commission's belief that the statutory authority to institute a test also carries with it the statutory authority to authorize pay tele- vision on a permanent basis, is a proposition which finds no support either in the Court's holding in Connecticut Committee, or any other court decision of which the Joint Committee is aware~ It should be ob- vious that the statutory framework and guidelines which would be re- quired to support a nation-wide permanent pay television system is far different from the type of legislation required to support a small ex- periment so limited in size as the Hartford test, and with such a nec- essarily inconclusive effect on the free broadcast system~ The danger- ous effect which pay television will have on the free television system does not arise from a limited system of tests~ It arises precisely be- cause such testing is fruitless and futile~ The dangers of pay television will not be apparent until the system is extensive enough to accomplish the very things feared~ At this point, the existence of an extensive and expensive pay television operation will present the Commission with a fait accompli~ Section 303(g) of the present Communications Act, as the Court noted in Connecticut Committee, expressly confers jurisdiction on the Commission to authorize "experiments~" There is no provision, however, in the Act which would authorize the Commission to permanent- ly authorize a system so radically different in nature from the present American free broadcasting system, and with such a potentially destruc- tive effect on that system. Indeed, the precise difference between the power to authorize lim- ited tests of pay television systems, and the power to authorize pay tele- vision on a permanent basis wan clearly pointed out by Congressman Harris, the then Chairman of the House Interstate and Foreign Commerce PAGENO="0462" 458 32 Committee~ Congressman Harris indicated that the Committee allowed tests such as Hartford pursuant to the Third Report solely because of the experimental nature of the venture, and he stated that (105 Cong. Rec. 5362-63, emphasis added): * * * the Congress reserves to itself the right to determine whether or not to enact legislation to amend the Communications Act of 1934, as amend- ed, to empower the Commission to grant, and to prescribe the conditions under which the Commis- sion would have the power to grant, authorizations for extended or permanent operations Mr. Speaker, therefore, in conclusion, under no circumstances can the action of the Federal Com-~ munications Commission fin the First and Third Reports] and the action of the Committee on Inter~ state and Foreign. Commerce be construed as plac- ing a stamp of approval on subscription television as a permanent service. It seems clear, therefore, that the mere power to aUthorize experimental operations (which was the only power approved by the Court of Appeals in Connecticut Committee, supra) does not carry within it the power to authorize pay television on a permanent basis. The Joint Committee is aware that the Commission in the First Re- port has concluded that the Commission has such permanent authority. The Joint Committee believes that the Commission's determination in the First Report was erroneous, and that it should be carefully reconsidered at this time. It cannot. be emphasized too strongly that a system which demands direct payment of fees by the public in order to receive programs broad- cast on publicly controlled broadcast facilities represents a major and drastic change in the nature of American broadcasting. Prior to the ad- vent of pay television, broadcasting.had been solely supported by com- mercial advertisers. There was, and is, no direct financial relationship between a listener and a broadcast licensee. The absence of this relation- ship is more than just a matter of commercial choice; it represents an PAGENO="0463" 459 33 important feature distinguishing broadcasting from public utilities, and common carriers - a distinction which was explicitly recognized by Congress when it drafted and adopted the Communications Act~29 This single fact also sharply distinguishes pay television from other changes in broadcasting which have occurred over the years, such as color television, FM broadcasting, simplexing, multiplexing and func- tional music operations,30 It also distinguishes pay television from CATV since in CATV there, again, is no direct financial relationship between a listener and a broadcast licensee The relationship is between a listener and the ~ATV operator who is. in effect, charging the listener for the use of wire lines which he has constructed so as to bring the pro- gramming presented by the licensee to the public,31 On the other hand, a licensed pay television system permits the licensee to charge for the use of public facilities (the air waves) without any governmental regula- tion of those rates; the Supreme Court clearly indicated in the Sanders case32 that rate regulation of broadcasting is not encompassed within the present Act. See ~., the remarks of Senator Broussard who, during the debates on the Communications Act o. 1927, stated "radio makes no direct charges whereas the others (telephone and telegraph) are in the business of serving the public for di- rect pay." 67 Cong. Rec. 12504. See also ~uUtzer Pubiish~Co, v. FCC, 68 U. S. App. D, C. 124, 126, 94 F2d 249, 251. 30 Although it is true that certain subscribers of functional thusic pay for the privilege of receiving material broadcast over the air, it is also clear that the ~ listening audience does not pay for this brcadcasting. Stores, factories and buildings which desire such operations purchase them so as to provide the public in those stores and buildings with background music as an additi~al serv- ice, The public is not simultaneously ~fl~ed of the service, 31 It should be noted, of course, that, as was pointed out above, the CATV op- erator may, himself, originate programming, charging the public for it. Under these circumstances ~ATV becomes quite similar to pay television, It is signif icant, however, that the Commission has specifically refused to hold that origina-. tion of programming by CATV systems on a permanent basis is in the public in- terest and has sought guidance from Congress on thls matter. See Second Report in Docket No, 14895, at Par, 153(u), 2 FCC at 787. 32 FCC v. Sanders Bros ~dio Station, 309 U. S 470, 474. PAGENO="0464" 460 34 In the First Report the Commission, although admitting that the Communications Act of 1934 makes no specific or direct delegation of power to authorize such a major change in the concept of American broadcasting and the regulatory scheme surrounding it, nevertheless found that power in the statute, and found support for its interpretation in its legislative history. The Commission reasoned that Sections 301 and 303 of the Act gave it broad powers over the use of radio frequen- cies, and it specifically cited Section 303(g) as giving it the power to study new and experimental use of frequencies and to generally encour- age the larger and more effective use of radio in the public interest. It then cited what it considered to be certain specific statutory limita- tions on the Commission's licensing power (Sections 310(a), 313, 317, 325(a), 325(b) and 326) and concluded that if Congress wished to further limit that power in regard to pay television operations it would have specifically done so. Thus, by this strained interpretation the Commis- sion concluded that it had been given the authority to regulate an indus- try never conceived of at the time of the drafting of the statute The statutory provisions relied upon by the Commission, however (Sections 301 and 303), do not support the Commission's interpretation of its power and authority. Section 301 of the Act merely states the gen- eral purposes which the Act was drafted to effectuate. This broad state- ment does not grant the Commission any power. It nowhere suggests or even hints that the use of the public channels can be permanently licensed to those who would withhold the benefits of those channels from persons who fail to pay a per-program fee. The general powers of the Commission are stated in Section 303. Thus, Section 303(b) gives the Commission power to prescribe the nature of the service to be rendered by each station. Section 303(c) allows the Commission to assign frequencies to various classes of stations and to designate the power and the time which they may operate. Section 303(d) allows the Commission to determine the location of the different stations; PAGENO="0465" .461 35 Section 303(e) allows regulation of the apparatus to be used; and 303(f) grants the Commission power to make such regulations as are neces- sary to prevent electrical interference between stations and to carry out the provisions of the Act. The balance of Section 303 covers mis- cellaneous rules to insure the proper technical operation of all stations. None of these provisions even remotely indicate that the Commission has authority to authorize a permanent pay television system. The only part of Section 303 which gives any support to the inter- pretation adopted by the Commission in the First Report is Section 303(g) which empowers the Commission to study new uses for radio and to pro- vide for experimental uses for frequencies and generally to encourage the larger and more effective use of radio in the public interest. Un- questionably, this section grants the Commission the power to run tech- nical tests such as the ones carried out by Zenith in 1950. This section, as interpreted by the Court of Appeals in Connecticut Committee Against Pay-TV v. FCC, supra, also allows the Commission to authorize trial experiments such as the Hartford test. However, there is a vast differ- ence between allowing the Commission to conduct experimental tests, and authorizing it to establish pay television on a permanent basis. The Communications Act, as now written, neither sets out nor attempts to set out the kind of regulatory scheme that would be necessary to encom- pass a permanent pay television system. The right to experiment in- cluded in Section 303(g) does not supply the statutory deficiency. It is true, of course, that the Communications Act gives the Com- mission broad regulatory powers over the broadcast field. As the Com- mission correctly indicated, broadcasting is a rapid and dynamic field and Congress allowed the Commission great flexibility to enable it to cope with new problems as they developed. It is also true, and the Courts have already indicated, that these powers are not all encompassing and that matters regarding the manner in which stations derive their revenue, as well as other internal business affairs, were never conceived as being within the Commission's regulatory power. See Sanders Brothers, supra. 86-399 0 - 67 - 30 PAGENO="0466" 462 36 The concept of a pay television operation and the introduction of a direct financial relationship between the individual listener and the station is more than a mere advance in the broadcasting arL It intro- duces a major change in the entire concept of broadcasting and must necessarily introduce a major change in the regulatory sheme which surrounds the broadcasting Ilidustry. If rates are to be charged the public f or the privilege of using public facilities, the question arises as to whether and how these rates must be regulated~ The present Act does not provide this guidance to the Commission. Moreover, if rates are to be regulated, it would mean that the Commission must assess such things as cost of operation, cost of equipment and cost of talent and then decide - as though the licensee were a public utility - what constitutes a reasonable return upon the iicense&s investment. It is apparent that the Communications Act as now written neither sets out nor attempts to set out such a broad regulatory scheme The absence of such a scheme Is plain evidence that Congress did not grant the Corn- mission power to authorize a permanent pay television system. B. The Commission Should Not Act Without Guidance From Congress Even assuming, however, that the Commission possesses the stat- utory "power" to authorize permanent pay television, nevertheless, it is clear that it should not do so without further guidance from Congress Indeed, the Commission, itself, in the instant Further Notice of Proposed Rule Making, has indicated that amendment of the Communi- cations Act may indeed be necessary in order to properly protect the public from the detriments inherent in pa.y television. However, the Commission has indicated that it will apparently follow the procedure of first establishing pay television on a permanent basis and then seeking guidance from Congress through amendments of the Communications Act to correct the abuses which may occur precisely as a result of the Corn- mission~s authorization of permanent pay television (Notice, Par. 20). PAGENO="0467" 463 37 This is indeed a strange view of the Commission's responsibilities: to allow the abuses first to occur and then to seek from Congress methods by which to correct them. It is even stranger yet to hear the Commis- sion, on the one hand, earnestly urging that with regard to CATV it is seeking to fashion rules to protect the public before CATV becomes "en- trenched,"33 while, at the same time, virtually ignoring the vastly more serious dangers of pay television "entrenchment" by vaguely asserting that at some later time (after it has allowed pay television to be perma- nently authorized) it may seek some guidance from Congress on such a vital matter. One of the problems which the Commission has always faced is the fact that events move so quickly, and interests vest so rapid- ly, that the Commission is often swept ahead by technological and other changes, rather than controlling or regulating them properly or effective- ly. It is disheartening to see the Commission so forcefully pushed by the desire of pay television gadgeteers for profit as to allow permanent pay television to be foisted upon the American public without appropriate statutory amendments necessary to protect the public from gouging. It is particularly inappropriate for the Commission to do so in the face of the clear Congressional intent, as indicated by the House Interstate and Foreign Commerce Committee, that the ultimate decision to authorize extended or permanent pay television operations must rest with Congress and not with the Commission. Congressional developments during the intervening years have clearly indicated Congressional concern with the possibility that the free television system would be supplanted by pay television. As noted above (footnote 3, supra), numerous bills have been introduced into the Con- gress which would prohibit pay television. Moreover, the House Inter- state and Foreign Commerce Committee has made quite clear its belief that the Commission has no statutory authority under the present Act. "3 See particularly Second Eeport in Docket 14895 et. al., at Pars. 28-46, 2 FCC at 737-745. PAGENO="0468" 464 38 Both the House and the Senate Interstate and Foreign Commerce Com- mittees vigorously attacked the Commission's conclusion in the First Report that it had such authority.34 The House Committee only ac- quiesced in the Hartford trial to be held pursuant to the First and Third Reports because of the limited and experimental nature of. the proposed trials. Chairman Harris made it quite clear, however, that the Commit- tee's acquiescence did not indicate a belIef that the Commission should authorize pay television on a permanent basis without first obtaining Congressional guidance in the form of statutory amendments. Moreover, public concern has always been evident. It might con- ceivably be argued that if a groundswell of public opinion or demand was present seeking the prompt institution of a pay television system, the Commission might be obligated to act even in the absence of a clear Congressional mandate, and despite the fact that the Communications Act gives no clear guidelines. Thus, for example, in the case of CATV systems, the Commission has been confronted with an industry which, as a result of public demand for increased television service in areas which cannot receive adequate signals, has been burgeoning at such a rapid rate that it threatened to distort or destroy the Commission's carefully considered nationwide television allocation plan. Under these circumstances the Commission recently indicated that it intended to take jurisdiction of off-the-air CATV systems even in the absence of a clear Congressional mandate, and even where the Commission once See Second Report, 16 R.R. at 1539-1540. Thus, on February 28, 1958, the Senate Interstate and Foreign Commerce Committee voted to recommend the adoption by the Senate of the following resolution: Resolved, that it Is the sense of the Senate that the Federal Communications Commission should not, without specific authorization by law, authorize or permit any television licensee or agent thereof to impose a toll, fee, subscription or other charge on the general public or any portion there- of, for the privilege of viewing television programs received over television receivers located in the home, with the ex- ception of both community antenna systems and those pro- grams transmitted by cable or wire or both. PAGENO="0469" 465 refused to take such action without Congressional guidance.35 It is clear, however, that there is no such public demand or pressure evi.~ dent in the case of pay television. It can hardly be contended that the public has been besieging the Commission (or any other regulatory agency or public authority) with demands that a permanent pay tele- vision system is either necessary or appropriate. Indeed, in California, as the Commission is aware, the public voted down by a decisive mar- gin the institution of a wired pay television system in the only state- wide referendum ever held on this question. Similarly, it is significant that only one test of a pay television system pursuant to the First and Third Reports has been conducted, It is at least reasonable to assume that if a real demand for such a service were evident, it would be re- flected in requests by prospective pay TV proponents for authority to conduct experimental operations Nor has it been demonstrated that the public of Hartford has demanded the service. Although RKO arti- ficially limited the Hartford test to 5,000 subscribers and alleged that there is a "backlog" of demand, nevertheless, neither they nor any other proponent of pay television has indicated the extent of such a demand or has demonstrated the existence of public clamor for a pay television system. The information supplied by Telemeter concerning its Canadi- an experiments corroborates the fact that, far from demanding a pay television service, the residents of Etobicoke and Mimico actually re- jected it. In these communities, the number of wired, pay television subscribers actually declined more than 50% during the five-year test from an initial high of 5,500 to 2,500 even after Telemeter expanded its potential service area from 12,000 to 14,000 (see Telemeter Comments, pp. 7-9). There were, no doubt, many reasons for the decline in demand for the Telemeter service. Whatever the reason, the Canadian experience See, e~g., Notice of Inquiry and Proposed Rule-Making in Docket No. 15971, 30 Fed. Reg. 6078. Even here, however, the Commission requested Congressional guidance and Congressional clarification of its authority to act. Id. at 6082-83, par. 31 PAGENO="0470" 466 40 clearly indicates that a widespread public demand for the institution of a pay television system simply does not exist.36 Finally, and most importantly, the Commission should not attempt to authorize pay television on a permanent basis since it is plain that the Communications Act gives no guidelines to the Commission as to the manner in which pay television should be operated. One of the most pressing problems raised by a permanent pay television system is the question of rate regulation. There is serious doubt under the Sanders Brothers and Pulitzer Publishing cases37 as to whether the Commission may regulate the rates which may be charged by a pay television licensee to its subscribers. Proponents of pay television vigorously assert that such regulation is not authorized by the present Act. The Commission, In the First Report, did not decide this question. Nevertheless, it would be a total abdication of responsibility for the Commission to allow the institution of charges to the public by Commission licensees for the use of the public airways in the face of the very real possibility that it has no statutory authority to regulate rates In short, subscription television representsa marked departure from the present pattern of broadcast operations. It raises, for the first time, fundamental policy questions which, heretofore, there has been lit- tle or no occasion to consider. Its introduction will cause dislocation, disruption and confusion in the industry. Clearly, the Congress is the proper body to legislate a change of this magnitude and consequence, even if it can be determined that the Commission has the requisite juris- diction to authorize a permanent pay television system. The determina- tion of whether or not pay television should be permanently authorized, and, if so, the circumstances which should surround its operation, are legislative functions. They should not be undertaken in the absence of a clear Congressional mandate. 36 It is also significant that after the cessation of the Etobicoke-Mimico test, less than 20 per cent of Telemeter's subscribers indicated regret that the sys- tem had stopped, despite the fact that Telemeter sought an expression of opinion from all of its subscribers. See Telemeter Comments, p. 7. Sanders Brothers v. FCC, 309 U. S. 470; Pulitzer Broadcasting Company v FCC, 68 U. S. App. D. C. 124, 94 F,2d 249, PAGENO="0471" 467 41 VL THE COMMISSION SHOULD DEFER ACTION UPON AUTHORIZATION OF A PAY-TV SYS- TEM UNTIL THE IMPACT OF CATV UPON THE PRESENT SYSTEM IS KNOWN Throughout all of its consideration of the possible authorization of Pay-TV, the Commission has adhered to one fundamental principle - that any action authorizing Pay-TV would be taken only if it were clear that the result would be at least to preserve the traditional free televi- sion system in the United States, or1 indeed, possibly even to strengthen it~ The Commission's manifest position on this subject needs no reit- eration. Its deliberations during the years preceding the present con- sideration of the subject have been devoted largely to efforts to ascer- tain whether a Pay-TV system could come into being without depriving the American public of the free television service on which it relles~ The Joint Committee respectfully urges that at the present moment in time the Commission is in a poorer position to make any determina- tion with respect to that all important matter than it has been at any time since It first engaged in formal consideration of Pay-TV~ The es- sential reason for the inability to determine at this time whether the au- thorization of Pay-TV would result in serious harm to the free television system is because the free television system faces a clear threat from the rapid growth of CATV. That threat, the result of which cannot be predicted at this time, may so effect free television that the additional impact of Pay-TV could constitute a mortal blow. At the very least, the Commission, the industry, and the public must acquire additional infor- mation from the operation and growth of CATV under recently adopted Commission regulation and possible Congressional action before any reasonable judgment can be made concerning the ultimate impact on the free television system or Pay-TV. PAGENO="0472" 468 42 Underlying the issuance of the Further Notice of Proposed Rule Making in this docket is a fundamental two-fold assumption of the Com- mission that a basic decision with respect to pay television may be made at this time. The assumption is: (1) That the shape of the free television industry is sufficiently ftxed so that the impact upon it from a pay television authorization may be measured with suf- ficient precision for regulatory purposes; and (2) That the form a nationwide pay television system will take is sufficiently known at this point so that Federal regulation may be intelligently applied. As indicated elsewhere herein, the Joint Committee believes the Commission may not rely upon the Hartford test as a basis for authoriz- ing a nationwide Pay-TV system, and is without sufficient data from that test to determine what the impact of nationwide Pay-TV will be on the traditional free television service. It is the further position of the Joint Committee, however, that the Commission is not able at this point to as- sess what form a pay television system is likely to take, nor is it in a position to assess the nature of the television system which may finally evolve in this country with or without pay television. Knowledge concern- ing both these factors is essential if the Commission's action with respect to Pay-TV will safeguard the oft-repeated concern for maintenance of healthy free television service. The unsettling and unknown factor in the equation at this point is the burgeoning growth of the community antenna television industry, not only in small and isolated communities but in large cities, and the pos- sibility that such CATV activity will itself become a vehicle for Pay-TV operations. In its current deliberations in the CATV field, the Commis- sion has refused to make final decisions as to the role of CATV in the national television structure, and as we shall show, until basic decisions have been taken with regard to the CATV industry, and its role in the national television allocations structure is understood, no action should, or properly can, be taken to authorize a nationwide Pay-TV service. PAGENO="0473" 469 43 A. The Extent Of~ATVDeve1opme~ The rapid growth of CATY systems within the last several years must be Considered a factor of prime significance to this proceeding. This growth appears to be concentrating in the large television markets of the country, the very areas which would be the first targets of Pay-Tv operations, This activity formed much of the basis for the Commission's decision to assert jurisdiction over all CATV systems in the Second Re~ tort and Order in Dockets 14895, 15233, and 15971, 2 F,C,C,2d 725. Thus, at Paragraph 38 the Commission stated (2 F~C,C,2d at 741): 38. There is also widespread CATV activity within major cities, Our attention has been called to the asserted intent of CATv interests to wire up "almost all American cities - small and large" and 85 percent of all television sets - 40 million homes,43 The December 1965 issue of Television Magazine (vol. 22, No. 12) states that franchise applications have been filed in San Francisco, Seattle, Pittsburgh, Baltimore, Fresno, Columbus, Tucson, Birmingham, Providence, and Sacramento, Two of the commenting parties in this proceeding are applicants for CATv franchises in Philadelphia, The comments of Columbia Broadcasting System (CBS) refer to applications for CATV franchises in Albany and Syracuse, N. Y~; Galveston, Tex~; and the grant of a CATV franchise in Wilmington, Del. D~ H. Overmyer, permittee of new UHF sta- tion WDHO-TV in Toledo, Ohio, comments that local authorities have granted a CATV franchise fOr that city since the issuance of the joint notice herein, Toledo has two VHF stations, a UHF ed- ucational station, and - according to Storer Broad- casting Co,, receives the signals of four Detroit- Windsor VHF stations, off the air and without re- ception difficulty. Telerama, mc,, az~ applicant for a CATV franchise in Cleveland, has filed com- ments describing its proposed cable operation for that city which has three VHF stations, a UHF ed- ucational station, and applications pending for two PAGENO="0474" 470 44 new UHF facilities.24 Taft Broadcasting Co., in a June 1965 petition to deny a microwave application (file No. 6226-C1-P-65) to bring the three New York independent stations to CATV systems in the Wilkes-Barre-Scranton area of Pennsylvania, states that in the last 6 months 90 franchise applications have been filed in 54 communities in Lackawanna and Luzerne Counties. The Scranton-Wilkes-Barre area is served by three UHF stations, providing three full network services. [Footnotes omitted] This current activity in the large cities by CATV interests is sig- nificant because it reflects the fact that CATV service no longer appears to be confined to its originally assumed purposes. Instead, despite the presence of numerous local signals, CATV systems now planned in the larger markets propose to provide an unusual number of additional broad- cast programs. Such activity in the large markets has the potential to threaten local free television service. This threat exists because CATV systems frag- ment the audience otherwise available to local stations by importing other broadcast signals. In addition they may be used as a vehicle for distri- buting programs which either originate with the CATV system or are made available to it on an exclusive basis. It is clear that substantial investments have been and are being made by CATV interests in the large markets of the country. There are currently on file with the Commission 112 requests for waiver of the Commission's new CATV rules requiring an evidentiary hearing before "distant" signals may be imported into the large markets. In addition, several significant CATV systems are in op- eration in the very largest cities of the country, such as New York, Cleve- land, San Diego, etc. The economic pressure to utilize these systems in the maximum manner possible under the state of art, is likely to increase in the next few years. In addition, there is increasing interest in origi- nating programming on CATV systems. These developments must be fully understood before a Pay-TV, off-the-air system should be authorized. PAGENO="0475" 471 45 B. CATV As A Form of Pay-TV A clear threat to the continued healthy existence and growth of free television is posed by the possibility that CATV systems may be converted into Pay-TV operations, or that they will originate program- ming on vacant video channels. In fact, there is now formal interest in utilizing CATV systems to carry programming which does not originate with broadcast stations. See applications of Dal-Worth Microwave, Inc., File No. `7661-C1-P-66. It is common knowledge that CATV systems have been utilized to distribute specialized programming, e.g., heavy- weight championship fights, that is not otherwise available to television broadcast stations, and substantial interest now exists among CATV groups for program origination on a broad scale. The Dal-Worth applications apparently do not propose to charge subscribers on a per program basis for the nonbroadcast programming that would be provided. It is nevertheless clear that program origina- tion undertaken by CATV systems can have as serious consequences for free local service as the most widespread pay television operation con- ducted on a broadcast frequency. Manifestly, such CATV operation would be in active competition with free television both for audience and for program material. That no valid distinction between such CATV and Pay-TV may be based on the difference per program and monthly subscription payments has repeatedly been recognized. Indeed, the Commission uses the terms "pay television" and "subscription television" interchangeably. More- over, one of the first pay television operations in the country involved a community antenna television system located in Bartlesville, Oklahoma, ("Telemovies") which did not charge subscribers on a per program basis but on a monthly basis. There was no doubt that this was pay television. (See Broadcasting, September 9, 1957, p. 31). PAGENO="0476" 472 46 Former Chairman Oren Harris o. the House Committee on Interstate and Foreign Commerce has stated: Now I think we are kidding ourselves when we try to say that Pay-TV is limited to dropping a coin in a box and getting a program out of the whirL I think a lot of people in this country are going to wake up one of these days and find them- selves in the midst of a new policy or program that they cannot get out oL (Hearings on H.R. 7715, su~ra, at 185~) *: *. * Now what we are doing, I must say in all frankness and candor, in my judgment we are sitting around here and watching a nationwide Pay-TV operation develop ~Id at 186.) * * * ~W]hether you talk about collecting on a monthly basis or per program basis, whatever method it is, it is still Pay-TV~ ~Thid~) It is true that the Commission has already expressed its concern over the possible impact on free television service from a hybrid CATV- Pay-TV operation~ Thus, in the Second Report and Order in Docket 15971 at Paragraph 128, the Commission stated (2 F~C.C.2d at 777): Whether a form of Pay-TV operation will re- suit from CATV is uncertain and would appear to depend again very largely upon the growth factor, particularly in the larger cities which would nat- urally be the backbone of any wire Pay-TV opera- tion~ But we would agree that in the circumstances its authorization should stem from the Commission (or the Congress) after appropriate proceedings~ For, what is involved is not the strictly wire Pay- TV proposals such as recently attempted in Cali- fornia~ A hybrid CATV-Pay-TV operation would be baseth in an integral and substantial fashion, on use of broadcast signals (to provide the econom- ic base for the Pay-TV "frosting"), and such use of broadcast signals should be allowed only if it is found to be in the public interesL We have petitions now under consideration, which seek the authoriza- tion of Pay-TV on a regular basis using broadcast PAGENO="0477" 473 47 facilities, perhaps only in the UHF portion of the spectrum~ It is clear that until resolution of the very important policy issues, Pay-TV operations based in substantial part on use of broadcast signals is inappropriate~ The Commission further stated at Paragraph 153 that Congres- sional consideration of Pay-TV in conjunction with CATV was "partic- ularly called for~" The Commission stated (2 F~C~C.2d at 787): W~ believe that congressional consideration of Pay-TV aspects of CATV is particularly called for~ For the reason stated in pars~ 128-129, we shall urge that Congress prohibit the origination of program or other material by a CATV system, with such dmitations or expectations as are deemed appropriate~ A hybrid CATV-Pay-TV operation would be based, in an integral and substantial fash- ion, on use of broadcast signals, and such use of the broadcast industries signals would appear to be both inequitable and inconsistent with the pub- lic interesL It is inequitable because it is clear- ly unfair to use the broadcast industries product as a basis for wire Pay-TV operation which could adversely effect that industry or indeed supplant IL More important, were wire Pay-TV to sup- plant "free" television broadcast service, it would be inconsistent with the public interest, since it would mean that the public would receive, at least in part, the same service it now does, but for a fee. Finally, we are considering petition seeking the authorization of Pay-TV in the broadcast spec- trumP Despite the above statements reflecting the Commission's concern over joint CATV-Pay-TV operation, it may be that CATV systems will nonetheless enter into the Pay-TV fleld~ For instance, if the Commis- sion rigorously prohibits the importation of "distant" broadcast televi- sion signals by CATV systems into the larger markets, such systems may be required to look elsewhere for program sources in order to at- tract subscribers and compete with existing off-the-air television serv- ice. Much of the Commission's CATV regulation has been bottomed upon PAGENO="0478" 474 48 the unfair competitive aspects of CATV service where no charges are paid for the program product by the CATV system and where television stations themselves must compete in the market place for such program- ming. However, if CATV systems are required to pay copyright fees and are not permitted to import distant signals, then much of the justi- fication for prohibiting program origination op rations by such systems will have been dissipated. The Senate Judiciary Committee has recent- ly approved a new copyright statute which, it is reported, would not pro- hibit original programming by CATV systems so long as copyright lia- bility to local broadcasting stations was acknowledged for the programs of such stations carried by the CATV system. While the economics of the matter are not clear, it certainly can- not be denied that a `arge scale CATV system in the major markets would have the potential to compete for program originations. Even if CATV systems were required to pay reasonable license fees to local stations, adjustment of subscribers monthly fees to reflect copyright costs of the CATV system would not necessarily result in pricing of the CATV "product" beyond the reach of a substantial segment of the public One of the factors which the Commission must investigate is the extent to which possible copyright liability may be an insufficient deterrent to the commencement of Pay-TV operation by CATV systems. The relevance of this discussion to the instant proposal to estab- lish a nationwide Pay-TV service utilizing broadcast frequencies is read- ily apparent. Insofar as the impact upon the free television service may be concerned, pay television originating on broadcast frequencies cannot be distinguished from pay television carried by wired systems. In fact, wired systems may have the physical potential to carry more than one original program at the same time. This is exactly the type of operation which was proposed by the subscription television service offered in Los Angeles and San Francisco. It is impossible to measure the impact of a Pay-TV service originating on broadcast frequencies upon the local free PAGENO="0479" 475 49 television unless the Corn: lission knows all of the other competitive threats to the local free television service extant at the same time. Unless the Commission is assured, either by an explicit prohibition on program origination through Congressional legislation, or by un- disputed economic data demonstrating that such CATV-Pay-TV oper- ations would never get. off the ground, that there is no such threat to local television service, it cannot reasonably conclude that the addi- tional authorization of nationwide off-the-air Pay-TV would not ser- iously harm the free television service. C~ CATV As An Adjunct to Free TV The unsettled nature of the regulatory scheme and, indeed, the unsettled nature of the CATV industry, itself, dictates at this point that no definitive action can be taken with respect to the current proposal. This is so even if no hybrid CATV-Pay-Ty operation is assumed, For insofar as CATV may import distant TV signals into a market, the im- pact upon the free television service may be precisely the same as the threat of program origination by CATV systems. Importation of New York independent broadcast stations into Philadelphia by a CLTV sys- tem will have the similar effect upon the local free television service in Philadelphia as an off-the-air Pay-TV service. In both cases, the public would be receiving programming from a source not otherwise available to it, and the impact upon the local television stations in that respect is the same. Thus, if the CATV service does not develop into a Pay-TV form of operation, it may still represent a substantial threat to the local television service if signals not otherwise available locally are permitted to be shown in the particular market, While the Commis- sion has established procedures for investigation of CATV operations in the larger markets, it is not entirely clear that the importation of distant signals will be rigorously prohibited by the Commission. In fact, the very decision of the Commission in th: See~nd Repcr;~ an~ Order to PAGENO="0480" 476 50 "grandfather" existing systems, even though they are located in the large markets and importing distant signals, is fair indication that at least some cities will be subjected to the competition of a CATV system, with an effect upon the local television stations exactly as if an off-the-air Pay-TV service had been established~ The extent of the CATV develop- ment at this point in time is not such that the Commission can dismiss the impact of distant signals upon local television stations before meas- uring that factor in determining whether off-the-air Pay-TV service should be established~ In addition, the same type of procedures should be adopted by the Commission with respect to the proposed broadcast Pay-TV service as have been adopted for new CATV activity in the larger markets When- ever CATV systems bring to a particular community television programs which are not otherwise available off-the-air, they are affecting the com-~ petitive viability of the local television service in exactly the same man- ner that a Pay-TV system from a local broadcast station would do~ Log- ical analysis requires the Commission to adopt procedures which would permit scrutinizing of the impact of broadcast Pay-TV operations upon the local television services in exactly the same manner that the Com- mission now requires CATV systems in the larger markets to prove in an evidentiary hearing that other stations will not be harmed by such operations~ Since the threat is the same, the Commission's procedures to handle each should be the same. It should be emphasized that the importation of distant signals is not merely a potential factor to be measured together with proposed off- the-air Pay-TV operations~ According to a study of the National Com- munication Television Association, 92 percent of the CATV systems in this country carry at least one distant television signal and most sys- tems carry moreS See Cable TV Review, September 19, 1966, pp~ 4-5. If the Commission is to treat the Pay-TV threat to local service in the same manner as it has treated the CATV threat, it must conclude at a PAGENO="0481" 477 51 minimum, as in the CATV field, that evidentiary hearings in the partic.. ular markets on the proposal of the Pay-TV proço~ient must be con- ducted. Such hearings are an unsatisfactory alternative to deferral of action upon the instant proposal until the Commission's regulatory program in the CATV field has been developed. If, however, the Com- mission is determined to go forward with authorization of a nationwide Pay-TV service, then it must permit individual evidentiary hearings to be conducted so that the impact upon the local free television serv- ice may be assessed in a realistic manner, Such hearings would de- velop: (1) the nature of the Pay-TV service proposed, including its proposed penetration of the market; (2) the posture of the local free television service in existence and likely to come into existence; and (3) the extent of existing and proposed and CATV activity in the par- ticular market. D. Summary The Commission has proposed here to authorize on a permanent basis and throughout the nation a broadcast service which has no sub- stantial precedent, Whatever the merits of such a service in bringing additional programming to the public, it is clear that there are serious and substantial questions concerning the impact of the service upon ex- isting free television operation, The Commission's proposal is put f or- ward when the shape of the television industry has not been settled. All that is clear now is that the industry faces a five to ten year period of maximum instability. The burgeoning growth of CATV systems, par- ticularly in the larger markets, must be assessed by the Commission before it can take definitive action in the Pay-TV field, The Commission also must not lose sight of the fact that with an ever increasing need for frequency space, authorization of an unprec- edented and largely unknown service such as Pay-TV on broadcast 86-399 0 - 67 - 31 PAGENO="0482" 478 52 frequencies is not justified in light of the potential impact upon free television. The Commission may not also close its eyes to the poten- tial impact of satellite communications upon the television industry and the public at large. While it Is not clear how satellite communi- cation might be used to bring service to the public, this kind of tech- nical innovation no doubt will permit a greater number of television services to be brought to the public. In sum, the Commission is pro- posing at this time to permanently authorize a controversial and little needed auxiliary broadcast service in the face of widespread changes in the television industry which may become necessary or unavoidable within the near future. At a minimum, the Commission should defer further consideration of an off-the-air Pay-TV service. VII. ASSUMING ARGUENDO THAT THE COMMISSION IS PREPARED TO AUTHORIZE A NATIONWIDE PERMANENT PAY-TV SYSTEM, ANY SUCH AU- THORIZATION MUST BE COUCHED IN TERMS OF A REGULATORY PATTERN DESIGNED TO INSURE THE SURVIVAL OF FREE TELEVISION If Pay-TV is to be authorized on a nationwide basis, it must be in the context of a regulatory pattern designed to protect free television and the public. The Commission has never suggested that it would per- mit Pay-TV to supplant free TV. The grant of a permanent authoriza- tion rests upon the assumption that the two techniques can coexist. This assumption cannot be left to chance and must be incorporated as best as possible in an overall regulatory pattern. We have attempted to set forth below the minimum restrictions which we believe appropriate If any authorization is to be made at the present time. Each proposed rule is set forth separate arid apart from the others as well as ~part of a complete regulatory system. PAGENO="0483" 479 53 As was indicated earlier, we do not believe the Commission has the data upon which to conclude that any nationwide authorization was warranted - the data necessary to determine the economic viability of Pay-TV as well as the impact of a successful pay television system on free TV. Nevertheless, if Pay-TV is to be authorized, the rules set forth herein constitute the minimum necessary to protect the public interest. A~ Pay-TV App1tc~ions In the Top 100 Markets will be Granted Only Alter a Hearing The basic question permeating the Commission's Notice of Pro- posed Rule Making in both the CATV and Pay-TV matters pertain to the impact of those respective services on the national television struc- ture. With respect to CATV, hundreds of systems were operated in all types of markets prior to the adoption by the Commission of rules in- tended to assure the orderly integration of CATV with free television. Extensive studies of CATV were conducted by Drs. Seiden and Fisher, the National Community Television Association (NCTA), CBS, and AMST (Second Report and Order~ Docket Nos~ 14895, 15233, and 15971, paragraph 44). Consequently, prior to the adoption of the CATV rules, exhaustive data was available to the Commission concerning the t~utia~ impact of this service on free television. Despite the voluminous in- formation available to the Commission on CATV, despite the recogni- tion by the Commission of significant contributions made by CATV (Second Report and Order, supra, paragraph 139), the Commission adopted rules which require an evidentiary hearing where a CATV sys- tem proposes to extend the signal of a television broadcast station be- yond its Grade B contour into the top 100 markets. In contrast to this mass data on CATV, the Commission has very little material on Pay- TV -- one test in one market, and a test conducted under controlled PAGENO="0484" 480 54 conditions promulgated by the Commission to assure minimal impact on free television. The significant factor common to both Pay-TV and to CATV sys- tems proposing to extend Grade B signals of broadcast stations beyond their contours into the top 100 markets is the introduction of program- ming into a given market not otherwise available on free television in the said market. The foremost concern to which the Commission has addressed itself in both the CATV and Pay-TV proceedings is the im- pact on free television. In attempting to assess the impact on free tele- vision from CATV systems operating in the top 100 markets, the Com- mission adopted rules which require a hearing. In attempting to assess the impact on free television from Pay-TV, the Commission can do no less. The method by which the pertinent issue (impact) is to be ascer- tained cannot justifiably vary because the sources of the impact are dif- ferent. Indeed, the need for a hearing to determine impact prior to the grant of a Pay-TV authorization is more apparent in view of the dearth of information available to the Commission concerning Pay-TV in con- trast to the abundance of information which was available to the Commis- sion at the time it adopted the CATV rules. PROPOSED RULES No Pay-TV station shall be permitted to operate in the 100 largest markets except. upon a showing, approved by the Commission, that such operation shall be consistent with the public interest, and specifically the establishment and healthy mainten- ance of free television broadcast service in the area. Commission approval of a request to operate a Pay- TV station i.n the foregoing circumstances will be granted where the Commission, after consideration of the ~quest and all related material in a full evi- dentiary hearing, determines that the requisite show- ing has been made. The market size shall be deter- mined by the rating of the American Research Bu- reau on the basis of net weekly circulation for the most recent year. PAGENO="0485" 481 55 B. Subscribers Will Be Limited to A 10% PenetratIon Any Pay-TV authorization is based upon the Commission's as- sumption, derived presumably from the Hartford experience, that Pay- TV would achieve, at best, a 10% penetration, and the average subscrib- er audience would be 10%. Consequently, Pay-TV would not affect more than 1% of the television homes in the United States From this, the Commission deduced that there would be no noticeable impact on free TV. Since the impact of Pay-TV on free TV is of paramount impor- tance, the assumptions should be crystallized as rules. There is no way of precluding subscribers from watching any given program and, consequently, any limitation must be in terms of a limit on the number of subscribers. We believe that a 10% penetration a limitation of the number of subscribers to io% of the net circulation in the market - is, in fact, excessive in light of the actual experience in Hartford. Since the Commission, however, has utilized this figure in the Further Notice, we have assumed its validity for purposes of this discussion. If the Commission adopts the hearing requirement for Pay-TV in the top 100 markets, no specific additional rules will be required in this context. It is assumed that during the course of such a hearing, the proponents would be required to demonstrate the number of antici- pated subscribers, the penetration of the market, and the effect of such a penetration on free television. Any final decision by the Commission to grant any particular application would necessarily contain a deter- niinationas to tin maximum number of subscribers proposed and the ef- fect of such a penetration on free television, The Pay-TV system, thereafter, would be limited to its proposal and any growth beyond this point would require prior Commission approval and another hearing. PAGENO="0486" 482 56 The problem also exists in markets other than the top 100.38 The problem may be obiated by a rule which limits Pay-TV to four- station markets, In, such event2 Pay-TV will be, for all intents and purposes, precluded from the small markets. The proposed rule has been drafted to cover the maximum contingency and it can be adjusted in light of the discussion above. PROPOSED RULE 1. No Pay-TV station shall be permitted to operate where more than 10% penetration is proposed or will be achteved except upon a showing, approved by the Commission, that such operation would be consistent with the public interest, and, spe- cifically, the establishment and maintenance of a healthy free television broadcast service in the area, Commission approval of a request to operate a Pay-TV station in the foregoing cir- cumstances will be granted where the Commis- sion, after consideration of the request and all related material in a full evidentiary hearing, determines that the requisite showing has been made. Penetration shall be determined by the rating of the American Research bureau on the basis of the net weekly circulation for the most recent year. 2. Pay-TV stations shall file with the Coinmission monthly subscriber lists. Pay-TV stations shall either (1) maintain subscribers at this 10% penetration level (or at such other level as the Commission may have approved in an eviden- tiary hearing) or (2) request Commission ap- proval of additional subscribers. Commission approval of such a request will be granted where the Commission, after consideration of the request and all related material in a full evidentiary hearing, determines that the requi- site showing described above has been made. 38 It is to be noted that the minimum number of subscribers deemed by the proponents to be economically feasible is 20,000 and the proponents indicate that operation below the top 100 markets, consequently, will require a pene- tration substantially greater than 10%. PAGENO="0487" 483 57 C. No Pay-TV System Will Be Authorized Until it has A Minimum of 2,000 Sub- S scribers Every family or individual possessing a television receiver within technical range are potential viewers for free TV. Thus, considering television set saturation, there is no need to require applicants for tele- vision broadcast stations to demonstrate the existence of an audience. Pay-TV, however, absent the addition of a new element - subscribers, has no potential, audience and the Commission cannot blightly assume that such an audience will materialize. In fact, based on the results of the Hartford test, there is an adequate basis to forecast that Pay-TV will not achieve a sufficient audience base necessary to survive. In short, whereas free TV has a potential audience recognizably available, Pay-TV does not until subscribers are obtained, The proposed rule would translate this basic difference (the new element - subscribers) into a meaningful standard. Based on the Hartford test, proponents state that a 20,000 sub- scriber system is the smallest system economically feasible (Joint Comments, p. 35). Accepting this as an accurate projectioa, the Com- mission should adopt a rule looking toward reasonable assurance of continued operation (Ultravision Broadcasting Co., 1 FCC 2d 544). Such a rule would help protect against the type of public and private detriment suffered as a consequence of the early failures in UHF tele- vision~ While it is not realistic `to expect Pay-TV stations to commence operation with 20,000 subscribers, it is reasonable to require, as a part of the basic showing of need, that Pay-TV applicants demonstrate by firm, binding agreements at least 2,000 subscribers, prior to the grant of a Pay-TV authorization. PAGENO="0488" 484 58 PROPOSED RULE ~4o pay TV authorization shall be granted except upon the affirmative showing that the applicant has obtained at least 2,000 subscriber contracts. Only contracts under which the subscriber has agreed to pay the regular prescribed charges will be considered in ascertaining compliance with this rule. D. Pay-TV Must Be Limited to Preclude ~pboning of Programs and Ta1ent~ Underlying proponents' definition of "box-office" Is the impli- cation that Pay-TV programming will consist of programs not avail- able to free television. For example, in the area of sport events proponents state: subscription television's major contribu- tion to sports fans will be the making available of those events such as heavyweight champion- ship boxing matches, home professional football and baseball games and the vast number of col- lege football games which are kept off conven- tional television by the owners thereof because of fear of the drastic effect conventional televi- sion may have upon box-office attendance. (Joint Comments, p. 46.) As previously set forth, supra, the conditions under which the Hartford test was conducted, rendered Impossible the formulation of meaningful conclusions pertaining to its impact on free TV. Nationwide Pay-TV, through the inducement of greater profits, may well siphon-off pro- grams and talent now available on or to free television. Illustrative of this point is the disappearance from local free television of the games of certain major league baseball teams in California. PAGENO="0489" tevjsjon goal and proponents? representations that I. is a Supplemental service to the existing televj~ ably tournaments eason - s not been c I on a re~ PAGENO="0490" 486 60 It is virtually impossible to proscribe entertainment prOgram- ming as such Any limitations written in terms of particular programs would Involve the Commission in the type of detail that is considered in copyright lltigatiqn At what point does a program change sufficient- ly so that it becomes a different program? The obvious instances are few - change in title does not create a new program. Does the addi- tion of one new character or the change in character names create a new format? Is "Run For Your Life" the same program as "The Fugi- tive"? We have also considered the possibility of a rule precluding pro- grams or program series revolving around a main character. Tele- vision is not limited to such programs and, conversely, the problem of identification continues to exist. The only approach which bears any hope from an administrative point of view is to preclude the siphoning of talent in such a way as to make that talent unavailable to free television and, accordingly, we have drafted a rule in this context. ~9 It is to be noted that the rule on talent cannot reasonably be ap- plied to motion picture film exhibited on Pay-TV while, at the same time, every utilization by Pay-TV of motion picture film impedes the use of that film by free television. The Commission, consequently, should adopt a rule which limits the amount of time that a Pay-TV sta- tion ca~ devote to fllms~ The benefits inherent in such a rule extend beyond reducing the impact on free television. Movies occupied 86% of the Pay-TV programming in Hartford and, as such, the service pro- vided by Pay-TV coald be described charitably as analogous to the service provided by a neighborhood theater and the neighborhood theater does not utilize scarce broadcast frequencies. If the broadcast of mo- tion picture film were limited, Pay-TV would be forced into the type of programming which heretofore has been limited to the speeches of com- pany officials. Comments looking toward a talent restriction were requested In Paragraph 14 of the Further Notice. PAGENO="0491" 487 61 We have suggested a 50% limitation as an equitable balance de- signed, in conjunction with the sports that will be available, to afford the proponents sufficient programming to operate and yet requiring new programming resources. PROPOSED RULE No licensee shall broadcast any program in- volving sports events for which a fee is charged which was regularly televised into the market via a free television station within 5 years from the last date on which the event appeared on free television. a. Notification of the sports events proposed to be carried by the Pay- TV station shall be provided to all other television broad- cast stations located within 25 miles of the Pay- TV station at least 30 days prior to the designated broadcast date of said sports event. b. Petitions to prohibit the carriage of such sports events on a Pay-TV shall be filed with the Federal Communications Com- mission no later than 21 days prior to the designated broadcast date together with a copy of the contract (if available) upon which the petitioner relies. 2. No licensee shall broadcast any program for which a fee is charged, if the talent for such program is restricted, prohibited, or in any way induced or influenced from appearing at any time on free television. 3. No Pay-TV licensees shall devote more than 50% of its subscription hours in any week to the transmission of motion picture film. PAGENO="0492" 488 62 E. Pay-TV Stations Should Be Limited to UHF Stations and to Communities within the Grade A Contours of at Least Four Commercial Television Stations Historically, the Commission has striven to attain television dis- persion throughout the United States. Incidental to this goal, the Com- mission has deemed it significant to provide conditions looking toward the establishment of parity among the national networks. Operation of a Pay-TV station in a market within the Grade A contour of less than four commercial television stations will subvert the progress hereto- fore accomplished. The displacement of network programming by a Pay-TV movie during the prime time in a major market would disrupt the competitive position of that network, vis-a~-vis, the other two and it would also deprive the viewing public of the displaced network pro- gramming. Presumptively, pay television is to be authorized as a supple- mental service. No such justification exists if its authorization will result in the displacing of a major program source. The available data from the Hartford test provides no basis for deviation from the policy considerations set forth in the Third Report and Order, limiting Pay-TV operation to markets within the Grade A contour of four commercial television stations. PROPOSED RULE No license shall be granted to a television broad- cast station proposing to carry programming for which a fee is charged except upon a showing that the market which it serves or proposes to serve is within the Grade A contour of at least four com- mercial television stations (including the Grade A contour of the Pay-TV station). The market shall be the market as used by the American Research Bureau for the most recent year. PAGENO="0493" 489 63 It is also to be noted that one of the principal claims advanced on behalf of Pay-TV is its alleged ability to promote the growth of new stations by providing additional economic and program resources. Since, as a practical matter, this relates almost exclusively to UHF stations, any authorization of Pay-TV should, we believe, be limited to such stations. PROPOSED RULE No license shall be granted to a television broad- cast station proposing to carry Pay-TV program- ming except to a station operating on a UHF fre- quency. F. Pay-TV Programming Should Be Limited In Total Hours of Operation and to Certain Segments of the Broadcast Day The necessity of restricting Pay-TV authorizations to communi- ties within the Grade A contour of four commercial television stations has been previously discussed and such arguments are equally appli- cable here, Bearing significantly on this question is the matter of re- stricting the broadcast hours of a Pay-TV station. While conditions imposed upon Pay-TV authorizations must not be so burdensome as to unreasonably fetter operation, the objective of preserving free televi- sion as it is recognized today, remains the paramount consideration. The data available from the carefully cc simply does n t' , C ( C n all types .~ts, the ColT tion and adopt rules which will av rtheless, 3 part could S. PAGENO="0494" 490 64 Assuming the adoption of a rule limiting Pay-TV authorizations to markets within the Grade A contour of four commercial television stations, the Joint Committee believes that the Commission's proposal set forth in Appendix C, Secton 73 643 should be modified to the extent of restricting the Pay-TV station to devoting not more than 60 per cent of its prime broadcast time to Pay-TV programming The Joint Com- mittee urges, however, that this restriction should be applied to any Pay-TV station and not be limited solely to markets with a maximum of four stations The lick of information respecting the impact on free television does not warrant the risk of permitting any Pay-TV station to operate on unlimited time in any market. Should the Commission fail, to adopt a rule limiting Pay-TV au- thorizations to markets within the Grade A contour of four commercial television stations, the Commission must apply a more strict limita- tion on the hours of operation available for Pay-TV programming in the smaller markets. The utilization of prime time hours for Pay-TV will upset the competitive positions of the networks and will deprive the public of the benefits of noteworthy network programming. In its proposed Section 73.643, the Commission has recognized the need to reserve broadcast day segments for free TV in relation to the number of stations in the market. Thus, it is more imperative that a Pay-TV station in a market within the Grade A contour of only one station reserve significantly more time for free TV than a Pay-TV sta- tion in a community within the Grade A contour of four or more stations. While the Joint Committee agrees in principle with the proposal, it be- lieves that a greater percentage of prime time must be reserved for free television. Accordingly, it is submitted that in single station mar- kets, not more than 25 percent of the station's prime time broadcasting time, computed on a weekly basis, with a maximum of three hours in any one prime time segment, be permitted for Pay-TV use; that in two and three station markets, not more than 40 percent of a station's prime PAGENO="0495" 491 65 time broadcasting time, computed on a weekly basis, with a maximum of three hours in any one prime time segment, be permitted for Pay-. TV use. If the Commission adopts rules authorizing more than one Pay-TV station in a market, the time and percentage should continue to be calculated on the basis of only one authorization. In addition to the reservation of broadcast day segments for free television, the Joint Committee further believes that it is neces- sary that the Commission impose a limitation on the number of hours per week which can be devoted to Pay-TV. Proponents state that on the basis of the Hartford test the feasibility of b:roadcasting more than 30 to 40 hours is unlikely. Since there is really no basis for knowing whether this condition would continue in the event of the authorization of nationwide Pay-TV, the Commission should affirmatively adopt a rule placing a weekly time limitation on the number of hours to be utilized for Pay-TV programming in a market. PROPOSED RULE If a television broadcast station supplies the only Grade A signal to a community, not more than 15 percent of its non-prime broadcast time (includ- ing subscription and non-subscription broadcast time during that period) and not more than 25 per- cent of its prime broadcasting time (including subscription and non-subscription broadcast time during that period) may be devoted to Pay-TV; if a television broadcast station supplies the second or third Grade A signal to a community, not more than 25 percent of its non-prime broadcast time, and 40 percent of Its prime broadcast time may be devoted to Pay-TV; if a television broadcast station supplies the fourth or more Grade A sig- nal to a community, not more than 50 percent of its non-prime broadcast time and 60 percent of its prime broadcast time may be devoted to pay television. PAGENO="0496" 492 66 a. In no event shall a Pay-TV station or sta- tions devote, individually or collectively, more than tI*ee hours to Pay-TV program- ming. in any on~ broadcast day during prime broadcast tlme;in markets within the Grade A contoursOf one, two or three television stations (including the pay television sta- tion.). b. In no event shall a Pay-TV station or sta- tions devote more than four hours, individ- ually or collectively, to Pay-TV program- ming in any one broadcast day during prime broadcast time in markets within the Grade A contour of four or more television sta- tions (including the Pay-TV station). C. Prime time broadcast hours are defined as those hours of the broadcast day between 6:00 p.m. and 11:00 p.m. d. In no event shall a Pay-TV station or sta- ti~ns in a market exceed 35 hotirs, collec- tively, per week of Pay-TV programming. e. In the event that more than one Pay-TV au- thorization is granted in the same market, the percentage of prime time authorized for Pa'j-TV programming will be calcu- lated on the basis of a total of 35 hours and the percentage of non-prime time au- thorization for Pay-TV programming will be calculated on the basis of the station operating the fewest hours. 0. Pay-TV Licensees Shall Be Prohibited from Engaging in Network Operations or Other Types of Multiple Program Purchase Agreements The Commission itself questioned the wisdom of interconnection and, in Paragraph 14, it requested Comments concerning rules pre- venting or limiting interconnection of Pay-TV operations by micro- wave or otherwise. This questioning relates to the limited nature of the Information provided by the Hartford test. The Commission stated: PAGENO="0497" 86~399 o - 67 - 32 PAGENO="0498" 494 68 Both free TV and Pay-TV, as licensees, are recipients of a public trust and both utilize valuable public airways. Unlike free broadcasting, Pay-TV proposes to make a direct charge on the members of the public. It is this basic distinction; a direct charge on the public for services provided over the public's property, whIch requires government rate regulation. It is the nature of the Pay-TV operation, as in the case of common carriers and public utilities, which dictates rate regulatiozi. If jurisdiction is to be asserted over Pay-TV, concomitantly the Com- mission must regulate rates. Lacking the express authority to regulate rates in the broadcast Industry, it is incumbent upon the Commission to seek legislation in this field In order to validly carry out its asser- tion of jurisdiction. I. CATV Systems Should Be Prohibited from Originating Programming or Carrying Pay-TV Programming We have previously discussed the significance of CATV in the context of any Pay-TV authorization. Suffice it here to say that if the Commission determines that a nationwide off-the-air Pay-TV author- ization is warranted at the present time, the very least that should be done is to prohibit CATV systems from originating programs or func- tioning or serving as an outlet for Pay~TV programming at least until such time as the Commission is prepared to evaluate the significance of CATV generally on free television. PROPOSED RULE No CATV system shall carry Pay-TV programs originating from a Pay-TV broadcast station or originate any programs for carriage to its sub- scribers. PAGENO="0499" 495 69 Conversely, the Pay-TV licensee should be prohibited from entering into any arrangement, the purpose of which is to utilize CATV systems as direct outlets for Pay-TV programming. PROPOSED RULE No license shall be granted to a television broad- cast station having any contract, arrangement, or understanding, expressed or implied, which pro- vides for the distribution or furnishing of Pay-TV programming to or through CATV systems. J. Pay-TV Licensees Should Be Required to Comply with All Commission Rules Imposed Upon Broadcast Licensees Proponents have indicated, based on the Hartford test, that Pay- TV licensees can comply with the Commission's Rules otherwise ap- plicable to a television licensee.40 In the clear absence of any objec- tion of hardship, such rules should be made applicable to Pay-TV li- censees. In addition, we believe that the Commission should adcpt rules in connection with the application to be submitted by Pay-TV applicants which solicit information comparable to that set forth in the Commis- sion's Third Report and Order, Paragraph 32. CONCLUSION The Commission today has as little meaningful data from which to determine the impact of Pay-TV on the economy and on free televi- sion as it did when the subject first arose more than ten years ago. Hartford was virtually useless. The Hartford experience demonstrated nothing more than an inability to secure subscribers. Hartford provided 40 As was done in Hartford, the minimum hours of operation required of tele- vision licensees should not include the hours devoted to Pay-TV. PAGENO="0500" 496 70 no information as to the impact a successful pay television system would have on free television. The Commission, however, appears to have succumbed to a belief that, having authorized the test, it must now ac- cord weight to its results. The experience in Hartford does not provide a basis for the conclusions which the Commission is attempting to draw and, at this stage, the Commission, in the public Interest, should either terminate the test authorization or, at best, permit Pay-TV to continue in a limited test context In the hope that the ensuing years will produce the necessary data or that Pay-TV will recognize Its own limitations and quietly fade away. Free television has not remained stagnant dur- ing the period and its value to the public is such that its continued growth should not be retarded. The entire problem has now been complicated by the development of CATV. CATV has mushroomed to such an extent that the Commission is now attempting to assess its impact on free television. Certainly, the Commission cannot permit a new attack from a different source - Pay-TV - without first determining that free TV can survive under the existing conditions. We are still of the opinion that the Commission does not have the necessary authority to grant Pay-TV on a permanent basis. Even more important, in light of the dangers inherent in a successful Pay-TV op- eration, the Commission should seek Congressional guidance before the problem becomes insurmountable. The Commission has seen fit to request guidance from Congress concerning CATV. Pay-TV presents even greater regulatory problems and the Commission has the opportunity of securing guidance before the situation becomes catastrophic. PAGENO="0501" 497 71 Finally, Since the Commission's Further Order, as written, suggests the Possibility of an immediate Pay-TV authorization on a nationwide basis, we have set forth a regulatory pattern which we be- lieve to be the minimum necessary if free TV is to Survive. Respectfully submitted, JOINT COMMITTEE AGAINST TOLL TV By ~ By ~ ~ its Attorneys Cohn and Marks 317 Cafritz Building Washington, D. C. 20006 October 10, 1966 PAGENO="0502" 498 APPENDIX A x~. 302 JUNE 1966 Vol. LXXVI THE ECONOMIC JOURNAL THE QUARTERLY JOURNAL OF THE ROYAL ECONOMIC SOCIETY Editors: C. F. CARTER and E. A. G. ROBINSON Associate Editor: R. C. 0. MATTHEWS I. ARTICLES Planners' Preferences, Priorities and Reforms A. NOVE 267 Control of the Money Supply A. B. CRAMP 278 A Proposal for the Reform of Exchange Rates j. BLACK 288 Optimal International Reserves H. it. HELLER 296 Consumer Asset Formation and Economic Growth- The United States Case H. G. VATTER and it. L. THOMPSON 312 The Redistributional Effect of Television Advertising F. A. LEES and a. y. YANG 328 Indifference Curves in Asset Analysis 0. 0. BIERWAG and M. A. GROVE 337 On the Theory of Induced Invention s. AHMAD 344 Long Term Economic Criteria for Foreign Loans A. QAYUM 358 II. REVIEWS (For a List of Books Reviewed see inside cover) 370 III. NOTES AND MEMORANDA Mcasurement of Capital, the Production Function and Relative Factor-Endowments J. L. FORD 425 On the Shape of the Production Possibility Function-A Delayed Comment j. p. sioucx 428 Obituaries: Oscar Lange, 1904-65 M. KALECK! 431 Walter Thomas Layton, 1884-1966 E. A. 0. ROBINSON 432 Current Topics 434 IV. RECENT PERIODICALS AND NEW BOOKS 438 LONDON: MACMILLAN (JOURNALS) LIMITED NEW YORK: ST. MARTIN'S PRESS PRICE: FIFTEEN SHILLINGS NET PAGENO="0503" 499 THE REDISTRIBUTIONAL EFFECT OF T~LE VISION ADVERTISING THE economic merit of advertising must be judged on the basis of its ultimate contribution to consumer welfare, as well as by its immediate effects on production and distribution costs.1 The purpose of this paper is to investigate the redistributional effect which results from television advertising. Our study reveals that in 1963, under the present commercial television system, all income groups in the United States experienced a redistribution of income slightly in excess of one-quarter of 1 billion dollars. Conversion of the commercial system to an alternative system of pay television would result in a complete or nearly complete elimination of the benefits of this redistribution currently enjoyed by families with a disposable personal in- come of less than $6,400. If a metered system of pay television were adopted the entire redistributional effect would be removed. If a fiat- fee system were used a small amount of redistribution would continue to exist, but the size and direction of such redistribution would depend on the viewing pattern of subscribers. Conversion to a government-supported system could be expected to alter the redistributional effect, the extent of which would depend upon the relationship between viewing pattern and progressiveness of the tax structure. If the same redistributional pattern prevailed in Great Britain for .the commercial portion of its system the magnitude of redistribution would have been approximately £15 million in 1963, or 11 % of the total expenditures on television, as compared to 18% for the United States. The lower percentage for Great Britain is attributed to the existence of a government- operated system. The Concept and Measures of Redistribution In 1963 American advertisers spent $l~6 billion to support the existing commercial television system. In the same year this system provided viewers in all income groups with a total of 3'4 million station hours of entertainment and news programmes. The costs of this entertainment were shifted to consumers in the form of higher prices for advertised goods and services. We may assume that approximately the same amount of expenditures 1 Nicholas Kaldor points to the impossibility of evaluating advertising simply by reference to its direct effects. He considers at least six types of direct and indirect effects from advertising. They are: an increase in productive efficiency, an improved quality of product, a stimulus to business activity, reduced amplitude of cyclical fluctuations, greater shopping convenience and a subsidy to newspapers which promotes a free and independent press. "TheEconomic Aspects of Advertising," Review of Economic Studies, Vol. XVIII, 1950-51, pp. 7-8. PAGENO="0504" 500 JUNE 1966) REDISTRIBUTIONAL EFFECT OF TELEVISION ADVERTISING 329 would be necessary to support the television system in the absence of advertis- ing, if the same volume and types of programmes were to be supplied.' In this event direct payments for programmes would have to be made by con- sumers to television stations under a pay television system, or to the Govern- ment under a governmentsubsidised system. It then follows that the bene- fit received by any given consumer under the present system is equivalent to what he would have to pay for the programmes viewed in the absence of advertising; and the cost to the consumer would be what he pays for advert- ising, which is included in the prices of the advertised goods and services he purchases. In so far as the purchases of advertised goods and services by families at different income levels are not proportional to the volume of their tele- visiOn viewing, discrepancies inevitably develop between benefits received and costs paid. This creates a redistribution of income between income groups. When the benefits received by a family exceed the costs paid a net positive subsidy arises, whereas when the costs exceed the benefits a net negative subsidy exists.2 Three sets of equations have been constructed to measure: (1) the net subsidy to a family with a given income for a given product group (equations (1.11) and (1.12)) and a total net subsidy for all product groups (equation (1.21)); (2) the level of income at which a net subsidy becomes zero (the break-even point) for a given product (equation (2.11)); and (3) an aggre- gate net subsidy to families in a given income bracket for a given product and also for all product groups (equations (3.11) and (3.21)). A net annual subsidy received or paid (se) by a family with a given in- come (Y) for a given product is the difference between the value of television programmes viewed by the family that are sponsored by advertisers of the product and the amount of advertising expenditures included in the ex- penditures of the family on that product. Thus, = Ch~ - a~E~ (i = 1,2, 3,.. .n) (1.11) ~etting h~ = 0% (H), and E~ = f~ (Y); where, H = g(Y) and 0% = Then, s~ = G{0%g(Y)} - a1f~ (Y) . (1.12) In the case oIpay television, costs may vary somewhat, depending on the type of system adopted. If a wired system is used, there will be additional cable charges; and if an over-the-air system is used with a meter that enables the operator to charge differential rates for different programmes there will also be additional costs of providing and maintaining a black box. It is entirely possible, however, that a system can operate with a meter that is similar to that which is being used by electric power companies in measuring power consumption. Under such a system additional costs of meter reading and billing would be nominal. The costs of operating a totally government- sponsored system can be lowered by as much as 10% because of savings in selling costs. An advertising subsidy is sometimes regarded as the difference between the value of the benefits received and the actual costs paid by a consumer, such as subscription fees for magazines and newspapers. See, for example, W. B. Reddaway, The Economics of Newspapers," ECONOMIC JOURNAL,JUflC 1963, pp. 201-18. PAGENO="0505" Definition. s~ Net subsidy to a family for ith product group C Value per hour of television programme viewed as obtained from dividing the total advertising expenditures in television by the aggregate number of hours viewed by all families oc~ Percentage of programmes sponsored by zth product group as estimated from tele vision advertising expenditures of each product group H Total number of hours of' viewing by a family per year. Estimated from Nielsen's viewing data as follows: H = l414~7 + 0*200451' = 0'O0O01'~, where H~l,400 hours h5 Number of hours of viewing per family sponsored by the advertisers in ith product group. h5 n~ (H) 4g Amount of advertising expenditures of the advertisers in ith product group a~ Advertising expenditures per dollar of spending for ith product group, as obtained from dividing television advertising expen- ditures of ith product group by consump- tion expenditures on that product group Y Disposable personal income per family E, Consumer expenditures of a family for ith product group. Computed as function of income. Source. Total television advertising expenditures, Fines. clot Report for Television, 1963, Federal Communications Commission, The number of hours of viewing, Nielsen Television Index, January through December, 1963 Television advertising expenditures of each product group were estimated from the net- work billings and spot billings published by Television Bureau of Advertising Nielsen Television Index January through Decent ber 1963. Since viewing data are not avail. able for the upper income groups, a lower limit has been set at 1,400 hours which is the number of hours viewed by a family with a disposable income of $11,900 See cc~ and H Seeag Television advertising expenditures of each product group, see aj; consumption expendi- tures in each product group, Consumer Expendi. lures and Income, 1960-61, Bureau of Labor Statistics. Data for the urban families were projected to the total universe due to the un availablity of data for rural families Same as above Same as above. The following product. consumption functions have been computed: E = 2l9*1 + 0*225Y - 0'0000049Y' £ 148.1 + 0~I70Y - 0~00000205y' - 0000000000094Y' £ = 17.3 + 0~0l7Y - 0~000000527'~ £ - 14*7 + 0*0575Y - 000000096Y~ E= ll~0+00129y E = 422~2 + 00851 Y E= 658 + 0~0356Y + 0~000000861" £ = 82~8 + 0~051 Y - 000000059Y~ E=58.4~o.o49y E = -4~3 + 0~0544Y E 359*2 + 0~147Y And for all product groups combined the total subsidy is s=Cg(Y) - ~a1f~ Y * (1.21) The level of income at which a net subsidy to a family becomes zero (the break.even point) for a given product group can be computed as follows: C{oc~g(Y)} = a1f(Y). . . . . (2.11) 501 330 ThE ECONOMIC JOURNAL CJtJNE T~LEI Definition of Symbols and Sources of Data Usedfor Computation in Subsequent Tables 1. Food 2. Automobile 3. Tobacco 4. House furnishings and equipment 5. Alcoholic beverages 6. Clothing and related materials 7. Household operations 8. Medical care 9. Personal care 10. Recreation and Transport 11. Others Since C and g(Y) are th~ same for all product groups, variations in the PAGENO="0506" 502 1966] REDISTRIBUTIONAL EFFECT OF ~LEVISION ADVERTISING 331 break~even point among different product groups must come from differences in the values of the remaining terms. Hence, a higher value of eitherfj(Y) or a~ will lower the break~even point, while a higher value of rs~ will raise it. TABLE II The Values of ~ and a~ fo, all Product Groups in 1963 Percentage programmes Television advertising sponsored by expenditure per dollar product group~ of consumer spending. a~, cents. Food 026 O~O6 068 0'29 Automobile . . . . Tobacco . . . . . House furnishings, and equipment Alcoholic beverages . . . Clothing and related materials Household operations. . . Medical care . . . 0~O8 O~04 005 0 02 0~12 0~12 0~l6 . 288 O~49 i~90 0 12 1~29 1~l6 3*53 ~crsonal care . . . . Recreation and transport . . Others . . . . . 002 0~07 022 019 Source: See Table I. That iS, the relative size of'the net subsidy to a family is significantly affected by the slope off~ (Y). The aggregate net subsidy for all families in a given income bracket for a given product group can be obtained as follows: S~J =f[C {oc~g(Y)} a~f~ (7)) ~ (7) dY . . (3.11) where the jth income bracket covers all families with income of from a to b, and ~(Y) denotes the distribution of families as a function of income. Similarly, the aggregate net subsidy for a given income group can be computed for all product groups combined, (3.21) i-I i-i a The Estimc!ion R~'su1ts and Interpretations Net subsidies have been computed for two hypothetical families, one with a disposable personal income of $3,000 and the other with $10,000. The results are presented in Table III. In 1963 a family with an income of $3,000 viewed television programmes valued at S34~2l, while paying an equivalent of only $21'20 in higher prices for advertised products. This leaves a net subsidy received on all product groups of $13~0l, or 38% of the benefits received. The comparable figures No. 302.-VOL. LXXVI. Z PAGENO="0507" 503 THE ECONOMIC JOURNAL (JUNE for a family with an income of $10,000 are $32*56, $51.73 and a net subsidy paid in the amount of $19*17. This represents 59% more than the benefits received from television viewing. When the subsidy is broken down into TABLE III Net Subsidies to Hypothetical Families with Disposable Incomes of $3,000 and $10,000 Respectively-1963 (1) (2) Benefits Payments received, $. made, 8. (3) Net Subsidy, $. (4) Subsidy- ~ (5) Income elasticity. A Family with Disp osable Person al Income of $3,000 Source: See Table I. product groups considerable divergency emerges. Thus, a family with an income of $3,000 received a net subsidy as high as $313 from programmes sponsored by food advertisers and as low as $032 from clothing. The abso~ 8*91 2*06 2*74 1.36 1.71 0*68 4~l0 4~l0 5.48 0~68 2~39 5*68 0*99 1*87 0*73 0*95 0~36 2~33 2~68 3'64 0~35 l'52 3*13 1~07 0*87 0*63 0~76 032 l'77 1*42 184 033 087 35 52 32 46 44 47 43 35 34 49 36 0*70 1~36 0*65 l*04 0~77 086 0.68 0'61 0*43 1~03 0'55 Food . Automobile Tobacco House furnishings and equipment Alcoholic beverages Clothing and related materials Household operations Medical care Personal care. Recreation and transport Others. Total Food . Automobile Tobacco House furnishings and equipment Alcoholic beverages Clothing and related materials Household operations Medical care Personal care Recreation and transport Others . Total . 34~21 21*20 13*0l 38 A Family with Disposable Personal Income of $10,000 8~48 l*95 2*61 13.46 3.63 3*92 -4~98 -.1~68 -l*31 l*3l 1*64 0~64 2~27 2~66 1.07 -O'96 -l~02 -0*43 3*90 3.9O 5~23 0~64 2~26 6*55 6~19 7*3l l*19 3'48 -2~65 -2*29 -2~08 -0.55 l~22 -59 -86 -50 -73 -62 -67 -68 -59 -40 -86 -54 0*64 0*80 049 0~83 0*92 095 1~04 0~73 0~72 101 0~80 32*56 51.73 -l9~l7 59 Note: The values in each column were computed as follows: (I) C{cqg(Y)}; (2) asfs(Y); (3) column 1 minus column 2; (4) column 3 divided by column 1; (5)sj=~~-. PAGENO="0508" 504 1966] REDISTRIBUTIONAL EFFECT OF TELEVISION ADVERTISING 333 lute size of subsidy for each product group is roughly proportional to the size of its advertising expenditures. The relative size of subsidy, i.e., the subsidy- benefit ratio, however, is significantly affected by the income elasticity of demand for the product. Thus, we observe a positive correlation between the subsidy-benefit ratios and the income elasticities for both a family with an income of $3,000 and a family with an income of $10,000. Hence, the higher the income elasticity of demand, the larger the relative size of net subsidy. A break-even point is attained for each product group when the value of benefits received is equal to payments made, at which point the net subsidy becomes zero. This break-even point varies from product to product, depending upon the value of ~ and the level of E. A higher value of ~ tends to raise the break-even point, while a higher value of a and E lowers it. The break-even points for all product groups are presented in Table IV. For all groups with the exception of personal care, the break- even point falls within the relatively narrow range of $6,000-$6,800. TABLE IV The Levels of Disposable Personal Income at which a Net Subsidy Becomes Zero, 1963 S Food Automobile Tobacco House furnishings and equipment Alcoholic beverages . . Clothing and related materials . Household operations . . Medical care . . . . Personal care Recreation and transport . Others . . . . . . 6,250 6,005 6,133 6,200 6,646 6,710 6,667 6,340 7,080 6,230 6,765 Note: Equation (2.21) was used in computing the break-even points. Source: See Table I. For all families taken together, television advertising brought about a redistribution of income in the magnitude of $291'l million in 1963. This represents 18% of the total sum spent on television advertising. The largest gainers were the families in the lowest income bracket. The size of net subsidy received declines as income increases until the break-even point is reached, thereafter the size of net subsidy paid rises as income increases. The lowest income bracket (under $3,000) gained $1514 million or approximately half of the net subsidy received. In contrast, the highest income bracket ($15,000 and over) experienced a negative net subsidy of $79~2 million. Thà largest negative net subsidy, however, fell upon the PAGENO="0509" TABLE V Total Net Subsidies for All Income Groups 1963 ($ million) Under $3,000. Disposable personal income. $7,500- $10,000- $9,999. $14,999. $3,000-. $4,000- $5,000- $6,000- $3,999. $4,999. $5,999. $7,499. -5-2 -24 -1-5 -1-1 -0-2 0-0 0-0 -1-5 2-4 -0-4 0-2 4.3 1-0 1-1 0-9 1-7 0-8 4.5 2-8 5.9 0-6 2-2 Food 399 14-2 10-7 Automobile . . . . . 12-0 4-9 3.9 Tobacco 11-6 4-1 30 House furnishings and equipment. . 9-2 34 24 Alcoholic beverag~ . . . . 8-2 33 3-0 Clothing . . . . . . 3-4 1-3 Household operations. . . . 20-5 8-5 7-5 Medical care . . . . . 17-7 68 56 Personal care . . . . . 15-3 9-1 84 Recreation and transport . . . 4-3 16 1-4 Others 9-0 3-8 3-2 Net subsidy received:. . . . 1514 61-0 50-3 25-8 2-6 (52.0%) (21-0%) (17.3%) (8.8%) (0.9%) Net subsidy paid: . . . . - 12-3 -78-1 -121-5 -79-2 _______________________________________________________________ (4-2%) (26-8%) (41-8%) (272%) Notes: I. irs computing a total subsidy for each product group, a net subsidy for the family with the median income, computed in the same manner as in Table III, is multiplied by the number of families in the group. 2. The figure of 46-8 million families was used. 3. A 100% saturation rate was assumed for television ownership. The actual saturation rate was 91% irs 1963. A lower saturation rate, however, does not alter the results, irs so far as the rate is the same for all income groups, which is considered to be a valid assumption. Source: See Table I. -21-7 -7-8 5.9 -4-2 -4-0 -1-6 -94 -6-4 -2-2 -28-5 -8-9 7.5 -6-3 -2-6 -164 -13-6 - 19-3 -3-1 -7-8 $15,000 Net redis- and over. tribution.. -13-7 69-1 -3-0 22-1 49 19-8 -3-1 15*9 _57 16-2 -2-5 6-7 -14-7 41-0 -8-4 32-9 -14-9 41-1 -2-2 7.9 -6-1 184 291-I (100-0%) -291-1 (100-0%) tTS C) o ~ `-4 0 PAGENO="0510" 506 1966] REDISTRIBUTIONAL EFFECT OP TELEVISION ADVERTISING 335 second highest income group ($lO,000-$14,999). This amounted to $121~5 million, or 41.8% of total negative net subsidies. The net redistributional effect varies widely among the various product groups, with the food group leading with a net shift of $694 million, followed by person.~~ care, with $41.1 million, and household operations, with $41 million. A breakdown of the net subsidy by income bracket and redistribu- tional effect by product is presented in Table V. Compariso7ls with Other Systems In the previous section we have shown how commercial television generates a substantial welfare effect in the United States through the redistribution of income. This pure commercial system, however, does not exist in other countries. In many cases the burden of expense connected with television programming is shared either by the Government or by viewing households which pay licence fees for the operation of television sets. Potentially there are two additional types of pure television systems, nai~cly pay television and a government-supported system. While pay television operates in the United States and in Canada on an experimental basis, the fully government-supported system rarely exists in non~~omxnunist countries. A number of countries use a hybrid system. The two most popular hybrid systems that exist in several of the more important television~viewing countries are: (1) the combination of com- mercial and licence fee system, and (2) the hybrid of a licence fee and govern- ment-supported system. Great Britain operates a dual television system, consisting of the British Broadcasting Corporation (BBC) and the Independent Television Authority (ITA).' BBC is financed (1964) by a ~4 ($1 120) annual licence fee paid by television-Set owners, and ITA programme companies are financed by revenues from the sale of advertising time and programmes.2 Assuming no differences in viewing pattern for BBC programmes among families in different income groups, the flat fee charged by BBC minimises and possibly completely removes the redistributional effect for this portion of programmes viewed by consumers. On the other hand, the ITA net- work tends to generate a redistributional effect similar to that found in the United States. It cost £133 million to support both the BBC and ITA television systems in 1963, £50 million and £83 million, respectively. As noted earlier, the net redistribution towards lower-income families in the United States in 1963 represented approximately 18% of aggregate 1In 1963 there were approximately 12'6 million television sets in operation almost all of which were licensed to receive BBC broadcasts. In that year 475% of the 144 hours of weekly viewing per family was tuned in on the BBC network, with the remainder receiving ITA programmes (Bl3C Handbook, 1963). `For the fiscal year ended March 31, 1964, BBC received £326 million and expended ~34'8 million, leaving a deficit of only £22 million. PAGENO="0511" 507 THE ECONOMIC JOURNAL [JUNE 1966 television advertising expenditures. Assuming a similar redistributionai effect in Britain for ITA programmes, we would expect a net redistribution of approximately £15 million ($42 million) in 1963, or I % of total ex- penditures on television (advertising expenditures and licence fees combined). Thus, the larger the role of the government4icensed television sector (in this case BBC), the smaller the relative importance of the redistributional effect. If we relax our assumptions regarding viewing patterns for BBC and ITA programmes, and with respect to qualitative differences in pro- grammes, the welfare results would be changed somewhat. The other popular hybrid sySt(.:sn is exemplified by the French system, which is supported by licence fees paid by set owners and by government subsidies. In places of expenditures by advertisers, the French Govern- ment provides financial support. In 1963 the 4'2 million set owners each paid 85 francs ($17). Although the precise amount of government subsidy is ~io~ knt.wn, it is estimated that the Government supported as much as half of the expenses of television incurred in 1963. The extent of redistribution under this system depends upon the magni- tude of government subsidies and upon the tax structure, from which the French Government derives revenues to subsidise the television system. The more progressive the tax structure, the greater the shift of income from higher-income brackets to lower-income brackets through television viewing. This assumes a viewing pattern similar to that found in the United States. F1t~Ncrs A. LEES CHARLES YNETJ YANG St. John's University, New York. PAGENO="0512" 508 APPENDIX B PROPOSED RULES No Pay-TV station shall be. permitted to operate in the 100 largest television markets except upon a showing, approved by the Commission, that such operation shall be consistent with the public interest, and specifically the establishment and healthy maintenance of free television broadcast serv- ice in the area. Commission approval of a request to oper- ate a Pay-TV station in the foregoing circumstances will be granted where the Commission, after consideration of the request and all related material in a full evidentiary hearing, determines that the requisite showing has been made. The market size shall be determined by the rating of the American Research Bureau on the basis of net weekly circulation for the most recent year~ No Pay- TV station shall be permitted to operate where more than 10% penetration is proposed or will be achieved except upon a showing~ approved by the Commission, that such opera- tion would be consistent with the public interest, and, specifi- cally, the establishment and maintenance of a healthy free television broadcast service in the ar~a, Commission appro- val of a request to operate a Pay-TV station in the foregoing circumstances will be granted where the Commission, alter consideration of the request and all related material in a full evidentiary hearing, determines that the requisite showing has been made~ Penetration shall be determined by the rating of the American Research Bureau on the basis of the net weekly circulation for the most recent yearS Pay-TV stations shall file with the Commission monthly sub- scriber lists. Pay- TV stations shall either (1) maintain sub- scribers at this 10% penetration level (or at such other level as the Commission may have approved in an evidentiary hear- ing) or (2) request Commission approval of additional sub- scribers~ Commission approval of such a request will be granted where the Commission, after consideration of the request and all related material in a full evidentiary hearing, determines that the requisite showing described above has been made~ No Pay-TV authorization shall be granted except upon the af- firmative showing that the applicant has obtained at least 2,000 subscriber contracts~ Only contract~i under which the subscriber has agreed to pay the regular prescribed charges will be con- sidered in ascertaining compliance with this rule. PAGENO="0513" * 509 B- 2 No licensee shall broadcast any program involving sports events for which a fee is charged which was regularly tele- vised into the market via a free television station within 5 years from the last date on which the event appeared on free television~ a. Notification of the sports events proposed to be car- ried by the Pay- TV station shall be provided to all other television broadcast stations located within 25 miles of the Pay- TV station at least 30 days prior to the designated broadcast date of said sports event. b~ Petitions to prohibit the carriage of such sports events on a Pay- TV station shall be filed with the Federal Communications Commission no later than 21 days prior to the designated broadcast date to- gether with a copy of the contract (if available) upon which the petitioner reiies~ No licensee shall broadcast any program for which fee is charged, if the talent for such program is restricted, pro- hibited, or in any way induced or influenced from appearing at any time on free television~ No Pay-TV licensee shall devote more than 50% of its sub- scription hours in any week to the transmiSsiOn of motion picture fiim~ No license shall be granted to a television broadcast station proposing to carry programming for which a fee is charged except upon a showing that the market which it serves or pro- poses to serve is within the Grade A contour of at least four commercial television stations (including the Grade A contour of the Pay- TV station)~ The market shall be the market as used by the American Research Bureau for the most recent yearS No license shall be granted to a television broadcast station proposing to carry Pay-TV programming except to a station operating on a UHF frequency~ If a television broadcast station supplies the only Grade A sig- nal to a community, not more than 15 percent of its non-prime broadcast time (including subscription and non-subscription 86-399 0 - 67 - 33 PAGENO="0514" 510 B- 3 broadcast time during that period) and not more than 25 per- cent of its prime broadcasting time (including subscription and non-subscription broadcast time during that period) may be devoted to Pay-TV; if a television broadcast station sup~ plies the second or third Grade A signal to a community, not more than 25 percent of its non-prime broadcast time, and 40 percent. of its prime broadcast time may be devoted to Pay-TV; if a television broadcast station supplies the fourth or more Grade A signal to a community, not more than 50 percent of its non-prime broadcast time and 60 per- cent of its prime broadcast time may be devoted to pay tele- vision~ a. In no event shall a Pay-TV station or statiais devote, individually or collectively, more than three hours to Pay-TV programming in any one broadcast day during prime broadcast time in markets within the Grade A contours of one, two or three television stations (in- cluding the pa.y television station). b. In no event shall a Pay- TV station or stations devote more than four hours, individually or collectively, to Pay- TV programming in any one broadcast day during prime broadcast time in markets within the Grade A contour of four or more television stations (including the Pay-TV station), c. Prime time broadcast hours are defined as those hours of the broadcast day between 6:00 p~m. and 11:00 p.m. d~ In no event shall a Pay- TV station or stations in a mar- ket exceed 35 hours, collectively, per week of Pay-TV programming. e. In the event that more than one Pay- TV authorization is granted in the same market, the percentage of prime time authorized for Pay- TV programming will be calcu- lated on the basis of a total of 35 hours and the percen- tage of non-prime time authorization for Pay-TV pro- gramming will be calculated on the basis of the station operating the fewest hours. No license shall be granted to a television broadcast station having any contract, arrangement, or understanding, expressed or implied, with a network organization, providing for the fur- nishing of programs intended, for Pay~TV use. PAGENO="0515" 511 B- 4 No license shall be granted to a television broadcast station having any contract, arrangement, or understanding, expressed or implied, with any other Pay-TV licensee, franchise holder, or agents thereof, for the purpose of purchasing Pay-TV pro- gramming. No license shall be granted to a television broadcast station having any contract, arrangement, or understanding, expressed or implied, with any company, organization, etc., providing Pay-TV programming as a part of an interconnected system. No CATV system shall carry Pay-TV programs originating from a Pay- TV broadcast station or originate any programs for carriage to its subscribers. No license shall be granted to a television broadcast station having any contract, arrangement, or understanding, expressed or implied, which provides for the distribution or furnishing of Pay-TV programming to or through CATV systems. PAGENO="0516" PAGENO="0517" 5083 BEFORE THE uutrattLnw QlnmmiøMrnt WASHINGTON, D, C. 20554 In the Matter of: Amendment of Part 3 of the Commission's ) Docket No. 11279 Rules and Regulations (Radio Broadcast Services) to Provide for Subscription Television Service FURTHER COMMENTS SUBMITTED BY JOINT COMMITTEE AGAINST TOLL TV ANI) NATIONAL ASSOCIATION OF THEATRE OWNERS SEPTEMBER 15, 1967 The Joint Committee Against Toll TV, and the National Associ- ation of Theatre Owners (hereinafter referred to as "Petitioners"), by their attorneys, hereby submit Further Comments in the above- captioned rule making. The Commission has scheduled oral argu- ment October 2, 1967, on matters relating to whether pay television should be authorized on a permanent basis and, 11 so, the nature of the rules and regulations which should be adopted concerning pay TV. The Commission has allowed parties to file written comments on the Issues involved on or before September 15, 1967. The instant Further Comments are being filed pursuant thereto. 513 PAGENO="0518" * 514 2 1. The October 2 argument concerns the Report submitted by the Commi~ion's Subscription Television Committee Iherein- after "Committee") which recommended the institution of pay television on a permanent basis, and which suggested the rules, regulations, and conditions pursuant to which the pay television service should be authorized.1 Petitioners respectfully submit that the Report should not be adopted, and that the Commission should not, and, indeed, cannot, authorize pay television on a per- manent basis under its existing statutory authority. 2. Petitioners do not intend, in the instant document, to repeat all of the grounds which they believe require the Commis- sion to decline to institute permanent pay television. Some of the arguments have already been made at length to the Commission in various papers filed by the opponents of pay television. They have also been covered in more detaU in the papers previously filed by the Joint Committee Against Toll TV, to which the Com- mission is respectfully referred. The purpose of the instant doc- ument is to point out what Petitioners believe to be the errors in the Report of the Subscription Television Committee. 1 The Subscription Television Committee consists of Commissioners Wadsworth, Lee and Cox. Commissioner Wadsworth, the Committee Chairman, indicated that while he agreed that the issues should be brought to the attention of the full Commission, nevertheless, he stated that his agreement to the submission of the Report should not be con- strued as an endorsement of it. PAGENO="0519" 515 3 i. Statement of Interest 3. The Joint Committee Against Toll TV (sometimes also known as the "Committee Against Pay-As-You-See TV") is a vol- untary association which has previously identified itself in this proceeding, and which has indicated its interest in the subject of pay television by filing Comments thereon on June 6, 1955, and by participating thereafter. The National Association of Theatre Owners is a nationwide organization consisting of the owners of motion picture theatres. II. jurisdictional Considerations 4. The Subscription Television Committee did not reeval- uate or reconsider the question of whether, under the Communica- tions Act, the Commission has the statutory power to authorize pay television on a permanent basis. The Committee merely noted that the Commission, in its First Report,2 had concluded that it possessed such authority, a conclusion which was reiterated in the Third Report,3 and again in the Commission's March, 1966 Further Notice of Proposed Rule Making and Notice of Inquiry. Petitioners believe, however, that the Commission's determination in the First Report was erroneous and should be reevaluated and reconsidered by the Commission at this time. 2 16 R.R. 1509, 1514-1520 at Pars. 20-44. 16 LR. 154(a). PAGENO="0520" 516 4 5. Although at times the Committee's Report overlooks or ignores the fact, it cannot be emphasized too strongly that a system which demands direct payment of fees by the public in order to re- *ceive programs broadcast on publicly controlled broadcast facilities represents a major and drastic change in the nature of American broadcasting. Prior to the advent of pay television, commercial broadcasting had been supported solely by advertisers. There was, and is, no direct financial relationship between a listener and a broadcast licensee. The absence of this relationship is more than just a matter of commercial choice. It represents an important feature distinguishing broadcasting from public utilities, and com- mon carriers - a distinction which was explicitly recognized by Congress when it drafted and adopted the Communications Act.4 6. This single fact also sharply distinguishes pay television from other changes in broadcasting which have occurred over the years, such as color television, FM broadcasting, simplexing, mul- tiplexing and functional music operations.5 It also distinguishes pay television from CATV, since in CATV there is no direct finan- cial relationship between a listener and a broadcast licensee. The relationship is between a listener and the CATV operator who See, ~g., the remarks of Senator Broussard who, during the debates on the Communications Act of 1927, stated "radio makes no direct charges, whereas the others (telephone and telegraph) are in the business of serving the public for direct pay 67 Cong Rec 12504 See also Pulitzer Publish v. F.C.C., 68 U. S. App. D. C. 124, 126, 94 F.2d 249,251. Although it is true that certain subscribers of functional music pay for the privilege of receiving material broadcast over the air, it is also clear that the ~ listening audience does not pay for this broadcasting. Stores, factories and buildings which desire such operations purchase them so as to provide the public in those stores and buildings with back- ground music as an additional service. The public is not simultaneously ~~e4 of the service. PAGENO="0521" 517 5 charges the listener for the use of wire lines which he has constructed so as to bring the programming presented by the licensee to the public.6 But a licensed pay television system permits the licensee to directly charge for the use of public facilities (the air waves) without any gov- ernmental regulation of those rates,7 while at the same time depriv- ing the public of the free service it previously enjoyed over the air. 7. In the First Report, the Commission, although admitting that the Communications Act of 1934 makes no specific or direct delegation of power to authorize such a major change in the concept of American broadcasting and the regulatory scheme surrounding it, nevertheless found, that power in the statute, and found support for its interpretation in its legislative history. The Commission reasoned that Sections 301 and 303 of the Act gave it broad powers over the use of radio frequen- cies, and it specifically cited Section 303(g) as giving it the power to study new and experimental use of frequencies and to generally encour- age the larger and more effective use of radio in the public interest. It then cited what it considered to be certain specific statutory limita- tions on the Commission's licensing power (Secttons 310(a), 313, 317, 325(a), 325(b) and 326) and concluded that if Congress wished to further 6 It should be noted, of course, that, as was pointed out above, the CATV operator may, himself, originate programming, charging the public for it. Under these circumstances, CATV becomes quite similar to pay television. It is significant, however, that the Commission has specifically refused to hold that origination of programming by CATV systems on a permanent basis Is in the public interest and has sought guidance from Congress on this matter. See Second Report in Docket No. 14895 at Par. 153(11), 2 F.C.C. 2d at 787. The Supreme Court clearly Indicated in F.C.C. v. Sanders Bros. Radio Station, 309 U. S. 470, 474, that rate regulation of broadcasting is not en- compassed within the present Act. PAGENO="0522" 518 6 limit that power in regard to pay television operations, it would have specifically done so. By this strained interpretation, the Commission concluded that it had been given the authority to regulate an industry never conceived of at the time of the drafting of the statute. 8. The statutory provisions relied upon by the CommIssion, however (Sections 301 and 303), do not support the Commission's in- terpretation of its power and authority. Section 301 of the Act mere- ly states the general purposes which the Act was drafted to effectuate. This broad statement does not grant the Commission any power. 9. The general powers of the Commission are stated In Section 303. Thus, Section 303(b) gives the Commission power to prescribe the nature of the service to be rendered by each station. Section 303(c) allows the Commission to assign frequencies to various classes of stations and to designate the power and the time which they may op- erate. Section 303(d) allows the Commission to determine the loca- tion of the different stations; Section 303(e) allows regulation of the apparatus to be used; and 303(f) grants the Commission power to make such regulations as are necessary to prevent electrical interference between stations and to carry out the provisions of the Act. The bal- ance of Section 303 covers miscellaneous rules to Insure the proper technical operation of all stations. None of these provisions even re- motely indicate that the Commission has authority to authorize a per- manent pay television system. 10. The only part of Section 303 which gives any support to the interpretation adopted by the Commission in the First Report is Sec- tion 303(g) which empowers the Commission to study new uses for radio and to provide for experimental uses for frequencies, and gen- erally to encourage the larger and more effective use of radio in the PAGENO="0523" 519 7 public interest. Unquestionably, this Section grants the Commission the power to run technical tests such as the ones carried out by Zenith in 1950. This Section, as interpreted by the Court of Appeals in Connecticut Committee Against Pay-TV v. F.C.C.,8 ~lso aUows the Commission to authorize trial experiments such as the Hartford test. However, there is a vast difference between allowing the Commission to conduct experimental tests, and authorizing it to establish pay television on a permanent basis. The Communications Act, as now written, neither sets out nor attempts to set out the kind of regulatory scheme that would be necessary to encompass a perma- nent pay television system. The right to experiment included in Sec- tion 303(g) does not supply the statutory deficiency. 11. It is true, of course, that the Communications Act gives the Commission broad regulatory powers over the broadcast field. It is also true, and the Courts have already indicated, that these powers are not all encompassing and that matters regarding the manner in which stations derive their revenue, as well as other in- ternal business affairs, were never conceived as being within the Commission's regulatory power. See Sanders Bros., su~ra. 12. The Commission asserted in its Further Notice of Pro- posed Rule Making, and the Committee asserted in its Report, that the Commission's decision as to its jurisdictional power was sup- ported by the Court of Appeals' decision in Connecticut Committee Against Pay-TV v. F.C.C. The Commission has asserted that if 8 112 U. S. App. D. C. 248, 301 F.2d 835, ~ ~ 371 U. S. 816 (1962). PAGENO="0524" 520 8 (as the Court held in Connecticut Committee) it possessed the stat- utory authority to authorize a test, then, of necessity, the Commis- sion possesses the statutory authority to authorize pay television on a permanent basis. 13. Petitioners respectfully submit that the Commission's reading of the Court of Appeals' opinion is erroneous. Although the appellant in Connecticut Committee urged that the Commission did not have the power to authorize pay television on a permanent basis, nevertheless, the Court refused to decide this question in its decision in that case. The Court never addressed itself to whether the Commission possessed the power to authorize pay television Permanently. The Court held merely that the Commission's power to provide for experimental uses of frequencies constituted a suf- ficient basis for the trial authorization there in issue. The Court's opinion was explained and Justified exclusively by the experimental nature of the authorization, and the Court went to great lengths to emphasize the experimental nature of the operation as the basis for Its decision, stating (301 F.2d at 837): The distinguishing characteristics of the Fed- eral Communications Commission's authoriza- tion of subscription television in this case is the experimental or trial basis upon which the system is to operate for the duration of Its three years authority. 14. It should be obvious that the statutory framework and guide- lines which would be required to support a nation-wide permanent pay television system is far different from the type of legislation required to support a small experiment so limited In size as the Hartford test, and with such a necessarily inconclusive effect on the free broadcast system. The dangerous effect which pay television will have on the PAGENO="0525" 521 9 free television system does not arise from a limited system of tests. tt arises precisely because such testing is fruitless and futile. The dangers of pay television will not be apparent until the system is ex- tensive enough to accomplish the very things feared. At this point, the existence of an extensive and expensive pay television operation will present the Commission with afait accompli. Section 303(g) of the present Communications Act, as the Court noted in Connecticut Committee, expressly confers jurisdiction on the Commission to au- thorize "experiments." There is no provision, however, in the Act which would authorize the Commission to permanently authorize a system so radically different in nature from the present American free broadcasting system, and with such a potentially destructive ef- fect on that system. 15. The concept of a pay television operation and the introduc- tion of a direct financial relationship between the individual listener and the station is more than a mere change in the broadcasting art. Tt introduces a major change in the entire concept of broadcasting and must necessarily introduce a major change in the regulatory scheme which surrounds the broadcasting industry. If rates are to be charged the public for the privilege of using public facilities, the question arises as to whether and how these rates must be regulated. Moreover, the Committee itself recognized that novel conditions, the like of which have never heretofore been imposed on any television station, must now be placed upon pay television stations if the free service is to be protected. Yet, the present Act does not provide the Commission with authority to regulate broadcasting rates. Moreover, If rates are to be regulated, it would mean that the Commission must assess such things as cost of operation, cost of equipment and cost of PAGENO="0526" 522 10 talent. It must then decide - as though the licensee were a public utility what constitutes a reasonable return upon the licensee's investment, for which no guidance is given In the Act. The pay television proponents, as well as certain of its opponents, strenu- ously urge that the Act as now written does not, in fact, allow the Commission to institute even the minimum controls recommended by the Committee, on the grounds that those conditions represent "censorship" forbidden by Section 326. If such assertions are cor- rect, then the Commission will be deprived of the power to promul- gate and enforce even the conditions which the Committee recognizes are vital to the protection of the public interest. 16. It is apparent that the Communications Act as now written neither sets out nor attempts to set out a broad regulatory scheme sufficient to promulgate and regulate a permanent pay television system. The absence of such a scheme is plain evidence that Con- gress did not grant the Commission power to authorize a permanent pay television system.9 III. The Commission Should Not Authorize Permanent Pay Television Without Further Congressional Guidance 17. Even assuming, however, that the Commission possessed the statutory authority to authorize pay television on a permanent basis, nevertheless, it must then face the question whether stich au- thorization is appropriate in the absence of Congressional guidance. Petitioners believe, and will discuss more fully below, that the conclusions in the Committee's Report concerning rate regulation of pay TV represent per- haps the most serious error contained in the Report. PAGENO="0527" 523 11 Various parties in the instant proceeding have pointed to the many reasons why the Commission should not act without specific Con~- gressional direction. Among these reasons are the following: (1) pay television represents a basic modification of the American system of broadcasting a modification which should originate with Congress and not the Commission; (2) the jurisdiction of the Commission is, at the very least, questionable and should not be assumed without further Congressional action; (3) the Commerce Committees of bothHouses of Congress have forcefully expressed their views either questioning the Commission's jurisdiction, or emphatically stating that such operations should not be authorized by the Commission without further specific authorization by law; (4) amendments to the Communications Act will unquestionably be required if pay television is to exist as a permanent medium; the Commission should not wait until after establishment to seek or obtain necessary changes in the law; proper control and regulation of pay television should be implemented before events and vesting interests render it difficult or impossible for proper regulations to take effect; (5) there has been no evidence of public demand or need for the implementation of permanent pay television which would warrant the establishment of permanent pay television in such haste as to preclude the necessity of awaiting Congressional implementa- tion; and (6) it would be a total abdication of responsibility for the Commission to permit licensees to charge for the use of public air- ways in the face of the very real possibility that the Commission has no statutory authority to regulate rates. petitioners submit that any one of these reasons is sufficient to withhold Commission author- ization pending Congressional action. PAGENO="0528" 524 12 18. The Committee noted some, though not all, of these objec- tions in its Report (Par. 7), and attempted to answer a few of them. The points made by the Committee, however, are untenable. 19. The Committee rejects the need for awaiting Congression- al clarification by stating (Report, Pars. 8-9) that Congress has not acted, although it was aware of the pendency of this proceeding for a number of years, and although the Commission specifically announced that it would allow a lengthy period for the filing of Comments so that Congress could act if it so desired. But this Is no answer. Concededly, Congress as a body has not acted. Congressional inaction per Se, however, obviously can mean either of two mutually contradictory things: either it believes that no guidance is necessary and that pay TV can be established and fully regulated under the present Act or, on the contrary, Congress may believe that no further statutory ac- tivity is required since the Commission cannot, under the present Act, authorize permanent pay television at all. If Congressiotial in- action is based upon the second of these propositions then, clearly, inaction cannot be used as an excuse by the Commission for author- izing the system on a permanent basis. And it appears that the weight of the evidence indicates that the second of these propositions is precisely the explanation for Congressional inaction for, as the Com- mittee candidly noted (Par. 7), both Committees of Congress most intimately concerned with the Commission have indicated their judg- ment that the Commission does not have the requisite jurisdiction. Under these circumstances, it would appear that Congressional action (not inaction) affirmatively indicating that the Commission has such power is necessary before pay television should be permanently au- thorized. Such action, of course, has not been forthcoming. PAGENO="0529" 525 13 20. The Committee urges that the Commission should not await Congressional guidance because it is the Commission's "present duty" to establish pay television if it can be found to be in the public inter- est, such action being required by Section 303(g) of the Act which re- quires the Commission to encourage "the larger and more effective use of radio in the public interest." (Report, Par. 9) Yet, the Com- mittee's assertion merely begs the question, for it does not indicate why it believes that the institution of such a basic modification in the American broadcasting scheme (a modification which, it should be noted, the Committee itself recognizes has a potentially catastrophic effect upon the free service)10 must be instituted before Congress has expressed its views legislatively on the question, and in the ab- sence of a statutory scheme adequate to regulate a pay television system. 21. The Committee certainly does not, and could not, point to any demonstration of public demand seeking the prompt institution of a pay television system. Had such a ground swell of public opinion or demand been present, the Committee could conceivably urge that the Commission must act even in the absence of a clear Congression- al mandate, and despite the fact that the Communications Act gives no clear guidelines. In the case of CATV systems, for example, the Com- mission was confronted with an industry which, as a result of public demand, had been growing at such a rapid rate that it threatened to distort or destroy the Commission's carefully considered television allocation plan. Under these extreme circumstances, the Commission 10 The Committee s explicit recognition of thIs fact is demonstrated by the conditions which it imposed. 86-399 0 - 67 - 34 PAGENO="0530" 526 14 was required to take jurisdiction, even without Congressional guid- ance. It is clear, however, that there is absolutely no such public demand or pressure evident in the case of pay television. 22. It can hardly be contended that the public has been be- seiging the Commission with demands that a permanent pay tele- vision system be established. To the contrary, in California, as the Commission is aware, the public voted down by a decisive mar- gin the institution of a wired pay television system in the only pub- lic referendum ever held on this question. And, it is significant that only one test of a pay television system pursuant to the First and Third Reports has been conducted. It is at least reasonable to as- sume that if a real demand for such a service were evident, it would be reflected in requests by numerous prospective pay TV proponents for authority to conduct experimental operations. 23. Nor has it been demonstrated even that the public of Hart- ford has demanded the service. Although RKO artificially limited the Hartford test to 5,000 subscribers and alleged that there is a "backlog" of demand, nevertheless, neither RKO nor any other pro- ponent of pay television has indicated the extent of such a demand, or has demonstrated the existence of public clamor for a pay tele- vision system. The information supplied by Telemeter concerning its Canadian experiments corroborates the fact that, far from de- manding a pay television service, the residents of Etobicoke and Mimico actually rejected it. In these communities, the number of wired, pay television subscribers actually declined more than 50% during the five-year test from an initial high of 5,500 to 2,500, even after Telemeter expanded its potential service area from 12,000 to 14,000 (see Telemeter Comments, pp. 7-9). There were, no doubt, many reasons for the decline in demand for the Telemeter service. PAGENO="0531" 527 15 Whatever the reason, the Canadian experience clearly indicates that a widespread public demand for the Institution of a pay television system simply does not exist.11 24. The Committee urges immediate action because it does not see the necessity of amendments to the Act at this time, and, in particular, it does not believe that rate regulation is necessary. In- deed, the Committee goes further: it contends that the authority to regulate rates is not even necessary to the Commission's authority to authorize the system on a permanent basis (Par. 221). In the Committee's view, it does not matter one whit that the Commission may not (and, under the present Act, does not) have the authority to protect the public against gouging. 25. In order to defend this type of "the public be damned" at- titude, the Committee is forced to contend that the entire history of the present American system of broadcasting should be Ignored and, in some magical fashion, pay TV should be considered in legal and practical effect as if it were free TV. Thus, the Committee asserts (Par. 221) that free TV is not really "free" because the cost is passed on to the consumer In the form of hidden additions to the price which the consumer pays for goods and services to cover ad- vertising costs. The alleged Indirect cost increase (which Is never analyzed and the existence or amount of which is nowhere demon- strated by the Committee) Is thereupon analogized to the direct per It is also significant that after the cessation of the Etobicoke-Mimico test, less than 20 per cent of Telemeter's subscribers indicated regret that the sys- tem had stopped, despite the fact that Telemeter sought an expression of opinion from all of its subscribers. See Telemeter Comments, p. 7. PAGENO="0532" 528 16 program cost which exists in pay television, and because the Commis- sion cannot and does not regulate the rates charged by free television stations for time,12 the Committee reasons by analogy that there is no need to regulate the direct costs to be charged to the public under a pay television system. 26. The difficulty, however, with the Committee's analogy is that it is both legally and historically unsound. The very difference which the Committee seeks to ignore is precisely the reason why rate regulation of broadcasting is not authorized by the present Act. 13 Ironically, this is made clear by the very case which the Committee cites in support of its novel theory. 14 In Pulitzer, the Court of Ap- peals pointed out that the absence of a direct charge by broadcasters to their listening audience is precisely the reason for the lack of rate regulation, and this fact was to be distinguished from the situation where such a charge would be present. It is inexplicable to Petition- ers how Pulitzer can be read by the Committee as obliterating the clear historical distinction between free and pay TV when the ration- ale of the case is based precisely upon the existence of such a distinc- tion. 27. The difficulties to which the Committee's position lead are demonstrated by the justifications which It offers in order to defend its abdication of responsibility. Thus,the Committee urges that rate 12 Which rate is then reflected in the hidden indirect cost. 13 See, ~g., note 4, p~, where Senator Broussard pointed out the differ- ence between radio, whose rates are not regulated, and public utilities, whose rates are regulated, as being that radio makes no direct charge to the public for service while the others do. 14Pulitzer Publish1ng~ç~. v. F.C.C., 94 F.2d 249 (D. C. Cir. 1937). PAGENO="0533" 529 17 regulation is not necessary because: "The public is free to subscribe or not to subscribe to STV services." (Par. 222) The contention, however, is untenable. Obviously, the same could be said about any public utility: the public is free to subscribe or not to subscribe for phone service; it is free to obtain or not to obtain gas or electricity; it is perfectly free not to send a wire by telegraph or cable; it is free to refuse to travel by airplane, railroad or bus. Yet, these facts have not resulted in an absence of regulation over telephone costs, gas and electric services, telegraph and cable fees, and transportation rates. The fact that the public might ignore a service which is licensed by the government has never commended itself as a reason to refuse government regulation of the rates to be charged the public. Indeed, the Committee's argument sounds suspiciously like Anatole France's famous comment: The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the stores and to steal bread. 28. The Committee urges that rate regulation is unnecessary since: "We believe that the market place will regulate charges that are paid and that if they are excessive, the operations will not suc- ceed." (Par. 222) Yet, it can fairly be asked: "What market place?" The conditions which the Committee, itself, recommends as govern- ing permanent pay television for the immediate future limit pay tele- vision to only one station in each city with five television allocations. There is certainly no guarantee that this condition wUl be changed or liberalized to allow more than one in each city. The Committee has no right to assume that the limitation which it proposes will become unnecessary; in all probability such a condition will always be neces- sary so as to render the free service at least the minimal protection which even the Committee recognizes is necessary in the public inter- est. PAGENO="0534" 530 18 29. Under these conditions, it is simply fallacious to argue that a "market place" exists, the operation of which would protect the pub- lic. There is no "market place" when there is a government-authorized monopoly. Petitioners are unaware of any instance in which a govern- ment-sanctioned monopoly has been established without clear indication that the rates charged the public are to be regulated. 30. The Committee asserts rate regulation to be unnecessary because there was "nothing in the Hartford trial to indicate that rates will be exorbitant." It asserts that the rates charged appeared "rea- sonable." (Par. 222) Yet, the Committee did not indicate the gauge by which it determined the rates to be "reasonable" or "non-exorbitant." The Committee did not indicate whether reasonableness was to be de- termined by return on investment, by capitalization of assets, by com- parison to the price of similar events in non-television media such as legitimate stage, motion picture theatres, sports arenas or by a com- bination of these methods. 15 The Committee simply cannot make 15 The Committee cited with apparent approval the fact that at Hartford nine persons viewed a heavyweight fight at a cost of $3.00 while the same fight was shown on closed circuit television for a price of $5.00 per head. Yet, the fact that the per capita cost was less on pay television does not mean that the pay television cost to the subscriber was "fair" and "reasonable." Such a judg- ment could only be made after assessing RKO's cost in presenting the fight, and allocating that cost over the number of subscribers. Thus, it may be that RKO's cost per subscribing set was 25ç~ for which it then charged $3.00. At the same time, the per capita cost to the theatre owner may have been $2.50 so that he may have made a $2.50 profit on a $2.50 investment. Under these circumstances, which of the two arrangements was "fairer"? And, more per- tinent, should the pay TV station have been allowed to reap over a 1,000% pro- fit when the only reason for him making any profit at all was that he was al- lowed to use publicly-owned spectrum space? Of course, it should be noted that the operators of the Hartford test lost over three million dollars. As the Committee recognized, these business en- terprises are not charities. In order to recoup their expenses, the prices which they would charge would logically have to be higher than those which they did charge at Hartford. Under the circumstances, the fact that they were willing to absorb a loss during the test period is hardly a sound basis upon which to postulate the costs to the public which would accrue under a perma- nent system. PAGENO="0535" 531 19 judgments as to "reasonableness" in a vacuum without appropriate standards which have not yet begun to be formulated. 31. The simple fact which distinguishes pay television from other traditional entertainment media making direct charges to the public is that the other media do not use scarce public facilities (the airwaves) to make their profit, nor do they deprive the public of what the public could once enjoy free. It is only the pay TV pro- ponents which desire a free and unregulated ride at public expense. W. The Detriments to the Public From a Permanent Pay Television System Clearly Outweigh Any Minimal Benefits Which May Be Derived 32. The Committee's recommendation to move upon the un- charted sea of permanent pay television Is even more seriously impaired when the reasons for its recommendation are considered. For it is obvious that the Committee has lost sight of the nature of the judgment which the Commission must render before it can au- thorize pay television on a permanent basis. That judgment Is whether there are any benefits to be gained by the public by the authorization of the service and, if so, whether the benefits clearly outweigh the detriments. And the record makes it painfully obvious that the benefits to the public are minimal at best, while the detri- ments are substantial and potentially catastrophic. A. The Alleged Benefits. 33. It is clear, of course, that the promises and siren-songs of the pay television proponents have been demonstrably proven false. Pay television was first portrayed to the American public as a means PAGENO="0536" 532 20 by which television programming fare would allegedly be diversified and improved through the presentation of high quality, minority-type programming which was allegedly unavailable over the free system. Thus, as the Commission noted in its First Report (Par. 48), 16 pay TV proponents promised that the system: could and would provide a wider choice of members of the public interested in the fine arts, operas, educational and informational ma- terial and other similar kinds of programs. The proponents of the Hartford test promised to present significant amounts of such high-quality minority-type programming17 and the Court of Appeals, in approving the Commission's authorization of the test, noted that:18 It seems to us imperative that the licensee be held to adhere faithfully to the high standard of programming which it has promised. The Committee has candidly recognized, however, that pay television will not, in fact, yield these benefits which were its original raison d'etre. The Committee recognized what the opponents of pay televi- sion have continually pointed out - that pay television will not, in any way, offer additional cultural and high-quality diversified minority- type programming, but would program for the mass audience. The Committee has now recognized that whatever hopes may have been 1616 R.R. at 1521. 17 See Exhibits submitted with the application of Hartford Phonovision, Exh. 8, p. 1. 18 301 F.2d at 838; emphasis added. PAGENO="0537" 533 21 held out for such programming can no longer be realistically en- tertained (see Report Pars~ 54-57). The Committee has rejected as the basis for its recommendation the requirement that such programming be forthcoming. It does not now even urge that any such benefits would accrue to the public. 34. The sole benefits which the Committee has been able to discern are that pay television (1) can bring to the public some motion picture films somewhat more quickly than these films would be shown on free TV, and (2) can present certain sports events such as heavyweight championship bouts and other sports programs which are now, for one reason or another, "blacked out" on free TV. 35. With respect to films, the Committee does not even urge that the films to be presented are first-run features. It holds that even the presentation of films from six months to two years old would be a sufficient justification to authorize a permanent pay tele- vision service (Report, Par. 53), despite the fact that free television now presents a plethora of motion picture films, some of which are less than two years old, and despite the fact that the average age of movies presented on the free system has steadily been lowered dur- ing the past five years. And with respect to sports, the Committee acknowledges that the occasional spectacular sports event such as championship boxing is rare and unusual (Par. 107). B. The Substantial Detriments. 36. Having thus pared down the high touted "benefits" to a realistic bare minimum, the Committee was then required to assess these benefits against the detriments which its own Report revealed, and particularly to determine (a) whether the presentation of such PAGENO="0538" 534 22 programming warranted the deprivation to the public of a scarce broadcast frequency and (b) even if so, the effect which it would have upon the free service. Perhaps the most revealing aspect of the Committee's Report, however, is that it never realistically assessed the first of these questions, and it attempted to solve the second of them upon a totally inadequate basis (i.e., the Hartford failure), buttressed by the sheerest form of speculation and con- jecture. 37. The first, and most obvious detriment is that, in order to give the public a few more current motion picture films, and some sports events, the public will thereby be deprived of the abil- ity to receive a scarce broadcast frequency on a free basis. To state the obvious, if there are 5 channels allocated to a particular community, and one of them is being used as a pay television facil- ity, there are no longer 5 free television allocations; there are 4. The public is simply deprived of the programming which it other- wise would have received, but for the pay television operation. Yet, nowhere in the Committee's Report is there any realistic recogni- tion of the fact that the institution of a pay television system would rob the public of the benefits of a scarce frequency. Indeed, at one point, the Committee refused even to acknowledge that the public would be deprived of anything. Thus, at Paragraph 75, the Commit- tee can blithely state that listeners "will not be deprived of anything" if pay television is authorized, apparently forgetting the plain and simple fact that authorization of a pay television station deprives the public of the use of that station on a free basis. 38. Moreover, the Committee failed to consider the importance of the fact (heavily stressed by the Committee in another context) that the audience to be reached by pay television is a minority, and one PAGENO="0539" 535 23 which totally excludes all of the families in the lower one-third eco- nomic level of the United States. Thus, in attempting to demonstrate that a permanent pay television system will have no adverse impact upon the free system, the Committee heavily stresses (Par. 107) that, on the average, pay television could not expect to attract more than a small percentage: of the total television listening audience. And (again, in another context) the Committee notes (without apparent concern) that this small percentage excludes the lowest economic third of the nation (Pars. 74-75). Yet, nowhere in the entire report does the Committee even face the question of whether the use of a scarce broadcast frequency, which would be totally denied to one- third of the families in the United States and, at best, would be lim- ited to a fraction of the total listening audience, is justified merely for the purpose of presenting some additional movies and occasional sports events. 19 The Committee, Instead, appeared to view its task as one of finding any benefit, no matter how slim, which would then be used as a justification for recommending pay television. 39. The Committee's casual attitude toward waste of frequency space is odd, indeed, when contrasted to the concern which the Com- mission manifested in its CATV proceedings. In the Commission's First and Second CATV Reports, it made it abundantly clear that the Commission's main concern was to protect the viabUity of the one or two new UHF facilities which might be instituted in communitIes throughout the country as a result of the passage of the all-channel 19 Petitioners do not wish to imply that they agree with the Committee's evaluation of the percent of penetration which pay TV could achieve, although it does agree that this penetration would not occur in the lower economic levels. Petitioners have here attempted merely to demonstrate that even on its own terms, the Committee failed to make the required assessment of benefits and detriments. PAGENO="0540" 536 24 receiver legislation. The Commission there recognized that the potential programming to be offered by a single new UHF facility was so necessary to the public interest that it was to be protected from destructive competition by CATV systems which sought to import distant signals. The necessity of such protection led the Commission to take Jurisdiction over CATV and to require a show- ing by any CATV system desiring to import distant signals that such importation would not adversely affect existing stations and, particularly, new UHF facilities.20 It is obvious, of course, that instituting a pay television station over a UHF facility effectively deprives the public in that community (at least during the prime time listening hours) of the benefits of free UHF service, in the same way as if that UHF station had been driven off the air by a CATV system which imported distant signals. Yet, the concern with the protection of the viability of a scarce television frequency manifested by the Commission in the case of CATV systems Is no- where manifested or even recognized by the Committee in consid- ering the effect of the authorization of pay television. 40. The Committee at least attempted to evaluate the second potential detriment of permanent pay TV, i.e., the effect which it might have upon the free service. Its error in this regard, however, lay in accepting the results of the Hartford test as a responsible gauge upon which to measure future impact. 20 There are now pending before the Commission numerous hearings in which a CATV system is required to justify extension of signals into an area with only a single UHF facility in it. See, ~g., the hearing on the Dalton, Ga. CATV sys- tem (Docket No. 17066). PAGENO="0541" 537 25 41. The folly of such an attempt is made clear by the fact that the Hartford test, despite the promises of RKO to install up to 50,000 units, was limited to a maximum of 4,851 persons who were asked to subscribe to a diet of run-of-the-mill movies, the great majority of which were more than six months old at the time of showing, and at least 149 of which were two years old or older at the time of presen- tation. The test represented a penetration of 0.6% of the net weekly circulation in the Hartford market, and only 0.3% of the tele- vision households in that market. Moreover, as the Committee re- cognizes (Par. 87), only an average of 267 families tuned in to the programs presented during the Hartford test. And it is not merely the small size of the sample which renders the data virtually mean- ingless. The Hartford operators did not even purport to obtain a valid scientific statistical sample such as is done, for example, by the rating services. It is simply naive to contend that such data is a meaningful basis upon which to make any predictions or projections of the actual effect of pay TV as a permanent media. Yet, the Com- mittee attempted to do just that. 42. The impossibility of projecting the Hartford test on a na- tional basis is made manifest by the Committee's own Report. The Committee pointed out that two of the most critical statistics in de- termining impact are (a) the amount of television homes which would adapt to pay TV (i.e., the "penetration rate"), and (b) the average numbers of pay TV homes who would watch each attraction (i.e., the "subscription rate"). Yet, as to the "penetration rate" the Committee recognized that it could not use the Hartford rate since it was simply impossible to do so. The Hartford penetration rate was, in fact, less than 1%, and the Committee realized that such a figure was totally unrealistic. Instead, the Committee noted that the penetration rate was a matter of sheer speculation,although it "guessed" (with no PAGENO="0542" 538 26 explanation for the basis of the guess) that the rate might be some- where between 10% and 20% (see Par. 149). And with regard to the critical question of program diversion, the Committee also recog- nized that the Hartford test could provide little meaningful explana- tion, and pointed out that the question "is one of the impondera- bles . . ." (see Par. 111). 43. At the same time that the Committee recognized the de- ficiencies in the Hartford experiment, it inexplicitly accepted as gospel truth the notion that only an average of 5.5% of the persons who subscribed to pay TV would tune in to the pay TV offerings. The Committee's entire conclusion as to the lack of substantial adverse impact upon the free service (Par. 107) is couched entire- ly upon an uncritical acceptance of the 5.5% figure whIch, it must be noted, is based upon the weekly average of only 267 Hartford subscribers. 44. But this is akin to creating an empire built upon quicksand. The Committee offered no persuasive explanation as to why it chose to accept so readily the 5.5% figure. Although the Committee indi- cated its reason to be that the 5.5% figure remained constant whether the station presented first subsequent-run, or whether it showed older movies, the Committee failed to recognize that the steadiness of the figure merely reflected the fact that, to the average viewer, a first subsequent-run movie is no more attractive than a movie which may be three, four or five years old. The run-of-the-mill movies shown at Hartford were simply not attractive enough, or dI.f- ferent enough from material shown over the free service, to interest pay TV viewers. Rather than reflect a need for the programming of- fered, it indicated that the Hartford test, in fact, did not offer any meaningful "supplement" whatsoever to the material presented on the free service, much less a "beneficial" supplement. PAGENO="0543" 539 27 45. At the same time, the test indicated that when a popular and unavailable item, such as a heavyweight championship fight, was presented, the viewing percentage rose to 83.6%, and it takes no great prophetical insight to discern that if similar popular pro- ductions are kept off the free service and placed only upon the pay service, the viewing percentage would rise far above 5.5%, and the Committee's conclusions would be revealed as erroneous. 46. There is yet another deficiency in the Committee's rea- soning concerning impact, even if the 5.5% figure is accepted. The Committee, based upon this figure, has assumed the audience diver- sion to be 2-3/4% even if there were a 50% penetration, i.e., if 50% of the television homes subscribed to the pay TV service. It then held that such a low percentage, combined with the rules which it adopted covering program and talent siphoning, gave it no cause for cpncern (Par. 107). In so doing, however, the Committee obviously treated all of the stations in the cities to be affected as if they were on an equal level. In other words, it failed to recognize the well- known fact that in cities with four stations, three of them network affiliated, the non-affiliated station can only count upon a small frac- tion of the total potential audience, the overwhelming majority of whom would normally be tuned to the three network affiliates. Thus, while the three network stations might have significant strength to resist the small diversions which the Committee prophesied as oc- curring, the independent station would be in a far worse position, and its financial viability may be destroyed even by a small further frac- tionalization of its audience. 47. Indeed, it was precisely the effect of fractionalization of the small potential audience of UHF stations which lay behind the adoption of the CATV rules and which made it necessary for a CATV system desiring to import distant signals to demonstrate that such PAGENO="0544" 540 28 Importation would not have the adverse impact which the Commission envisioned.21 The Commission, in considering CATV, recognized that new UHF stations would be marginal, and that even sn~iall shifts In viewing might be sufficient to destroy them. No such recognition can be discerned In the Committee's Report. The obvious threat to non- pay TV UHF stations is virtually ignored. 48. Moreover, It Is no answer to Imply that UHF stations will be aided because they might apply for pay TV authority and therefore supplement their free TV revenue by pay TV revenue (see Par. 76). In a five-station market with more than one UHF station, In which only one station can become a pay TV outlet, obviously the UHF sta- tion which does not obtain the pay TV franchise could not possibly be helped by a fractionalizatlon of its audience. And It Is a contradic- tion in terms to argue that the pay TV UHF station will be helped so that UHF will be thereby fostered. The pay TV UHF station may be helped to survive financially, but It will survive not as the type of UHF station originally envisioned by the Commission, but as primari- ly a pay TV station which also happens to show some free television at non-prime time hours as the price it must pay for the privilege of reaping the pay TV bonanza. Petitioners submit that the Commission's strenuous attempts to aid UHF stations were not undertaken for the sole purpose of having stations broadcast free UHF programming dur - Ing the daytime hours only. 49. The danger in the Committee's glib use of the Hartford fig- tires as projections, and In Its failure to realize that It simply does not have sufficient meaningful data upon which to base Its conclusions, Is made manifest by the catastrophic results which might occur if the Committee's speculations are erroneous. 21 See, ~ CATV Second Report and Order, 6 R.R. 2d 1717, 1772-1781, and particularly Par. 123 at 1777-78. PAGENO="0545" 541 29 50. The Committee, itseLf, recognizes explicitly in its Report the absolute necessity of protecting the free service. Thus, the Com- mittee noted with approval (Par. 77) the Commission's statement in its Further Notice that: We also emphasize that we regard the preserva- tion of conventional television service and the continued availability of good program material to the free service as extremely important con- siderations. And the Committee noted (Par. 147) that it would be a breach of faith with the public who have invested millions of dollars. on television equipment on the expectation of receiving abundant free television programming to suddenly find such programming denied to them be- cause it was shifted to a pay television system. 51. As a further indication of its concern, the Committee re- commended the adoption of novel and unique conditions limiting the types of programs which could be shown on the pay TV service (i.e., that pay TV movies cannot be more than two years old in general release), and further prohibiting the presentation of programs which, during the preceding two years, had been seen on the free service. 52. But If the Committee's speculations as to impact are erroneous, and if the conditions which it imposes are ineffective to protect the free service, then the free service would be rendered a blow from which It might never recover. In addition, with the invest- ment of substantial funds by pay television proponents and the public, the Commission would be faced with a fait accompli, and It would be difficult, if not impossible, to unscramble the egg. Can the Commis- sion truly believe that it has sufficient data upon which it can make reasonable judgments regarding future impact based upon the smidgins 86-399 0 - 67 - 35 PAGENO="0546" 542 so of statistical data which it gleaned from the Hartford test, some of which the Committee itself recognizes is unreliable as a gauge for the future? Is it not more rational to conclude that until more pro- bative and responsible data is collected, the Commission should not move into such a dangerous and potentially destructive area? V. The Hartford Test Demonstrates That * Authorization of Permanent Pay TV Would Improperly Discriminate Against the Poor 53. There Is one area, Petitioners submit, in which the Hart- ford test yields some meaningful data. A breakdown of the subscrib- ers demonstrates that virtually no persons in the income level 0 - $3,999 (an income level which represents almost one-third of all famUies in the United States) were able to subscribe to the test. Based upon these statistics, there can be no question that the author- ization of a pay TV system would systematically deprive 30% of the nation of the free use of public frequencies, which would instead be turned over to the pay television proponents to be used for the bene- fit of wealthier American citizens. In effect, the Commission would be systematically discriminating against the lower Income level fam- ilies, and depriving them of the ability to use what heretofore have been recognized as broadcast frequencies available free to all parts of the population, regardless of income. 54. This systematic discrimination against one-third of a na- tion appears not to bother the Committee; the manner in which they treat this fact is one of the most startling aspects of their Report. Thus, the Committee blithely ignores the fact that the precise dis- tinguishing feature of the American broadcasting system since Its PAGENO="0547" 543 31 inception was that it was free to all members of the public, and that the public's airways were not to be sold to any particular segment of a listening audience only if they would pay a direct fee. When the Commission allocated its scarce television frequencies, it plainly did so with the intention of maximizing the amount of free television spectrum space which could be equitably distributed throughout the country. Yet, the Committee would now have the Commission effec- tively deprive one-third of the nation of the ability to use certain of the allocated facilities. It would have the Commission say, in effect, that it has sufficient spectrum space to accommodate five stations in a city, but, nevertheless, it chooses to deny one-third of the public the right to free access to all five, but limit free ac- cess to four, with the fifth to be used only for that portion of the audience wealthy enough and willing to pay for the service. Thus, rather than meeting its statutory obligation of effectuating the "lar- ger" use of broadcast facilities, the Commission would now narrow the use of such facilities by restricting a significant portion of them for use by the wealthy American citizens. 55. This creation of a type of second-class citizenry is treated most cavalierly by the Committee. Thus, the Committee rationalizes the discrimination against the lowest income level by asserting that, under the rules adopted, all those in the lowest income group "will be able to continue to see ample amounts of free TV programming, so that they will not be deprived of anything . . . ." (Par. 75) This rea- soning is specious. It first assumes, with little Justification, that the rules which the Committee proposes will be effective in preventing the siphoning of free TV programming. But what if the Committee is wrong, and the siphoning and destruction of the free service cannot be protected? How will the Committee then give back to this third of PAGENO="0548" 544 32 a nation the programs of which it was deprived? And how will it protect them from further deprivations? 56. And by what standards can the Commission so patroniz- ingly assume that the lowest income group has "ample" amounts of free TV programming, while at the same time urge that the free service is not "ample" enough for the wealthier citizens? Does the Commission assert one standard of programming for the wealthy and a lesser standard for the poor ?22 Is the Commission so satisfied with the quantity of free TV programming that it can conclude, even in cities with five or more stations, that the loss of one station's potential programming is a desired or non-harmful result? This patronizing attitude hardly commends itself as a standard which the Commission should follow. 57. And it is, of course, incredible for the Committee t&as- sert that these persons "will not be deprived of anything." Of course they will be deprived of something - the free programming which the station would have presented had it not been given the opportunity of directly charging the public for the use of the public's own airways. 58. The Committee's final attempt to rationalize its disregard of a third of a nation is reflected in the Committee's attempted analogy to the color TV. The Committee argues that (Par. 75): The same economic difference presently exists with regard to color TV. Many in the country who desire color sets with large screens cannot afford them. The analogy is totally false. It is quite true that economic differences allow the wealthy to purchase color sets and deny the poor the same opportunity. But the ability of the wealthy to receive color sets can 22 Is the Commission urging in the Orwellian sense that: "All animals are equal, but some animals are more equal than others"? PAGENO="0549" 545 33 be accomplished without any deprivation whatsoever to the poor. Color television is a true supplement - available to those who can afford it without cost to those who cannot. Over-the-air pay televi- sion is totally different, for it benefits those who could afford it only at the expense of those who cannot. 59. It needs no elaboration to demonstrate that television is perhaps the most successful and effective mass media which the world has ever known. It has allowed the poorest citizen to obtain, in return for the mere purchase price of a television set, entertain- ment, information and news of a quality and quantity unobtainable in the past by the richest prince or king. It is, in truth, the poor man's theatre; the benefits which it has brought redound most strongly to those persons and groups in the lowest income level. It is strange, indeed, that the Committee can so easily ignore this group, and seek to deprive them of some of the benefits of which television is capable. 60. It is even stranger when it is recalled that, at this point in our history, the country as a whole is making the most determined efforts to bring to the lowest economic levels of our nation the full benefits of the American society as they are enjoyed by the more fortunate majority of our citizens. Federal and state governments have instituted far-reaching programs in urban development, open housing, work training, education, and a myriad of poverty programs so as to enrich the lives of the poor. The country has recognized the disparity in income which exists in our society, and has moved to correct it through massive Federal and state aid. It is anomalous that the Committee would now have the Commission turn precisely in the opposite direction, and deprive the very portion of the nation which needs it most of the fullest opportunity to take advantage of the free service. The Committee, in essence, has created its own anti-poverty program - its program is directed against the poor. PAGENO="0550" 546 34 VI. Conclustons 61. It is gratifying to note that the Committee has recognized the potentially disastrous effect which pay TV could have on the free service by at least attempting to impose conditions to protect free TV. Petitioners believe that the conditions which the Committee would impose, though laudable, are not stringent nor comprehensive enough to obtain the result which the Committee desires. The ad- ditional conditions which petitioners believe should have been im- posed, and the reasons for their imposition, have been discussed at length at pp. 52-70 of the October, 1966 Comments submitted by the Joint Committee Against Toll TV, and will not be repeated here. Suffice it to say that the overwhelming weakness of the Committee's recommended conditions is that they are easily surmounted merely by withholding material from free TV for a two-year period, with the knowledge that thereafter such material can reap, unhampered, the profits of pay TV. Again, it takes no great insight to realize that proponents of pay TV systems could well decide to make good any loss which a program producer may suffer during the two-year hiatus. There is simply no way for the Commission to prevent circumvention of its conditions. 62. And it is particularly distressing that the Committee has rejected the suggestion that, if pay TV is permanently authorized, individual pay TV stations should not be licensed until after they de- monstrate in an evidentiary hearing that operation of the station will not damage the free stations in the community, and will affirmatively serve the public interest. The Commission has required such hear- ings in the case of CATV systems desiring to import distant signals precisely because it was unable to determine without proper evidence PAGENO="0551" 547 35 the impact of an individual system upon the existing local TV stations in its community. The determination to hold such hearings was made at a point when the Commission had before It far more statistical evidence of the effect of the CATV upon TV stations than the Commis- sion now has with regard to the effect of pay TV on free TV. It is dis- tressing that the Committee is so certain of the absence of adverse impact that it refuses to take this realistic and practical approach. 63. In sum, petitioners do not believe that the Commission has the authority to authorize permanent pay TV under the existing stat- utory scheme. But even if the Commission decides otherwise, and even if it attempts to enter the field without appropriate legislative guidance, nevertheless, the Commission today has as little meaning- ful data upon which to determine the impact of pay TV on the economy and on free TV as it did when the subject first arose more than ten years ago. The Hartford test did not yield such information. The ex- perience in Hartford does not provide a basis for the conclusions which the Commission is attempting to draw. At this stage the Com- mission should, at most, permit pay TV to continue in a limited test context in the hope that the ensuing years will produce the n~ces5ary data. Under all of these circumstances it is submitted that the Com- mittee's recommended Report should not be adopted. Respectfully submitted, JOINT COMMITTEE AGAINST TOLL TV NATIONAL ASSOCIATION OF THEATRE OWNERS By ____________ Marcus Cohn By ____________ September 15, 1967 ~ai'thui Gaynes PAGENO="0552" 54~ Mr. GAYNE& We believe first of all and perhaps primarily that this committee should make it very clear to the Federal Communications Commission, one, that the Commission does not have the statutory au- thority to institute pay television under the Communications Act of 1934 and, two, that even if it did it certainly should not do so be- cause pay television is not in the public interest. I do not think I have to speak too long about the fact that pay tele- vision is a tremendously drastic change in the television system we have in this country today. I think the fact that this committee has beenworking so assiduously at it and the fact that so many people have appeared before them arguing pro and con demonstrate the novelty of pay television and the change it would make. For the first time in the history of television broadcasting there would be a direct charge from the broadcasting licensee to the view- in~ public. In fact, it seeks to adopt a pay system which I think was rejected by the drafters of the Communications Act and certainly finds no support in it. I find the lack of statutory authority in three aspects most par- ticularly. One, the present act has not a word about it which would indicate that the Commission has the power to institute a direct pay system. The legislative history of the act which is long and which we have analyzed in some of our comments make it quite clear this was never conceived as a real practical possibility at the time the act was passed. Two, this is demonstrated I think by the absence of rate regulation which I think is perhaps the most striking demonstration of the Com- mission's lack of authority. The Communications Act is, of course, broad and gives the Commis- sion many powers but it does not give them the power I believe to regulate the rates. If the Congress wished to give the Commission the authority to institute pay television I cannot believe they would have done so without giving them the authority to regulate the rates. This is a public utility. The airways belong to the people of the United States. They are given to broadcast licensees to use for limited periods and no property right is given therein. I just cannot conceive, it would be singular in the history of regulatory authority for this kind of power to be given without the regulation authority. Yet the Commission does not have the power to regulate the rates. It wo~i't even say it does have the power to regulate rates. It would launch this venture without the kind of protection that is necessary to protect the public. I think there is a third reason. That can be found right in the fourth report. The Commission has recognized as we all have recog- nized the tremendously destructive potential which pay television has to destroy the free system. It tries to protect the free system by instituting program controls of a type which have never before been attempted. It would limit movies on pay televisiOn only to those which are less than 2 years old in general release. It would prohibit the presen- tation of sporting events that appeared on free television in the past PAGENO="0553" 2 years. It would go farther, it would prohibit the presentation of a series of programs with an interconnected plot This, I submit, is regulation of program content, the very one thing which the Commission has resisted throughout its entire career. The farthest the Commission has ever done insofar as regulating program content is indicating it might have some authority over broad cate- gories of types of programs but never to my knowledge did it ever come out before the fourth report with a regulation which would de- pend upon the very nature and content of the program being pre- sented. Now obviously these are the only conditions under which even the Commission or the committee would allow pay television. Yet, both the proponents and the opponents of pay television have argued vociferously-not aM proponents but some-that these are unconstitu- tional if not illegal under the censorship provisions of the Com- munications Act. Commissioner Loevinger pointed out that under the committee's recommendation pay television might not be able to present the plays of Shakespeare because there are a series of interconnected plots or * they could be so defined. This kind of judgment would lead the Com- mission into a morass of programing judgments which they have here- tofore, I think properly, eschewed.. But in any event, the present act, I believe, does not give them the power to do it or at least there is a very serious question that the act gives them the power to dolt. Under these circumstances, how can it seriously be contended that the present Communications Act gives them the authority to authorize pay television? The very conditions which they think are necessary may not be within their power to impose. This would start litigation that I think would be with us for years on definition of programs. The chairman just touched one area of definition, whether the sports program to be prohibited must be within the community or through- out the country. That is just one of them, that is an easy one. I don't consider that one a particularly hard one. That is one of the easy ones. I don~t think the Commission really wants to do that in this way. Those are perhaps the main reasons why I don't think they have the power. Even if they did, I don't think they ought to do it before this committee at least would tell them to have the power. I am a lawyer with no particular repute and if I don't know the answers to the question it does not mean very much I don't think this committee knows the final answer to this question. It ought to be made very clear instead of leaving them in a morass of uncertainty. Secondly, the history of the Hartford test has made it clear that there is no demonstrthle demand for pay TV. The committee is un- doubtedly aware that the only instance in which this question was put to the people in California They voted it down by a sizable margin Later the courts struck down the legislation but I think the public reaction was at least indicative that there is no tremendous public de- m~.nd for this service. There has been only one test. Now the Commission envisioned a number of tests I think in the third report but there has been only one test run under the Third Report. PAGENO="0554" 550 If there was a demonstrable public demand isn't it logical to assume there would have been more than one? We should contrast this with CATV. The whole CATV industry developed in 3 or 4 years, burgeoning at a fantastic rate; almost unbelievable. There was a demand and need. The people demanded it and they got it. I don't think there is this demand for pay TV, not in Hartford. The average audience in Hartford was 267. It was less than 1 percent. Mr. Macdonald, you raised the question yesterday which I think is a very pertinent and excellent one. That is, aren't people like myself a little bit inconsistent saying on the one hand there is no demand, on the other hand it is such a tremendous demand that it will destroy free television? Certainly it does appear inconsistent. I don't think upon reflection it is that inconsistent because demand is a `strange thing. It can be created. Demand can be created by scar- city. Right now you don't have a tremendous demand for pay television because the people can get pretty much everything, virtually every- thing, that pay TV would offer, over free TV. You take that away from free TV and you will create the demand. That is the answer to the apparent inconsistency. It is the economics of scarcity which will create the demand that does not now exist.' Let me use a simile. If you banned automobiles today you would have the greatest de- mand for the horee and buggy that you ever saw in your life. If peo- ple don't have something then, of course, they will go to the vehicle from which they can get it. I think it is clear beyond doubt that you will not get the sports pro- graming that you have now. Here I would like to speak for a moment to the question that was raised yesterday about whether the pay TV people could put on pro football sports if it appears anywhere in the United States. I think that they can because the conditions that the committee wc'uld impose in the fourth report speak not about absence from free television any- where in the United States but absence from free television in the community. The proposed rule is section 73.643(b) (2). It says: Sports events shall not be broadcast which have been televised live on a non- subscription regular basis in the community during the two years preceding .the proposed subscription broadcast. I agree with the representative from ABC and from the NAB that tinder the conditions of the fourth report the home games can imme diately be sold to pay TV and they can withhold the away games for 2 years. They would not lose very much money. At the end of the 2 years they would `reap it all back. But I don't rely. strictly on legal interpretation. I think events have proven that they will `do this. The Los Angeles Dodgers and the San Francisco Giants kept their baseball games off free TV for years and they did it admittedly because they were looking forward to the pay TV bonanza which turned out did not result for many reasons but they certainly were willing to keep it off. In the face of that experience I think it is at least reasonable to argue that the proponents of pay TV would do exactly the same thing. Now what are the benefits to be gained? For years the proponents PAGENO="0555" 551 of pay TV have contended that you are going to get high-level, min- ority cultural programing, operas, ballets, this type of material. The i~ationale for pay TV was that you will get on pay TV the kind of minority programing you cannot get on free TV. The Hartford experiment did not prove a heck of a lot I think but it did prove this, you are not going to get this kind of programing on pay TV. You just are not going to get it. They had virtually none of the things that they promised in this area. It was movies and sports. I think it is realistic to conclude that that is what you are going to have if you authorize this as a permanent medium. I think the Commission was quite realistic in saying that we no longer would authorize it for this kind of programing, we will author- ize it for movies and sports. What about movies? Movies have been presented on free television in overwhelming proportions. The peop'e demand it, the people like it. It has gotten the highest ratings. The average age of movies has been declining. Movies of less than 2 years old have been shown and will continue to be shown. I think that what the imposition of pay television would have, the effect it would have would be to stop this development of better movies and would retard it. It would make it impossible, I think, to present the kind of movies that we are now getting over free television. As far as sports are con- concerned we have such a plethora of sports now on free television that it has even come in for great criticism. There is a plethora of sports. Are we going to deprive the majority of the American people of the ability to utilize a scarce spectrum for the presentation of a few more occasional sports programs? I don't think that is in the public interest. I don't think that this is what the Communications Act was set up to do. I don't think this is what this committee wants to do, to give entrepreneurs the use of a public facility to serve what would probably be a minority viewing audience in the higher economic class. I do not think it is justified. Now I think perhaps the most startling aspect of the Commission's fourth report was the institution for the first time of an economic discrimination in the use of broadcast facilities. Up until now the radio spectrum was available to all without regard to the income level, without regard to the ability to pay. Yet, pay television would divide the country along economic lines and I think the Hartford test also proved that it would eliminate from that viewing audience the lower 30 percent of our Nation in the less than $4,000 class. Now the committee said, we don't have to worry too much about these people because they still will be able to see plenty of free tele- vision. I find this argument very tenuous. In fact, the implications of it are kind of startling. What the Commission is saying is that for you people, the lower third of the Nation, you have ample television; but the wealthier, they don't. Because they don't, we are going to give them, m effect, the bonanza of pay television. This is a kind of Orwellian argument, all animals are equal but some animals are more equal than others. The lower third, you have enough, the upper two-thirds, you don't. HOw can this Commission come to this kind of judgment? How can they say you who have less PAGENO="0556" 552 than $4,000 have enough, when it is those people on whom television makes the greatest impact. I can't thmk I have to argue now at this late date that television is the theater for the poor. Television gives to the poor the kind of entertainment that was never available to the richest prince years ago. They are the ones who get the greatest benefit not only from what they see-it was very interesting to me during the riots they would take pictures of people who were looting. What were they taking? They were taking television sets. I remem- ber a very vivid picture of them taking those television sets out.. Why? Because this is their medium. This is the medium I think that you are going to deprive them of if you allow the authorization of a pay tele- vision system. Now I was very struck with th~ words of Congressman Celler yester- day. He also gave some details before the Federal Communications Commission. I think his concluding statement was quite eloquent. I beg leave to say that I adopt it. We should not authorize pay television. There is no benefit. It is going to increase the cost. It has such a potentially catastrophic effect on the free system that I don't think we ought to gamble on it because I think that effect will take place. You will not see what you now see free. I would like to conclude by perhaps speaking to a few of the points that were made by the other speakers. Mr. Wright, who was here, I respect, and he is very competent and his company makes the best television set on the market. He assures the committee that Zenith would never siphon off sports that are now seen on free TV. I think Mr. Wright is more than serious. He believes it. There are two problems that I could point out. One, Zenith is not going to be the licensee of the pay TV stations so far as I know. Zenith is the &iuiprnent manufacturer. The licensee will be the broadcast station. Flowing from that it is very clear that Zenith is not going to be the one who has the say about programing, not from choice but by law, because the fourth report has within it a condition which states and I would like to cite it for the record. It is section 73.642(e). It says: No subscription television authorization or renewal thereof shall be granted to the party under any contract, arrangement or understanding, expressed or im- plied, which among other things- And I skip- prevents or hinders it from or penalizes it for making a free choice of subscrip- tion programs, whatever their source. Zenith under the fourth report does not have the legal power to impose any such condition that they told the committee here they would follow. It is kind of ironic, you see, because that condition was the condition that was placed in the fourth report at Zenith's instigation. If you look at the bluebook that they gave to you, you will find on page 68 the Zenith proposal which says: No subscription television authorization shall be granted to a television sta- tion having any contract, arrangement or understanding, expressed or Implied, which prevents the television station from making a free choice of subscription programs whatever their source. PAGENO="0557" 553 Zenith can't impose the condition legally that it told the committee it wishes to follow. Let me say again, I think Zenith is quite sincere in what they are doing. But Zenith is not the only one in this ball game aside from the tact it is not the only system; there are other systems, aside from the fact that they can't bind their future managements. Now Mr. Brown raised a point I think, a very good one, to which I would like to address myself. The point was that we have so many UHF stations that ,are unallocated. How can you say that there is a demand for scarce spectrum space? Aren't you being foolish by using this argument when so many UHF stations lay fallow? That is an argument. But I think there is an answer and the answer is this: First, the great number of those stations which lie fallow are allocated to the smaller communities, not to the large ones; They are in very small towns. They would not be put into operation even if pay TV existed, the audience is not there. Some of them, over a hundred, are reserved for educational sta- tions. Someone pointed out earlier that perhaps with one or two exceptions there are no unallocated UHF stations in the top 51 in the United States. As a matter of fact, the last ones in Cleveland were just allocated after bitter fights. People are willing to spend thousands of dollars in legal battles to get the UHF stations in a big city. If anybody has an open UHF station in a large city and does not want it let him turn it in. I will guarantee there are four people trying to get it. There is no real shortage of UHF in the major markets which is in the com- munity where this would be issued. There are some arguments made by Mr. Ottinger, ~y others, by Mr. Preminger, that we need this because it is going to force competition. Pay TV is going to put in their best efforts. This will force the net- works to compete. 1 don't think so. Why? There are two reasons. The networks have frankly said if this is authorized we have a responsibility to our stock- holders, we are not going to sit by and let that bonanza flow to pay TV. Second, we will get into it from the production end. If this thing comes to fruition, they are going to produce program- ing. After all, that is their business. They are one of the greatest sources of program production. What makes anybody think they are not going to go into that business? They are in the business now. You will have the networks on the one hand trying to protect their investment in the free system, on the other hand they are going to be producing things to put on the pay television. Thus, what they feel will go on pay television they will put on pay television. What they feel will go on free television they will put on free tele- vision. It will be quite similar to the arrangement that used to be present in motion pictures before the Paramount decision. I think this argument about competition is a little unrealistic. Many members of this committee have rightly said, what is the Hartford experiment, what did they really do? Zenith gave you what they did in this blue book. One of the significant parts about the book is the date, it says March 10, 1965. PAGENO="0558" 554 Now this is 1967, so this is ~½ years old. Do you know they have not given any more detailed showing than this yet? We don't know what happened in the last 3 years in Hartford. The "Fourth Report" is based on the first 2 years of the 5 years' experiment. They have never given any more information than the program guide which I think they wish they had never given anyway. I would like to find out what happened in the past 3 years. I would like to analyze what we analyzed before. But we have not seen it yet. We know virtually as little now as we did 3 years ago. If anything, perhaps we should have some more experimentation. I would like to conclude with one last point: There is a kind of assumption among the committee that free TV is not free, and I think some of the committee members have doubt whether it is free. I don't want to indulge in semantics, it is not important., but I would like to point out that the theory that advertising represents an indirect charge to the public because the advertising costs are passed on to them in the cost of the product is a theory that is held by many people. I think it underlies the skepticism which this committee has in the word "free." I would like to point out to the committee that that theory is not universally accepted. There is a substantial body of economic opinion which holds that advertising reduces the unit cost of the product be- cause it creates the demand. That theory was, I think, set forth most recently in a book published in 1967 `by Dr. Jules Backman called "Ad- vertising and `Competition," in which he makes the point that the cost-price in volume relationships are very complex but that to the extent advertising is successful, total sales volume expands and may result in reductions in unit costs for production and overhead. In such cases total unit costs could be lower with heavy advertising' than without it. Jam quoting from page 143. I commend the book to the study of the committee because I think it sheds some light on this very complex question of the relationship between prices and advertsing. Incidentally, this theory was also put forth as far back as 1943 in other works, a book by Borden, called "Economic Effects of Advertis- ing" and a book by Sandage, called "Advertising, Theory and Prac- tice." I would like to conclude by thanking `the committee for giving me the privilege of appearing before it and expressing our views. Thank you. I shall be `happy to answer any questions you have. Mr. MACDONALD. On behalf of the committee I certainly thank you for coming here. I just have `two short questions. We have many other witnesses who are scheduled to be heard. Also, aren't you talking very inconsistently because as I understand from the title, you represent the National Association of Theatre Owners? Mr. GAYNES. Yes, sir. Mr. MACDONALD. Aren't they in the business of pay TV on occasion? Mr. GAYNES. If you are referring to the occasional broadcast of sports over the wire to that extent, yes. But that is not this business. Mr. MACDONALD. Has it worked out for you? Have you made money onit? Mr. GAYNES. I suppose some have, some haven't. Some have lost money on it. PAGENO="0559" 555 As a matter of fact, we have had some problems as I recall with short fights and people demanding their money back and breakdowns, there have been J?roblems One of the interesting things is, there is this difference, we build our own theaters. Mr. MACDONALD. You do what? Mr. GATNES. We put the money up to build our own theaters. The method by which we reach these people is by money we have expended. We don't ask the Government to build the theater for us. Mr. MACDONALD. I haven't heard of any, except the new bill that we have, I haven't heard of any TV station asking the Government to put up their station either. Mr. GAYNES. Because of the system we have they get the most im- portant aspect of their business virtually free, that is the license, the right to use public facilities. That is a kind of subsidy. It is only given that right because we are going to use it, or the television Stations are going to use it in the interest of public convenience and necessity which I think is all the people. The theaters are different. Mr. MACDONALD. You are talking about the poor people who are going to be robbed of their right to see things for free. I have never gotten into a theater free. Do you give away tickets to people? Mr. GATNES. No; we don't. We take our risks, we spend a lot of money on theaters. We spend a lot of money getting films in, we spend a lot of money on advertising. We hope enough people will come in on Saturday and Sunday to make up for the middle of the week when no one is in that theater. Mr. MACDONALD. My only question is what is the relative between your taking a championship fight or something you think can be sold to the public and what pay TV would do? It just moves it from the home into a large amphitheater. Mr. GAYNES. I think there are two basic differences. First, as I said we don't use public airways to do it. Mr. MACDONALD. You do. How does it get in the theater? Mr. GATNES. By wire. Mr. M4CDONALD. Whom do you pay? Mr. GAYNES. I don't know. I guess we pay A. T~&T. Mr. MAcDONALD. You know the thing we have kicked around, the Olay fight, in Phoenix that got blacked out because it was shown in the theater in Phoenix. isn't that correct? Mr. GAYNES. I am not familiar with the Phoenix situation but the people who blacked it out, I think, were the people who owned the rights to it. They felt they could get more money. Mr. MACDONALD. They could not have done it unless the theater peo- ple had pcrrnitited it to be done. Mr. GAYNES. That is true. Mr. MACDONALD. Aren't you talking out of both sides of your mouth? Mr. GAYNES. No, because I think the occasional theater TV pres- entation will not have the effect on the free TV system that this is going to have. I still say that we are not using the public airways. We were not given this theater on the representation we were goiwr to serve everybody. Aside from that, the occasional theater presentations how many times do we have it? It has not destroyed or even impaired free television yet. I don't think it ever will. It is a different kind of thing. PAGENO="0560" 556 Mr. MAODONALD. You are not talking about free TV, you are talk.. ing about commercial TV, isn't that right? Mr GAYN~S I will accept that I think it is a matter of impact In certain respects they are similar They are both in the entertainment business, but I think there are significant differences. I think the most significant differences for the purpose of this committee is the impact this will have on commercial TV. I think the impact of pay television over the air would be disastrous to it. Mr. MACDONALD. I will yield to Mr. Brown in a minute but I have just one other question which bothered me yesterday and it bothers me again today. You say that if the home games of professional football or baseball teams under the regulation are not used for 2 years, they would then become public property, shall we say, and could go on subscription Say the Redskins are going to play in Los Angeles. Although it is an away game for the Redskins, isn't it a home game for the Rams? So it still could be sold. Mr. GA~nti~s. I am not sure I understand your question. Mr. MACDONALD. I am not sure I understood any answers I got yes- terday in which it was said that if they sold the away game, it would automatically free them to become the property of subscription TV In other words, somebody will broadcast that game whether it is at home or away. Isn't that rig)it? Mr. GAYN~Is. Yes, somebody will. Mr. MAODONALD. If one-half of the contestants are from one city, why, isn't that the selling of their performance? Mr. GAYNDS. Yes. Mr. MACDONALD. Then how can it become subject to becoming public property and therefore able to be put on subscription TV after a 2- year period? Mr. GAYNE5. Supposing they take it off entirely, supposing the Redskins decided they are not going to show any games- Mr. MAODONALD. Somebody said yesterday that the league gets a certain amount of money and divides it into the number of teams that there are in the league. Mr. GAYNES. That is right. Mr. MACDONALD. Aren't they getting paid just as if they were on- Mr. GAYNES. Yes, the individual team. The individual team could say, "Look, I am not going to give you rights to my game at all, I am giving up my share of the pot, I am going to sell the home games to pay TV, I am going to make as much money. I don't want my away games to be put on at all." Mr. MAcDONALD. Do you think they could make that stick? Mr. GAYNE5. I think they could, yes. Mr. MACDONALD. The Redskins playing in Los Angeles against the Rams, they tell the Rams, "No broadcasting." Mr. GAYNES. I think the Rams would do the same thing. Mr. MACDONALD. Do you think the Redskins would tell the Rams not to sell their rights or vice versa? Mr. GAYNES. I don't know. I certainly envision conflicts that may arise. Let me say about conflicts in professional football between teams, PAGENO="0561" 557 they always manage to be resolved somehow. I think there would be agreements between them in order to do that. Because the future promises such a fantastic bonanza for them I think they are willing to take the short-term loss. Mr. MACDONALD. I don't want to sound like Johnny One Note and talk about sports all the time but that is the original question I asked the Zenith people. They said no, they would not do that. Mr. GAYNES. I know they said it and they meant it. Mr. MACDONALD. I am on your side in a way and yet I don't under- stand your answer. Mr. GAYNES. My answer merely is that I think the Redskins could say that we are going to stay off because I think the Rams would say so, too. I think every other group would say so. They would say we are foregoing all the money we would get from the network and each one of us individually will then sell our games to the local pay television station because we can make as much money as we could by getting our share of the whole pot. I am not saying this is going to happen tomorrow, obviously it won't because there won't be that many pay television stations but it will happen in 10 years. The minute you get a pay television station in every home city, at that point the team I think would be more than willing because it is again a question of creating demand They are creating a demand by their refusal to give it to the free television station. I think from their point of view they are quite right. They are not charitable organizations, either. They have to maximize their profits. I think the longrun benefits to them would be enough to do it. Let me say this, I would hate to be right. Mr. MACDONALD. Which-you hate to be wrong or you hate to be right? Mr. GAYNES. I hate to be wrong. I certainly have been that. But I would hate to be right which would be worse because you won't see pro football on television any more. It seems to me it is a terrible risk that you are running. Certainly it is a terrible risk-you and I can disagree on what these rules mean and their effect. I don't know the answer. If you don't know the answer, who does? Mr. MACDONALD. The FCC, I hope. Mr. GA~s. Oh, no. Mr. MACDONALD. Mr. Brown. Mr. BROWN. I would like to go through your written testimony here. I would like to ask for an expansion on a couple of points you raise. You mentioned that "A licensed pay television system permits the licensee to directly charge for the use of public facilities (the airways) without any governmental regulation of those rates, while at the same time depriving the public of the free service it previously enjoyed over the air." Now I am not sure I will accept the last part of that, but I would like to discuss the question of the use of public facility without regula- tion of those facilities. What about the U.S. mail? Mr. GAYNES. It is regulated. The rates are regulated. Mr. BROWN. The rates charged by magazines, newspapers, and others for their product is regulated by the Federal Government? 86-899 O-67---36 PAGENO="0562" *558 Mr. GAYNES. No; but the amount I have to pay to use the U.S. mail is. Mr. BROwN. Should we require the payment of the use charges by radio and television stations? Is that what you are suggesting? I un- derstood your suggestion to mean that we should regulate the advertis- ing rates. Mr. GAYNI~S, No; I am sorry. Then I have been misunderstood and I apologize. What I am saying is that right now you do not have the power to regulate the rates that will be charged by pay television stations to the user, to the individual consumer The $1 50 or so that the pay television station will charge the public under the present act the FCC does not have the power to say, "for this movie you can only charge no more than. $1.50." Mr. BROWN. It seems to me that is a little closer to telling Life or Esquire how much they must charge for their issue, for each edition which is sent through the mail rather than charging for the mail handling of that. If you say that we are charging for the use of the mail a certain rate-we have been all through this in the last couple days in the House-then ar~ you suggesting that we should charge for the use of the airways in some way? Mr. GAYNES. No. Mr. BROWN. But you are suggesting that we limit the charge which may be levied for the individual programs Mr. GAYNES. Yes. Mr. BROWN. Would you draw an analogy that we should be able to say to Esquire magazine, "You can only charge ~25 cents a copy or 35 cents a copy since you use the tnails"? Mr. GAYNES. No, I would not. It would raise very serious consti- tutional questions. Mr BROWN I wonder if there are not constitutional questions in volved here. Mr. GAYNES. Yes; there are very serious constitutional questions in- volved as to whether you could do that. The most serious question.- I know Zenith would get up and go to the Supreme Court and say you certainly can draw the same analogy you draw and they might win. If they won, there would be no regulation. I think that would be terrible because I think there is a difference between the use or the expenses which Life and Time have vis-a-vis the mailing rates, set against the total amount of their cost, and giving in effect a frequency to a station. They are not exactly similar but they are enough similar to raise very serious constitutional questions. If the constitutional question is resolved against regulation, a private entrepreneur can use a scarce facility for the use of all people, he could charge what he wants for it and there is no one in the world who could tell hini how much he could charge. I don't think that is the desirable result. You may be right. It is conceivable that you don't have the power to do it either. I don't think that is an argument for it. Mr. BROWN. You raise the question and I have some figures, Mr. Chairman, which I would like to put in the record. They relate to PAGENO="0563" ~59 the figures I presented yesterday although they are not exactly what those figures were. There is a slight variation. The figures I had yesterday have been corrected by the FCC. I would like to have them inserted at this point in the record. Mr. MACDONALD. Without objection, it may be done. (The information referred to follows:) UHF AND VHF CHANNELS ALLOCATED, AS OF MARCH 1966; OPERATING AND AUTHORIZED, AS OF SEPT. 30, 1967 TOTAL ALLOCATIONS AS OF MARCH 1966 UHF VHF Total Commercial 626 593 Educational 514 118 1,219 632 TotaL... 1,140 711 1,851 STATIONS OPERATING AS OF SEPT. 30, 1967 Commercial 128 498 Educational 73 74 Total 201 572 626 147 773 - CONSTRUCTION PERMITS AS OF SEPT. 30, 1967 Commercial 167 11 Educational 41 6 178 41 Total 208 17 225 Source~ Research Office, Federal Communications Commission. Mr. BROWN. These figures relate to the number of allocations of UHF and VHF licenses, the number of stations operating and the construction permits which have been granted. The total number of commercial stations only-we are not talking about educational tele- vision-as of March 1966 was 1,219. The total number of stations operating is 626 as of September 30, 1967, which is just slightly over half of those which have been allo- cated. The construction permits granted as of September 30, 1967, are 178. That still leaves a rather sizable number of stations, in the area of 450 or so, for which allocations have been made but which are not on the air. The question I would raise is this: You suggested that in the large markets everybody who has an allocation is actively pursuing that allocation. I don't have figures to verify or refute that. I, frankly, would doubt it because I recognize again that there are so many slots on my television dial here in Washington and it is a fair market, if it is not a fluent market, and they are not all utilized. I don't know about New York but I presume from what has been said that the largest market in the United States, New York, would, under your argument, have all of its potential channels in use. Now, is that correct? Mr. eAYNES. Yes; there is nO open channel in New York. Mr. BROWN. Are they in use? Are they broadcasting? PAGENO="0564" 560 Mr. GAYNES. Certainly all the VHF's, are. There is an educational UHF that is on. I know that everyone in Washington is in operation except for the one which is still in hearing and will go in operation right away. Mr. BROWN. They are broadcasting; is that right? Mr. GAYNES. Yes; I think they arc. The only one that is still avail- able I think i's channel 50 and that is in hearing status now. The Com- mission has not decided who is to get it. Mr. BROWN. In other words, the potential number of stations that could be on the air in New York City and in Washington are all now operating on the air? Mr. GAYNES. I can't say for sure but I think that is true; they are. If they are not on the air, in the case of Washington, it is because they have not decided who is to get the channel yet. May I speak to this? Don't be misled by the number of spaces you have on the dials. That does not represent the number of stations you can have in the community. It is limited by physics and by mileage separations. You have 12 VHF stations. You can't have 12 channels~ All you can have are the ones you have, four. The potential number of channels, in fact, the realistic number for most communities, is four or five~ including UHF. That is the total number which has been allocated. Mr. BROWN. Let us look at CATV. Could I pick up on my set here in Washington, with the proper grid system of projection, a pay-TV station from, say, Asheville, N:C.? Mr. GAYNES. You mean physically? Is it technically possible to do it? Mr. BROWN. Yes. Mr. GAYNES. Yes'. Mr. BROWN. Can I get all 12 of the VHF channels on my set utilized? Mr. GAYNE8. By CATV? Yes, you could. Not really because there are certain nondtiplication rules that would make it impossible. In other words, the way the Commission operates now, if you have a CATV system in Washington and you have the technical capability of bringing in the Asheville `stations it could not duplicate what the local stations now present. It would have to block out those stations. Mr. BROWN. Let us assume that Asheville, N.O., is not such a hot market for commercial advertising on television and somebody in Asheville, N.C., wants to put up a television station and support that station part of the time by subscription TV. Mr. GAYNES. This is a television station? Mr. BROWN. Yes. I wonder if it is not possible for him to extend his subscription market-and perhaps I should ask this of Zenith or the people who developed the system-by means of a combination of the system we have had described to us on pay TV and CATV, or cable coverage to Washington so that in Washington I have a choice of three or four of these pay channels plus the channels you are allbwed on the spectrum because of the physics you mentioned and so forth? Mr. GAYNES. I think the answer would be no because the Commission would not allow it. Mr. BROWN. Under the present ruling. I am just asking if it is physically possible. PAGENO="0565" 561 Mr. GAYN]~S. I think it is technically feasible because almost any- thing is technically feasible. Mr. BROWN. I go to this point because of the question you raised with reference to the fact that the small markets will not get pay TV and they will not get their channels utilized because of the limit of advertising support for stations in that area. Now I am pursuing a philosophy which came out of this committee and the FCC and that is that there is something good about making as many television selections as possible available to `the general public. If we follow that idea, then maybe some entrepreneur in my small community will want to put up a pay TV station and offer certain things on that station which might, through the cable system or some other system, satellite or whatever, be available in Washington, D.C., so that here in Washington, D.C., by whatever system there is to be used for pay TV, I can have a choice of tha~t channel out in my town which is not a big commercial market. Mr. GAYNES. Yes; it is technically possible. I don't believe it is likely because the' present Commission attitude is not exactly the atti- tude of "as many signals as you can possibly get." It really is as many signals as you can possibly get without destroying the health of the local stations. I think that though certainly what you say could be done, I don't see that it is a likely probability under the present regulatory scheme. Mr. BROWN. I don't want to destroy the health of the local stations. I want to give the local stations another source of revenue besides advertising. Let me go to two other points. You mentioned on page 10 that in California a decisive margin voted against pay TV by wire. Now is it ___-~j~ur assumption, legally or otherwise, that because there have been examples where over half the population decided that they did not want this system that therefore the system should be precluded? Mr. GAYNES. No; I do&t necessarily mean that, just because more than half the people don't want it does not necessarily mean you should have it. I think it is indicative of a lack of demand for the service so great that it should not be instituted now by the Commission in the face of the figures. Mr. BROWN. Do you have the vote? Mr. GAYNES. The margin was 3 to 2. The exact numbers I don~t have. It was a 3-to-2 margin. Mr. BROWN. I find some conflict as I read your written testimony and listen to your oral views and I just happened to be in `a place in your written testimony when you said something different that did not square. You say in the written testimony that "pay television will not in any way, offer additional cultural and high quality diversified minority- type programing, but would program for the mass audience, and would create no long-term improvement in either the quantity or the quality of television programing." And just about that same time you were saying that if pay TV is instituted, in addition to all the film makers we have in this country today you will have all the networks going into the movie business, too. PAGENO="0566" 562 That seems to be a broadening of production of programing. I would agree with your oral comment and disagree with the written views. Mr. GAYNES. I think that if you do decide to do this you will create the demand which now doesn't exist by the very fact that you are doing it. As of now, if you really protect the free system, I don't think there will be any beneficial supplement. But there will be a beneficial supple- ment if you take what we now have free off; yes. Mr. BROWN. Finally, let me suggest to you two things. I agree thoroughly with Dr. Backman that advertising does reduce the unit costs of products and I am all for it. That is part of the free enterprise system. I would like to know if there is an adverse effect on movie theaters from competition of free television because of the limita- tions in the size of the total available audience. You have not touched on this at all and I think it would be a very strong point in your argu- ment against pay TV. But I don't know if it would be; I would like to have the facts. What has happened to the number of theaters in the TJnited States since the institution of free television and what has happened to the theater audience that goes out to see a movie? Let me just make this one other point in that connection: Again it seems to me that if somebody put a buck in the set to watch it at home that it may be a little cheaper for all these poor folks everybody seems to be worrying about to be able to sit at home in their underwear if they want to without having to hop in an automobile and drive to the city to watch a first-run production and pay two bucks for the garage and three bucks for each theater ticket and so forth. Can you give us some statistics on the numbers of theaters and the numbers of people who pay to watch presentations in the theater and also the numbers of dollars spent in theaters with reference to free television which certainly, I would think, is a competitive factor in the theater business? Mr. GAYNES. I cannot off the top of my head give you figures. I will do so. I will say the number of theaters has declined but the num- ber I don't know. Mr. BROWN. The number of theaters, the audience in theaters and the dollars involved. Mr. GAYNES. I certainly will do so. (The information requested follows:) S MARCUS COHN, LAW OFFICES, Washington, D.C., October 18, 1967. Re hearings on pay television. Hon. ToiEmsar H. MACDONALD, Chairman, ~5ubeommittee on Commnnications and Power, House Interstate and Foreign Commerce Committee, Rayburn House Office Building, Washing- ton, D.C. DEAR MR. CHAIRMAN: Last week I had the pleasure of appearing before the Subcommittee on behalf of the National Association of Theatre Owners and the Joint Committee Against Toll-TV on matters Involving pay television. Members of the Subcommittee requested that, if possible, I furnish certain information concerning the effect of television upon motion picture exhibition houses. This letter is in response to that inquiry. 1. You inquired as to the relative number of motion picture theatres in the United States prior to and subsequent to the advent of free television. The infor- mation at our disposal indicates that in 1946 there were 18,760 motion picture theatres in the United States. In 1963 this number had declined to 12,652 motion picture theatres. While we do not have any definite figures available, it is esti- PAGENO="0567" 563 mated that at least 1,500 additional motion picture theatres have ceased opera- tion since 1963. 2. You inquired as to the relative number of persons attending theatres prior and subsequent to the advent of free television. Our information indicates that in 1946 82,400,000 persons per week attended motion picture theatres in the United States. In 1006 approximately 44,000,000 attended motion pictures the- atres per week. 3. You inquired as to the effect of television upon gross receipts. In 1946 the gross receipts of motion picture theatres In the United States totaled $1,800,- 000,000. In 1963 the gross receipts totaled $1,062,732,000. It should be noted that this drop of over $700,000,000 occurred despite an increase in admission price of approximately 150% from 1946 to 1963. 4. You asked us to supply any information we might have about the effect of the Hartford pay television experiment upon the motion picture theatres at Hartford. We do not have at our disposal specific or definite data concerning the effect on Hartford motion picture houses which can be definitively ascribed to the Hartford pay television experiment. In general, some small theatres in the' area closed, but at the same time new drive-in theatres were built around Hart- ford during the period of the experiment. As I indicated in my testimony, it is our impression that the Hartford ex- periment had no measurable effect, and not too much Impact, for two reasons: a. In most cases during the Hartford test the pay television station carried subsequent run features. b. More Important, however, the test was simply too small to have any discerni- ble effect. The pay television experiment never achieved anywhere near the 50,000 subscriber limit it envisioned in its application and, in fact, was able to attract a total of less than 5,000 subscribers'. Average audience was 237 sets. Even if 2,000 persons would have tuned in at Hartford to listen to a pay tele- vision feature, this is still a small number compared to the total number of seats available In Hartford motion picture theatres. For these reasons, we do not believe that the Hartford test was at all proba- tive of the effect which the institution of pay television would have upon the motion picture exhibition industry. I thank you once again for the pleasure of appearing before you. Sincerely, MAirrrs J. OAYNns. Mr. MACDONALD. Thank you, Mr. Brown. I think also when you are getting those figures, I have been very curious as to what effect the subscription TV experiment in Hartford had on the theaters of Hartford. I am sure you can get those figures as well. Mr. GAYNES. I can get those figures, but I can tell you now, it bad none. It was just too small. (See letter above.) Mr. MACDONALD. In other words, it had no effect on the theaters? Mr. GAYNES. I don't think it had a perceptible effect on the theaters. That is only because it was too small to have any effect. You have average viewing of 237. Mr. MAcDONALD. Then what are you so afraid about? Mr. GAYNES. I think it will have an effect. There is no question about it. If it comes it is going to come and it is not going to be 237 people. Mr. BROWN. How do you square that, that there is not enough de- mand, vis-a-vis the California thing? You have to be on one side or the other. Mr. GAYNES. The only problem is that I can't foretell the futur'e. I have to take what appears to look like an inconsistent position but this demand, I again point out, will be a created demand. It will be a demand that is there because you can't get it anywhere else. You are not going to get it on free television. You are going to create your own demand. Mr. MACDONALD. I don't follow that. PAGENO="0568" 564 Mr. GAYNES Right now I think you have a choice and, therefore, the demand is not present If you deprive the people of the ability to have that choice you are going to get a demand. You take those movies off free televisjon-~--_ Mr. MACDONALu. As I said yesterday is it not wrong to deprive the American people of having a choice? Mr. GAYNES. The American people are not deprived of having a choice because the producers of these programs, the ones who produce them, the manufacturers, are going to say we can by this device, the use of public facilities, desired by a minority of the audience, make more money than we could by doing it free. We are going to have a minority dictating what the majority can see, the choice to black out made by the producers the same way they choose to black out sports now. They are going to say, all right, supposing NBC makes a movie; they make a real blockbuster movie. They started to make that movie because they wanted to fill a time period 8 to 11 on the network. But they find out if they put it on pay television they will make five times as much. What will they do? Mr. MACDONALD. What is wrong with that? Mr. G-AYNES. That movie would have been seen free for the benefit of more people. What is wrong with it is that they are using, in effect, the roadway that was given to them by the Federal Government to do that. Mr. MACDONALD. Thank you very much. Mr. Lester W. Lindow, executive director of the Association of Maximum Service Telecasters, Inc. STATEMENT OP LESTER W. LIRDOW, EXEcUTIVE DIRECTOR, ASSOCIATION ~OP MAXIMUM SERVICE TELECASTERS; INC.; ACCOMPANI~ BY HENRY GOLDBERG, COUNSEL Mr. LINDOW. Thank you, Mr. Chairman. I am accompanied this morning at the witness table by Mr. Henry Goldberg, of Covington & Burhng, who represents the association, and who will be here to be of assistance if required. - My name is Lester W. Lindow. I am executive director of the Asso- ciation of Maximum Service Telecasters, Inc. (MST), an association of approximately 160 television broadcast stations, both UHF and VHF, commercial and noncommercial educational, serving urban and rural areas throughout the United States. MST is dedicated to the development, improvement, and expansion of our nationwide system of free, competitive local and area television broadcasting. In keeping with this goal, MST is opposed to the authori- zation of pay TV by the FCC. MST believes that such authorization would be fundamentally incompatible with the public interest in free television broadcasting and that free television service would be seri- ously impaired by pay TV. This position has been adopted by MST's membership and has bee.n stated in pleadings filed with the FCC in the pay television docket. MST's further comments on pay TV was filed on September 15, 1967. PAGENO="0569" 5f~5 At this time I would like to incorporate this latest pleading into the record. These further comments set out the details of MST's position on pay TV. I will discuss only the highlights and submit a copy for the record of these hearings, if that is agreeable, Mr. Chairman. Mr. MACDONALD. Without objection, it is so ordered. (The document referred to follows:) Before the Federal Communications Commissio~, Washington, D.C. (Docket No. 11279) IN TUE MATTER OF AMENDMENT OF PART 73 OF `rxii~ CoMMISSION'S RULES AND REGULATIONS (RADIO BROADCAST SERVICES) To PROVIDE FOR SUBSCRIPTION TELEVISION ~S'ERVICE Further Comments of the Association of Ma,~v1mum~ service Telecasters, Inc. On July 14, 1967, the Commission released the proposed Fourth Report and Order in Docket No. 11279, prepared by its Subscription Television Committee (hereafter "STY Report"). Although the STY Report took into account in- formation received during the entire period of this extensive proceeding, it was most directly based upon the data of the Hartford, Connecticut (WHCT, Channel 18) pay television experiment and the comments submitted to the Commission in response to its Further Notice of Proposed Rule Making and Notice of Inquiry in Docket No. 11279 (FCC 66-268, March 24, 1966). The Association of Maximum Service Telecasters, Inc. (hereafter "MST") filed Comments in this proceeding on October 10, 194i6, and Reply Comments on November 10, 1966. MST has opposed the authorization of over-the-air subscription television (hereafter "STY") because of its faith in the capacity of the present and potential system of free television to meet the public's needs, tastes and Interests. STY would sharply impair the ability of free television broadcasting to serve effec- tively all segments of the American public, including those unable to pay for television. At the same time, STY would not produce the "benefits," claimed for it. As we have previously pointed out, the basic public policy issue the Commission must decide is not whether STY should be given a chance to fail, but what would happen if it succeeds. Based upon the conservative estimates of the STY Com- mittee's Report, even though the STY penetration were limited to as small a figure as 16 percent of the nation's television homes and to revenue per year of only $105 for each subscribing borne, STY's annual revenues would be almost $1 billion. This is almost 50 percent of the total 1966 broadcast revenues of all three commercial television networks and their 15 owned and operated stations and all other commercial television stations in the United States! Revenues of these dimensions, which assume all of the "limitations" which the STY Com- mittee's Report would place on STY operations, would have a devastating effect on the ability of the American public to continue to receive what it now receives for free. Even such "limited" success would provide STY with financial resources of such a magnitude as to enable it to siphon from free television many popular programs now provided without charge. The Commission must determine whether it is prepared to permit this to occur by licensing television stations to serve, for a fee, only those who can afford to pay and who live in communities where the economics justify the establishment of STY. Further, many of the basic public interest issues, as well as the specific regulatory issues, raised by the Commission, which assume pay television on some permanent basis, reflect the fundamental incompatability of STY with the public interest in free television broadcasting and show further that free television would be seriously impaired by STV.a Discussion of some of these regu- latory issues and of the likely effects of the STY Committee's conclusions on each of them is for the purpose of demonstrating that fundamental incompatibility and inevitable impairment. Finally, MST continues to take no. position, at this time, on subscription tele~ vision by cable, except when it is combined with CATY. MST firmly opposes any such combination. a Since the Commission excluded the Issues ot whether It has statutory authority to authorize STV on a permanent basis and whether 5TV is broadcasting, MST will not coin- meat on these issues at this time. PAGENO="0570" 566 I. Basic Public Intere8t Issue8 A. STV WOULD NOT CONSTITUTE A "BENEFICIAL SUPPLEMENT" TO ETEE TELEVISION EROAI~OASTIN~ The Commission has long recognized that one central issue relating to per- manent authorization of STV is "whether subscription television would provide a beneficial supplement to the program choices now available to the public [on free television]." Indeed, the STY Report states that, "if the programming of STY is merely duplicative of types of programs now appearing on free TV in quantity . . . we would be inclined to agree, that it would not appear that other public interest considerations could justify the authorization of STY using broadcast channels." Since this is the determinative issue, it is ironic that, to the extent the Hart- ford experiment has proven anything, it has proven that STV must provide essentially the same type of programming as free television if It is to be at all acceptable to the public, and, therefore, an economically viable service. STY had always promised previously that it would give those willing and able to pay the opportunity to enjoy programming essentially different from that generally available on free television. In Hartford, movies and sports-which are provided in quantity by free television-accounted for 93.7 percent of the programming, with only 5.5 percent devoted to so-called "special entertainment programs." Movies and sports found the greatest public acceptability and this, rather than diversity, has become the sine qua non of STY financial viability. The STY Re- port recognized that STY programs would be largely duplicative of free televi- sion programs, since "the reality Is that the major part of the programming, as `opponents had argued, will be of a kind that would appeal to a mass audience." Aside from films and sports, under the STY Committee's proposed rules, STY would be able to carry all the entertainment programming now available on free television with the exception of series with "interconnected plot or stibstantially the same cast of principal characters Such programming, which has nttracted millions of families to television, could and would be diverted to STY. What then would STY offer as a "beneficial supplement," if it cannot offer the diversity and nonduplicative programming originally promised? With respect to feature films, which are expected to be 85 percent of STY programming, the STY Report states that STY would offer "recency"; not better films, not differ- ent types of films, just recent ones.° STY would allow those people who could afford it the opportunity to sell films in their home sooner than they could see them on free television. For this "beneficial supplement," the STY Report justi- fies diversion of scarce spectrum space and broadcast facilities to STY! "Re- cency" of films' on television is a function of the feature film distribution sys- tem. The elements of this system. are not immutable, although the' Report treats them as if they were. Film distribtuion practices have changed and continue to change and the trend has steadily been toward making better and more re- cent films available to free television. This trend is bound to be reversed if STY is authorized. Film distributors would doubtless delay the sale of such films to free television until they had a "run" on STY. Moreover, "recency" as such is not determinative as to whether STY films would in fact be a "beneficial supplement." "The Bridge on the River Kwai" was successful on free television not because it was recent, but because it was an outstanding, Academy Award winning film. On the Committee's own data derived from the Hartford experiment, it can be seen that "recency" is virtually ir- relevant; "the average subsc~iber paid $1.20 per week for programs whether 27 percent or 70 percent of the feature films shown on STY were first subsequent 1 First Report on Subscription Television, 10 ER. 150i1, ,1i520-2'l (1957). `STY Report, ¶ 47. `Moreover, most of the "special entertainment programs" (for example, drama, variety, and "night club" programs) are either alre'ac~y available regularly on free television or are essentially the sante kinds of programs that are now available on free television. Insofar as concerts aacl opera and ballet are concerned-the types of programs that used to be promised by STV-lt will be noted that a tOtal of only four concerts and four opera and ballet programs were presented In Hartford over the period of two years. STy Report, ¶ 50, at 19-20. It is important to note that even the proposed STY program rules lmj~ltcitly assume that STV programming would duplicate free television programming substantially. Granting this, the proposed rules attempt te prevent siphoning of programs from free television by STy. `STY Report, App. D, §73..64a(b)(3). See STV Report, ¶11 51-52. PAGENO="0571" 567 run." ~ Yet an illusory standard of "recency" is the only way in which the STV Committee expects 85 percent of STY programming would be a "beneftcial supple- ment" to free television. As for sports programming, the other major component of projected STY program formats, STY proponents stated that they would be able to offer heavy- weight championship fights and blacked out games.8 The STY Report treats this as rendering STY a "beneficial supplement" by offering sports events not regularly available on free television. Again the Report sees what free television programming is (or was) and concludes that this pattern must be present in the future and proposes rules to assure that it ~vill. But while these proceedings have been going on, an increasing number of heavy- weight championships and home games, which STY proponents said they alone would present, have become available on free television. The Commission must compare what the STY Report expects to be SPY's "beneficial supplement" with the programming that free television is offering now and can be expected to offer in the foreseeable future, and not what free television programming was when this proceeding began. Local free television stations and the national networks have responded to the changing tastes and needs of the public with flexible program formats, which include feature films; regularly-scheduled variety and dramatic programs and entertainment, news and public affairs specials; and many different types of sports events,9 With respect to sports events, free television has moved from the days when boxing, wrestling and baseball were the staples to coverage of many diverse types of sports.1° The STY Report recognized that changing sports programming patterns with respect to broadcast of home games, title boxing matches and soccer will create problems to which solutions are presently unknown.11 It would be much simpler for the proponents of STY if free television programming would re- main static, But, free, commercial television has consistently demonstrated its capacity, when demand is sufficient, to pay for very expensive sports,12 film features a and other programming. The All-Ohannel Receiver Act has greatly facilitated the growth of UHF broadcastin.g by increasing the percentage of homes that have television receivers capable of receiving UHF transmissions and, thus, encouraging the establish- ment of new UHF stations.14 Most of these new UHF stations are likely to be unaffihiated with the three major commercial television networks and will have to rely on diverse program sources. To be financially viable, these new UHF ~STV Report, ¶ 104. STV Report, ¶ 84. ° f~ec discussion of proposed STV program rules, in/ra. 15 When the Hartford experiment began, none of the networks presented professional hockey or basketball (over two-thirds of the Hartford sports presentations), whereas both are now presented on free television. One of the proponents of pay television said in 1955~~ "Nevertheless television today is not portraying certain outstanding sports events and is likely to do so less in the future." Comments of Skiatron Electronics and Television Corpo- ration, June 8, 1955, p. 42. Free television has proven this prediction to be Inaccurate. Some professional sports rely on free television to build up an audience for the sport. For example, professional soccer was on free television for the first time last season and pro- moters expect free television to help establish soccer as a popular spectator sport in the United States. 11 Iiee STV Report, ¶11 267-69. ~ E,g., CBS Television Network purchased the rights to broadcast certain National Foot- ball League contests, not including the championship, the Pro Bowl and the Playoff Bowl, for $37.6 million for two years. Broadcasting, January 3, 1966, p. 124. The NBC Television Network has purchased television and radio rights to the World Series, All~Star Games an8 weekly "Game of the Week" telecasts for the 1969, 1970 and 1971 seasons for $50 million. The Washington Post, August 5, 1967, p. Dl. ~ For example, recent trends show that some commercial advertisers are willing to pro' vide support to enable free television to show recent "blockbuster" films. The Ford Motor Company is paying $2.5 million to sponsor and promote the telecast of "Mutiny on the Bounty" on ABC in September 1967. New York Times, August 2, 1967, p. 59, col. 4. 14 Under the stimulus of the All-Channel Receiver Act, commercial UHF broadcasting has grown significantly. As of July 21, 1966, there were 122 commercIal UHF stations on the air (90 licensed and 32 with CP's) and 96 stations with CP's5 but not on the air. As of July 27, 1967, there were 126 commercial UHF stations on the air (101 licensed and 25 with CP's), 3 stations licensed,, but not on the air, and 135 stations with CP'~, but not on the air. Uon,pao*e Broadcasting, August 1, 1~966, p. 92, with Broadcasting, July 31, 1967, p. 106. UHF penetration figures show a rise of over 10 percent in 12 months; 22.8 percent of all television sets in the United States were equipped for UHF in August, 1965,. while 33.8 percent of all sets were so equipped in August, 1966. See U.S. Bureau of the Census, Cur- rent Housisg Reports-Housing Characteristics-Households With Television Sets in the United States, August, 1906, p. 2 ~February 19.67). Moreover, based upon data compiled by the American Research Bureau in February and March, 1967, out of 62 metropolitan areas in the United States in which UHF is a "significantf actor," 19 have UHF penetra- tion rates of 90 percent or more. See 7 TelevIsion Digest 29 (July 17, 1967). PAGENO="0572" 568 stations must "counter-program" against the affiliated stations and established independents in their markets by offering programs that appeal to public needs and interests presently unserved by those stations. This means that the new UHF stations do and increasingly will present feature films and sports events not otherwise available over the existing stations in their markets. The total effect of increased UHF penetration in all television markets will be to offer the public more diverse, free program services. It now appears likely that the role of noncommercial educational television broadcasting in terms of diversity of program content will be greatly strength- ened. The Report of the Carnegie Commission on Educational Television placed great stress on free, noncommercial television ("pubic television") providing the American public with programming of high quality, catering to diverse interests and tastes and not tied to the economics of satisfying a mass audience.15 Pro- posed legislation incorporating this concept of programming has been passed by the Senate.16 Chairman Hyde predicted that passage of the legislation would add 20 noncommercial educational television broadcast stations a year.17 Ultimately, almost all of the American people will be able to receive this new programming service free of charge. It can be seen, therefore, that free television broadcasting, both commercial and noncommercial, will continue to expand its programming to meet developing needs and interests. This development offers a much better prospect for bene- ficial supplementary program services than STY. By diverting stations that would otherwise be providing such services to pay operations, Commission authorization of STV would hinder realization of a beneficial supplementary free television service. STV would not supplement this expanded programming, but would, if allowed to develop as outlined in the STY Report, begin merely by duplicating free television programming and ultimately would siphon off the cream of present programming.18 B. 5TV COULD GENERATE ENOUGH REVENUES TO HAVE AN ADVERSE IMPACT ON FREE TELEvIsION Some parties have concluded from the rather disappointing results of the Hartford experiment that STV would not find sufficient public acceptance and support to make it economically viable, and, that, it should not be authorized for this reason. The SPY Report recognized that STY might have financial problems but recommended authorization of STY to give it a chance to succeed or fail. However, as we observed at the outset-the real issue before the Commission is not whether STY should be given a chance to fail but what would happen if it succeeds. ~ven though there is no public need or demand for STY because it would not offer beneficial supplementary program services, STY could use its economic leverage to procure the free television programming that is most successful in attracting the mass audience and siphon off the cream of this programming. The end result would be that, while there is no significant present public interest in or demand for STY, once established it would create and generate its own demand by siphoning programs that were available free of charge and "snowball" until it destroys free television. Would SPY have the success it needs to give it the economic leverage to begin this "snowballing?" As MSP has pointed out, SPY does not have to be very successful to impair free television. Even at its inception, with relatively little ~ "Public television" itself Is defined In terms of program content of wide ranging di- versity. It "Includes all that is of human Interest and importance which Is not at the moment appropriate or available for support by advertising, and which Is not arranged for formal instruction." Carnegie Commission on Educational Television, Public Television: A Progrc~m for Action, Introductory Note (Bantam ed. lfidT). 16 5~ 1160, passed May 16, 1967. 11 ~ee Testimony of Chairman Hyde before the House Committee on laterstate and Foreign Commerce, July 13, 1967. 18 Recent developments in the field of low-cost video recording and playback systems, whereby television viewers will be able to purchase television programs and play them back on equipment coanecteci to their home receivers, much like a long playing phono- graph record, may perform the limited function contemplated by the STV Report without using broadcast frequencies. ~ee Broculca~sting, August Z8, 1967, pip. 67-08. As one com- mentator has stated, with such equipment widely available, "the entertainment world presumably would have a means of leapfrogging over such complex systems as pay-as-you- see TV . . ., and directly tap the box-office potential of the individual viewing family Jack Gould, "Soon You'll Collect TV Reels, Like LP's," New York Timesi, September 3, 1~J07, p. P13. PAGENO="0573" 569 penetration, it could gain sufficient revenue to start the "snowball" rolling. For example, a local free television station is tied to cost-per-thousand economics. Based upon information available to MST, the national average station rate for prime time is $3 per minute per 1000 homes!. Therefore, an hour long program delivering 100,000 homes and containing 10 commercial minutes is, on the average, worth $3,000 to a commercial advertiser. On the other hand, any STY operation, even at its inception, enjoys "box office" economics, it "sells" programs to an audience and not time to an advertiser. Even if the SPY station has only 5000 or 0000 subscribers tuning in a program that sells for $1, it could outbid free television for that program, Once begun, the potential revenues of STY are almost unlimited. The STY Report has very conservatively estimated that STY penetration would be approximately 10 percent to 20 percent." On the STY Report's figures, there is a potential for STY being authorized in markets constiuting 80 percent of the nation's television homes or 45,100,000 television homes.'° At the 20 percent penetration rate, this would give nationwide STY a conservative total potential of approximately 9,000,000 subscribers, or 10 percent of the total television homes. Assuming only this level of penetration and the Report's low projected revenue of $105 a year for each subscribing home, this would give STY at least potential annual revenues of $945,000,000 21 ~f this, between $545 million and $630 million would be merely annual program revenue. ($65-$70 per year from each subscribing home.) The STY proponents estimate that 35 percent of annual program revenue must go to pay program acquisition costs; no reason is given why this should not be 35 percent of all revenue. However, even using this conservative estimate, SPY would have a potential of between $190,750,000 and $220,500,000 available each year with which to purchase programs. It must be pointed out that all of these figures are low. Once STY began to snowball, the penetration rate could rise to 50 percent or more. Moreover, the 35 percent estimate is largely mean- ingless. As the STY Report appreciates, if more than the 35 percent expenditure is required to purchase programming that would attract a large number of viewers as some parties believe, STY operators would pay more for the program and "could charge more for the bettor product." ~` In practice, once STY began to snowball, the amount available to STY operators for the acquisition of programming is limited only by what their subscribers would be willing to pay. Throughout the STY Report, great reliance is placed on what is described as the "healthy competition" between STY and free television that would result to the benefit of all concerned, But, the benefits of this competition are illusory because free television would not be in a position to compete effectively with SPY. In the first place the "box office" economics of STY, when matched with the cost-per-thousand economics of free television, would give STY enormous financial leverage with which to dominate program procurement both locally and nationally. In the second place, under the proposed rules, STY operations are not required to telecast the costly news, public affairs and other public service programs that are expected of free television and which free television provides in the public interest. Cbmpetition between free television and STY could have seriously deleterious effects if free television had to reduce its costly public service programming. In its initial Comments, MST showed that the financial resources derived from STY operations would not be used to aid marginal, free broadcast stations, largely UHF, because STY would be competing with free television for station time (even on the same station), audience, programming and talent. Even if we were to accept the somewhat dubious proposition that the revenues derived from STY operations would be used to strengthen free operations on the station, there would be only one healthy UHF station in the market; the STY-UHF station. The station.s that did not have the STY authorization would be severely injured by the one station with STY. 155TV Report, ¶ 149, at 52. ~° STV Report, a. 37, at 51. ARB estimates that there will be approximately 56,375,000 television homes by December 31, 1967, Buoadcasting, August 7, l!~67, p, 5!7~ 21 This is close to half of the $2.2 billion figure whIch represents the total 1966 broad- cast revenues of all three national commercial television networks, and their 15 owned and operated stations and all 50.3 other commercial television stations ia the United! States. Idee FCC's TV Broadcast Financial Data-1966, August 2t5, 1967. STV Report, ¶ 73. PAGENO="0574" 570 C. STV'S ADVERSE IMPACT ON FREE TELEVISIO~~~ WOULD BE LARGELY FELT IN TERMS OF PREEMPTION OF TIME, AUDIENCE DIVERSION, AND aIPHONING OF PROGRAMMING AND PROGRAM TALENT The STY Report correctly analyzes the potential adverse impact of STY upon free television largely in ternis of preemption of time, audience diversion, and, especially, siphoning of programming and program talent. However, these aspects of impact are distinct only for purposes of analysis and evaluating the possible effects of STY. In reality, these effects overlap and, in some instances, are cumulative; this is what creates the "snowball" effect. 1. Preemption of time The STY Report defines this possible adverse effect as the broadcasting of STY programs over a station that would otherwise have been broadcasting free television, programs. The Hartford experiment, operating with less than 5000 subscribers and incuring a loss of over $3 million, preempted approximately 30 hours of free television time each week. The STY Report assumes that this amount of preemption by an isolated STY trial operation would be the "maxi- mum number of hours which STY will show per week The Report con- cedes that even 30 hours per week could cause dangerous preemption of time in certain communities. The preemption is likely to occur in peak viewing hours ~ :~fld, thus, is likely to have a disproportionately adverse effect, since, such hours comprise segments of the broadcast day in which free television generates Its largest advertising revenues and the revenue necessary to sustain public affairs programs. Rules are proposed that are intended to minimize the adverse effects of preemption of time, but MST will show that the proposed rules would not do so. 2. Audience diVCt-S~On The Hartford experiment indicated that an average of 5.5 percent of the 5000 subscribers watched a single STY program. The Report generalizes this 5.5 percent "average rating" achieved by an isolated, fledgling STY station, into the "average" for an established, nationwide STY system and finds that even at a nationwide STY penetration of 50 percent of all television households, audience diversion would be minimal and dismisses the problem.'~ The Report acknowledges that some STY programs might produce very high subscriber Viewing (e.g., 82 percent in Hartford for a Clay-Liston championship boxing match) but equates this to "blockbuster" presentations on free television (e.g., "The Bridge on the River Kwai"). It states that "such highly attractive presentations are unusual," and concludes that the answer to such great audience diversion "might be better competing programming. ~" 26 But the Report is both inconsistent and un- realistic, In the first place, the STY Report justifies STY as a "beneficial sup- plement" for the very reason that it could offer programs of mass audience ap- peal both regularly and often. Certainly STY would make every effort to maxi- mize its audience and revenues. Those revenues would be used to divert programs and hence further audience from free television. By skimming off the cream of free television programs (including `movies like "The Bridge on the River Kwai"), SPy would make usual the "unusual" occurrence of large audience diVer- sion. The suggested answer of "better competing programming" on the part of free television is no answer if, through the feedback effects of program siphon- ing and `audience diversion, the amounts of such programming available to free television are diminished. Finally, the potential STY audience would probably be the same audience that has been the most devoted to free television programming. STY program- ming of 90 percent films and sports and 10 percent other light entertainment is not going to attract as STY subscribers those who have not been viewing free television. When STY siphons free television programming, the new subscribers would be those who comprised the audience for such programming on free television and are willing and able to pay for it when it moves to STY. ~ STV Report, ¶ 108. `The STY Report does not `recognize that the 541/2 hours per week per channel (s.e., total of 1031/2 per week) presented on the Etobl~oke pay television system might be more typical, though it does concede that "more than 30 hours of STY program- ming might be available to preempt free TV time STV Report, ¶ 1110. 241d at ¶ 108. 26~ee STV Report, ¶ 107. 26lbid. PAGENO="0575" 571 At the same time, families that could not afford to subscribe to SPY, would be depriived of programs they may now view free of charge.27 In this connection, it must be noted that Zenith-Teco submitted a table showing the breakdown of Hartford STY subscribers by family income level relative to the proportion of income for all families in the United States to support the argument that STV is not solely for the wealthy.28 The STY Report accepts this argument and even suggests that to the extent low income level families did not subscribe, they could not afford television sets, let alone STY.29 However, it is unrealistic to take the results of the Hartford experiment, with its 4,633 subscrIbers and its limited amount of programs, and generalize to a STV operation-situation in which there is an established, nationwide operation. But even accepting the validity of this generalization, the Zenith-Teco sta- tistics indicate that approximately 30 percent of all families in the United States could not afford to subscribe to SPY and the STY Report so concedes.3° The suggestion that such low income families could not even afford television sets is incorrect, when applied to the Hartford situation. The statistics for Hartford County show that 96 percent of total households are television households.8' Moreover, the percentage of low income families who did not subscribe In Hart- ford is probably greater than 30 percent, since Zenith-Teco did not break down the $4,000-$6,999 income level category. It may be that most of the 40.8 percent of the Hartford subscribing families fall into the upper reitches of this category. It must also be noted that, while 30 percent or more of Hartford low Income families did not subscribe to STY, STY at Hartford was not as expensive as it could be nationwide, since, to attract subscribers, program and decoder rental discounts were given.82 Moreover, an average weekly program expenditure of approximately $1.25 appears to be much lower than subscribing families would have to spend to view a substantial pattern of programming provided by a regular STY operation, rather than the experimental Hartford STY operation. 3. ~8iphoning of free television prograAn8nisMl and program talent The STV Report defines the program-siphoning effect as the diversion of pro- grams from free television to STY and concludes that some program siphoning, which would be contrary to the public interest, might occur. But the problem is much more severe than the STY Report indicates. It is well recognized that one of television broadcasting's greatest challenges is to secure an adequate amount of program material worth broadcasting.~ Therefore, free television is highly vulnerable to selective program and talent siphoning by STY. Program siphoning by STY would be inevitable when one takes into accoun.t that STY programming would be largely duplicative of free television programming. STY and free television would be competing for the same type of programming, with STY having great leverage because it could use its large financial resources for "selective" program siphoning and because it would need only a fraction of the audience needed to support free television programming to make it financially viable. Because of the very real danger of selective program siphoning by STV, the proposed rules are designed to minimize the adverse effects of that danger upon free television. MST will analyze some of these proposed rules below. It is somewhat simplistics to view the siphoning problem solely in terms of program siphoning. The danger Is also one of STY's siphoning performers, producers, directors, writers and other program talent from free television. The primary danger of talent siphoning is not that of restrictive contracts, which the STY Committee has said it will "view with a jaundiced eye."84 The more subtle, but real, danger is that STY would have the financial resources to tie a performer to STY without resorting to restrictive agreements. If STY can contract with such stars as Ed 27Tbe STV Report states that families in the low Income groups, who can afford tele vision sets, but not STV, "will be able to continue to see ample amounts of free program- ming so they will not be deprived of anything (STV Report ¶ 75) However this assumes that STV would not have the adverse impact on free television, in terms of siphoning free television programs, that MST submits it would. ~ ~ee STV Report, App. B, p. 2. STV Report, ¶ 74, at 25. 3° Id. at 25. 31 See 1007 Television Factbook, Services Volume, p. 56-a. 32 See STV Report, App. B, p. 3. 33See, e.g., Speech of Commissioner Lee Loevinger before Geneva World Conference on World Peace Through Law, p. 19 (luly ii, 1967). 3° STV Report, ¶ 27t. PAGENO="0576" 572 Sullivan, the Smothers Brothers, Carol Burnett, Johnny Carson, or Dean Martin for a season's variety series, the stars would not have time for regular free television variety shows and appearances, which are presently available regardless of whether the viewer is in the largest markets or can afford to pay a fee. No Commission rule could prevent against the danger of program talent siphoning by STY. IL The CommIssion Should Await an Eo,plicit Congressional Mandate Support- ing Authorization of STV On the basis of the public interest issues discussed above, MST urges that the Commission refuse to authorize a nationwide system of STY. However, at the very least, the Conimission should take no action with respect to such authorization without an explicit, affirmative Congressional mandateP When the Congress determined that an 82-channel television system is essen- tial to the public interest and, accordingly, passed the All-Channel Receiver Act, its determination assumed use of these channels for programming available to all of the American people. Use of some or all of these channels during some or all of the time for STY would cut into the effective number of channels found by the Congress to be required. for free television. Moreover, the radical change in the structure of television broadcasting that would be caused by authorization of nationwide STY should not be undertaken without explicit Congressional ap- proval. It is not sufficient to say that it is proper for the Commission to go ahead because the Congress did not act during the lengthy period that has elapsed while his proceeding has been in progress. The type of regulation proposed by the STY Committee raises issues of a kind that are more properly resolved by the Congress-an an~biguous Congressional silence Is not sufficient justification for the Commission to proceed. III. Specific Regulatory Issues Raised by the Commission When MST first filed Comments in this proceeding, it stated that, since it is opposed to STY under any conditions, it took no substantive postion on most of the issues and proposed rules specified in the Further Notice of Proposed Rule Making. This is still MST's position. The regulatory issues themselves, the STV Report conclusions on these issues, and the rules it proposes all demonstrate the fundamental incompatibility of STY with free television. Not even the complex regulation of STY proposed in the STV Report would prevent the adverse impact of SPY. Over and above the qucetion of whether the proposed rules offer the intended protection of the public's interest in a sound free television service, it is clear that undue govern- ment intervention into broadcasting would reach intolerable levels if nation- wide STY is authorized by the Commission. There follows a discussion of the STY Report's conclusions with respect to some of the fifteen specific regulatory issues posed by the Commission in its Further Notice of Proposed Rule Making. A. PROTECPION AGAINST PREEMPTION or FREE TELEVISION TIME ANt) DIVERSION OF FREE TELEVISION'S AUDIENCE 1. Five grade A signals-STY Report, paragraphs 144-52 and proposed section 7,~.642 (a) Proposed Section 73.642(a) provides that an STY authorization would be issued only for a station "the principal community" °~ of which is located entirely within the Grade A contours of five or more commercial television stations. The Report states that the proposed rule is primarily intended to minimize the °5 The question of whether the Commission should authorize STY without explicit Con- gressional guidance is not the Same as the question of whether the Commission should regulate CATY without detailed Congressional guidance, Like unlimited CATY, STY poses a substantial threat to free television system, now serving the American public. But, whereas Commission Inaction would have allowed unregulated CATV to disrupt e~tabllshed national policy, such diisnuption would be caused in the ease of STY only by a~flrmative act of the Commission. Thus, the same consideration-protection of existing national tele- vision policy-which justified prompt Commission action with respect to CATY-dictates at least awaiting Congressional judgment on SiTV. 3°While the proposed rules use the term "community," the STY Report constantly speaks of five station markets. ~8ee, e.g., STV Report, n. 38, at 50; and ¶IJ 148, 102, 164, 172,, 199 and 230. The precise intention Is not clear. PAGENO="0577" 5?3 danger of preemption of free television time by STY, and also to reduce possible audience diversion. The Committee believes that: "The rule protects against such loss [time preemption] in smaller markets. In the markets where it permits STY, it assures three network services and one independent service. To the extent that existing stations in. those markets offer STY, there will be a relatively small amount of time preempted. To the extent that STY operations occur on new stations, there will be no preempting at ~ These assumptions are incorrect; therefore the proposed rule would not accom- plish its intended purpose. *The proposed rule does not restrict STY to only the largest communities. Given the configuration of Grade A contour overlaps in many areas, there could be many smaller communities in which STV could be authorized contrary to the intent of the STY Report. Taking the southeas't coast of Florida as an example of such an overlap area, it can be seen that Channel 51 in Fort Lauderdale could be authorized as an STY station. Its principal community is served by the Grade A signals of five operating commercial television stations.38 The only channel allocated to Fort Lauderdale to provide local service would thus be preempted for STY. As a result of overlapping Grade A contours between different communities and television markets, STY would not be confined within the seeming limita- tions of the proposed rules, and certainly would not be restricted to the com- munities which have been selected for STY service. In addition, the mandatory service requirement within the Grade A contour of the free television service of the STY station,19 when combined with the Grade A overlap situation, would permit STY penetration into smaller communities. In sum, what appears to be a restriction of STY to the largest communities and television markets, is no restriction at all.40 To the extent that the Commission could devise a rule that would restrict STY authorizations to' large cities and guarantee that people in those cities would receive at least three network service's and one independent service, the rule would still not prevent preemption of free television time in those cities, where more people would be deprived of the time and more audience would be diverted to STY. It would also not protect the public from being deprived of the free service of a second independent or a fourth specialized, national or re- gional network amliate. Moreover, if free television is impaired in the larger cities, the effect of program siphoning would be felt in the smaller communities whose residents could not even pay to see the siphoned programs on STY. 2. Minimum free broa4east 1bours-~TV Report, Paragraphs 162-65 and Pro- posed ~ect~on 73.643(e) The limitation intended by proposed Section 73.043(c) is also illusory. The STY Report asserts that requiring STY stations to broadcast at least the' mini- mum number of free television hours required by Section 73.651 of the Com- mission's Rules, would assure adequate free programming for the public. At most, after three years of operation, Section 73.651 would require the STY au- thorized station to' broadcast only 28 hours of free television a week! The STY Report rejected limiting STY programming to' certain segments of the broadcast day; 41 therefore, there' is nothing to prevent the STY station fro'm scheduling its minimum free television hours in off-viewing hours and preempting prime time for wholly-STY operations.°~ ~ STV Report ¶ 148. `°° Three Miami stations, WCE3T (Channel 7,, NBC), WLBW-~TV (Channel 10, ABC) and WTVJ (Channel 4, CBS), and two West Palm Beach stations, WPITV (Channel 5, NBC) and WIOAT-TV (Channel 12, ABC). Data are compiled from the 196i7 `Television Factbook, Station's Volume, pp. 14a-b-145-b, 149-b--150--b. ~` STY Report, ¶ 230. ~° The seepage of STV beyond the seeming limitations proposed in the STY Report may be further accentuated when one takes into account the Report's conclusion that STV sta- tions may make the arrangements with CATV systems operating In the Grade B contour of the station's free television service to carry the scrambled STV signal of the station. with the prior approval of the Commission. STV Report, ¶ 309. The most likely effect of such arrangements would be that communities not eligible for direct authorization of STY would receive it Indirectly by CATV. There would be a corresponding diversion of audience from free television in those communities. °~ STY Report, ¶ 164, at 56. 4~ The Report recognizes that this would be a serious loss, since: "the effect fpreeznption of time] would be even more marked, for although the loss in terms of hours is the same regardless of the time of day when the preempting occurs, the loss in prime time would generally speaking be a loss of more popular programs." STV Report, ¶ 147. 86-399 O-67------37 PAGENO="0578" 574 3. One STV station in a com~munity-,s'qjv Report, Paragraph 172 and Pro- posed 73.642(a) Proposed Section 73.642(a) states that, "only one snch authorization will be granted in any community." The rationale of the STY Report is, "if more than one station should broadcast BTV programs in ~r single market more time could be preempted than we consider to be in the public interest at this juncture." ~ However, there are many communities (and even markets) in which ~TV pro- grams from more than one station will be aVailable. This restriction breaks down because of the interaction of the overlapping Grade A contour situation with the Grade A mandatory service requirement described above. As an example of the breakdown of this apparent restriction, it is possible that the Springfield-}Jolyoke, Massachusetts, television market would be required to receive the STY programs of three STY stations. Under the proposed "five Grade A" rule, STY stations could be authorized in Worcester, Massachusettsp and Springfield-Holyoke,'~ and WRCP in Hartford, Connecticut, could receive a permanent STY authorization. Therefore, there could be service required from three STY stations In the 7Sth television market. Under the STY Report's own rationale, the preemption of free television time caused in multi-STY signal communities would not be in the public interest. To the extent that a rule could be devised, or the present proposed rule administered, to limit STY authorizations to only one per Community or market, problems caused by the creation of STY monopolies in those communities would arise.4' Moreover, an entity representing a combination of these monopolies would be in a strong position to siphon free television time and divert free television audiences.47 The strong "group monopoly" leverage would pose a serious threat to the nationwide free television system, and not merely jeopardize the service provided the public by free television stations in the communities in which STY is authorized. It is not merely a question of what individual STY stations can do to free television, but what the combined efforts of all STY stations could do to free television with selected siphoning of programming and even at selected prime time hours. 11. GUARANTEE OF LICENSEE RESPONSIBILITY-STV REPORT, PARAGRAPHS 195-208 AND PROPOSED SECTION 73.642 (e) (1 )-(4) In Issue (7) of the Further Proposed Notice of Rule Making, the Commission posed two alternative means of assuring licensee responsibility for the STY operations carried on over his station, but the STY Committee chose neither in its proposed rules.~' The proposed rules basically apply the philosophy underlying the chain broad- casting rules to STY operations and prohibits the SPY stations from entering into agreements that hinder their free choice in procuring or scheduling programs and prohibits them from optioning station time. However, the proposed rules would allow for restrictive "networking" arrangements and option time agree- ments, in violation of this basic philosophy, upon Commission approval. The STY Report states that this is the "middle course" between regulation and no regulation.4' However, it is either no regulation at all or, if it is a meaningful restriction, it would involve the Commission in the day to day program~ acqui- sition efforts of STY stations and would result in an intolerable substitution of Commission responsiblity for the licensee responsbility, which is essential for a mature and independent medium, of communications. ~ STV Report, ¶ 172 (emphasis added). ~4 Worcester is covered by the Grade A's of the three Boston commercial VHF stations and by the Grade A of the Worcester station. 1967 Television Factbook, Stations Volume, pp. 329-b-332-b, 339-b. ~` Springfield and Holyoke are covered by the Grade A's of at last two Hartford, Con- necticut, commercial stations (WTIC-TV and WHNB-TV) and the Grade A's of two Springfield-Holyoke stations (WHYN-TV and WWLP). 1967 Television Factbook Stations Volume, pp. 123-b-124--b, 337-b-338-b. ~ The divisiveness in television broadcasting that would be caused by such rigid segrega- tion Is inconsistent with the premise of this proceeding, which the Commission has stated as being: "that subscription television on a nation-wide scale can be effectively integrated into a total TV system, with advantages to the viewing audience Further Notice of Proposed Rule Making and Notice of Inquiry, FCC 6Z-268, ¶ 16 (March 24, 1966). ~ The proposed rules would in no way prevent the establishment of such an entity. 48 To the extent that the proposed rules allow for the separation of STV franchisees from station licensees, they are inconsistent with the Commission's policy of strengthening licensee programming responsibility. STV Report, ¶ 204. PAGENO="0579" 575 In addition, one expected effect of allowing equipment manufacturers and STY franchisees to procure programs for STY stations' would be to create a "broader purchasing base" for STY programs, which might "be helpful in obtaining more and better mass-appeal programs, thereby aiding STY to achieve greater market penetration. . . ." ~° This' would lead inevitably to program siphoning and result in audience diversion. C. REASONABLE ChARGES AND NONDISCRIMINATORY SERVICES BY STV OPERATORS- STV REPORT, PARAGRAPHS 219-22, 226-30, 234-35, 238 AND PROPOSED' SECTION 73.642(f) (1)-(3) The Further Notice of Proposed Rule Making reflected the deep concern of the Commission that STy o'perations would lead to the abuses of rate gouging, and discriminatory and unfair treatment of subscribers. Because of these poten- tial abuses, the Commission considered a public utility type of regulation. However, the STY Report declined to propose rules regulating STY rates., leaving the protection of subscribers to the market place. The STV operator in each community would have the advantages derived from monopoly status, but would not be subject to regulation to assure that reasonable rates would be charged to subscribers. On the other hand, the extent of government involvement in television broadcasting, if the Commission adopted regulations such as those suggested in its 1966 Further Notice of Proposed Rule' Making, would be enormous and would constitute an unacceptable degree of governmental inter- vention in broadcasting, which would be contrary to the public's interest in a strongly independent television service. As a matter of principle, television broadcasting, like the other media of communication and information, should be left as untrammeled of government regulation as possible. The STY Report did, however, incorporate some of the principles of public utility regulation, when it proposed rules to guarantee noludiscriminatory service to the public by STV stations. Although this proposal is ohviously a compromise, it is a halfway measure which does not solve the Commission's basic delimma of having to decide whether to take no action at all to deal with the range of possible STV abuses that concerned it, leaving the public unprotected, or to develop, adopt and administer an extensive and far-reaching type of public utility regulation. This Hobson's choice, which still faces the Commission, is but another compelling reason for the Commission not authorizing SPY at all. P. PROTECTION AGAINST SIPHONING OF FREE TELEVISION I~ROGRAMS BY ,STV It is MST's position that, if STY is authorized, it should not be allowed to present the same kind of programming that free television presents, otherwise there would be no' limitation on the destructive impact of program siphoning from free television. However, MST recognizes that it would be most difficult to regulate the programming of STY, in order to prevent siphoning, without raising serious questions' of law and policy. At the very least, the rules propo'sed in the STY Report, and the conclusions found in the "legislative history" of those rules, would involve the Commission in detailed regulation of program- ming transmitted over broadcast facilities. The Commission would be' making decisions which it has consistently avoided in order to promote licensee respon- sibility and independent judgment.5° This further Hobson's choice between no STY program regulation, which would allow STY to have a severe adverse im- pact on free television, and complex STY program regulation, which would involve governmental interference with licensee programming responsibility, again leads MST to oppose any authorization o'f STY. Moreover, the rules propo'sed in the STY Report to prevent program siphon- ing by restrictive STY to certain types of programming are unrealistic an4 im- practical and essentially do not prevent siphoning of free television programming or program talent. ~° STV Report, ¶ 199. 51 See Report and Statement of Policy Re: Commission En Bane Program Inquiry (FCC 60-970), 20 HR. 1902 (1960). For example, under the proposed rules the Commission would become Involved in scheduling programs for broadcast! An STV operator would be required to get prior Commission approval before he can show more than one film over 10 year's old per week per month. See S(TV Report, n. 4G, at 87. PAGENO="0580" 5~6 1. Feature films and entertainment programs-STV Report, Paragraphs 246-52 aiM Proposed Section 711.643(b) (1) and (3) As MST has shown above, STY programming would be substantially dupli- cative of free television programming. This becomes all the more apparent when one considers the proposed rule restricting STY to the broadcast of feature films within two years of the date on which they have been given general release to any theater in the United States. Feature films would be the major type of pro- gram on STY; they have long been a major program category on free televi- sion. In the 1967-68 television season, the three networks alone will be presenting feature films six nights a week, in prime time, or 12 hours of prime time each week.~ Contrary to what the STY Report indicates, a "recency" rule is no pro- tection against such films being siphoned from free television. Of 130 films scheduled by the networks to be shown in prime time during the 1967-68 season, it appears that approximately 20 percent would be eligible for presentation on STY.~ As MST has shown above, given the potential revenues of STY, STY could consistently outbid free television in the competition for recent films. Moreover, the proposed rules allow older films (more than 10 years from the date of general release), "which might or might not be available to free TV," ~ to be presented on STY. Approximately 12 percent of the public listing of 130 fea- ture films to be shown by the three networks during the 1967-68 season appear to fall within this category.55 Therefore, comparison of the proposed rules, which are intended to prevent siphoning of films from free television, with the films to be presented by the three networks in one season, shows that approximately coie-third of those films could be siphoned from free television by STY.5' Films in the category of older films eligible for STY comprise a significant part of the film acquisitions of local stations and are the mainstay of many independent UHF stations, which are mbst vulnerable to the adverse impact caused by STy.57 Moreover, the STY Report's basic conclusion about the ability of free televi- sion to obtain recent films, "because free TV cannot pay enough to cover produc- tion costs and potential box-office revenues that would be lost because of the free TV showing," is doubtful,58 For example, CBS "plans to televise four or five feature-length films it will produce for TV and subsequent theatrical release."59 The only type of free television programmin.g for which the proposed rule offers complete protection is television series with interconnected plots or sub- stantially the same cast of principal characters. However, recent data show that this type of program is becoming less and less important, in prime time, to free television.60 One cause of the decline is that the series cannot compete successfully for audience with feature films and specials,61 The former will com- prise the great majority of STY programming and the latter will be open to STY. The entertainment programs that are becoming more important to free televi- sion would not be protected from STY siphoning by the proposed rules! The STY Report states that "it is conceivable that this [the proposed rule] still leaves some types of programs open to siphoning 62 A review of the 1967- 68 free television season proves this to be an understatement. The three networks 62VaAriety, July 26~ 1967, p. ~fT, col. 2. ~ Variety, July 26, 1967, p. 39, cois. 4-5. Since the networks will broadcast some 180 films during the regular sea~on, this listing Is incomplete by 50 films. These 50 film~ may well be the more recent one~-wblcb, for competitive reasons,, the networks are not willing to publicize so far In advance of their presentation. ~ STY Report, ¶ 252. 5' ~See Variety, July 26, 19'6'7, p. 39, cols. 4-5. 5' Moreover, a review of every feature film that has been televised on any network from September 1961 through December 1966 shows that, using January 1, 1967 as a base date, approximately 41 percent of those films fall into categories that are not protected from siphoning by STY. ~ee Television, September 1967, pp. 76-86. ~7 There are indication's that many of the older films,, even pre-1948 films, are still very popular with the viewing public. ~ee Broadcasting, September 4, 1967, p. 5.. The ratings of many of these films further show that, contrary to the conclusions of the STY Report "recency" is not the most attractive characteristic of feature films. 5' STY Report, ¶ 51. ~ New York Times, August 2, 1967, p. 59, col. 4 (emphasis added). The comment has been made that the viewers do not like films produced for television and prefer films, made for theater release. `STY Report, n. 23, at 18. However, of the seven films telecast during the 1966-67 season which received the highest audience rating, three were produced especially for free television. ~ee Variety, July 26, 1967, p. 43'. 60 ~ee Variety, July 26., 1967, p. 27, col. 2; New York Times, August 2, 19'67, p. 59, cols. 1-4; The Washington Post, August 4, 1967, p. Dli, cols. 1-2. 61 Ibid. 62 STY Report, ¶ 114. PAGENO="0581" 577 are planning more than 150 dramatIc and entertainment specials.~ There will be at least five or six specials every week during the 1967-68 regular season.64 In addition to "special" programs, which could be siphoned by STY, there are many regular free television programs that do not fall within the protected series category. Such popular variety shows as "The Ed Sullivan Show," "Hollywood Palace," "The Dean Martin Show," etc.; dramatic shows appearing on "The Bob Hope Theatre," ABC's "Stage 67," NBC's "Experiment in Television," etc.; and various musical programs all may be siphoned by STV.~ This is not the kind of problem that can be brushed aside by praising competition and leaving it to the market place.5' As MST has shown, the "box-office" economics of STY would con- sistently allow it to outcompete free television for these programs, and, more important, for the talent that makes such programs possible. Programs in these nonprotected categories of "specials" and variety shows are often the only types of programs with which networks can counter the feature films appearing on rival networks.°~ Therefore, the proposed rules would offer no protection to the programs which may be free television's only defense against the feature films presented on STY. 2. S'ports event s-$TV report, paragraphs 256-70 and proposed section 73.643(b) (2) The proposed rule on feature films available for presentation on STY would not protect against siphoning, but it at least has the advantage of being rela- tively clear. The proposed rule on sports programs does not even have this ad- vantage.68 If these highly complex proposed rules are adopted, the Commission would find itself involved in endless disputes as to whether certain sports events are protected from siphoning by STY and would still not accomplish the in- tended purpose of protecting against siphoning of sports events which the public now can, or in the near future would, see free of charge. In essence, the proposed rule provides that, "sports events shall not be broad- cast [on STV] which Mve been televised live on a nonsubscription, regular basis in the community during the two years preceding their subscription broad- cast. . Under this rule, any sports e'vents conid be siphoned from free television by ~S~TV. All that a STV entrepreneur would have to do would be to arrange to black out a sports event in a certain community. The next year, and for every year thereafter, the event could be presented by STY in that community. Such situa- tions would be likely to develop, since the STY operator would have the financial resources with which to persuade those holding the television rights to sports events to withhold the event from free television for one year to cash in on the SPY revenues. Moreover, this siphoning would not have to be undertaken by STY on a large scale to be successful. Selective siphoning of a few of the most popular sports events could be undertaken community by community until the event is withdrawn, from a large number of people across the nation who could not afford STY or who are not served by STY.7° In some communities, popular, specific sports events have already been blacked out in the communities in which they are played, and STY would only have to outbid free television for the right to broadcast that event in that community next season when it would not be blacked out! For example, under the proposed rules, the NFL-AFL "Super Bowl" could be carried by an STY station In Los Angeles in January 1968 or January 1969, since Los Angeles was blacked ont for the "Super Bowl" in January of 1967. The whole category of taped sports programs is not protected from STY siphoning. Sports events originating in foreign countries, such as the Euro- pean Grand Prix automobile races, that may be taped for rebroadcast in the United States because of the time differential, would thus be available for STY. 64 150 additional specials will deal with news and public affairs. New York Times, August 2, 1967, p. 59, col. 1. 64 Ibid. 64 It must be noted that many of the fine dramatic and entertainment programs appear- ing on noncommercial television would also not be protected from siphoning by STV. 68 See STV Report, ¶ 276. 61 New York Times, August 2, 1967, p. 59, cols. 3-4. 68 The STV Report seems to concede this. See STV Report, ¶ 276. 69SpV Report, App. D, Section 73.643(b) (2). ~° The fact that the Commission might expect that the hue and cry that would arise if popular specific sports events were siphoned from free television would move the Congress to prevent this from happening is no reason for the Commission to abdicate its responsi- bility to protect the public interest. PAGENO="0582" Iii addition, the whole category of sports events that are n~ot now regularly broadcast on free television could be shown for a fee on STV. If STV were authorized five years ago, professional golf would probably be on STY and millions of viewers would not be able to see it free of charge. Under the proposed rules and absent contractual restrictions, professional soccer could be siphoned to STY next season, since last season was its first on STY. The point is that free television, in its sports and other programming, has shown great flexibility in seeking out new attractions to present to the public. The proposed ru~les as to sports events would tend to cast free television in a rigid mold of certain types of sports programming and deprive viewers, who would not be served by STY, of viewing different types of sports attractions. Sports that are not presently regularly shown on free television could also provide a program source for marginal UHF stations and could lead to the establishment of specialized sports networks with those stations as the affiliates. A specialized network, perhaps one that could offer a baseball game every week night during the baseball season, could develop if there were an "extra" UHF station in the major markets and an independent UHF station in the other markets.E If the sports events that such a network could offer are already com- mitted to STY, no such supplementary free television services could develop. Aside from the substantive provisions, the lack of clarity in the proposed rules raise other siphoning problems. For example, it is not clear how many games or matches of a specific event must be broadcast by free television to constitute a "substantial number," so as to protect that sports event from STY siphoning. There is also ambiguity with respect to the effect of the proposed rules as to limitations on STY presenting categories of nonspecific sports events. It appears that the STY Report proposed limitations on STY's ability to present entire categories of nonspecific sports events. In this way the proposed rules would distinguish between specific events, as to which there would be limitations for each event, and nonspecific events, as to which there would be limitations for each category of such events. If "a substantial number of events in a category were not televised in the community, the category will be considered not to have been regularly televised therein and STY may show the contests rn that cate gory." 72 Assuming that the converse is true, if a substantial number of contests in a category were broadcast on free television in the community, STY would not be permitted to broadcast any of the contests in that category over and above those broadcast on free television. However, the examples set out in Paragraph 267 of the STY Report would seem to indicate that free television would have to broadcast all of the nonspecific events in a category in order to preclude STY from siphoning the games that had been broadcast on free television. In one example used, "some, but not all" home baseball games of the Washington Senators were regularly shown on free television. The STY Report Indicated that STY could present the balance of the games in that category "above and beyond" the average number of games. broadcast on free television for the preceding two years. This appears to be inconsistent, since "some, but not all" may be a "substantial number." If the latter interpretation of the proposed rules is correct, there would appear to be no distinction between the STY limitations upon presenting specific sports events and nonspecific sports events. If such were the case, there would be no limitations on program spihoning by STY. A STY promoter would be able to use his economic leverage to purchase the balance of the games in a category and present them without delay. For example, a baseball team may play 80 home games and an average of ten to twenty each year may be regularly broadcast on free television in the home community. STY could purchse the television rights to the other 60 to 70 games the very next season, while the games pre- viously broadcast by free television could be withdrawn by the ball club during that season so that they, too, could be made available to STY the following year, thereby immediately depriving the public of any home games broadcast on free television. F~. APPLICATION OF COMMISSION'S BROADCASTING RULES TO sTy-STy REPORT, PARA- GRAPH 286 AND PROPOSED SECTION 73.643 (d) If STY is authorized, MST sees no reason why the provisions of the Coni- munications Act and of the Oommission's Rules which govern free television 71 Øf course, if the "extra" TifF station is engaging in STy operations, it would most likely be lost to a free television specialized network, 72 STV Report, ¶ 266, at 93 (emphasis added). PAGENO="0583" 5,79 should not also govern STY. For example, these areas include the three-year license period (Section 307(d)), political broadcasts (Section 315) ,n rebroad- casts (Section 325), exemption from the prohibition of unauthorized publication of communications of radio broadcasts (Section 605) and the fairness doctrine (as to the legality of which MST takes no position). F. OTHER SPECIFIC REGULATORY ISSUES 1. Uomrnercia~ csnnounoemcnts-STV Report, Paragraph 275 and Proposed Sec tion 73.643(a) The STY Report recommended that commercial announcements of any kind be prohibited during SPV programming hours. MST supports this recommen- dation but, as MST pointed out in its initial Comments, advertising on STY would be likely only after free television had lost the battle for broadcast time, audiences and programming. At that time, retaining the prohibition against commercial announcements on SPY might not be in the public interest; the de- mand for STY to fill the advertising void left by the impairment of free televi- sion might be irresistible.74 Instead of waiting until it is too late, the Commission should face the fact that STV threatens ultimately to impair free television to the point of destroying its essential advertising role In the economy of the nation. 2. UATV and STy-STy Report, paragraphs 306-12 The STY Report made a threefold distinction concerning the relationship of CATV and STY: (1) STY systems in which the programs travel entirely by cable from the studio to the sets of subscribers, (2) CATY systems which, in addition to their traditional function of receiving and. retransmitting free televi- sion signals, also originate STY programs that are distributed by cable to sub- scribers, and (3) CATY systems which, in addition to their traditional functions, transmit over-the-air STY programs which they have picked up off the air or by microwave. MST takes no position on the first category, which is purely closed-circuit STY. Although there was no recommendation in the STY Report concerning Com- mission jurisdiction over the seco~ld category, it is incorrect to state that there are presently no STY operations in the Unled States in this category merely because the program originations of some CATV systems are made available to suiscribers at no additional charge. The program origination by some CATV systems at present,75 and the much greater program origination that CATY systems plan for the future, is wired STY and it is totally Irrelevant whether payment for those programs is made by the program, by the day or by the month. Nothing compels SPY operators to charge' by the program. Indeed, STY pro- moters have indicated that there might be STY stations that sell "magazines" of programs.76 A's MST has stated in the past, program origination over CATY systems is a form of pay television and MST is strongly opposed to such opera- tions. The Commission recognized in its Second Report and Order on OATV, that CATY should not be allowed to use free television programs as the financial base for STY operations, which would impair free television. If wired STY is to be authorized, it must succeed or fail upon its own merits and not use revenues derived from exploitation of free television programs as a stepping stone. With regard to the third category of combined OAT'Y-SPV operations, the rules proposed in the STY Report would allow SPY stations to make arrange- ments, upon prior Commission approval, with CATY systems operating in the station's Grade B contour to carry the STY programs of the station. As dis- cussed above, such arrangements would have been the effect of broadening the adverse impact of STY on free television beyond the apparent limits pro- posed in the STY Report. ~ However, a licensee's Section 315 and fairness doctrine responsibilities for pay pro- gramming should apply Independently of its responsibilities for free programming, so that, for example, a station should not be able to balance a candidate appearance on STV against a candidate appearance on free television. ~ The fact that STV proponents have not proposed commercials is irrelevant. CATV proponents disclaimed any such intent, but some are now selling commercial time. See Broadcasting, July 4, 1967, p. 30; Hornberger, "Your Friendly Neighborhood Video Chan- nel." 23 Television 45, 71, 74 (December 1966). 7'For example, International Artists, Inc. is selling films foi- program origination on CATY. Agreements have been signed with, 27 CATV systems, with 12.5,000 subscribers. (IATV Magazine, August 7, 1967, p. 10. ~°Broadcasting, July 24, 1967. D. 42. PAGENO="0584" 580 Wherefore, the Commission should not authorize over-the-air subscription television on any basis, uniess the Congress explicitly directs such authorization. Respectfully submitted. ASSOCIATION OF MAXIMtM Sisnvioz TELRCASTERS, INC., By ERNEST W. JENNES, By hENRY GOLDBERG, Attorn~eys. SEPTEMBER 15, 1967. Mr. LINDow. If you review the history of the pay television pro- ceeding at the FCC and the results of the Hartford pay television ex- periment, it is clear that a nationwide system pay TV would represent a drastic, fundamental change in the system of American broadcasting as we know it. The most apparent change is that viewers would have to pay, whether by the program, day, week, or month, for the oppor- tunity to see television programs they now see free of charge. The imposition of program charges would mean that pay TV would be available only to those who could afford to pay such charges and who live in communities where the economics justify the establish- ment of pay TV. The FCC has concluded that such pay TV "narrow- casting" constitutes "broadcasting" under the Communications Act and is, therefore, within the Commission's jurisdiction. But this asser- tion of jurisdiction is of doubtful validity. In any event, by asserting jurisdiction over pay TV upon such grounds, the Commission is faced with a very serious dilemma. On the one hand, it is trapped by its conclusion that pay TV is "broad- casting" and thus its rates and related practices cannot be regulated. On the other hand, the Commission is aware that authorizing pay TV on a permanent basis without the type of control imposed upon public utilities would create dangers of rate gouging and other serious abuses to pay TV customers. And the dilemma becomes even greater because the imposition of such controls would result in an intolerable degree of governmental involvement in television. Furthermore, under the rules proposed for pay TV authorizations, pay TV would be regulated primarily in terms of its programing content, even to the extent of regulating the scheduling of certain types of programs. This would involve the Government in an area in which, as a matter of law and policy, it clearly should not be. On the other hand, without adequate regulation of program con- tent, pay TV poses the danger of severe adverse impact on the service the public receives from our present system of free television broad- casting. Many segments of the American public would be deprived of the free television broadcast service that they now receive free of charge. This is another regulatory dilemma which merely points up the drastic change in our television system that authorization of pay TV would involve. Given these radical changes in television broadcasting that pay TV would involve, MST believes that, even if it has jurisdiction to au- thorize pay TV, the Commission should not act without an explicit and affirmative mandate from the Congress. When it enacted the All-Channel Receiver Act, the Congress determined that an 82-channel television system is essential to the public interest. This was a determination that these channels would be used for all, the American people, not just those able to pay. Use of some or all of these channels during some or all of the time for pay TV would PAGENO="0585" 581 reduce the effective number of channels found by the Congress to be required for free television. The FCC should not proceed with a course of action that represents a fundamental modification of the structure of television broadcasting without explicit congressional approval. The report of the FCC's Pay TV Committee justified proceeding without such approval on the ground that the Congress was allowed a sufficient amount of time in which to make its views on pay TV known to the Commission. Even if the Commission were faced with an ambiguous congressional silence, this would not be sufficient justifi- cation for it to proceed on issues of a kind that are more properly re- solved by the Congress. However, the congressional reaction to pay television since the FCC first began consideration of it in 1955 can hardly be characterized as "silence." The resolutions of this committee and these hearings are indications of the vital interest that the Congress has taken in pay television. Of course, the question of whether the FCC should authorizç~ pay TV without explicit congressional guidance is not the same as the question of whether the Commission should regulate CATV without such guidance. Like unlimited CATV, pay TV poses a substantial threat to existing free television service. In the CATV situation, how- ever, Commission inaction would have allowed unregulated CATV to disrupt established national policy. With respect to pay television, such disruption would result from the affirmative action of the Commission. Thus, the same consideration which justified prompt Commission action with respect to CATV should require deference to the judg- ment of Congress with respect to pay TV. It is significant to note that, in its second report and order on CATV, as to the CATV operator who originates programing, the Commission specifically refused to hold that this type of pay television is in the public interest and stated that it would seek guidance from the Congress. One obvious question that must be answered is what advantages of pay TV could be expected to outweigh its adverse effects on our pres- ent system of free television broadcasting. When pay TV was first pro- posed, and indeed before the committee earlier this week at least one of its supporters promised that it would serve the unique and diverse programing tastes and interests of minority audiences, audiences which the pay TV proponents said were unserved by free television. This was to be a "beneficial supplement" to free television. However, to the extent that the Hartford pay television experiment can be relied upon for anything, it has completely ended this myth. The pay TV report repeatedly recognizes that pay TV must provide the sames types of programing as free television if it is to be at all acceptable to the public and, therefore, a financial success. TJnder the proposed rules, feature films and sporting events, which are provided in quantity by free television, may comprise 90 percent of pay TV programing. Furthermore, the Hartford experiment shows that the balance of pay TV programing would not be made up of the so-called cultural programs that were promised, but would be made up of drama-not necessarily Shakespearean drama-variety shows and entertainment programs appealing to mass audiences. PAGENO="0586" 582 I might mention that, of the so-called cultural programs that were to be the staples of pay TV, a total of only four concerts and only four opera and ballet programs were presented in Hartford over a 2-year period. There is little doubt on this point. The report of the FCC's Pay TV Committee recognizes that pay TV programs would be largely duplicative of free television programs. It states that "the reality is that the major part of the programing, as opponents had argued, will be of a kind that would appeal to a mass audience." (STV Report, para. 56, at 19-20.) The other day, Mr. Wright, of Zenith, when he was before you, did not even mention diverse cultural program offerings. You hear this from other proponents of the pay TV who have not operated a sys- tem over a period of 3 or 4 years as Zenith has but you don't hear the promises of culture from the experienced people who have seen the balance sheets. Previously, Zenith talked culture but they sold movies and sports. Now they talk "free enterprise" and "competition," but they still sell movies and sports. It is somewhat ironic to hear this kind of argument from a business entity that would be a legal mo- nopoly under the proposed Commission rules and is said to be a natural monopoly even without the proposed rules. As a practical matter, the promises for pay TV's beneficial supple- mentary programing have proven to be lacking in substance. Yet, the pay TV report says to go ahead with permanent authorization of pay TV without regard to the realities of the situation. We must face up to the question of whether the public need for pay TV programing, which would be duplicative of free television programing, justifies the use of scarce broadcast frequencies and the likely, if not probable, im- pairment of free television service for all the people. One need only look at the recent action of both Houses of Congress in passing the Public Broadcasting Act of 1967 and the revitalization of UHF broadcasting under the stigmiation of the All-Channel Re- ceiver Act to know that free television broadcasting is well on the way to bringing into being what pay TV has promised and cannot deliver. These positive developments with respect to increased program diver- sity for free television service could be impeded by establishment of pay TV. Much of the argument has revolved around pay TV's chances for financial success. There are those who minimize its threat merely be- cause it would not be a "beneficial supplement" to free television. They suggest, therefore, that pay TV would not create sufficient public de- mand to allow it to succeed financially. The question, however, is not whether pay TV should be given a chance to fail, but what will happen if it were to succeed. It is pre- cisely because we know that pay TV would not be a beneficial supple- ment that MST believes that it would have to attract free television's audiences by siphoning programs and talent now available free of charge in order to survive. Pay TV does not have to be very successful to impair free television. It operates with box office economies which, when compared with the cost-per-thousand economics of free television, would allow pay TV to outbid free television for programing and dominate it at the local and national level. Even based upon the revenue figures derived from the Hartford failure, nationwide pay TV could easily have annual PAGENO="0587" 583 revenues of $1 billion, and this at only 16-percent penetration of U.S. television homes. This is almost half the total of 1966 broadcast rev- enues of all three national commercial networks and their 15 owned and operated stations and all 593 other commercial television stations in the United States. That is at a 16-percent penetration. Of this $1 billion, pay TV program revenues alone of at least be- tween $550 and $630 million would almost equal the total program expenditures for the three commercial networks in 1966. By adjusting the figures for family program expenditures to only $1.25 more than the weekly figure for Hartford's 2 hours of run-of- the-mill programs a day, or raising the cost per program slightly, one can project program revenues alone for a moderately successful na- tionwide pay TV system of at least $1.1 billion, which is greater than the total program expenditures of all commercial broadcasting in 1966. This is still at a 16-percent penetration. Increase the penetration rate, as pay TV can do once it begins to "snowball," and the program and other revenues climb that much higher. You can buy a lot of feature films, sports events, and other enter- tainment for the kind of money that pay TV would make. Pay TV program siphoning would seriously impair the ability of free tele- vision to serve all segments of the American public, including the approximate one-third of American families who would be unable to afford pay TV, plus those who could afford pay TV but live in areas where the economics do not justify its establishment. As may be seen from the detailed analysis in MST's "Further Comments," which we have just put into the record, the complex proposals of the pay TV report, which are intended to minimize this harmful siphoning, would simply not do the job. For example, the rule proposed to limit siphoning of feature films from free television would not cover at least one-third the feature films to be shown by the three commercial networks in the 1967-68 season, as they have been announced thus far. Moreover, any sports event now shown on free television could be siphoned to pay TV. This siphoning would not take 2 years, as this committee has been told, but could be done with only a 1-year wait or blackout on free television and, in many cases, not even a 1-year wait. There has been considerable discussion this week about the proposed FCC rules for pay TV as they would affect sports events. Quite under- standably, there has been a certain amount of confusion. Let me say, first of all, that the proposed rules regarding sports are quite complex. It is certainly understandable that confusion has been created. I do not blame you one bit for having problems with these things. However, the proposed FCC Fourth Report and Order does set forth the proposed rules although, as I say, they are somewhat com- plicated. First of all, it is important to understand that there are two kinds of sports events established by the proposed rules. The first type is what are called specific sports events. These include such features as the world's series, the all-star game, the various bowl games, league championships, and, of course, they extend not only two baseball but other kinds of sports, as well. The second type is what is described as nonspecific sports events. Generally speaking, these include those games played as a part of a PAGENO="0588" 584 regular season, in other words, all the regular games of the Washing- ton Redskins or the Washington Senators. Within the nonspecific type there is a further breakdown of cate- gories, again applying to all types of sports having a regular season. It includes home games, games away from home, preseason games or exhibition games, or the so-called games of the week. These matters are set forth in detail on page 91, paragraph 261 of the proposed FCC report, as well as in paragraph 262 which immediately follows that. Let us refer back to the type described as specific sports events; the world's series, the all-star game. The proposed Commission rules would provide that if such an event had been broadcast on free tele- vision for 2 consecutive years in the community, and I emphasize "in the community," where the pay television station is located, not na- tionwide but in the community, pay television cannot broadcast it. I refer now to page 92 of the proposed report at paragraph 264. Let us take the world's series as an example. If the series were on free TV in that community in October 1965 as well as in October 1966, both years, pay television could not show it in October 1967 on the pay TV station licensed to that community. Here I quote from the report, "If the series were on free TV in that community in either October 1965 or 1966 but not in both years it would be viewed as not having been regularly televised there and an STV station could show the series in October 1967." This is the rule. Would it prevent siphoning? I don't think that it would. Let us see how this could conceivably work. It could work in several ways. Assum.e that the series was broadcast on free television in 1966 and again this year, in 1967. The pay television station opera- tor in Washington, D.C., could go to the baseball people, offer them a sufficient amount of money if they would refuse to sell the world's series right for Washington for free television in 1968-they only have to do it in Washington-_and agree to make up the difference in income. The following year it could be placed on pay TV and every year thereafter. Another method to get around this might well be to keep it off free television ~ 1968 but, through mutually agreeable arrangements, put the series in 1968 into theater pay television in Washington, in near-by Maryland, Virginia, all through our whole area, with the idea of bringing it on pay TV the following year. Under this method, the base- ball people would not stand to lose any revenue and the public could see that series provided they were able to go to the theater and pay for it for 1 year. Now, we do not say that this would necessily happen on a national basis overnight but it could happen on a selected basis in market A and B this year, in C and D next year, and, incidentally, Zenith said that they did not expect to go into operation all Over the country; they are just talking about a couple of markets at a time; Mr. Wright made that point the other day-_they could do this progressively and so on until in a relatively short time, for all practical purposes, the world's series would be taken out of the realm of free television and into a completely pay TV setup. Certainly there would be outcries from the public. There were outcries from the public when championship fights were put into the theaters on a pay basis and taken off free television. You have re- PAGENO="0589" 585 minded us on several occasionS, again this week, that there were very serious outcries from Arizona this spring on this very matter, in the case of the Clay-Foley championship fight. But the situation still exists. That is part of what we are up here talking about today. Now let us turn to the second type of sports event set up by the proposed Commission rules, that of the nonspecific sports event; the game which is played as a part of a regular season. The proposed Com- mision rules cover this as well. I refer you now to paragraphs 266 and 267, commencing at the bottom of page 92 of the proposed FCC report. If a substantial number of nonspecific events, such as home games or away from home games, or the so-called games of the week, were televised over free television in the pay TV community and were, and and I quote from the proposed FCC report, "within each of the 2 years preceding the proposed STV broadcasting thereof," then no games in that category may be presented by pay television in that community. As the proposed FCC report states, the standard is to be applied on a category-by-category basis, and, here I quote again from the re- port, "If during one but not both of the 2 years preceding proposed STV broadcast, a substantial number of events in a category were not televised in a community, the category will be considered not to have been regularly televised therein and STV may show the con- tests in that category." That means all such contests. Now, that is the rule that is proposed. Does it prevent siphoning? A pay TV promoter could use his economic leverage to purchase the games in a category of nonspecific sport events, such as regular season home baseball games which may not have been broadcast in the com- munity over free television, and present them without any delay. For example, assume that a baseball team plays 80 home games and no games in this category are broadcast on free television in the home community. Pay TV could purchase the television rights to all of the home games in this category the very next season, while the away from home games previously broadcast by television could be with- drawn from free television by the ball club during that season so that they, too, could be made available to pay TV the following year. The same situation could exist if some but not all of the home games were broadcast on free television. Now, I hope this may help clear up the so-called 2-year provision which I think is a snare and a delusion. Whole categories of regularly scheduled variety shows, such as the "Ed Sullivan Show" or the "Dean Martin Show," and free television drama, such as the "Bob Hope Theater" or last season's ABC "Stage 67," and entertainment and dramatic specials, such as "Death of a Salesman" or the "Barbra Streisand Special," are not even offered protection from pay TV siphoning. What is also important is that the proposed rules do not and could not stop pay TV from pirating free television program talent. Thus, the rules that are intended to limit siphoning are ineffectual, despite the fact that they would involve the FCC in detailed, day-to-day reg- ulation of every aspect of the programing transmitted over broadcast facilities by pay TV. The impossible choice between no pay TV program regulation at all, which would have a severe adverse impact on free television service, PAGENO="0590" 586 and complex pay TV program regulation, which would involve gov- ernmental interference with licensee programing responsibility is another reason that leads MST to oppose, pay TV and should l~ead the Congress `to act now to forbid the establishment of pay television. The Congress should reaffirm the principle that the future of broad- casting in this country belongs to all the people, not merely to those who are able to pay and who live in communities in which STV operators would find financial gain. Thank you very much, Mr. Chairman. Mr. MACDONALD. Thank you, sir. Mr. Lindow, I just have two questions. On page 3 you say that "the dilemma becomes even greater because the imposition of such controls will result in an intolerable degree of Government involvement in television." Don't you think that the Government is already quite involved? Mr. LINDOW. Yes, sir; I certainly do. Mr. MACDONALD. What would change? Mr. LINDOw. As I tried to point out in the statement, sir, faced with this dilemma the Federal Communications Commission would set up complicated rules such as the sports rule that I went into in detail and this, of necessity, would involve `the FCC in the type of programing regulations which they so far have not practiced. As I think the preceding >witness so aptly put it, if we are having problems here whep we have been studying this thing and trying to understand it, it is very easy to appreciate that these problems would become more and more severe as a Government agency is trying to regulate the entire pay television industry. It would be intolerable. Mr. MACDONALD. I have read the Fourth Report. Everyone hints around but I don't see anything in there that further regulates TV than it is already regulated. Mr. LINDow. Yes, sir; they are saying under what conditions pro- graming can be presented by pay TV. Mr. MACDONALD. The programing of 10 percent cultural programs which I think is a mistake, frankly, but outside of that. Mr. LINDoW. I think you find in here a considerable number of things that they are suggesting they will look into from time to time, that they will have to regulate and provide for in a degree that `they just' don't do at this time, sir. I have been a licensee in one way or another of the FCC for 33 years. Mr. MAcDONALD. All broadcasters are subject to review to see whether they should have their licenses renewed. The witnesses yester- day pointed out there has not been any revoking of licenses for quite' some time and certainly no major broadcasters. I don't see how the Government could get more involved by allowing pay TV to happen. If you have some specific illustrations, I am sure the committee would like to hear them. Mr. LINDOW. Counsel reminds me that one of the places the Com- mission provides for increased governmental involvement in the pro- posed Fourth Report is in connection with where pay TV can operate and where it cannot, where it must provide nondiscriminatory service. Do you have the citation on that, Mr. Goldberg? We might give you that for the record. PAGENO="0591" 5~7 Mr. MACDONALD. Indeed, it would be helpful. Mr. LIND0w. It is. in paragraph 230 on page 7~. That is an example of the sort of thing we are talking about. Mr. MACDONALD. What does it cite? Mr. LIND0W. This is the citation; yes, sir. It is very brief, if I may read it to you. Mr. MACDONALD. Please do. Mr. LIND0w (reading) As to geographic or other reasonable patterns of installation for new STY services the rule is drafted to permit this. Such a provision seems reasonable and likely to make for a more rapid and efficient development of the new service in any community. There is also a footnote: Finally, our preliminary study of the technical systems for STV leads us to recognize that the service area of an STy operation may well be smaller than that of its free TV service that our rules were required to provide. The rule adopted today in the instant issue of whether STV service should be pro- vided within all the service area of the station is designed to strike what seems a reasonable requirement; namely, that STY service must be provided to all within the grade A contour of the free TV service of the station with the excep- tions mentioned above concerning nonpayment, poor reception pockets and the like. This rule is consistent with our use of the grade A contour limiting STY to five station markets. No doubt many subscribers will be obtained outside that service area but service there will not be mandatory. Mr. MAcDONALD. Does that not overlook the fact that CATV will be in operation, as well? Mr. LIND0w. CATV is another operation. Mr. MACDONALD. CATV could interlock with pay TV. Mr. LINDOw. I think C.ATV is bound to interlock itself into the pay TV. Mr. MACDONALD. As I understand, I hope one of the counsel will correct me if I am wrong, but, as I understand the grude A contour, it just means a radius of 58 miles. Am I correct? Mr. LISIiMAN (committee counsel). Depending on whether it istJHF or VHF. Mr. LINDOW. It depends, but that is approximate. Mr. MACDONALD. The use of CATV just throws that out of the window, does it not? Mr. LINDOw. I am not sure that I understand, but CATV can con- ceivably bring in signals from quite a distance away. Mr. MACDONALD. Therefore, what is now in this year of our Lord 1967, grade A does not necessarily mean that it will be grade A con- tour if CATV i~ successfully used in, say, a year or 2 years? Mr. LIND0w. Grade A is the measurement of a signal of an in- dividual station. So, grade A for a station is a particular thing. CATV does not have anything to do with changing where that signal goes. Mr. MACDONALD. No, but the use of that station, if I have CATV I can pick up a station that is farther away than 58 miles, can't I? Mr. LIND0w. Yes; in some cases, you can. Mr. MACDONALD. Therefore, ttie use of the words "Grade A" does not mean very much any more. Mr. LIND0w. It depends on what you are using it for, sir. It is a term of the art, so to speak, describing the signal strength of a specific station, without assistance of CATV. It is the measurement of an off-the-air signal. PAGENO="0592" 588 Mr. MACDONALD. As Mr. Brown indicated to me, it presumes the nonexistence of CATV with STV. It seems to me the whole ball game is changed. Mr. LINDOW. I agree that CATV coupled with pay television, which is bound to happen unless something is done about this, poses some tremendous problems for this committee and the Congress and the Federal Communications Commission, to say nothing of the broadcast industry. I think the two do have a direct relationship to each other. Mr. MACDONALD. I do not mean to get into the technical aspects of the thing. You have made a fine statement. Mr. LINDOW. Thank you, sir. Mr. MACDONALD. On page 9, you, like all the other opponents, and I am not saying that I am for this pay TV, but you keep calling it a failure. You say based on the revenue they derived from the Hart- ford experiment. If it was such a failure, why are the commercial networks fearing it so much? Mr. LINDOW. I didn't think the concern is that of the commercial networks alone The commercial networks, incidentally, sir, are not members of our association. We represent individual stations. I think the concern of the networks is shared by the individual broadcast- ers, as well. Mr. MACDONALD. If it were a fialure and the public does not want it, then they are not going to use it; is that right? If they are not going to use it, Zenith and the other four or five stations are going to fall flat on their face and lo~se a lot of money. Is that right? Mr. LINDOW. That is right. Mr. MACDONALD. Therefore, are you not putting the cart before the horse in saying that this has proven to be a failure and yet you are so fearful of it? I cannot connect up the two thoughts. Mr. LINDOW. Sir, as I said in my statement, I think the problem before us is not what happens if pay TV fails If you and the members of this committee and other Members of the Congress, the Commis- sion, everybody else, agree that this thing is a complete failure, then we all have been wasting an awful lot of time and money because in that case why establish pay TV and utilize scarce broadcast frequencies for this purpose? We have to address our question only to the question of what happens if it succeeds. Mr. MAODONALD. It is not the substance of this hearing so I have not made a point of it. Mr. Dingell made a point of it, but the U.S. Govern- ment, itself, uses over half of the spectrum or reserves it. All this talk about spectrum or lack of space, to use somebody's words yesterday, is hogwash; it does not mean anything because the spectrum is there and it is not being utilized. Mr. LINDOW. May I speak to that point, sir? Mr. MACDONALD. Of course. Mr. LINDOW. The spectrum is being utilized to a considerable degree and the degree of utilization has been growing at a fantastic rate-I am speaking now of the television broadcast spectrum-at a fanta:stic rate in these past years. Originally, when Zenith and others were trying to start the pay TV argument some years ago, Zenith made a big hue and cry on this point; we were not using the spectrum so what difference does it make? PAGENO="0593" 589 Mr. MACDONALD. The land mobile people are the ones who were really pushing that part and I think they are right. Mr. LIND0w. Mr. Brown referred to the 400-and-some unused tele- vision channels that are not in operation, 450, I believe is what the gentleman from Ohio said. Let us look at those 450 for just a minute. As I understood it, you qualified it further by saying this excluded all the educational, these were all commercial stations. Now, ~i sub- stantial number of those are located in remote, sparsely populated parts of the United States where they may very well never come to life as a full-fledged television broadcast station. We have a pet expression in our business and I do not mean to cast any aspersions on the great State of Nevada, but Broken Jaw, Nev., meaning a small crossroads community far away from everybody else. A good part of the channels not presently in use you will find dis- tributed among such communities. Mr. MACDONALD. May I interrupt you? Mr. LINoow. Yes. Mr. MACDONALD. I have a house in a place called Cape Neddick, Maine, which I don't get to use as often as I like. I can get double the channels at Cape Neddick, which is a rural area, that I can in Boston because I can draw from Manchester, N.H.; Portland, Maine; Ports- mouth, N.H.; educational station in Durham, N.H. Then I can get the Boston stations, too. All this without OATV. So, your argument about the rural areas being harmed by this thing is specious. Mr. LIND0w. The rural areas will be harmed in this sense, that if the programing that is now on free television which provides a big part of our income, revenue, and enables us to do all the things that you and the Commission tell us we have to do and we want to do, if that income is jeopardized then our programing will be reduced. The type of programs we are now carrying will be siphoned off to pay TV. Mr. MACDONALD. Would the opposite happen? Would you up your type of programing? Would you be afraid of competition and there- fore put on better programing? Instead of having 17 commercials in a movie, you might cut them down to seven? Mr. LIND0w. I don't think the number of commercials is causing any problem. Mr. MACDONALD. I guarantee you they are. Mr. LINDOW. I meant in the sense of limiting the amount of accept- ance that television is having in most cities. Let me try to answer your question. The fact that there would be some problem of competition is not a matter of our being afraid to go out and fight. We have competition now. You talk to any station oper- ator in any market, particularly this year when things are a little bit rough, he will tell you he has plenty of competition. But, as I pointed out in my statement, it takes not only a desire to compete but it takes money to go out and buy the raw material, if you will, of our business~ which is talent and programs, and yOU have to have the resources in order to do that. These pay TV people, on the very, very unoptimistic projection that I gave you, would have $1,100 million to spend on programs when they would have only a small degree of penetration and this is the equiva- lent of a great part of what free television broadcasting has to spend 86-899 O-~67------88 PAGENO="0594" 590 flow, you can see they are going to outbid us, and there are just so many features, there are just so many world series. Mr. MACDONALD. Would not the public end up getting better pro- grams than they flow have available? Do you not have to go to the least common denominator of intelligence and taste to sell the stuff that you try to sell over your stations? Would not the public benefit from a change from that? Mr. LINDOw. I don't know. Mr. MACDONALD. I don't, either. You are in the business. I have a million things to do. I am just th~ lowest kind of worker in the vine- yard. I just watch TV. I have not made up my mind one way or the other. I am not sure a little competition would not do you some good. Mr. LINDOw. I listened the other day, and I will try to answer your question, sir. I listened the other day when Mr. Wright was on with the station manager, I guess it is not his station, it was the station's general manager from Hartford. Members of the committee were talk- ing about the programs offered there. Your questions related to the quality of programing. He said they had to take the kind of film they could get from the film companies and they could not alter it or change it, because there had been some questions about whether this was of a standard that was acceptable or not, they could not alter or change it or cut it. Mr. Preminger made a big point about the fact that there would not be any changes on some of these programs. That does not sound to me like they are looking toward any great big improvements in programs. They are suggesting taking the same kind of program material now offered on free television, except they are not going to exercise the kind of control over it apparently that we do regularly. Ninety percent of this is going to come from films and sports. How is this going to improve the programing? I can't see it. Mr. MACDONALD. You said that that formula was a failure. It is, in your judgment. You said that the Hartford experiment was a failure. Mr. LINDOW. I said Hartford was a failure as a test. Mr. MACDONALD. You also said that that was the breakdown, that ii was; namely, movies and sports. I read in the paper yesterday. I bBheve, or the day before, that the Nielsen ratings buttressed the fact that movies were the biggest draw on TV. Mr. LIND0W. Yes, sir; they sure are. Mr. MACDONALD. I don't know how accurate the Nielsen ratings are but at least it is an expression of opinion and has some authority in it. So maybe what they are experimenting with in Hartford was wrong because if you say it was a failure, maybe the programing was the reason it was a failure. I, personally, would not stay at home to watch movies and sports events all the time. I certainly like a more diverse type of entertainment than that. Mr. LINDOW. I think they pointed out that it was their intention, they certainly did not disagree with the Commission's findings that 90 percent of the programing of pay television would be in feature films and sports. So, if the feature films and sports which they had been pro- graming up in Hartford was wrong, maybe they should change to something else. At least, they don't believe it is wrong. PAGENO="0595" 591 As I indicated in my statement, I have heard very little said, by the Zenith people at least, on the subject of new and different types of programing, different sorts of programing in the future. They used to talk about that but right now they are talking films and sports and that is what they are selling. The films they are selling up there, as Mr. Wright so correctly pointed out are the ones that are currently shown. Mr. MACDONALD. Yes, but you said `the experiment was a failure. Mr. LIND0w. I said the test was a failure, sir. Mr. MACDONALD. If you did an experiment and showed that a certain formula was wrong, as a businessman wouldn't you change it? Mr. LIND0w. I certainly would. Mr. MACDONALD. Maybe they will. Mr. LINDOW. I didn't say their formula was wrong. I said as a test of the extent of the success of subscription `television it was a failure. 1\~[r. MACDONALD. Mr. Brown. Mr. BROWN. I do not follow what you are saying to Mr. Macdonald with reference to your comments on page 9. You talk about the 16 per- cent penetration. Was that the Hartford penetration? Mr. LIND0w. This is based on the Pay TV Committee's figures of what pay TV could reasonably expect to do. Again this is based on the proposed FCC "Fourth Report" and what the FCC and Zenith and everybody else said. Mr. BROWN. What was the Hartford penetration? Mr. LINDOW. That was much smaller than that. Mr. BROWN. What was it? Mr. LINDOW. 0.75 or thereabouts. Mr. BROWN. Was that a controlled percentage or was that as much as they could get? Mr. LINDOW. I think Zenith set forth certain limits, the total size of their test. Mr. BROWN. Here again, if there was a forced limitation, then we have `another question, have we not? Because we don't know how far Hartford might have gone if it had been left free and everybody who wanted to could have joined. Mr. LIND0W. It was not a. forced limitation. I think they just de- cided they wanted to spend just so much on the test. Mr. BROWN. If they had been able to make available as many control units to as many people in Hartford that wanted it, it might have been different. Mr. LINDOW. I think if `this was spread all over the country I think it would be considerably different. If pay `television was instituted as a nationwide system, it would be considerably different; yes. Mr. BROWN. You don't think it would have been a failure? Mr. LIND0w. This is the point I have been trying to make, sir. Again a pay TV system wi'th this type of programing and the opportunity t? get it that `they will have under the rules proposed by `the Commis- sion, I don't think it will be a failure. I think it will be a howling suc- cess. As a financial operation, it would be a howling success. It might be disastrous as far as the public in' concerned who would wind up paying for something they have beeii getting for nothing up to now. Mr. BROWN. Wai't a minute. If people are willing to pay for a service even though somebody else is offering that service free, what is wrong with that? PAGENO="0596" 592 Mr. LINDOW. We have set up, the Congress has set up, a system of free broadcasting in this country. Mr. MACDONALD Commercial; not free. Mr. LINDOW. Commercial and educational, different categories of stations; yes, sir. It is one where the viewer does not have to pay a specific amount to view the program. Mr. BROWN. Wherein the advertiser determines, along with the sta- tion or the network, what is going to go on the air and what selection that the public has. This Congress just got through passing public broadcasting legislation in order to provide with public funds an alternative to that choice because the Congress apparently felt that the existing "free" choice was not adequate. I happened not to Support that piece of legislation. But I think it is highly inconsistent for the Congress to take the taxpayers' money willingly and put it into public broadcasting, really free broadcasting except the taxpayer pays, and say that the public cannot, given the possibility of a system to do this, put some money in the meter and see what they would like to see themselves and cannot have a choice between the commercial broadcast and the public free taxpayersuppo~te~ Government broadcast. Mr. LINDOW. Of course, Congress can and it has the power to change our system. This is well within the authority of Congress to do this if they want to. Mr. BROWN. I am trying to figure out where the morality is in the other two systems and the immorality is in this system. Mr. LINDOW. I think it is a basic policy question, the philosophy under which our system of broadcasting has operated. It is quite unique and distinctive and was the first in the world to operate on this basis. It has done extremely well for the public and for those who laid their money on the line. Mr. BROWN. Let us get into a policy question here. Do you feel that any control should be exercised by the FCC over the program content of television? Mr. LINDOW. No; I do not. Mr. BROWN. I share that view and am concerned that we may get to the point where, because of what is involved, people are going to say we have to have some control over it. It seems to me that One of the controls might be exercisable directly by the citizens rather than through their Government. Mr. LINDOW. That has been the way it has been Operating. Somebody said the other day, I guess it was Mr. Van Deerlin, about how he has to run for office every 2 years. I can sympathize with his problem. We have a vote taken as a television broadcaster every second because the viewer can either switch it on or turn it off, It is a big problem to do the job. People do exercise control over us, considerable control over us believe me, by that device. `Mr. BROWN. Where do I vote to see the National Symphony Orchestra on television? Mr. LINDOW. Channel 9 has been over a period of years carrying concerts of the National Symphony Orchestra, I believe. Mr. BROWN. How about sponsors? Mr. LINDOW. They have been sponsored. Mr. BROWN. At what price? PAGENO="0597" 593 Mr. LINDOW. I don't know what the figures for the sponsors were. I suspect that probably WTOP may have dug into its own pocket to make up the difference between what it got from the sponsor and what it paid for the symphony but I don't know. I am not familiar with that. That is frequently the case with cultural events. Mr. MACDONALD. I must be voting wrong all the time because some of the programs I like run about 8 weeks or a month. Mr. LIND0w. You and I have the same problem. Mr. MACDONALD. I don't know who does the voting, but it certainly is not the public. Mr. BROWN. Let me ask this question: I happen to be in the news- paper business in real life. I think that there is an analogy here, if every station were allowed to be a combination of pay and subscrip- tion TV wherein you would probably sell your prime time, that is, the station would sell its prime time to the audience and not to the adver- tiser in much the same way that the newspaper sells its front page to the reader and not to the advertiser on the theory, which you devel- oped so effectively on page 9 of your testimony, that you can make more money from the audience for that time than you can from the advertiser with that time. Does that make sense? Mr. LINDOW. I don't think there is any question but what you can make more money out of pay television than you can out of what we call free television or commercial television. I think there is no doubt about that. The potential is much greater. You have more people to draw on. If you charge everybody to see everything that you are giving to them for free now, of course, you are going to produce a lot more money. But with it come a great many penalties that we are not prepared to accept, that we don't believe are right; and this is why we feel the way we do. Mr. BROWN. You see, I think we have an issue here, not an argu- ment; I don't see it as an argument between Zenith and RCA or any- body else or an argument between two or three networks or an argu- ment between a number of different stations. If the Congress acts in an area, it can say to the FCC the jurisdic- tion is ours; we will permit or not permit pay television. It can also act and say further, your regulations as proposed should be limited or changed in this way or that way. This is what we have come to in this hearing-I don't know whether we intended to get into it this far or not, but of necessity we have. It occurs to me one of the rules that may be wrong is the five-stations market rule. Maybe we ought to permit everybody, who wants to, to go pay TV. Mr. LIND0w. Then you are changing our whole system over to a pay system from a free system. Mr. BROWN. Perhaps because it may just be that there would be a station in that market that would say to themselves, I think we can make more money as a free TV system in our particular market and offer good programing between 8 and 10 o'clock at night which would be available to a high-bid advertiser in such a way that we would counter the pay TV. Let us be frank about the system under which we operate. Watching free TV is not the only choice I have at night. I can go out, if I have the money, I can go out to the Shoreham and PAGENO="0598" 594 have a meal and watch topnotch entertainers, live. I can go to a movie and see something that I will later be able to see on either pay TV or free TV. I can watch the ETV channel which I help support by my contribution or which the University of Maryland or somebody else sponsors with Federal, State, and local funds. Or I can go to the symphony and hear Iturbi or to the boxing matches. Mr. LINDOW. You are a fortunate man, sir. There are a good many people who are not in that position, right here in the District of Columbia. Mr. BROWN. Precisely. Those people also buy things, don't they? Mr. LINDOW. Yes. Mr. BROWN. As a matter of fact, if you take the number of people and the number of dollars that move with these people a lot of them buy more than the people who go out and watch live enter- tainment at the Shoreham because those people drive out in their Cad- illacs and Lincolns and there are not very many Cadillacs and Lincolns sold versus the number of Fords that are sold. What I am getting at is that we are in a position in free TV now where the number of things which are most common in our society, and I don't use the word "common" in a deprecatory way, are the things that the advertiser wants to sell to people he cannot get to~ through free television. If you want to sell something to people who have money, you sell it through the Wall Street Journal because the people who have money buy the Wall Street Journal. Now my question is: Does not pay TV offer the possibility of aiming for audience selection that would provide for the selection of an eco- nomic strata market and intellectual strata market, and wit.h pay TV in combination with free TV you would be offering to the advertisers of this country, for instance, a broader possibility of making the eco- nomic system work? Mr. LINDOW. The proposed FCC pay TV report recognizes, as I indicated, that pay TV programs would largely be duplicati've of the free TV program. Let me quote this again. They state: "The reality is that the major part of the program, as the proponents argue, will be of a kind that would appeal to a mass audience" and not this select group that you are just talking about, sir. Mr. GOLDBRRG. The economic pressures are the same in commercial television as they are in pay television, to maximize the profit. You don't have this in public television because you don't worry about the profit. But where you are worrying `about the profits you want to maximize them. The economic pressure, whether they are using the cost per thousand of free television or the box office economics of pay television, is the same. It would lead to the same kind of programing. The Hartford test was not a failure in terms of what could be financially successful on pay television. At Etobicoke, the experiment showed the same thing. This is in the proposed FCC report, that the programing which seemed to satisfy most of the people most of the time was the readymade audience pack- ages of films and sport~ The Hartford experiment was a failure in terms of its concept of programing to minority audiences. This failed. As a result, they are still sticking with movies and sports, as you saw in their program guide. PAGENO="0599" 595 Mr. BROWN. You know, if your analogy were followed all the way through, we would not have an ballet or symphony in this country. We would be watching the same thing. This seems to me unfortunately the direction in which free TV may be headed. If the only criteria you use is the sale of your time that is available because you have this franchise from the Federal Communications Commission, to make money, the most money from the guy who wants to get the broadest audience, you wind up with the least common denominator. I should not say the least common denominator, the broadest com- mon denominator, because the least common denominator infers some very low taste which will offend enough people that they will not watch it and you will lose it at the other end. Mr. LINDOW. This is not the case in free television. We have been putting on ballet. We have been putting on opera. We have been put- ting on concerts. We have been putting on programs of the highest standards. These are done in proportion. We try to have a balanced program schedule which is what the Federal Communications Com- mission has urged. We quite readily accept that as good business. We have done this to the extent that we have gone far overboard. We have spent millions and millions of dollars on providing the type of programs which, if you measure it by the pure standards of their commercial attractiveness, would never get on. But they are done because we have this obligation which we freely accept and try to honor. The record is full of this sort of thing, to say nothing of the public service activities that free television takes part in, to say nothing of the news and special events programs that we do. Believe me, sr, I can't sit quietly here and accept the suggestion that free television is not doing a job in that area. I believe, sir, that it is. I think we can do better and we would like to do better and we are going to try but we have to have money to do it. Mr. BROWN. If you infer this as a flat statement, you are wrong. What I am concerned about is that we are trending in that direction in free radio and television because of the commercial problems in- volved. Now, my only suggestion in this area, my only question really to you is, why can't we have a combination of audience interest and commercial interest? In any event, it is not free unless we go to a Government system and it is not free that way, either. There is a political interest. Mr. LIND0w, If the Congress wants us to have that kind of system, you can have it. Mr. BROWN. I understand. I am asking you as a representative of the group in whose behalf you are testifying what your feeling about it is. I know Congress can do it if it wants to. Mr. LINDOW. Because I think you would be depriving a great many people of the opportunity that they now have. I don't think that that is right in terms of the system that we operate under. Mr. BROWN. The assumption being that everybody, all commercial broadcasters, would go to the pay TV system. Mr. LIND0w. I think that would be a very unfortunate decision for the American people. Mr. BROWN. And also broadcast 100 percent of the time on pay TV. Is that your assumption? PAGENO="0600" 596 Mr. LINDOW. I don't know whether they could all sustain them- selves but maybe they could. Broadcasters have a lot of ingenuity. I see some small radio stations sustaining themselves in areas where I did not think they could possibly exist, but I don't know. Mr. BROWN. I don't think we know, either. To say that it is a failure and therefore we should not go into it or that it is such a howling success that it is going to completely disrupt the present system of free TV seems to me to be an assumption so broad that I have to have a better rationale for why one or the other is true. I think you will find the true place is right down the middle. Mr. LIND0W. Once you start this thing snowballing, it does not happen overnight, but the siphoning effect we have been talking about starts to come into play and increases and increases and de- velops further and further and I think this is what the witness that preceded me tried to point out, as well. Mr. BROWN. Will the chairman be patient for one more statement? It seems to me the station in Broken Jaw, Nev., will have to wind up using a combination of pay and commercial television in order to supply the people in Broken Jaw, Nev., full usage of the spec- trum that the Government makes available to them. Up in Torbert's area, in that cabin, he may get it all free or all pay; I don't know. But why could not all stations use a combination of the two systems? Mr. GOLDBERG. We don't believe that pay TV and free television service could exist side by side because of the siphoning effect. They are both going to be competing for the same kind of programs. There is only a certain kind of program that apppeals to a great many people in the context of their home viewing. One of the greatest problems in broadcasting is that there is not an adequate supply of programs worth broadcasting. That is the problem that the network have each season. They will be competing for the same general type of progra.m to present in the context of the home. It becomes then a question of who can compete better or who has more revenue with which to compete. We feel that pay TV, given its potential of unlimited penetration nationwide, would dominate the program acquisition races. Mr. BROWN. You had on channel 18 in Hartford a combination of pay and free TV because that station was oniy pay TV a few hours a day. This was a controlled experiment in such a way that it loses some of its impact. But, in a market like New York City where you have a wide number of stations available, if all stations were pay and free both, you would have free TV available on some stations some of the time, and pay TV on some stations some of the time. I think you would have a spectrum of selections that would serve the public interest better. I would submit this is something that we have to prove is or is not going to be the case. I don't think it has been well proved. If we can, prove it some bettetr way. Mr. GOLDBERG. On your example, if you have that situation existing in New York City you would find that this would be true but what you would have is a free system during the clay, the off viewing hours, and a pay system in the prime evening time and the 20 or 25 to 50 per- cent of the people who could afford that service would have the service on pay TV in the evening and the people who could not afford it would be totally deprived of any service in prime time. PAGENO="0601" 597 Mr. BROWN. You don't think that somebody would keep their evening hours free and sell them to Schick to sponsor the boxing matches? Mr. LINDOW. He would not get the boxing matches. The pay TV stations would outbid him. Mr. BROWN. I submit that some stations in New York, perhaps more than just one, are going to say those hours are going to be free, there will be a lot of people watching and those people will sell the Metropoli- tan Transit Authority or somebody else because those viewing are the guys that ride to work on the subway and those are the ones some advertiser will want to get. It is the same reason that not everybody advertises in the Wall Street Journal, in Life or Esquire or in subway cars. Mr. GOLDBERG. That is assuming the advertiser wants to reach the bottom economic third of the people in New York City who can't afford pay television. Mr. BROWN. Those people do spend money and do buy things commercially. Mr. LINDOW. The advertiser does not want to be cut out from that very important middle-class market. You mentioned you are in the newspaper business. You know your circulation. If it were just limited to that lower segment, it would not be as attractive to the purchaser of advertising. Mr. BROWN. I will tell you what market he is looking for if you tell me what he is selling. Mr. LINDOW. That is true. I am talking about the mass commodities that appeal to the mass of people in all income brackets. Mr. BROWN. They don't want to be cut out of that lower third, either~ So they will put a little money into free televesion. Mr. LIND0w. Maybe they will put more in the newspaper. Mr. MACDONALD. Thank you very much. In conclusion, I would just like to correct two things. I don't have a cabin. It is a house. Secondly, I would think that the strongest argument you make against yourself is the fact that you say that all these poor under- privileged people who can't afford pay TV are going to go to pay TV, because if your programs are that bad, to paraphrase an adver- tisement, you must be doing something wrong, because people are not going to pay for a program that is good if they dont have to pay for it unless they are willing to pay for it. I would think the networks, and I know you don't represent the networks and perhaps you are not the proper person to say it to, but there must be something being done wrong on TV, and I guess radio, that irritates people enough that they are willing to pay for what they are getting free now. When you say that you fear this pay TV will just spread like wildfire-I forget the exact words you used but they had that connotation-then you don't have much faith in what you are doing, yourself. I should think that the network broadcasters would try to upgrade what they are doing if they are afraid of pay TV. I think if they came with a comparable type of entertainment that would be successful, it is just the law of human nature that nobody is ready to pay for somethmg that they can get for nothing un'ess what they are getting PAGENO="0602" 598 for nothing is so irritating to them that they are ready to pay to get away from it. You know, like all these ads that you hear about, mouth wash and all, you know, all the rather distatsej~ul things you have to watch. I would like to put in a word for the networks because nothing much good has been said about them today. I think they do an outstanding job in news coverage and in sports and some other fields. But the vast wasteland that got so overpublicized is there. Have you ever had to be in bed or in a hospital for a day or two~ and watch daytime tele- vision? Mr. LINDOW. Yes, sir. Mr. MACDONALD. I agree with you 100 percent when you say that nobody would watch that. Talking about free TV, they would have to pay me to watch some of those programs. I think I am speaking as the typical listener of TV. On the other hand, as I said yesterday, the program ABC did about Africa and many programs that are done by the networks are superb. It is like the thing about the girl with the curl. When you are good, you are very, very good, but when you are bad, you are really horrid, it seems to me. It seems to me that is why people should have the choice to choose whether they want to take something for nothing or they will pay for something, just to get away from the inaneness of some of the things that go on TV. As long as you go to the least common denominator, there will be a market; I don't know how big the market is going to be, but there is going to be a market for people who just can't put up with a lot of this stuff that is shown on TV. I would think, you know, a sort of plague on both your houses. Every witness who has appeared here has made a good argument. It is true that perhaps things would be siphoned off; I don't know. The FCC went into rather complicated rules in my judgment. How that would work out, who knows. But, on the other hand, if you would upgrade your product, you would not have any fear of pay TV because, as I repeat for the last time, nobody is about to pay for something that they can get for nothing. Mr. LINDOW. May I respond to that, Mr. Chairman? When these programs are siphoned off, and we believe they will be siphoned off, then what will we have left? We have the soap operas that you were talking about, perhaps. We would have our news and public affairs programs, which cost a tremendous amount of money to pro- duce, without the revenue to sustain them. I think Mr. Adams stated on the first day of these hearings in be- half of NBC they spent a substantial amount of money in that case and I know the other networks do, too, and I know the individual sta- tions do. You would have secondhand programs that have been re- run over and over and over again. You would have very little worth- while program fare to offer. Now, these people that you are referring to, sir, in the lower 30 percent economically, have desires, too. They want to see better pro- grams. They want to see the best that they can see a:nd I think they ought to see the best they can see. I think if we are to try to help them PAGENO="0603" 59~ improve their status we have to give them better things. So they will have to go to pay TV to get those if they are denied them because we don't have the financial basis to provide the sort of thing we are pro- viding now, and we hope to improve. Mr. MACDONALD. I don't think the networks have been losing money lately. Mr. LINDOW. No; `they are not. Believe me, they are not. We are not talking about this year or next~year. We are talking about the ultimate effect; what happens if pay TV succeeds, not if it fails. As I said before, if it fails, we might as well all go home and forget about it, if we agree it is going to fail. Mr. BROWN. I ha;sten to point out that soap operas got their name from their sponsors and not from their content, and a whole genera- tion grew up on free radio sponsored by soap companies and some others. I happen not to find not too much fault with that. I don't find too much fault with the fact th~vt sponsors ought to be allowed to sponsor things to be made available to the public free. What I am trying to suggest is a combination of these things rather than resist a technological possibility and development that is here. Now, I am wondering whether CBS' attitude will change if they can come up with a patent possibility that will make a pay TV system available-maybe they have it; I don't know-but I wondered if their attitude would change if they had to pay money to somebody else. Mr. LINDOW. I don't know, either. Mr. BROWN. Second-hand programs, "Our Miss Brooks," and some of those things are still floating around on free TV. I prefer not to watch them because I have seen them three or four times before. Some of my kids are delighted with them and I think they are good enter- tainment for children. Mr. LIND0W. My point on that, sir, was that they would be even more second hand, if possible, before they would become available because pay TV would have wrung every nickel out of them at the box office before we got them. We know you can play a program a number of times and still command a good audience. Mr. BROWN. That is a matter of viewpoint. I think the gentleman who preceded you, if he had leaned on what his real interest was rather than picking an argument out of the air, he would have been able to establish that there are a lot of people who pay box office to see it when it is first run but there are a lot of people who will wait and see it when it is free. I don't think we are raising a question here as to whether you are going to see good stuff on pay TV and rotten stuff on free TV. I think you are raising a question as to when you will see it. If you want to see the world series ball game right now, you may watch it on free TV. If you don't have time to see the game until next weekend, you may watch it on pay TV. They are doing this with sports right now. If I want to go to the Firestone open when it is played, I can go to Akron. Mr. LINDOW. Under the Commission's rules, those could be siphoned off right now and they would not have to wait 2 years or any length of time. Mr. BROWN. I could spend the money to go see it or I could wait until it is on ABC's "Wide World of Sports." I do the latter because PAGENO="0604" 6O~ I don't have the time or money or inclination for the former. But let me ask another question. Is the technology developing in the broadcast industry to such an extent that it will permit more television channels on the spectrum or is that a frozen commodity that is unlikely to change? This is a scientific question. Mr. LINDOW. I am not an engineer but I do have a little under- standing of this matter. I believe the short answer to it is this: There has been suggested from time to time ways in which the bandwidth could be adjusted in order to provide more spectrum space. I haven't yet heard of or seen anybody who has come up with a way in which this could be done and still be sure that we have the same type of high- quality reception we have. And, No. 2, to overcome the problem of the existing number of sets running into the many, many millions in the hands of the American public without making them obsolete overnight were you to change that. That is the short answer to your question, sir. Mr. MACDONALD. Thank you very much for your testimony. Mr. LIND0W. Thank you. I appreciate the opportunity to be here. Mr. MACDONALD. Without objection the statement of Harry L. Graham, legislative representative of the National Grange, will `be in- cluded in the record at this point. (Mr. Graham's statement follows:) STATEMENT OF HARRY L. GRAHAM, LEGISLATIVE REPRESENTATIVE, NATIONAL GRANGE Mr. Chairman and members of the subcommittee, the Grange appreciates the opportunity of appearing before this distinguished subcommittee today to express our opposftion to proposals for paid TV, and to discuss our reasons for this position. One of the problems concerning all rural America throughout our history has been that of communications. This is an area in which the Grange has had a consistent interest, beginning wi'th our successful attempts to provide rural free delivery service. We have supported the organization of mutual telephone companies, and later *on cooperative telephone services und'er the REA, and other public and semi-public `cooperative endeavors to improve rural communi- cations. You will remember that we appeared before you concerning CATV. We are not opposed to CATV or to paid TV per se so much as we are concerned that the result's of both of these will be the further diminution of the TV coverage which is available to vast sections of sparsely populated rural America. We opposed OATV in the smaller towns because we believed it would siphon off the revenue necessary to keep free television continually beamed into the rural areas. It is with this same thought in mind that we come before you today hop- ing that this subcommittee, in its judgment, will not approve pai'd television as a means of mass communications in the United States. We do not believe that paid TV offers any attractive alternative to free tele vision. In fact, the opposite might be true. Paid television could become so much of a commercial enterprise that it could further deteriorate the quality of TV programs. Paid television would undoubtedly cure some of the problems created by an over-emphasis and increasing `frequency of `television commercials, but the quality of the programs could very well suffer as a result of this, and we would get a steady diet of "Grade B" movies with considerably less of the kind of news and special events coverage that we have at `the present time. The exception to this would probably be more sports coverage. The prize fights now available to paid TV audiences in movies with giant s'creens would be avail- able to those on `the subscriber list. However, considering the quality of this so- called "sports", especially in recent years, this does not offer much attraction to us. On the other hand, at the present time, free television is bringing us most of the sports spectaculars of general interest to the public, including the Olympics, PAGENO="0605" 601 the World Series, professional football, ice hockey, road racing and many others. Another problem is that paid TV could siphon off the best of these programs and leave only the second rate and highly undesirable programs for free TV. This would have the effect of further reducing the quality of televisioll pro- grams which has been a major concern of the National Grange at its annual sessions for the last several years. All across the country, our Grange members have submitted resolutions to their Subordinate, County, and State Granges, petitioning us to find some way to improve the quality of `television programs and to keep some of those programs offensive to morals and decency off the air. Paid television, like CATV, would be available only in urban markets or iii centers of population, and the vast rural areas would be shut off from the bene- fits of these programs, if any benefits were forthcoming. In the so-called Hartford Report, which suggested $05 a year as' a fee for paid TV if it did become an acceptable fact in our urban life, then the available re- sources to the companies would not be measured in hundreds of millions' of dol- lars, but rather in billions. These companies could very well become "the tail which wags the dog." Since they would be in the realm of private enterprise, they would be considerably more difficult to control in terms of the general weF fare and the public interest. As an alternative to paid TV, we would be of the opinion that it would be much cheaper for the American public and probably considerably more beneficial if there were additional allocations of funds at all levels of government for the ex- pansion of `the so-called "educational television" with the word "education'al" being used in its broadest sense so that the arts, sciences and humanities might all be included. My observation of some of the educational programs indica'tes to me that they certainly are more acceptable in terms of our own concepts of morality in our own home and generally in the homes of our Grange people across the country than either what we are getting today in free TV or what we are afraid we would get in paid TV. However, to conclude with our initial point, our greatest objection is' the possibility that the rural areas would be left in the darkness as far as tele- casting is concerned, as they were left in the dark without electric lights and many of the other services for many years which were available to urban America. Even today, we are suffering from difficiencies of education facilities', health and welfare facilities, general planning and many other of the recognized requirements of urban living which are just as vital to American rural devel- opment and revitalization as they are to our urban centers. The loss of any kind of quality television to our rural areas would, in our judgment, be a major disaster at a price which our national welfare cannot afford. We therefore urge this subcommittee to reject this concept of paid TV until there is conclusive evidence that it can be made available to all who wish it rather than solely to our urban citizens simply by reason of geography. Mr. MACDONALD. The next witness is Mr. Solomon Sagall, presi- dent of Teleglobe Pay-TV System of New York. STATEMENT OP SOLOMON SAGALL, PRESIDENT, TELEGLOBE PAY-TV SYSTEM, INC. Mr. SAGALL. Mr. Chairman, my name is Solomon Sagall. I am president of Teleglobe Pay-TV System. Teleglobe is one of the pioneers in the field of pay TV. It has developed systems for use both over the air and over cable. rreleglobe holds approximately 30 granted patents of which nine are in the United States as well as several patent applications. I had the privilege of testifying before the House committee on January 21, 1958. I would like to incorporate my statement in the record and I will only address myself to a few basic points. Mr. MACDONALD. Without objection, it is so ordered. PAGENO="0606" 602 (Mr. Sagall's prepared statement follows:) STATSMENT OF SOLOMON SAGALL, PRESIDENP, TELEGLOBE PAY-TV SYsTE1~i, Iwo. My name is Solomon Sagall. I am President of Teleglobe Pay-TV System, Inc., whose address is 400 Madison Avenue, New York, New York 10017. Tele- globe is one of the pioneers in the field of Pay-TV. It has developed systems for use both over-the-air and over cable. Telegiobe holds approximately 30 granted patents of which nine are in the United States as well as several patent applications. I had the privilege of testifying before the House Committee on January 21, 1958. I will address myself today to a number of specific points: Why subscription-TV? May I quote in this connection from my testimony given to the House Committee nearly 10 years ago? "The whole conception of Pay-TV is a natural result of dissatisfaction on the part of the American public, with the substandard, low-level anemic pro- grams that they have been offered for so many years. "Some of the purveyors of TV entertainment have been treating the American public as immature children, dumping on the airways third-rate material, being only concerned with filling air time. "Television has largely become a kind of a soporific, a mild narcotic having the effect of preventing the majority of the viewers from exercising their thinking faculties. Television, instead of being the most dynamic, most stimu- lating force towards creating Interest in higher quality intertainment and culture, has had largely an opposite effect." Has there been a change for the better during the decade that has elapsed? I will claim your indulgence in quoting a few excerpts from an article published in the New York Times of October 23, 1966, by Mr. Jack Gould, its Television Editor, entitled "Almost of Age and No Prospect in Sight": "How long, then can TV go on saying that it is young, underdeveloped and in need of time to find itself? Two decades is a long period in which to grow up, yet TV is in deep difficulties * * *~ "Television has a deep-rooted problem that is becoming more evident with each passing year. The medium patently does not really require an incentive to im- provement in its daily output. It can be wildly profitable by just doing what it is doing, and reap handsome dividends from sustained mediocrity. Even if there were substantial defections of viewers, the remaining audience would be more than enough to make television a sound advertising buy." The article goes on to say: "The medium is living dangerously on borrowed time, and reflects unmistakable signs of overwhelming executive fatigue. The tired men cling to their saddles and do not want to step aside for a new generation * * Mr. Chairman, this was an article published in the New York Times on October 23, 1966. A year has gone by. Has the situation improved since? Most emphatic- ally-NO. It is illuminating to quote some excerpts from the same Mr. Gould in the New York Times of Sunday, September 24, 1967. The article is headlined "Balony Sliced Very Thin": "With the completion of the premieres of the new season, the report card of the networks makes for dismal reading * * * taken as an overall group, the net- work crop of weekly features is probably the sorriest collection in many years. The bankruptcy of the Hollywood Factory is manifestly complete, and discerning network executives whose thoughts must turn immediately to the 1968-69 sea- son foresee little or no promise in the ideas being advanced for a year from now. "All in all, the new season is electronic baloney sliced with a minimum of imagination and innovation. "The current season suggests primarily a weary band of old hands who are exhausting the tried and true formulas and have lost their zest for recognizing that broadcasting-like all affairs of mankind-now faces a radical1~r different new day." Conventional, or advertiser-financed, TV has had 20 years of growth, 20 years of unparalleled affluence and prosperty and still has been unable to offer anything better to the American public than the same stale diet. Why is the result of the last 20 years so dismal? It is because the networks have had an unhampered, un- restricted monopoly of the nation's airwaves, one of the nation's greatest natural resources. Only competition of the kind that STV may be able to supply could jolt PAGENO="0607" the networks out of their 20 years of complacency. Such competition is healthy and in the public interest. The opponents of STV have done their utmost to create confusion and to mis- lead the public and occasionally the legislators by advancing totally unfounded, spurious arguments against Pay-TV. The basic anti-STV claims are: a. There is a shortage of spectrum space. b. There will be a siphoning of programs and talent from conventional or ad- vertiser-financed TV. c. There will be pre-emption of free air time. d. The underprivileged cannot afford Pay-TV. Cold facts and hard figures belie each and every one of these claims. There is no shortage of spectrnm-space in the UHF part of the spectrum. Many of the UHF construction permits are still lying idle-and in some of the major markets. Even affluent grantees are trying to delay putting the stations on the air as long as possible. Harcourt, Brace & Co., the well known publishers, withdrew altogether from the privilege of losing millions in the UHF fleld~ Quite a number of UHF operators are losing money, many are continuing opera- tions in the hope of selling their respective stations to prosperous major com- panies, who are able to utilize the tax loss. How abont siphoning? It is high time to explode the bogy of siphoning. Let's consider the economics. Let's assume the most optimistic Pay-TV penetration of approximately 20% of the present 55 million homes, or say 10 million homes. It will take a decade to reach a 20% penetration. Let's assume that one-half of Pay-TV homes or say 5 million homes will be paying on the average $2 a week for programs and equip- ment leasing charges, or $100 a year. I am using the Hartford figures. This will provide, within 10 years, an annual Pay-TV gross of $500 million. At say $2.50 a week, or $1.30 a year, the gross will amount to $650 million a year. But-ten years from now the gross of conventional advertiser-financed TV, would rise-according to a recent statement by Mr. Walter D. Scott, Chairman of NBC, to $6.5 billion, or exactly ten times the amount of the most optimistic forecast of pay-TV annual take. Is it not logical to assume that the purchasing power of $6112 billion for programs and for talent will dwarf that of $650 million? It may not be inappropriate to mention that the nation's tele- casters grossed last year $2.2 billion with pre-tax profits of $492.9 millions. The profits accumulated by the telecasters during the last 20 years of their dead- head monopoly of the public airways provide an extraordinary cushion, which will more than enable them to outbid any offers from the fledgling Pay-TV industry for programs. In light of the above-any assertion that conventional TV needs potection i's ludicrous! The networks are now rapidly invading the field of movie production. Mr. Otto Preminger stated yesterday that he does not agree with the decision of the Motion Picture Producers Association to make representations to the De- partment of Justice, with a view to preventing the incursion of the networks into movie production. Mr. Preminger welcomed competition in this field as well, as a basic tenet of the American free enterprise system. A `C'BS~-1VtGM production deal was reported last week, according to which a number of movies will be made for theatrical release and later for network showing. CBS will pay to MGM between $700,000 and $900,000 per picture. It Is assumed in the case of Pay-TV that on the average one-third of every Pay-TV dollar will go towards the cost of production. With a $700,000 tab, the gross Pay-TV take will have to be $2,100,000. Taking the price charged in Hartford, in respect to the bulk of the STV programs, namely $1.50 for the entire family, it will require 1,400,000 Pay-TV homes to sustain a movie of that cost. But since on the average no more than one-half of the Pay-TV homes will tune into a given program, it will require 2,800,000 Pay-TV homes to gross $2,100,000. 2,800,000 represents approximately 5.80% penetration of the present TV homes. And I venture to say it will take probably 4-5 years for Pay-TV to reach such a penetration. At $100 per annum, the gross Pay-TV take from 2,800,000 subscribers will amount to $2,800,000, but by that time advertiser-financed TV will be grossing probably 3~/2-4 billion dol- lars, with a purchasing power exceeding 12-14 times that of Pay-TV. CBS has also announced a far more ambitious $21,000,000 production deal with Jack Lemmon and the average cost per movie is expected to be $2.9 million, with Jack Lemmon getting $1 million guarantee per picture against 10% rentals. With the customary overhead added on, each picture has to bring a minimum of PAGENO="0608" 604 $3,600,000. With two-thirds of this sum expected from theatrical exhibition, each picture will cost CBS $1,200,000. In the case of Pay-TV, it will require a net of 2,400,000 homes paying $1.50 each, which means a total of 4,800,000 Pay-TV homes to be able to afford this type of picture and with a star of the magnitude of Jack Lemmon, or Elizabeth Taylor, or Richard Burton; 4,80,000 homes means almost a 10%. Pay-TV penetration. In light of these incontrovertible figures, could the opponents `still honestly and seriously assert that Pay-TV will at any time be able to outbid conventional TV for programs and talent? The situation might have been different 20 years ago at the inception of TV in this country. If Pay-TV and conventional TV would have had an equal starting chance-20 years ago-the situation might have been `different. Today-given every opportunity, and even without `any FCC proposed restrictions, Pay-TV would only be able to grow slowly and painfully into a supplemental service. Now, let's deal with the pre-emption of air-time. The question is: Will STV encroach upon conventional airtime to the detriment of the public? Certainly NO! Affluent, prosperous VHF or UHF stations will not go into Pay-TV with all its headaches. It is the independent UHF operator who in the struggle for survival in VHF markets will turn to part-time Pay-TV, in order to minimize his losses~ Teleglobe estimates that he will have to find $2,500,000 to be able to reach break- even point with 20,000 subscribers. Let's take a four-station market, with all the stations in operation. Each station is on the air an average of, say, 16 hours a day, or 112 hours a week; the four `stations are on the air for a weekly total of 448 hours. Pay-TV will enable the fifth independent to go on the air much earlier than he would do otherwise. Let's assume the independent will provide as much as 4-5 `hours o'f Pay-TV programs daily. He is not ta'king away anything from conventional TV! The `economic viability of his `station as a result of part- time Pay-TV will enable him to provide ultimately a hundred or so hours a week. There is really little likelihood that he will be able to use more than half of the airtime for Pay-TV. The other half or, `say, 50 hours a week will thus be a net addition to free or conventional airti'me in the market. Pay-TV will thus not deprive the public of the amount of free airtime available at present. It will make possible maximum utilization of broadcast channels, at present still idle, or otherwise ineffectively used, in some cases nourished by `sub-standard pro- grams, of no benefit to the viewing public at large. The low-income groups and Pa~y-TV In their fear `of the competitive element that Pay-TV can bring about, the opponents are assuming the role of the champion of the underdog, namely the underprivileged, low income classes-the 30% of viewing families-who, they claim, will not be able to afford Pay-TV. Let's explode this bogey as well. There are possibly many low-income families who cannot afford and will not be able to afford for years to come a color television set. It would certainly be a nice and generous gesture on the part of the networks to allocate a certain amount of their annual income to providing the low-income families with color television sets for free. After all, telecasters have waxed fat over so many years by using the natural resources belonging to the American public-the air frequencies. By the same token, some of the underprivileged 30% cannot afford to pay the sky- rocketing admission prices to the neigh'borhoo~ motion picture theatres. Would it not be an excellent idea for the theatre owners to provide during certain hours in the day-prime evening hours included-free admission for members of the low-income groups? It is the Teleglobe philosophy, largely `shared by other Pay-TV proponents, that subscribers should never be charged more than the price of one single admis- sion ticket to a neighborhood theatre. The average American family consists of 3'/2 persons. Pay-TV will enable the cnt~re family~, and often friends of the family, to watch a Pay-TV program at home for the price of only one single ticket. This will represent a substantial saving to a low~income family. The STV op- ponents are therefore not prompted by genuine sympathy for the underprivileged, but by a fully understandable desire to protect their vested interests. As a matter of fact-it is the low income groups that stand to benefit a great deal from Pay~TV. They may be enabled to see via Pay-TV Broadway plays that may not be shown on advertiser-financed TV for ten years or so. Let's take for example a musical like Camelot. It played on Broadway some six years ago. One has to pay on Broadway anything between 15-20 dollars for a pair of seats; add cost of parking a car, and sometimes of a baby-sitter and perhaps `of a supper PAGENO="0609" 605 in town. This may mean an expenditure of $25-30 an evening~ Only a privileged minority can afford seeing "live" theatre. But nobody calls this undemocratic. Camelot is now-six years later-about to make its debut as a movie on Broadway and probably in selected theatres in major cities-at hard ticket prices, in the range of $2.50-$4 a seat. The selective presentations of the movie will attract a wider audience, but the hard ticket prices may still exclude possibly 3/4 or more of the potential moviegoers. Does it not sound rather undemocratic? A couple of years later-~dependent upon the picture's appeal-it will reach the screen in the neighborhood theatres, where the average charge is approximately $1.50 a ticket. This creates an additional, much wider level of audiences. But the millions of TV viewers are still deprived of the opportunity to see it. Camelot-or the Man of La Mancha, or Fiddler on the Roof, or My Fair Lady-may not reach the home screen for 10 years or perhaps longer. Pay-TV on the other hand will make it possible for many-including the underprivileged segment- to vieW these out- standing Broadway attractions shortly after they reach the neighborhood theatres, and perhaps 3-5 years earlier than on advertiser-financed TV. The theatre, by the way, is not being deprived of its steady audience. Moreover, the young will always prefer to go to a neighborhood movie theatre than sit at home. Pay-TV creates a new audience level. And 3-5 years later the same Broad- way attraction will come on for free on conventional television-with its mass audience level. If STV is successful, then the 1/3 underprivileged will be able to sit at home and for $2-$3 for the entire family and friends see the Man of La Mancha, for $1 or $2 for the entire family, see legitimate Broadway plays and operas, for the price of $1 for the entire family, see Off-Broadway productions, in short every- thing which is today unavailable for economic reasons, to the very segment of the population for whom the opponents are shedding crocodile tears. Teleglobe supports the Fourth Report Teleglobe is here to express its support of the Subscription Television Com- mittee's recommendations to the FCC to authorize nationwide Pay-TV on a permanent basis, as outlined in the Fourth Report. The SPV Committee declared that subscription television is in the public interest and benefit, and at the same time decided to impose certain restrictions in order to safeguard conventional or advertiser-financed television against siphoning of programs or pre-emption of airtime. We are of the opinion that conventional television does not need any safeguards, does not need any sheltering, does not need any coddling; it is too solidily entrenched to fear serious undermining of its position. We are, however, willing to accept the FCC proposed restrictions, perhaps with some minor modi- fications, if the FCC decides, in its wisdom, to make authorization of Pay-TV conditional upon such restrictions, Let's examine some further objections raised by the opponents: The opponents claim that there is no proven public demand which would jus- tify FCC authorization of Pay-TV. There was no public demand for conventional. television when it was introduced 20 years ago. There could have been no demon- strable demand for it since the public could hardly have visualized what it was all atout. There was no public demand for ETV, or for FM, nor, for that matter, was there any public demand for radio when it was introduced some 40 years ago. It was the duty of the Commission placed as it was in charge of the Communications Act to foster all such new developments; it was the duty of the Commission to look ahead. Looking ahead remains the clear duty of the Commission; hence it has accordingly a duty to authorize nationwide Pay-TV now. The opponents are afraid-on the one hand-of the success of nationwide Pay-TV; on the other hand they continue to assert that Hartford was a failure, that there is no demand for Pay-TV and that it will flop. C~msequently, they are against FCC authorization. The FCC does not have to be assured beforehand of the success of a particular innovation. There was no guarantee in 1927 that Radio would be successful; there was no guarantee in 1947 that TV would suc- ceed. The FCC allocated some 15 years ago frequencies in the UHF part of the spectrum; the majority of those frequencies remain unutilized and the bulk of the UHF stations that courageously started operations at that time failed. This did not prevent the FCC, aided by means of the All-Channel Set Law, from trying to revive UHF. And still-without part-time Pay-TV, many UHF stations may fail again. Teleglobe accordingly believes that the FCC will be derelict in its duty as guardian of the nation's airwaves if it were not at long last to open the door to Pay-TV now. 86-399 O-67-39 PAGENO="0610" 606 The Hartford programs The oppofleuts continue to assert that Hartford failed to fulfill the promise of better and different programs How could Hartford do better than it did with a the difficulties and uncertainties of a test Operation? it is indeed a miracle in the circun~stances that Hartford did as well as it did. This does not mean that I am satisfied with the performance in Hartford. Quite the contrary firmly believe that Pay TV if it is to become a beneficial supple mental service in the interest of American TV viewers, will have to do a lot more than Hartford did thus far; it will have to offer more than merely current movies; it will have to evolve a new Programming format. If people are willing to pay for "adult" programs, then that is a good enough reason why they should get them, but this type of program will have to be balanced with far more diversified fare. Marshall McLuhan, the communications expert, made a frightening prediction last week that the United States will have an economic depression in about five years because its youth lacks direction and described "the TV generation" as being "in a slump of human drive and ambition." Television is one of the most powerful means of influencing the human mind that the world has ever known. We accuse Conventional TV of having failed to make adequate, beneficial use of the medium. Twenty years o~ brain-washing the American public by a fare of mediocrity was bound to produce a negative, paralyzing impact, particularly on the minds of the impressionable younger gen- eration. There is little that conventional TV can do about it. Advertiser-financed TV and mediocrity are as inseparable as Siamese twins. Can STV do better? It can and it will. I have great ambitions for STV. I firmly believe that STV will be able to evolve a new programing format, that it will be able to create programs that will awaken the mind, programs that will stimu- late the brain.. . - And a new generation of creative writers, directors, actors- who have little chance to get ahead in conventional TV-will be attracted to Pay-TV and to its challenge to produce new ideas, new forms. A new approach that will be able to capture the attention of both the older as well as the younger generation will emerge. Not dependent on the advertising dollar, Pay-Tv pro- ducers will not be afraid to experiment. A new dynamism will be introduced into American TV, and herein lies the great promise and the real future of Pay-TV. Cultural programs do not have to be synonomous with dullness. Viewers can and will be educated-via Pay-TV to appreciate and desire operas, concerts, ballet and the like. You have to get men like Leonard Bernstein to teach appre- ciation of music as lie used to do-in a dramatic, exciting way-with his masterly introductions to some outstanding concerts. Advertiser-financed TV can no longer do it, since it has to cater to the lowest common denominator in order to sell the wares of the advertisers. Pay-TV is fortunately free from such stultifying shackles! And that is why Pay-TV ought to be given every chance of fullllhnent. The question has been raised in the Sub-Committee hearings whether one Pay-TV operation in a five station market-as proposed in the Fourth Report, would not create a Pay-TV monopoly for the particular station. Teleglobe agrees with this point of view. Teleglobe did accordingly suggest in its statement to the Commission and in the oral arguments held last week, to permit competition by authorizing two Pay-TV operations in markets with siw or more TV stations. Mr. Chairman, the opponents fearing the healthy competition of Pay-TV have done their utmost to mislead the American public. One has but to remember the testimony of Dr. Frank Stanton, head of CBS, before the House Committee on Interstate and Foreign Commerce in January 1958, in the course of which Dr. Stanton pictured the frightening prospect of an average American family having to spend about $480 a year for Pay-TV programs. The figures submitted by Zenith and Teco show an annual subscriber cost of approximately $104 ($65 from programs and $39 from decoder rental and maintenance). This is approximately but 1/5 of the figure given to the Congressional Committee by Dr. Stanton. Tele- globe projections for nationwide Pay-TV visualized, in its statement to the FCC of July 8, 1965 and its Comments of October 10, 1966 a possible gross income from programs and decoder rentals and maintenance of $2.50 a week or $130 a year per subscriber, approximately 1/~ of the estimate given by Dr. Stanton. One ha~ but to remember that Mr. Richard Salent, President of CBS New-s, and at the time a CBS Vice President, in a TV debate on Pay-TV sometime in 1958, drama- tically displayed and read to the multi-million TV audience a letter from an old widow who stated that she invested her life savings in the purchase of a TV set PAGENO="0611" 607 and now with the advent of Pay-TV, she will be deprived of the opportunity to view "free" television. Reference has been made to the misleading campaign of the California theatre owners against Pay-TV. These are but a few examples of the methods to which the Pay-TV opponents stooped in order to "blackent" Pay-TV. All methods were considered fair in the opponents' efforts to kill the Pay-TV embryo. Pay-TV opponeats are fighting progress Mr. Chairman, the opponents are trying to stifle competition-the very essence of the American free enterprise system. Like King Canute, they are trying to stem the tide of progress. It may be appropriate to mention here the decision of California Superior Judge Irving H. Perluss, who declared that the outlawing of Pay-TV by the California referendum of November 4, 1964 was unconstitu- tional. Judge Perluss said that he found the success of the initiative was based on a "speculative and illusory evil"-that Pay-TV might destroy free television. "Publicity statements issued by the Citizens Committee during last fall's (1964) campaign hammered at this theme, warning the public that Pay-TV would ulti- mately corner all the most popular television offerings and leave commercial or `free' television with less popular programs." "In the final analysis," Judge Perluss said in his ruling, "it would appear that the charges here made could have been made by the radio industry when television was made available for the home, and by the producers of silent pictures on that memorable day when Al Jolson appeared on the motion picture screen and sang in the Jazz Singer. Invention and progress may not and should not be so restricted, at least when they are cloaked with the immunity of that fundamental `freedom of speech.'" The opponents are now screaming their heads off that it is up to Congress to settle the issue of Pay-TV. They are hoping for delay and perhaps for a ban of Pay-TV. The opponents of Pay-TV desire to move the clock back to the year 1683 when the manufacturers of metal buttons for men's clothing succeeded in getting the Virginia legislature to institute a law to prohibit the manufacture of cloth but- tons; the law declared the making of cloth buttons a penal offense; it remained on the statutes of Virginia from 1683 to 1721. We are sure that Congress will have no desire to move the clock back to 1683. We are certainly against further delay, and we pray and hope that the delibera- tions of this Sub-Committee will enable the FCC to proceed constructively and give-after 14 years of delay and frustration-the green light to Pay-TV. Pay-TV is entitled to its opportunity in the American market place. Of course there are still many unknowns, many unchartered areas. There were, however, many unknowns when conventional TV started to emerge. No amount of further experimentation on a test basis will bring about additional useful information. Only actual STY operations-on a basis of permanency- is a gradually growing number of markets-can provide the conclusive proof of the ability of Pay-TV to make a constructive contribution to American TV. Mr. Chairman, may I say in conclusion: The mere fact of FCC authorization will not bring about overnight nation- wide Pay-TV. We are realistic enough to visualize the difficulties in the path of Pay-TV. It will be an uphill fight. Vision alone Is not sufficient. Good intentions are not enough. Dedication on the part of Pay-TV proponents to achieving a new breakthrough will be required. Tremendous capital resources will be required. Readiness on the part of the Pay-TV entrepreneurs to risk money and to shoulder losses for possibly years to come will be required. For many it will prove merely "a license to lose money". If Pay-TV succeeds it will be to the benefit of- (a) the American public at large, (b) the millions of viewers, (c) the UHF broadcasters, (d) producers of entertainment, (e) a new generation of writers, directors, actors, (f) manufacturers of equipment, and (g) many others who will share in the development and operation of this new industry. If it fails, nobody will be hurt except its courageous backers. Mr. Chairman, STV-we claim-is a new, progressive, beneficial force Its future is in your hands; it fully merits your support. I thank you. PAGENO="0612" `608 Mr. SAGALL. I refer in my statement to the effect that a great deal of confusion has been introduced into the subject of pay TV by the opponents and indeed many misleadiug statements. I think I would like to start with the projection given to us just before I came to this table. On page 9 of the statement of the Association of Maximum Service Telecasters it is stated: Even based upon the revenue figures derived from the Hartford failure, nationwide pay TV could easily have annual revenues of $1 billion, and this with only 16-percent penetration of the United States television homes. Now I engaged in some simple arithmetic. A 16-percent penetration would mean 8,800,000 homes and with each contributing a total of $104 a year, $65 in program charges and $39 in equipment leasing and maintenance charges-as in Hartford-the gross would be $915,200,000. This would, however mean 100-percent rating. It would mean that every one of the homes, each of the 8,800,000 pay TV homes in the United States, would be willing to pay a total of $104 a year. But this is perfectly ridiculous. We would all be very happy-and I think the Hartford figures prove it-if on the a'verage 50 percent of the pay TV homes will pay $104 a year-SO percent. In this way you can immediately halve the figures introduced by AMST just before. It would mean, not $1 billion annual revenue from pay TV, but half a billion dollars. A little later the AMST statement says that one can project program revenues alone from a moderately successful nation- wide pay TV system of at least $1.1 billion by adding $1.25 more a week. That means adding $65 a year. That means doubling the figures received in Hartford from program fees. Instead of the present Hartford figure of $65 this statement visual- izes $130 in program charges. But I believe even more misleading it is when you come to read further tl4at - Of these $1 billion, pay TV program revenues alone of at least $550 to $630 million would almost equal the total program expenditures for the three commer- cial networks in 1966. The average dollar that will be brought in by any pay TV operator will allocate no more than one-third of the gross receipts for programs. Therefore, the actual figure should be no more than $380 million out of a billion dollars, or, if based on a 50 percent rating, as in Hartford, no more than $160 million out of half a billion dollars. I need not go into any further examination of the AMST statement. Now, Mr. Chairman, you just said there must be something wrong with free television if there is a movement toward pay TV. I would like to quote one sentence from my statement to the House Commerce Committee made 10 years ago: The whole conception of Pay-TV is a natural result of dissatisfaction on the part of the American public, with the substandard, low-level anemic programs that they have been offered for so many years. Some of the purveyors of TV entertainment have been treating the American public as immature children, dumping on the airwaves third-rate material, being only concerned with filling air time. It is interesting to quote almost 10 years later from an article in the PAGENO="0613" 609 New York Times by Jack Gould, its television editor, on September 24, 1967. The article is headlined "Baloney Sliced Very Thin": With the completion of the premieres of the new season, the report card of the networks makes for dismal reading * * * taken as an overall group, the network crop of weekly features is probably the sorriest collection in many years. The bankruptcy of the Hollywood Factory is manifestly complete, and discerning network executives whose thoughts must turn immediately to the 19G8-6~ season foresee little or no promise in the ideas being advanced for a year from now. This is the explanation why there is growing dissatisfaction with the present-day commercial TV programs. May I deal now for a moment with a vital point, the quality of the Hartford programs;. Hartford, I think, did as much as it could under the difficulties and uncertainties of the test operation. Incidentally, I would like to reply to a question posed here: Why are there no other pay TV tests? The Teleglobe System was approved for a pay TV test by the Com- mission in Denver, Cob. We did grant a franchise to the firm of McFadden-Bartell, publishers and operators of radio stations. Because of the stringent FCC regulations governing tests, our fran- chise holder was unable to proceed with the test, after having sunk into it almost a quarter of a million dollars. They had difficulty at the time of getting programs from motion picture producers~ All this has been set out in briefs filed with the Commission. I think a great deal of credit is due to our competitor Zenith and RKO- General who had the means and courage to go ahead with their Hartford test. But anybody else who would have contemplated to go into further tests and experiments really should have had his head examined. Now coming back to the Hartford programs, tha~t does not mean- Mr. MACDONALD. Excuse me, sir. Would you mind expanding on that? Mr. SAGALL. There is not the slightest chance of making a success with an experimental operation under the test conditions imposed by the FCC. Mr. MACDONALD. Is that why you backed out of Denver? Mr. SAGALL. That is why our franchise holders were unable to get going. Mr. MACDONALD. What was the relationship between your company and the franchise holder? Mr. SAGALL. We granted them a franchise under the Teleglobe patents. Mr. MACDONALD. You charged them? Mr. SAGALL. Yes. We would have charged them a royalty of 5 per- cent. It is a public document filed with the Commission. Mr. MACDONALD. I haven't seen it. That is the oniy reason I have asked. Mr. SAGALL. I am explaining `that this information is public and in the same way, as the Zenith franchise contract granting similar terms in respect to Hartford to IRKO-General, is on file with the Commission. Mr. MACDONALD. Why would you have to be out of your mind? Mr. SAGALL. Not we but anybody who would be willing, as Mc- Fadden-Bartell did at the time, to spend to the tune of a quarter PAGENO="0614" 610 of a million dollars. McFadden-Bartefl had a great deal of support of public opinion in Denver. The Denver Post came out in favor of givin~ every possible help to McFadden-Bartefl to introduce pay TV in Denver. They stated it would make a valuable contribution to Denver's cultural life. They felt there would be an improvement in Denver television programs as a result. Indeed, I don't want to tire you, Mr. Chairman, but I have here in one of the briefs filed with the FCC the Denver editorial. May I continue? Mr. MACDONALD. Yes, sir, but I am not really sure why they backed out. Mr. SAGALL. First of all, they had difficulty in getting programs. They were starting in 1963. They were supposed to start in Denver a year or so after the Hartford operation started. Hartford had diffi- culty in getting motion pictures. They only got them from a couple of companies, Warner Bros., I believe, and perhaps one or two other companies. The majority of the motion picture producers refused to supply such programs. Hartford and RKO-General had to make representa- tions to the Department of Justice before they were able to get the other motion picture producers to fall in line. When McFadden-Bartell came to the same motion picture producers who originally were willing to supply Hartford, they refused. They said- We have taken a chance on Hartford; we antagonized the theater owners. Let some other motion picture company take a chance in Denver. We don't want to bear all the criticism and the stigma for Supporting pay TV. Mr. MACDONALD. How marty sets of whatever you call them did you contemplate to lease to these people in Denver? Mr. SAGALL. The original statement filed with the Commission set an experimental ceiling-remember, it was only experimental-of 2,000. Mr. MACDONALD. I don't quite understand why the motion picture people would get that exercised actually, just 2,000 families involved. Mr. SAGALL. The theater owners are a very powerful body. They were at that time even more than now, the bread and butter of the motion picture producers. In the intervening years the sale of motion pictures to television stations has been gradually increasing. Of course, they haite now two customers, theater owners and commercial television. Both of them today are, of course, against pay TV. I would like to deal with the Hartford programs. I am not satisfied with the performance in Hartford. Quite to the contrary, I firmly believe that pay TV, if it is to become a beneficial supplemental serv- ice in the interest of American TV viewers, we will have to do a lot more than Hartford did thus far. We will have to show more than cur- rent movies. We will have to evolve a new program format. If people are willing to pay for adult programs to which reference was made the other day, that is good enough reason why they should get them but this type of program will have to b~ balanced with a far more diversified fare. PAGENO="0615" 611 I would like to quote Dr. Marshall MeLuhan, the communications expert who made the other day the frightening prediction that the United States will have an economic depression in about 5 years be- cause its youth lacks direction and described "The TV generation as being in a slump of human drive and ambition." Television is one of the most powerful means of influencing the hu- man mind that the world has ever known. We accuse conventional TV of having failed to make adequate, beneficial use of the medium. Twenty years of brainwashing the American public by a fare of medi- ocrity was bound to produce a negative, paralyzing impact, particu- larly on the minds of the impressionable younger generation. There is little that conventional TV can do about it. Advertiser-financed TV and mediocrity are as inseparable as Siamese twins. Can S'TV do better? It can and it will. I have great ambitions for STV. I firmly believe that STV will be `able to evolve a new program- ing format, that it will be able to create programs that will awaken the mind, programs that will stimulate the brain, and a new gen- eration of creative writers, directors, actors-who have little chance to get ahead in conventional TV-will be attracted to pay-TV and to its challenge to produce new ideas, new forms. A new approach that will be able to capture the attention of both the older as well as the younger generation will emerge. Not dependent on the advertising dollar, pay-TV producers will not be afraid to experiment. A new dynamism will be introduced into American TV, and herein lies the great promise and the real future of pay-TV. Cultural programs do not have to be synonymous with dullness.' Viewers can and will be educated-via pay-TV to appreciate and desire operas, concerts, ballet, `and the like. I am not impressed by the way by the lipservice contribution made by some of the networks to bringing in an occasional concert or an occasional ballet. The history of the ballet is rather illuminating. A company in Britain called British Home Entertainment~ Ltd., started making programs for pay television for Britain and the Amer- ican market. They are now a part of a British experimental pay tele- vision operation called Pay Television, Ltd. Incidentally, in a part of London, Westminster, I think they only started about 18 months ago, in January it will be 2 years, and I think the last figure I had was that they had 9,000 or 10,000 subscribers. They started in February in a part of Sheffield with only 3,000 sub- scribers. The experiment has been working so well that there is a firm belief that i~e British Government is going to approve permanent pay-TV li~ .~es, possibly at the end of this year or early next year. Now this British Home Television, Ltd., produced the Royal Ballet with Margot Fonteyn and Rudolf Nureyev. They were unable to sell it here. By that time the California operation was suspended. They were going to sell it to California. I don't remember whether Hartford did show it or not, but the ~ British company needed money. They succeeded to sell it to CBS. CBS kept it in cold storage for a year or 2 years until Christmas 1965 and then during the Christmas season they offered it as a sus- taining program. I would not call that a particularly remarkable contribution to cultural TV. PAGENO="0616" 612 You have to get men like Leonard Bernstein to teach appreciation of music as he used to do-in a dramatic, exciting way-with his mas- terly introductions to some outstanding concerts. Advertiser-financed TV can no longer do it, since it has to cater to the lowest common denominator in order to sell the wares of the advertisers. I want to make only a couple more remarks, I know that members of the subcommittee will get very impatient if I keep them beyond the lunch hour and impose on. them involuntarily a fast on which I may have to-not may but will embark on a little later this evening after sunset. I did not mention anything in my statement about sports. Of course, I think that the pay TV proponents, those who preceded me and those who will come after mc will make out a good case that there will be no siphoning of programs of motion pictures and the like, that there will be no preemption of air time. As members of the subcommittee know, there is plenty of space in the air spectrum; the underprivileged will not suffer; just on the contrary. In this respect I don't know whether I am permitted to dare to criticize a Congressman of the eminence of Mr. Celler, when he took up the championship of the underprivileged. Indeed, when he came into this room yesterday I was almost shiver- ing because I remember, I believe, there was a bill introduced b Congressman Celler some years ago to punish pay TV operators wit substantial fines and with jail sentences up to 5 years. So I was some- what worried about it. But I believe that we have made out a good case and I don't think we need to belabor this point. The underprivileged will only benefit from pay TV. But I would like to deal now with sports, the question of outbidding for sports. Again figures were mentioned here yesterday that in New York City 500,000 homes would install pay TV and would each pay a dollar and obviously they would outbid commercial TV for the sports. First of all, that would assume a rating of 100 percent for every pay TV home. But I unerstand that sports events, pro football does not get a higher rating today than 10 to 14 percent, even when it is offered for free. So why come up with those fantastic, indeed, I woulld say ridiculous, figures? I assumed in my statement figures, most optimistic ones, that in 10 years we will have 2O-percent penetration, more than 16 percent sug- gested by AMST, of which only half will be paying. I take the Zenith figures of $2 a week, or I take slightly higher figures of $2.50 a week, between $100 to $130 annually that will give pay TV a gross of from $500 to $650 million a year 10 years from now. Now, Mr. Walter P. Scott, the chairman of NBC, predicted a couple of weeks ago that 10 years from now the gross billings of advertiser financed TV will reach $6.5 billion. Let us take last year's pretax profits of commercial television; $492 million on billings of $2.2 billion. That means 22 percent. On $6.5 billion the pretax profits will rise to almost $1.5 billion. PAGENO="0617" 613 Pay TV 10 years from now, even with my higher figure, will gross $650 million; let us take the same 22-percent pretax profits. The pre- tax profits will reach $143 million on the maximum optimistic pro- jection of pay TV 10 years from now. This will compare with $1.5 billion of pretax profits of commercial television. Would they really in the circumstances let sports events go to pay TV? It would really be ridiculous. Now I would like to make an additional observation. Mr. Chairman we think that no restrictions by the Commission are really warranted or required but we accept them and, therefore, if it would appear that the 2-year provision of not showing on pay TV sports which have been shown regularly, I am quoting from the third report: "Sports events may not be broadcast on STV which were regularly televised in the community within the 2 years preceding proposed STV broad- cast," is not adequate, if there is still any fear that the public may be deprived of the free sports events, I, for one, on behalf of my com- pany would not object to even a more stringent provision on the part of the Commission. Maybe the Commission in their wisdom will decide then to increase it from 2 years to 3, maybe 5 years. Now would there be sufficient money on the part of all the pay TV entrepreneurs in the country then to outbid the networks for the sports events? I think that I do not have to belabor this point any more. I would like to refer to one question raised by one member of this subcommittee. With only one pay TV operation in a given market would there not be established a strong monopoly for this pay TV station? We agree. We made the suggestion to the Commission to authorize two pay TV operations in markets with six stations or more. And all the major markets have six stations or more. Mr. BRowN. Mr. Sagall, may I interrupt you at this point? Mr. SAGALL. Please. Mr. BROWN. There are two principles here that I think we ought to be concerned with. One is whether or not you are penalizing a portion of the stations already on the air, by not permitting everybody that wants to go to Then the other principle is this one of trying to encourage as many stations as possible to go on the air in an area where the advertising dollar has been pretty well sopped up by the stations which are on the air a.nd the only way perhaps to get a new station on the air is with the principles of STV. `Would it make sense to you if the Commission were to say in its rules that STV is available only to stations not now on the air at this point for a certain time? In other words, say, a 3-year or 5-year permission on that basis, and then to open STY up to anybody who wishes to go into the field including every station in the market if they want. The idea I am suggesting here is aimed at increasing the number of stations on the air by giving the STV to new stations and then eventu- ally not limiting STY to the stations in the market? Do you follow my thought? PAGENO="0618" .614 Mr. SAGALL. I follow you, Mr. Brown. However, there is a big prob- lem in it. Fifteen years ago or so the Commission allocated many fre- quencies in the UHF part of the spectrum. Some people jumped into them hopefully and the overwhelming majority lost money and they had togo off the air. Now there are today many markets where there are UHF opera- tors, independents, who are losing money. If pay TV were to be limited to stations not yet on the air today would get an opportunity to have viable stations and those who pione.ered and spent millions of dollars in UHF and are still losing money would be deprived of it, there is a danger they would get off the air. Mr. BROWN. Would you prefer then to see the STV available to everyone in the market? Why the limitation? I am not sure I follow you. Mr. SAGALL. Mr. Brown, I would say that no affluent operator, no one who is making any money, will want to go now into pay TV. It does require a lot of money to engage in the franchise operation-$2.5 mil- lion, maybe $3 million. Mr. BROWN. I did not understand. No affluent operator will want to go into it. Mr. SAGALL. Affluetit will not, certainly not, not until the success of pay `TV is proven over a period of 5 or 10 years, not until some of the pioneers break their bones in the process. I happen to be a pioneer some- what. I don't happen to have the resources of some `of my major com- p~titors ,and it is a very hard task to be pioneering. `Therefore, the same would apply to the UHF operators. Let me give you an example that right now in New York there is one construction permit and they are `trying to sit it out as long as possible on the construction permit. All the people, even major companies who have the means, are try- ing to sit as long as possible on the construction permits. New York has one construction permit and it may be a year or two before the station will be on the air. There are two o'thers which are losing money, UHF. One is privately owned, the other one is the city of New York owned, station 31. Its cost of operation is $1.1 million a year. `The taxpayers of New York City are worried. Very few people are tuning in to that channel. It is quite possible if pay TV is authorized the New York municipal authorities may want to use it part time. Chicago has two stations which are losing a lot of money. There is also a construction permit and the grantees are trying to delay going on the air as long as possible. I have information on the situation in other major markets. Mr. BROWN. I accept the principle that drowning men clutch at straws. So maybe a station that is losing money will look at STV and decide that that is the way out and invest in it. But it seems to me that the person who does the investing will invest on the basis of one reason or another of all the arguments that we have heard, that there is a great deal of demand or there is no demand. You have modified the statement of the gentleman who preceded you, Mr. Lindow, to the extent that you think there will be some failures. PAGENO="0619" 615 I am not sure whether you are right or he is right or somebody else is right. If it is not a success and there is no demand for it, then the whole thing will fall of its own weight. I don't think that is the issue that we have to determine-ho~1 much he is going to make or what prospect there is for a quick and easy way of making money. I don't think that is the issue. The issue is whether or not it offers a possibility and a broadening of the opportunity which viewers have to see a selection of programs. I would suggest to you that if pay TV is quite successful that Congress and the FCC ought to permit any sta- tion, which wants to, to get into it, any network that wants to get into it, so that competition will ultimately bring down the prices of pay TV to the consumer and also so that they can make a little money to have the opportunity to do public service programing. Would you agree with that? Mr. SAGALL. I agree wholeheartedly. I think ultimately after the pay TV pioneers of today, if they are successful, I hope they will be successful in proving that it is a paying proposition, certainly some commercial broadcasters may want to go into pay `TV unless they feel that revenues from part-time advertising are more lucrative. On the other hand, I feel this is a point that can be safely left to the Commission and, of course, to Congress. I remember when I read economics in London, where I lived be- fore, I heard a famous authority on the British Constitution say: "Parliament is all powerful; it can do everything except turn a man into a woman and a woman into a man." I think this goes for the Congress as well. Congress is all powerful and 5 or 10 years from now there may be all sorts of different ap- proaches and expansion and so on of the whole broadcasting situa- tion, that will have to be considered. But the important point is, and that is why I feel we are here today, to see that this young fledgling of pay TV is not suppressed before it is given a chance to prove something. The danger is here that the opponents have combined and they have terrific resources and very powerful lobbyists and they are trying to kill-by the bill of Congress- man Dingell-pay TV before it is even given a chance to emerge. There I see is the great danger for the development of broadcasting in the United States. If I may, I would like only to refer in conclu- sion- Mr. MACDONALD. Obviously, that British parliamentarian never heard of Denmark. Perhaps it is not possible in England but in other places it is. My question specifically is: Do you feel that it will be possible to have two or more pay TV networks? Mr. SAGALL. Networks? I think, Mr. Chairman, sooner or later there will emerge, I believe, an association of the UHF, largely pay TV operators, which would be `the foundation for a fourth network. I think it could easily arise in the first 5 years of pay TV operation but I don't know that it would immediately lead to a fifth network. Mr. MACDONALD. If the Congress does permit pay TV to happen don't you think it is almost necessary that there be a network to be successful? You have already talked about how difficult it is for a station to operate in this field. Would there not have to be a network to be successful? By network I mean interconnection. PAGENO="0620" 616 Mr. SAGALL. I am sure something like this will have to happen. Since I visualize that there will be attracted to pay TV a new gen- eration of directors and producers and actors and so on, they will not want just to work, it would not be economical to sell it to just one pay TV operation. Therefore, there would have to be a number of customers. Indeed when I was referring to a new programing format I was not just indulging in fantasy. I personally and I am sure the other pay TV proponents had discussions about such programing-indeed I had many discussions with one of the leading talent agencies how to get about it, how to start with Broadway productions. The programs will have to be sold to a number of stations and therefore we do have immediately the foundation of a pay TV net- work. Mr. MACDONALD. I happen to agree with you that it will have to be more than one or two stations in operation to have any chance of financial success. My original question was, Do you think that there is room in this field for, let us say, two or more types of systems as a concrete example? Mr. SAGALL. You mean technical system? Mr. MACDONALD. I know that Zenith has one. I know that you have one. Mr. SAGALL. There is also Skiatron and there is Telemeter. Mr. MACDONALD. We will hear from them later. Do you think it is feasible to have-you know, it is sort of like having a telephone, it is not quite feasible to have two telephone systems in your house because half of your friends would have one cable and the other half would have a second cable. Don't you think that this lends itself in some ways to having just one system preempt the field? Mr. SAGALL. Mr. Chairman, the Commission in rulemaking proceed- ings posed this question. Now the Commission decided against a single nationwide system. Therefore, we all have the same chance- Mr. MACDONALD. Excuse me, sir. I did not understand. Mr. SAGALL. The Commission recommended in the fourth report against introduction of a single nationwide system. This would have created possibly a $1 billion monopoly for one pay TV manufac- turer or developer of a system. Therefore, everybody, all the four sys- tems known today, there may be others, will have an equal chance of competing in the marketplace and trying to grant franchises for their respective systems. The question you have asked, Mr. Chairman, refers to another point, namely, could there be in one given market more than one system. Mr. MACDONALD. Right. Mr. SAGALL. Now we, like the other pay TV proponents, have said we don't object to there being more than one system even in one .market, but we did indicate that we think in practice it will not work. The practical experience will mitigate against it. Namely, is it not quite like having two telephone systems. I believe that at one time Philadelphia had two telephone systems many years ago. One was an independent, one was Bell, and many subscribers had to have both systems installed. What would happen is that if Zenith has a better sales organization they will go into a given market. If Teleglobe has an efficient sales PAGENO="0621" 617 organization we will get into some markets. Now, if there is a second station which wants pay TV and if the Commission should authorize it, they can join; there is no technical difficulty in the second station joining the Teleglobe or the Zenith pay TV local network for that purpose. Therefore, I do tend to agree, much perhaps to my regret, that in a given market it will not probably be practical to have more than one technical system. Mr. BROWN. If the gentleman will yield, is the analogy more like the analogy on the color systems? I understand the FCC some years ago had to make a decision on which color system they would permit or encourage because it related to both broadcast and receiving of color and th4 they finally went with the system that was basically an RCA system as opposed to the Columbia Broadcasting System. Is this the same kind of thing that you think we will get into? If this is broadly available and not restricted will this likely be built into the set in some way so that you can get your free or pay? Mr. SAGALL. I don't think the analogy will hold good. The decoders of the various companies are different and the billing and collection methods are different. By the nature of things many members of the subcommittee have been referring to a coin in the slot. The majority of pay TV proponents are not going to use that. So there are differences in the systems. Therefore, I don't know whether we could combine into a uniform decoder. I am not talking of patent arrangements. Those would have to be worked out. The other question raised was about making it part of the tele- vision set. This would not be practical as long as pay TV is not uni- versal in every American home. Moreover, under the FCC regulations the potential pay TV subscriber will not have to buy the decoder. Mr. BROWN. Are you suggesting that if there are three networks in this operation there might have to be three different decoders installed? Mr. SAGALL. In the home. There need not be if there is only one technical system authorized in the market. It could be done and I believe the Zenith representative, Mr. Wright, explained it the other day. Let us say `that there is a pay TV operation on channel 4 and over an independent channel 31 in New York City and they use the Tele- globe system. Therefore, the program is encoded by means of the Teleglobe en- coder at the channel 31 transmitter. Let us say there are x number of homes in New York City which will have decoders. Now comes NBC. They would like also to use the same local pay TV network for the already installed homes for showing the program of theirs for pay. We could easily encode it at our transmitter or we could give NBC a Teleglobe encoder at their transmitter to encode the program and everybody sitting at home could tune into either channel 31 or chan- nel 4, and there could be simultaneous transmission of two programs. Now I may say in conclusion one more word. I offer my apologies for being perhaps late. I would like just to refer to a little historical item. I have a son who is a historian. He dug out for me a very interesting observation that in the year 1683 the manufacturers of metal buttons for men's clothing succeeded in getting the Virginia Legislature to institute a law to pro- PAGENO="0622" 618 hibit the manufacture of cloth buttons. The law declared the making of cloth buttons a penal offense. It remained in the statute of Virginia from 1683 to 1721. I hope, Mr. Chairman, that you and members of the subcommittee will agree that we should not turn back the clock to the year 1683. Thank you, Mr. Ohairman, for your patience. Mr. MACDONALD. Thank you very much for a very interesting presen- tation. As a matter of fact I think that historians are probably right and cloth buttons are probably coming back. Mr. SAGALL. Thank you. Mr. MACDONALD. With this the hearing will have to be adjourned until Monday morning at 10 a.m. (Whereupon, at 1:25 p.m., the subcommittee adjourned, to recon- vene at 10 a.m., Monday, October 16, 1967.) PAGENO="0623" SUBSCRIPTION TELEVISION 1\~ONDAY, OCTOBER 16, 1967 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMUNICATIONS AND POWER, COMMITrEE ON INTERSTATE AND FOREIGN COMMERCE, Wa$hington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2123, Rayburn House Office Building, Hon. Torbert H. Macdonald (chair- man of the subcommittee) presiding. Mr. MACDONALD. The hearings will come to order. The first witness is Mr. William Putnam, accompanied, as I under- stand it, by Mr. Stevens and Mr. Firestone. STATEMENT OP MARTIN B. PIR~STONE~ COUNSEL, ALL-CHANNEL TELEVISION SOCIETY Mr. FIRESTONE. Mr. Putnam and Mr. Stevens did not make it down, Mr. Chairman. I will appear. My name is Martin E. Firestone and I am appearing today as coun- sel for the All-Channel Television Society, an organization represent- ing some 100 UHF television licensees and permittees. UHF operators support the proposition that the Federal Communi- cations Commission has the authority to provide for a national sub- scription, pay, television service. In general, they believe that the authorization of such a system will, under proper regulatory condi- tions, aid in the economic development of marginal UHF stations in the larger television markets; and will encourage the lighting up of presently dark UHF allocations. In reaching this conclusion, however, UHF operators are aware of several unresolved questions concerning subscription television which can drastically condition their conclusion. First, there is no real exidence that a public demand exists for a subscription television service. They are aware of this in the same degree that there was no way of ascertaining whether there was ini- tially a public demand for radio service or for television service. You had to take your chances and get in before you know whether people were going to buy your service. Therefore, they are aware that UHF operators entering this phase of broadcasting will be engaging in a highly speculative operation. Second, subscription television, regardless of attempts to the con- trary, will, to a degree, be a competitor of over-the-air free broad- cast services. Subscription television will compete with the over-the- air free services for both audience and program material. This is an unavoidable conclusion. Anybody who watches sub- scription service will not be watching over-the-air service. The lat- (6li~) PAGENO="0624" ~2O ter competition will become more acute as program material be- comes in even more short supply. Third, if subscription television is a competitor of over-the-air free services, will its entry into the national television distribution system be accompanied by appropriate regulatory safeguards? If subscription television is to compete with existing over-the-air broadcast services, then it should compete with them as an integral part of the national television distribution system; that is, it should be subject to the same FCC rules, regulations, and policies to which the existing stations are subject. The impartial imposition of these rules, regulations, and policies is not required solely by the dictates of fair competition; it is the only means by which subscription television can be truly tested with re- spect to public demand and economic viability. Spokesmen for subscription television interests assert that their systems can make an important contribution to the total television service available to the public; that it can supplement and enhance service by providing programing not available through regular tele- vision facilities. This assertion can be put to the test only if subscrip- tion television is authorized to operate under the same regulatory con- ditions as existent television facilities. Thus, if subscription television is proposed for a particular market, let the system demonstrate to the FCC, as television broadcasters are now required, in their applications for construction permits, renewal applications, and applications for assignment of licenses, how it pro- poses to serve unmet programing needs and interests in that market. Let the subscription system demonstrate exactly what programing is not being provided the community and how it intends to fill this void. Once these representations are made to the FCC by the system, the subscription system, if it is authorized, should be held accountable to the FCC for failure to provide service in accordance with its rep- resentations. A consistent issue before the FCC has been whether or not more than one subscription service should be authorized in any given market. Again, were the FCC to apply its existing television rules, regulations, and policies, the matter could be easily and practically resolved. If two systems are proposed for a market, let those seeking the authoriza- tion demonstrate to the FCC, as broadcasters are now required to dem- onstrate, that the market can support more than one system or in a comparative hearing afford them the opportunity to show the FCC which system will serve better the public interest. By using its existing rules and regulations, the Commission can also deal effectively with the problem of program "siphoning" which has been a matter of sharp discussion. Subscription television systems should be licensed by the FCC just as television stations are now. The programing representations which they make to the commission to justify their authorization can be made conditions of their license. Then, if a subscription television system fails to adhere to its program- ing representations and commences to "siphon" programing to an un- conscionable degree, the Commission can act to revoke or fail to renew the license. The proponents of subscription television contend that it has a valu- able contribution to make to the national television system. Opponents PAGENO="0625" 621 of the service argue that there is no demand for subscription television and that it will only provide that which is, or will be, available from commercial television, educational televãsion, and the new corporation for public broadcasting. ACTS is not prepared to tell this commit-. tee that one side or the other holds the whole truth. We are, however, prepared to state that we support authorization of subscription television service so that it may have a chance to prove its value and viability. If in competition with existing facilities sub- scription television services can obtain subscribers and flourish, then obviously it is providing a service the public wants and for which it is willing to pay. If the systems cannot obtain subscribers, then it is equally clear that it is not providing a service desired by the public. But this competitive, marketplace test can be of value only if the sub- scription services compete on exactly the same footing as the existing facilities. The FCC's proposal for authorizing subscription television does not provide the basis for a true competitive test of the service's public value and economic viability. Rather, it creates subscription television as a form of regulatory hybrid, within the Commission's rules for some purposes outside the rules for others, in what appears to be an attempt to shoehorn jnto the national system a new service for which there was no clear evidence of public demand. Establishment of subscription television as a special form of tele- vision service will prevent proper assessment of its true role. The op- ponents of the service will contend that it survives only because of the special treatment afforded by the FCC's rules. Proponents will argue that the service has never reached its potential because of the limiting impact of the rules. In all of this it will be the pu~blic which is most di- rectly affected. There is no question but that the FCC's authorization of subscrip- tion television service represents a major development in the national television distribution system. While the FCC has the jurisdiction to act, ACTS believes that it must be the role of the Congress to insure that the step is taken with all the safeguards appropriate for such an undertaking. It must insure that the FCC takes no half measure in authorizing this service but utilizes the full scope of its regulatory authority to insure proper accommodation of the new service into the existing system to the ultimate benefit of the public. The FCC's present proposal does not accomplish this goal. Our concern for the establishment of conditions for a true competi- tive test between subscription television service and existing free f a- cilities leads to one additional but crucial point. Subscription tele- vision must be clearly and unequivocally limited for over-the-air UHF use and not. be authorized for use by community antenna television (CATV) systems. The reason for this position is twofold: A true test of the viability of subscription television cannot be ob- tained if the service is to be subsidized by the revenues of CATV systems which derive their revenues from the sale of programing being broadcast by free commercial facilities. There is, of course, the factor that broadcasters are naturally repugnant to see the programing they pay for used to support a competing service. 86-399 O-67-----40 PAGENO="0626" 6~2 Limiting subscription television to over-the-air UHF facilities will provide economic support to these UHF stations-assuming subscrip- tion television is successful. This will result in the public not only obtaining a subscription service, but also additional free service. `For the UHF stations engaged in subscription television service will not do so on a ful-time basis. When not broadcasting the subscription service, they will be providing free television service which in part will be subsidized by revenues from the subscription programing. On the other hand, use of subscription television by CATV systems will not carry this collateral benefit. CATV sells every facet of its service; it provides nothing for nothing. Should Congressman Dingell's proposal which would limit tele- vision on the basis of FCC jurisdiction in this area and which would effectively prohibit it by being utilized by over-the-air fa- cilities, this proposal would not eliminate `the possibility of purely wire, intrastate pay television operations outside the jurisdiction of the F~C and probably subject only to limited and ineffectual regu~ lations by the State and local communities. Thus you have the problem of siphoning and consequent deleterious effect on local stations. I would rather see it come within some Federal regulatory scheme under FCC jurisdiction and the supervision of the Congress than leave it to a purely ad hoc State-by-State regulation of intrastate wire systems. Additionally, and perhaps from the standpoint of the public the use of subscription television by wire `systems will not provide the maximum benefit to the public because on a CATV system there will be no means by which that subscription television service can support a free. TV service. C'ATV systems charge for everything they provide regardless of it's source and therefore we feel that a strong public interest determination with respect to pay TV as it is now proposed is its ability to provide an economic base for new and additional free television service. This is why we feel that to promote free service, subscription service should be limited to the use by the ultra high frequency stations. That concludes my statement, Mr. Chairman. Mr. MACDONALD. Mr. Broyhill. Mr. BROYHILL. What do you mean by this last sentence ~ You say that CATV provides nothing for nothing. Mr. FIRESTONE. That is correct. Their service is a pure pay service. There is no, shall we say, free service provided. If you don't pay, you don't get a service, period. If you put sub- scription television on CATV, since you have to pay for all services, pay TV is not going to generate income which will provide additional free service. That revenue will not flow toa local station. which may be carrying subscription television for 3 or 4 hours a day and doing free programs the rest of the time as they did in Hartford. Mr. BROYHILL. As I understand your position, you are in favor of subscription TV but through another route, through another way of doing it than through the proposed rules that we have seen published. Mr. FIRESTONE. Our membership agrees that the rules are ineffec- tual, that they are totally incapable of being properly enforced, and PAGENO="0627" 623 they would create pay TV as an odd sort of animal, as a result of which you will never get a true test of whether it can survive. I do not think that we should have this strong set of restrictions on its ability to compete in the sense of what programing they can carry, what hours they can operate, where they can operate. I think those determinations can be made more properly by the marketplace. I do think that the FCC jurisdiction should be utilized to create a general scope of operation which will insure that all parties going into* the arena go in properly equipped and equipped in the same manner and not permit one side or the other to carry a horseshoe in its glove. I think without this free competition within the present framework of the Commission's broadcast policies, pay TV is not going to get a fair test. Mr. BROYHILL. I thought the proposed rule wants the pay TV station in Hartford to permit free TV. Mr. FIRESTONE.. Yes; that would be a flat prohibition. I don't think that is the way it should be handled. Mr. BROYHILL. I think more should be approved. Mr. FIIiEST0NE. That is true. I think a question should be resolved under the Commission's broadcast regulations. In a market where an applicant wants to add an additional broad- cast service, an existing station in that market can raise an objection that the entrance of a new service will adversely affect them economi- cally and that this will result in a deterioration of program service to the public. Well, the Commission permits both the applicant for the new facil- ity and the objecting existing facility to thrash it out and then on the basis of the evidence the determination is made whether or not the market can stand the additional service. I think this is the sam.e way the question of whether one or two subscription services should be permitted in a particular market can be resolved rather than just flatly prohibiting the entrance of a second service. I am sure New York could probably stand more than one service and probably some of the other larger markets. Mr. BROWN. Will you yield at this point? Mr. BROYHILL. Yes; I will be glad to yield. Mr. BROWN. Is there a presumption of the FCC at that point in your experience in favor of expanding channels available to viewers? Isn't that the policy of the Congress, the FCC, and this committee? Mr. FIRESTONE. Yes; it has been very rare that the Commission has denied the entrance of an additional service if the facility is available. It has been somewhat more stringent where someone is asking, say in the television field, to put in a totally new channel that was never allo- cated there to begin with. But there is a general feeling on the part of the Ommission-I would not say it is the policy, hut the trend has always been to expand the service unless a very clear-cut showing was made that the addi- tional service would result in a general deterioration of service to the public. Mr. BROWN. Thank you. Mr. BR0YmLL. Thank you, Mr. Chairman. Mr. MACDONALD. Mr. Brown. Mr. BROWN. I would like to pursue this particular point. PAGENO="0628" 624- Do you think it would be appropriate, if the FCC makes this pre- sumption under normal usage (some markets in Texas notwithstand- ing), that the present STV regulations they have made are proper now but that it might be modified so as to broaden the STV action in cer- tain markets later on? What I am saying is this. We don't know what STV may do to com- mercial stations on the air at present. This has been one of the great issues discussed in this hearing, that STV will have an adverse effect if it is highly successful on both talent and programs available and also on the viewing audience so that advertisers won't want to continue to `advertise when put up against something that has a high box-office appeal. Do you think it proper that the FCC has written a decision into its anticipated rules allowing only one STV station in a five-channel mar- ket? Perhaps, after it sees what happens, the FCC will open it up to more STV stations in those markets? Mr. FIRESTONE. No, sir. I would not say that this is a proper de- termination at this time because I am aware of UHF stations which are the fourth stations in four-station markets, where there are three VHF network-affiliated stations and a fourth UHF station, an inde- pendent, these stations are suffering economically at this time for many reasons. They might very well feel that the way for them to develop their total program service would be to take a subscription television franchise in the hopes of generating additional revenue to support their operation. Mr. BROWN. What about markets that presently have two commercial stations? Mr. FIRESTONE. If there are two, it would mean that there is a `very strong possibility that the third station-the third station being UHF-will thtain a network affiliation, which will have a dramatic impact on its ability to obtain revenues. For various reasons, having network affiliation can assure quicker turnaround for a UHF station than having to operate in an independent market. Mr. BROWN. I don't think you have to talk of UHF as set apart from VHF because what we are talking about is three- or four- or five- channel markets. Isn't that it? Mr. FIRESTONE. Yes. In those markets the stations that are the ones that would be most likely to utilize pay TV service would be the UHF stations. Mr. BROWN. You have Metromedia in the Washington market as the fourth VHF. Are you suggesting that Metromedia would not want to get STV? Mr. FIRESTONE. Not at this time. Mr. BROWN. And if we prohibit the fourth VHF from getting STV, would that leave STV to UHF? Mr. FIRESTONE. Metromedia's profit picture is such that there would not be any tremendous desire at this time to go into STV when it would be still a somewhat speculative operation. They make a sub- stantial profit in this market. They might do it 5 years from now if STV would prove successful and very profitable. Mr. BROWN. I am trying to find out whether or not it is the three- station market situation, wherein the network possibilities have all been absorbed or is it the UHF factor that is in back of your thinking? I am trying to get the rationale. PAGENO="0629" 625 Mr. FIRESTONE. I don't think you can divorce the two, M~. Brown, because in general there are very few markets in which there are UHF network-affiliated stations. When you get into the three-station mar- ket situation with three network affiliates, those are VHF stations. Too, you are really talking about the fourth station in that market which nine times out of 10 in the smaller markets outside of New York, Los Angeles, and so forth, will be the UHF channel. So, there is no real separation of those two points. Mr. BROWN. I think there is on the 10th station. Are you worrying about the fourth VHF or just the UHF Mr. FIRESTONE. I am worried about the UHF, whether it is the fourth, eighth, or 10th station in the market. Mr. BROWN. You are worried about that fourth station, anywhere that station is? Mr. FIRESTONE. If the fourth station is making money now it is not going to go to subscription television service in a five-station market. Mr. BROWN. Let us say vis-a-vis a VHF station. Mr. FIRESTONE. I think we can demonstrate the why to the Com- mission. Denver had a fourth VHF station which for many years has been a marginal station. If that station came in and demonstrated that it would require STV support or maintain part of its free service, I would say, yes; go ahead and do it. Mr. BROWN. You would make STV available to stations not yet on the air or to those stations which are on the air and are losing money? Mr. FIRESTONE. Stations which are marginal and which will be forced to terminate free service if they don't have the availability of STV service to help subsidize the operation. Mr. BROWN. Should subscription television and advertising be al- lowed on the same program? Mr. FIRESTONE. On the same program? You mean when you pay for the program? Mr. BROWN. When I pay for the opportunity to watch somebody. Mr. FIRESTONE. As an individual, I would oppose it. I don't think it should be permitted, but I won't say that that is my association's answer. I will say that that is my opinion. Mr. BROWN. Do you have a philosophical thinking or position about this? Mr. FIRESTONE. My feeling is that a prime asset to the viewer of sub- scription television is the ability to avoid commercials. I think as prac- tical businessmen subscription `television operators would be detractng from its appeal. But, philosophically, I `think where a person is paying, in effect giving dollar for dollar back to see a program, that either the charges be set so that the public does not have to see t.he commercials on sub- scription television or `they should be kept off or maybe the service will have to go down the drain absent the ability not only to charge the viewer but also to charge advertisers. Mr. BROWN. And finally, you mention CATV, but I am at something of a loss `to figure out how, from a technical point of view, you are go- ing to keep CATV and the neighborhood bar, or anybody else who wants to bring an audience in to watch pay television programs, out~ of the business of selling admissioii to that program to other people, so-called pirating the program? PAGENO="0630" 626 Mr. FIRESTONE. On the over-the-air system, it depends on whether they had the ability to unscramble the signal. I am not a technical ex- pert on the subscription television operation. Mr. BROWN. If they pay a dollar and a half for the program, they have the right to unscramble it. Mr. FIRESTONE. That is right, if they take the decoder box. You cannot prevent that. What I am concerned about at this point in the development of sub- scription television is the Dingell proposal which would prohibit over-the-air subscription, period. This would then open up the door to widespread wire use of subscription television on an intrastate basis. That would not provide a true test of the viability of the service. Mr. BROWN. My question is, Ca.n you prohibit by regulation the use of that dollar and a half right to view the screen from being trans- ferred into either a wire system of some kind to spread to other sets or from bringing an audience in to watch? Mr. FIRESTONE. No, because you are not treating the subscription service as a common carrier. They could stop it by merely refusing to lease their decoder box or to give their decoder box to the local bar and grill. Mr. MACDONALD.' Thank you very much, Mr. Firestone. Mr. FIRESTONE. Thank you, Mr. Chairman. Mr. MACDONALD. The next witness is Mr. Robert Hall, on behalf of Skiatron Electronics & Television Corp. We are glad to have you, Mr. Hall. I have known you under different circumstances. You represented a great university from Connecticut. It has been my pleasure to know you for many years. I am delighted to have you here this morning as I am sure all members of the committee are. STATEMENT OP ROBERT HALL, SKIATRON ELECTRONICS & TELEVISION CORP. Mr. HALL. Thank you, Mr. Chairman. I greatly appreciate the opportunity of being here and having this chance to give my feelings and views on the proposal, particularly as it relates to sports. For the record, my name is Robert Hall, of New Haven, Conn. I am appearing on behalf of Skiatron Electronics & Television Corp. I believe I am specifically qualified as an expert on sports in general and on football in particular and the relation to the public and to television. I might also add that I am heavily involved in presenting live en- tertainment with leading stars in theatrical offerings, including both variety and musical shows. I was former chairman of the board of athletic control and director of athletics at Yale University, chairman of the NCAA Television Committee representing well over 400 football playing institutions. I was the principal architect of the first NCAA restricted or con- trolled football program for television and I am sorry to admit, Mr. Chairman, that among my sins is the blackout which I also recom- mended to the late Bert Bell, commissioner of the National Football League and which was adopted in their plan. PAGENO="0631" 627 At the time the restricted national football program was adopted the networks and the advertising agencies made many dire predictions concerning its feasibility and salability. Their predictions and specula- tions were just as unsound then as many of the fears which they are now voicing are about STV. I have `been actively involved in STV efforts to obtain a' fair oppor- tunity in the marketplace for over 15 years and it is still rather in- credible to me that `the pressure groups have been able to block this effort to establish this service in the marketplace along with so-called free or commercial TV with its many admitted faults and shortcom7 ings. I should like to discuss the proposed sports rule and my understand- ing of its application to the college football season. The University of Southern California team is apparently one of the best teams in the Nation. Assume then that this team is to have exposure on commercial television once on a national basis and once on a regional basi's, as is now permitted under the N'CAA rules. By the time the University of Southern California and the Univer- sity of California at Los Angeles game is to be played they are both undefeated and the winner will emerge as the undisputed national champion. Provided that game-and I emphasize the word "game"- has not been broadcast by commercial television within, 2 years on a national basis, it would be available for subscription television. If it had been broadcast on a regional basis within 2 years, it would only be available for STV outside of that region of the previous broad- cast. Another example would be the case of a team like Houston. It might have been one of the great football teams in the Nation, perhaps it may still be. If this team were eligible for an NCAA telecast it could have been overlooked in the early summer selection of the teams and games to be telecast this fall under the NCAA program. STV if it were now operating would certainly have wanted a Hous- ton game and under the proposed rules could carry it. The proposed rule provides an opportunity to see more football without any siphon- ing away of football from free TV. The rule would enable games of special and local interest `to be seen by segments of the sports-minded public who now have no opportu- nity to see the game either live or on commercial TV. There are many sports events which could be seen in the home for a small fee which are not now and in the foreseeable future will not be available on commercial TV. I could cite examples but I am sure tha't there are many such examples already in the record. I am sure that I am speaking for a majority of the sports world, both the public and the organizations that sponsor and hold or stage sports events, when I urge the very early adoption of the proposed rules and regulations. I don't know how much more delay is warranted. Seventeen or more years it has been on the fire and that has been long enough for any tests and determinations. After 17 years of study of the problem of subscription television with respect to sports I am convinced that un- der the rules that are proposed that allow only one STV operation and only in class A markets having at least five TV stations operating, is unduly restrictive and that such a rule defeats the basic efforts of PAGENO="0632" 628 providing the public with programing that commercial TV cannot or will not provide. The NCAA won't broaden its advertiser-sponsored offerings because the reason for the NCAA plan and the pro plan is to protect the gate. But they would like to extend that box office which STV would enable them to do, Another important point is that college football has a very definite and important stake in its public, image. I am convinced in my own mind that free TV or commercial TV is a very important element to secure the Success of college football, to maintain its image and posi- tion with the public and to further the interest that we have in sports that do provide an important element in our process of educating these young men. I do not see any chance that the NCAA will broaden its plan of restricting the amount of television that you now can get at home via commercial television. There is a great deal of security in that with respect to this siphoning problem. When you charge for entertainment you are very definitely limited in what people will consistently buy. I know this because this is my business. Furthermore, product is in very short supply. I am now addressing myself to other areas in the entertainment fields that will not and can- not go via commercial television; 52 weeks a year, every evening, cov- ers many more hours than can ever be filled with box office attractions. I emphasize that again because when you charge, whether it is in the home or down the road, you have to have what they want or you can't give it away. To answer a question that Mr. Brown raised the other day, if many STV stations were competing for specific entertainment events, cer- tain of those stations would obviously lose out and would offer some- thing else, I would assume either competing for that box office dollar or perhaps a combination of when they could get one that they could sell they would put it on and when they could not they might revert to commercial television. The winners would also have to be careful that they do not price themselves out of the market. This is not hard to do. When you pay so much for talent, and we are doing that every day now in our live operations that we are almost getting ourselves priced out of the mar- ket with the public. So there is a control that just exists by virtue of the economics. The reason that the commercial television does not upgrade more than it has was answered by Mr. Lindow in his testimony. I was rather surprised, it is true, he said they just cannot afford to do it. He said they would if they had the money. We are running into this in the field of live entertainment. We already now in our theaters pay more to the box office attrac- tions than Las Vegas and we have reached a point where if we go any further we just won't have the people there. Now I should emphasize again that colleges want commercial tele- vision or free TV for their public image. This is most import.ant to them, it is paramount. The problem is very complicated. I have spent a great deal of time studying the proposed rules. I will admit they are not easy to completely understand and I am talking only about the sports rule, but I believe the examples that I gave this morning would PAGENO="0633" 629 be permissible under the rules and I am convinced that the rules do provide reasonable protection against siphoning. But in the event there should be further grave concern on this matter of siphoning, I would suggest that the proposed rule might run along such as follows, that no games-and I am addressing myself to 1)0th college and professional football-no games which are a part of the NCAA or the National Football League or the American Football League approved programs for free or commercial TV shall be avail- able to STV for a period of 2, 3, 4 years-let us make it 4 years-fol- lowing the actual broadcast of such games except where such games have been blacked out in the home team's market, presumably a 75-mile radius. In that case such games may be available to STV in such hometown market. Now if the time bar is extended, if it is felt this committee and the FCC, they can secure both commercial or free TV and give the public a chance to see these events which will not now be available and won't be available until the box office can be extended. Further, where a game is broadcast by commercial TV on a regional basis, then such game may be available to STV in any communities out- side the particular region covered by the commercial broadcast, pro- vided such game was not broadcast in such community or communities within 2 years or 3 years from the date of the proposed broadcast by What this would do in brief would be-let us take the Yale-Harvard game which will not be on the national or regional telecast under the controlled NCAA program. There is a great deal of interest in that game in the greater New England area. There would be, if STV were operating in Boston, Worcester, et cetera, a demand for that game. Admittedly on a limited audience basis but sufficiently large enough to warrant the extension of the Yale- Harvard box office, if you will, to those people who would like to have it. In fact, I have made available several Yale games to the Zenith experiment in Hartford. I might add also that when the first NCAA plan was prepared and put into force and for every year since that time great care has been taken to leave room under the plan to provide for cooperation with pay TV when, as and if it should come about. So, I suggest that the bar might be extended to a longer period of time or they might wish to take certain specific events and reserve those strictly for commercial TV. I, myself, would not advocate that as a part of the rule but if they wanted to go that far I think they could, and solve this siphoning problem. I do not think very much stress has been placed either on the fact that because of the wonderful advan ces thathave been made in the technical aspects of television, that now you can see on commercial television, and no matter how broad STV might get, a replay on that event on the tapes and see the reruns and get an analysis of the game, which is difficult to do now with the reruns in the time al- lowed when the game is being actually played. It seems to me that those who have the requirement to get box office extensions for their events might be given that opportunity PAGENO="0634" 630 and I cheerfully would be one that would pay2 as other people have indicated, to be free of commercial interruptions. But if I don't care that much I can wait a couple of hours or that evening and see that same event played at home for free. I think a great deal of attention should be given to that fact. I would limit STV or pay TV to box office attractions which are not now available. TV channels have been allocated for educational TV and that has been done in the public interest. It seems to me it would be in the public interest to do the same thing for STV. I have indicated that other reasonable regulations would be in order and I think would be both legal and in the public interest. I have addressed myself to the time bar. I have indicated that on the time bar if the interests which control various events which are now on free TV should elect to keep them away from the public for 4 or 5 years, the loss in public interest and in prestige as well as in dollars would be more than they could afford. That is an element that I haven't heard raised so far either before the FCC or here. There is much more at stake than just dollars when you are talking about college and professional football. Their stake in the public has to depend on this kind of exposure. If they attempt to price themselves right out of the market because pay TV could come along, as one gentleman suggested, and make it possible for them to take their games that are on and hold them off for a couple of years, they would have another serious problem to concern themselves with. How long can you keep this away from the public and maintain this great interest of the kids that are coming along, that you have to have to keep that sport going, as long as you need to have a gate to keep it going. Unfortunately college football has to depend on the gate, too. I say the public clamor would also be such that the public image of the particular sport would be seriously impaired. Now the professional football people as well as the colleges can have the best of two worlds under the rules as they are proposed or as they might be modified; they can supplement commercial TV by putting their home games on STV, talking about the professionals, and stay with commercial TV for the network presentation. The FCC rules can protect siphoning away from commercial TV and yet make it possible to provide more college and professional football for viewers via STV. This statement also can apply to other sports events. Further, events with special audience interest, both sports and other forms of entertainment, would be readily available in the home and under the present system we can get them. That is the sum and substance of my statement, Mr. Chairman. I would like to place in the record a letter from Mr. Weaver, who is the president of the company which operated the Skiatron system out on the west coast. This letter addressed to the Commission sets forth rather completely the experience that they had out there and the broad acceptance which a form of STV had received. With your permission I would like to put that in the record. Mr. MACDONALD. Without objection, it is so ordered. PAGENO="0635" 631 (The letter referred to follows:) SUBSCRIPTION TELEVISION, INC., Los Angeles, Calif., July 28, 1965. Re docket No. 11279, file No. RM-748. FEDERAL COMMUNICATIONS C~MMIS5ION, Washington, D.C. DEAR SIRS: Although we are not a party to the proceedings In the Matter of Amendment of Part 73 of the Commission's Rules and Regulations (Radio Broadcast Bervices) to Authorize Nationwide ~v,bseription Television, we would like to express our views with respect to the rule-making petition of Zenith Radio Cbrporation and Teco, Inc. We support the petition of the joint petitioners for authorization of nation- wide subscription television, subject to the modifications urged by International Telemeter Corporation. In 1964, this company offered a cable subscription service to two areas in Los Angeles, California and San Francisco, California. The cable passed or would pass one hundred thousand homes in these two areas, and before our business was declared illegal by initiative action in the election of November, 19~34, the public had already ordered the subscription service in tremendous numbers. (The initiative has since been declared unconsitutional by the Superior Court in Sacramento.) Although the selling effort in the two areas had only approached mid-point, we already had twenty-five thousand homes signed up for the service, with an additional twenty thousand homes ordering the service but outside the initial area. Our projections show that we signed up half of the homes in these areas where the families owned television sets, and were not moving. We believe this indicates in a degree far surpassing the experience of the other predecessor's attempts at subscription service, the public understanding of the difference in programs available by cable or fees, and the kind of product that commercial and educational television are limited to, one because of the nature of the advertising-supported `system, and the other because of the nature of the donation-supported system. In the case of over-the-air service, which is properly a matter for the Com- mission's jurisdiction, which is by no means clear in the case of cabled service our company believes that the need has been established for the public to re- ceive programs that can never be available on television as constituted, that is to say, (i) material where the audience is too small for commercial sponsor- ship, such as the cultural coverage programs of opera, ballet, symphony, recital, and the like, (ii) educational material which cannot be afforded by educational stations nor used in any major way by commercial `stations, but which is needed by our adult population and will be increasingly needed as we get more leisure, and more incentives to learn and (iii) material which ivill never be affordable by commercial television, such as current motion pictures, or blacked out home games of sports events, or plays or attractions playing at the box office at the time of televising. Our experience in California on the use of the service was too brief to be re- suitful, but we do know that while half the time was spent on motion picture~ and another twenty-five percent on sports, mainly baseball, the important fact to professional management in communications is that twenty-five percent of the time spent on system was in the categories of cultural coverage, non-fiction cov- erage, educational materials, and special events. The promise of the cable serv- ice is an intelligent population, with elevated tastes, upgraded standards, and the opportunity to enjoy the pleasures of civilized and literate human beings. We do not believe that, good as it is, commercial broadcasting can perform the mis- sion of bringing to groups of our people coverage of the interests they share in large enough numbers to be able to afford that coverage, although such num- bers are wholly unsuited to television on an advertising-supported basis. Our company believes that the new UHF stations may be sufficient in quantity to permit spectrum use of subscription television as an additional source of in- come to the station without reducing the number of services now available to people through broadcasting. Thus, in any community, without harm to broad cast service, the program range and scope could be increased through subscrip- tion service. The company does believe, however, that over-the-air subscription service will, for many reasons, always be a -supplemental delivery system to the cable service, with its multiple channels, its capability to move `to a 1000- line system in the near future with the great quality improvement available, its PAGENO="0636" 632 range of programs, its service to shared tastes of small size but great intensity as well as to the great popular events that are forever unaffordable by an ad- vertising-linilte~ source of funds. In view of the foregoing considerations, we urge the Comimissiori to adopt the rules proposed in the joint petition of Zenith Radio Corporation and Teco, Inc., subject to the modification suggested by International Telemeter, Inc. SYLVESTER L. WEAVER, Jr., Pre8ident. Mr. HALL. I thank you for this opportunity and I am open to any questions. Mr. MACDONALD. I repeat it is a pleasure to see you again. I can personally vouch for your vast wealth of experience in the field of sports. The only question I have really, because I could not follow one wit- ness who testified and I did not want to get into an argument with him-said under the present FCC regulation of sports that had been habitually and regularly shown in an area could go on STV within 1 year. As I read the rule, I thought it would take at least 2 years for the franchise. I was thinking of pro football at the time, but I guess the same thing would hold true of college football. Is he right? I should think they would have to hold back getting revenue from the com- mercial broadcasts for a 2-year period. He stated that it would only be a period of 1 year and I could not follow him, frankly. Could you clear that up for me? Mr. HALL. Yes, Mr. Chairman. I have read and reread the proposed rule many, many times. I am convinced that the language definitely means that a game-and I keep stressing the words "a game"-would not be available to STV in any community in which it had been put on commercial TV within 2 years prior to the proposed date of the STV broadcast. I am familiar with the testimony to which you refer. I just must feel, myself, that the gentleman had not read the rule as carefully as I think I may have. Mr. MACDONALD. Just to buttress what you say-and I am not taking any sides, I repeat-I happened to have the occasion to see the Colts game yesterday. I must have spent $20 in phone calls trying to get tickets. Finally, I was successful. I know very well if it were going to be on pay TV that I would have gladly paid $4 or $5 to have seen it on pay TV. When commercial broadcasts permit blackouts in the very areas in which the team is supported, why do they now say that pay TV is going to ruin them? You couldn't get a ticket, period. Do you have any comment on that? Mr. HALL. Yes; I do. I had the same experience the week before when I came down to attend t.he hearings before the FCC. It just happened I got here on a Sunday, by design, hoping to see the Red- skins play the Giants. I went through the same experience that you encountered in trying to get to the game. I would like to comment particularly on this blackout rule. Now the whole basis for controlling television of the sport, controlling the amount that can go on, stems from the basic idea that we have to pro- tect our box office. PAGENO="0637" 633 As I said, unfortunately college athletics are supported primarily by the box office. That is a mistake but there it is. So in the subsequent plans we provided the blackout rule and the professionals picked that rule up for the same reasons that we established it. To show you what happened, I recall the statement made: "Why don't the networks insist that there be no blackout." I will say in the case of college football I doubt that NCAA would ever accede to that. If the networks said, "Either give us the whole works or not at all," I think it would be not at all and that certainly would not be in the public interest. On the other hand, I don't think Congress would have any right to tell the colleges that they have to damage their box office and what supports the college financial structure of the Nation. So we do have the blackout rules, still have the blackout rules in force. To show you what can happen. You have a sellout game. In the first rule I said if we have sellout games we are now going to get into trouble with the public because they can't get a ticket and they are going to turn on college football and say quite properly, "I can't buy a ticket and I can't see the game." So I said that we will provide that in the event the game becomes a sellout and is so declared by both directors of athletics, that then the game will be available for commercial television within the backout area, provided, in the case of college football, no other game. is to be played within that area that will be seriously hurt by the telecast. A specific example arose, the Michigan-Michigan State game was a sellout. As chairman of the committee I called up Fritz Crisler. I said, "Fritz, you are a sellout and you and Biggie Munn can both declare this and can make it available to WJR in Detroit," an area where tremendous interest in that game existed and people could not buy a ticket. Under that rule it was done. To show you what can happen and what did happen, Mr. Crisler, the director of athletics of Michigan, was inundated by telegrams, letters, and phone calls, the gist of which was, "If we had known that your game was going to be televised we would not have paid $5 for those lousy seats behind the end zone." I think you might recognize that there are more so-called bad seats-that is, the average membe.r of the public considers them bad seats-available in a football stadium than there are good. In the Yale Bowl we can pack 65,000 to 70,000 people in there. There are 25,000 seats goal line to goal line on each side. In other words, 12,500 on the Harvard side and 12,500 on the Yale side. That leaves an awful lot of seats that people would rather not pay $5 for, if that happens to be the price, if they can stay home and see it for free. Now that is one of the answers. Mr. MACDONALD. Thank you. I might also add you can be on the 40-yard line in the Yale Bowl and see the game better from a helicopter. Mr. HALL. That is right. I do not want to say this for the record but that is not the best de- signed stadium to see sports from. Mr. MACDONALD. Mr. Kornegay. Mr. KORNEGAY. Mr. Hall, I have certainly enjoyed your testimony. PAGENO="0638" 634 There are a few things I would like to ask you for my own information and edification. No. 1 is that you suggest that the rule with reference to sports events be changed or made in such a way as to permit the showing on STV in blacked out areas of particular sports events. I don't quite understand that because as I understand it, that is a p~irt of the contract between the network and the institutions involved in the sports events. Mr. HALL. Yes. The NCAA rule provided that there be no telecast within the home area within a 75-mile radius. But the NCAA very easily could, and in my opinion very definitely would, say that the game may, however, go on STV in that area. Do I answer that question? Mr. KORNEGAY. Would they not be- Mr. HALL. No, it would extend the box office so that they might- now this would be a calculated measure. If I were the director of ath- letics at the particular institution where the game is to be played and that game is blacked out, if the interest is running very high in that game, (a) I would like to satisfy the public who can't get in my stadium (b), I would like to pick up additional revenue; I would then balance how much would I get from the pay TV telecast as against what ero- sion will there occur in the sale of my tickets at the box office at the stadium. Mr. KORNEGAY. I can certainly see that if it is a sellout. Is your suggestion limited only to those cases where it is sold out? Mr. HALL. I think the rule would not necessarily cover that. I think that is the rule that would be made by the people who have the sports event themselves. There is no thought here that the FCC is telling any- body that they have to go on television in any form if they don't want to. I say in the way it is actually happening now you will as far as I can determine, forever have a situation where you can't buy the ticket and yet it won't be shown in your area. That is the conditions that exist. But those are made by the Owners or the proprietors of the event, not by the networks themse]ves. Mr. KORNEGAY. You are starting with the network in that case. The network would prefer to have it shown all over, would they not? Mr. HML. Absolutely. Mr. KORNEGAY. So they would probably pay more for the show if it could be shown all over without any blackout. Mr. HALL. Yes. Take the Michigan-Michigan State game, for exam- ple. That is a very important market so that the advertiser would have paid additional revenues, advertiser dollars, for the privilege of putting that game on Detroit. But STV would also be there to put it on. Mr. KORNEGAY. But the promoters of the institutions involved, the tea~ms involved, have not seen fit to take the risk, that calculated gam- ble you spoke of? Mr. HALL. Because the amount that the advertiser dollar can come up with can't match the erosion of the free offering in the home right in your backyard. Mr. KORNEGAY. In other words, you say subscription TV can come up with a greater amount of money to buy the show for the blackout PAGENO="0639" 635 area than what the networks would pay for it, blackout or no black- out? Mr. HALL. That would be a measure that the director would have to concern himself with. An example that I had to live with was the determination of the pricing of a ticket for a particular event. We could reduce the price, and we did this on several occasions much to our chagrin; we thought we would fill the bowl for a Georgia game. We said we are going to charge a dollar a ticket. The Georgia bowl boys took a pretty strong exception to that dollar a game. I think it had a lot to do with their attitude on the field. But we had to sell an awful lot more tickets at a dollar to make up for what I could get with many fewer people at $3. Now, if I am balancing a situation between what commercial TV and what STV might say, I think I would be much more inclined to at least want a price for that blacked out game in my backyard at the home rather than try to get more money from the advertiser and say, "Well, I will just let it go free." I just don't think they would. I don't think it comes down as much to dollars and cents as to the fact, and this is why the professional teams obviously don't sell those markets-when you black out New York for the Giants games you are blacking out a fantastic market from an advertiser point of view, but they don't dare release that for more advertiser dollars because if they do, you gentlemen and I won't have nearly as much difficulty buying that ticket at the home game. Mr. KORNEGAY. I have one other question. On commercial television of sports events we have the timeouts be- tween innings in baseball and timeouts in football games and that is* the period when the commercials come on. What would STV substitute for the commercials during those peri- ods when there is no commercial? Mr. HALL. A very careful analysis of what had transpired up to that point. I think that the interest in the sports events would `be greatly heightened by the opportunity at those periods to make expert comment on what has transpired. With these tapes that are instantaneous now it would heighten your interest in the game immeasurably. Mr. KORNFJGAY. Thank you. Mr. MACDONALD. Mr. Harvey. Mr. HARVEY. No questions, Mr. Chairman. Mr. MACDONALD. Mr. Brown. Mr. BROWN. Is there a danger in STV that we are going to put broadcasting into the entrepreneurial kind of business for the factors of Broadway theaters or the backers of sports events that are not regu- lar like professional football `or baseball, such as prizefights, where it will be a boom or bust business; that is, where they will either make a killing if they guess right on the home box office or they will lose their shirts if they guess wrong? Mr. HALL. I am not sure that I clearly understand the question. Let us `take the Broadway producer. I have had `one fiin~ at a Broadway production. Like most of them it went down the drain. With respect to the cost of a Broadway production of a musical today, I am sure you are aware of the fact that no matter how much you trim it it will run $500,000 or $600,000. It looks like it will go PAGENO="0640" 636. higher. Broadway productions are currently not put on as a pre- Broadway show on commercial television. The costs of converting that for that purpose are extremely high. I believe that if STV does become a reality and it is broad enough across the land, that there would then be an opportunity `to try out via the air which would in my opinion provide many more of the Broadway shows `being tempting. Obviously, I would pay my dollar or $2 or $3 and the show may be a bomb. Just like anything else, you go `to the box office and put your dollar clown. `Sometimes you don't get what you look for, vis-a-vis some of the football games we just talked about. I do feel that pay television would provide support for the sheer commercial entertainment arts. There `is a great deal of `stress placed on the cultural activities and I am all for them. But they are not necessarily a's salable as people w'ould like to have you believe other th'an the fact that pay TV can take a ,fairly small `segment of the audi- ence that is of not real great in'terest `to the advertiser-sponsor but that group in itself can provide enough support via the home box office to support that activity. `So, I do believe that STy will help the `cultural activities. There are enough people but they are spread. A good example is the very success of the show, "The Three Penny Opera." That play ran with great success for, I don~t know how many years, in a relatively small theater in New York. The individual who owned the ri~hts to that show decided to take it on `the road. In my discussion I said, "I think you are going to have a sorry experience because five women come in from Kansas City and they `are bound to see the `Three Penny Opera.' They are coming in every day to New York from all over the country." There is a segment of those people who do wan't to see these more cultural activities. But you take that out to the area and you ~won't have enough to fill the theater in that community. But STy, if it were broad enough, could do something like that be- cause as an offering it would pick up ~ number within the framework of ~t5 miles or so. I do not think I have answered some of the questions that you asked. I don't know if I have thrown some light on the subject. Mr. BROWN. You have raised another interesting point and stated it very well. What I was `thinking of was a broader appeal than what you sug- gested: the possibility that broadcasters will be in the business of guessing public taste at the local level. In other words, broadcasters must guess the community reac'tion to "Three Penny Opera" as an STV project when `they pay the price to get it. If nobody signs up or indicates that `they are going `to watch it and pay their dollar for it, `the broadcasters have lost out. As it stands now through your networks, `the local programer's in- vestment in a return is somewhat smaller. The risk is taken by the net- works who can `bring together a fairly sizable chunk of money and buy a series or expensive program. And then if it bombs out in Kansas City, `they have already sold it for a time and they get back some of their money. But when the local UHF station, which is marginal anyway, is pay- ing a substantial amount of money to get a film or a sports event or a PAGENO="0641" 637 Broadway production on the air and they guess wrong they have lost a fair amount of money. Isn't that going to be the case Mr. HALL. I would say that I would be quite surprised if the owners of the events that would like to extend their box office would refuse to make them available unless they got the money up, whether it was going to be accepted or not. I would expect that in most instances they would go on a trial basis. If it happens to go in this area, well and good. I will agree that the owner of the STV station involved will have other costs which, as you might say, will go down the drain if nobody happens to want to buy it. I certainly agree this can happen. We have five theaters that seat about 2,500 people each and we provide live entertainment in these five areas. We have one in Wallingford about halfway between Hartford and New Haven. We have another one less than 75 miles away. The very show, I will give you a good example, "Sweet Charity," that might be a bomb with us. The same show, the same star can go 75 miles up the line and do a fantastic business. We just don't know how to measure the difference in area to area. I agree that the STV op~rator will put something on in Kansas City that will be successful for many and he may find out if he owns a station down in Lincoln, Nebr., that that one was a bomb. This will probably happen. But I think the STV people have said, "We want to take our chance in the marketplace, it is our dough. We are going to take these gambles." I don't think the owner of the event will. I think he will go along and say, "Let us try it out. If they take it in Kansas City and don~t like it in Lincoln, we will pick up what we get in Kansas City." Mr. BROWN. I have one question that relates to the expansion of both baseball and football leagues since the advent of television. Now I am trying to figure out how that relates or would relate to STV. Is there a presumption on your part that STV would encourage the interest in and support of local sports teams or would discourage it or would have no effect onit ~ Mr. HALL. I think STV would, as I indicated previously, enable events, and I am talking specifically about college and pro football, games which no matter what transpires here in Washington will not be available to the public. The NCAA plan is serving a very important purpose. So that those games not being available on free TV will now become available in my opinion on STV. Mr. BROWN. I understand your point about blackouts. What I am trying to ask is this. I must admit that I thought when they started telecasting free all the baseball and football games around the country, even though they were blacked out in local areas, that we would have a deterioration of the attendance in the park generally because people could sit in the comfort of their home and watch the game, and that you would also have a falloff of the less-competitive teams, those that were losing every Saturday, and that they would not be commercially salable and that you would begin, to get a concentration .of fewer highly expert teams. PAGENO="0642" 638 Instead, we have had an expansion of both major baseball leagues and also expansion of the NFL and AFL football leagues. Is there a conclusion that can be drawn from that with regard to STV? Mr. HALL. In this instance you must look at college football with a very definite understanding of how its problem differs from that of pro football. I will come back to that in a moment.. Now we will go to professional football. Professional football now has come very close in my opinion to establishing franchises in areas which can support a modern fran- chise I doubt that there will be many more communities, and this is my own personal observation obviously, where there will be expansion I can think of possibly two or three. Now this means, therefore, that pro football can still look to the big, big segment of the population of this country who occasionally may get to the community and want to get in the park but who wouldn't get pro football at home now. So in the case of pro ~ootball I think the biggest impact will be the availability of the home game, which is presently blacked out, on some form of box office extension. I don't think the impact of STy, jf ~e do h'ive it, I don't think it will make any material difference in whether we are going to see pro- fessional football in the foreseeable future. With respect to college football, there the problem is entirely different. The whole basis for the control plan of college football is to protect some 400 box offices. So there is almost no area where you can put a game that does not to some degree possibly interfere. But if you extend the box office you are now going to have to have somebody pay for something when there is something free `ilongside of it and it will be the special audience that will want to see it. You probably could not give the Yale-Harvard game away in some areas of the United States but we know of areas where that game would have a special audience appeal and we would like to give it to them. We don't want to give it to them at the expense of walking away from the NCAA plan. Mr. BROWN. I want to suggest one other problem. Somebody asked you what they would do. at half time. I am inclined to think we might have a little pirating on STV because at half time you might have your ham and coke in centerfield where you see the Anheuser-Busch ad and maybe the football team could sell the centerfield sign a little more dearly than they have now? Mr. HALL. No comment. Mr. MA000NALD. Mr. Springer. Mr. SPRINGER. Could I ask one question and I hope you can keep this brief, at least your opinion on this. In just what areas would pay TV expect to have programing? Could you name those? Mr. HALL. When you use the word "areas," are you referring to geographical or events? Mr. SPRINGER. I am referring to programing areas. Mr. HALL. I named blacked-out professional games. Mr. SPRINGER. Blacked out? Mr. HALL. Yes; the game played in New York by the Giants on a given Sunday will not be televised within 75 miles of that area. Any college game that is not on the NCAA program which is PAGENO="0643" 639 Selected in the summer before the season begins. This embraces a con- siderable amount of college football that could and would go to STV. Mr. SPRINGER. That is two. Mr. HALL. I would say many offerings of live entertamment thai would be Broadway bound. I would say special sports events like the Indianapolis 500. I would say a full schedule perhaps of National Hockey League. I would indicate that the Madison Square Garden major track meets such as the Meirose games and track meets of that national character. Mr. SPRINGER. What about movies? Mr. HALL. I would certainly expect that there would be motion pic- tures that would be made available to STV prior to their being made available to commercial TV. I would fully expect that to happen. Mr. SPRINGER. May I just refresh your recollection. I don't know that is altogether accurate but reading the ratings, I believe it was in last Thursday night's Star or Wednesday night's Star, the ratings of this fall's new programing, that the No. 1 programing was the "Satur- day Night Movie." The second rated program was the "Friday Night Movie." The third rated program was the "Thursday Night Movie." If those are the ones that are the big movies under free TV, there is the area that they are going to make money, isn't it? Mr. HALL. I thought I said, sir, that in my opinion they would go- Mr. S~RINGER. A big part of what you have been talking about in the sports field, Mr. Hall, is already covered by a ruling of the FCC. I would guess that that ruling would be made even tighter because I don't think Congress will stand around and let you make, at least 1 would not, and let free broadcasts of sports events be made into p~y~ TV for sports events that can be received on free TV. Mr. HALL. I concur. Mr. SPRINGER. Out of the seven you have imined four in that cate- gory. Boxing is a different thing. That is a closed circuit. kind of thing. I can think of one or two others. But the broad spectrum of sports is the exception. There are really only two areas where they could really make some money. I have been trying to find out whether they can. One would be in the field of special programing of their own, which would be Broad- way-bound plays. A season would be in the field of movies. Are those not the two big areas? Mr. HALL. I can't agree with you, sir. What I think you are doing is overlooking the vast amount of special interest in special football offerings that are not now and will not be available to commercial TV. It is nothing thnt Congress has to do with. It is just that it will not be made available bet it would go to the STV because of the special audience appeal that the local game would have. Right now it is not available to commercial TV. Mr. SPRINGER. Your thought is that they would change the rules of the National Football League and the American Football League to make those available at a price. Is that what you are talking about? Mr. HALL. I can say that the rules of the NCAA as they exist today have provided specifically for cooperation with STV if it ever is avail- able. PAGENO="0644" 640 In the case of the Hartford experiment, Yale football games were placed on STV offerings. Mr. SPRINGER. Then we are talking about live entertainment pro- graming, movies, and a certain spectrum of the sports field. Mr. HALL. Yes, sir. Mr. SPRINGER. We have narrowed it down to those three and that is about right. Mr. HALL. I would say that is about right. Mr. SPRINGER. I think we have on the record what would happen. This is what I want to know. Can you give any opinion as to what you think the areas of a million dollars will run into? Mr. HALL. No, sir; I can't make such a projection now~ I believe that the calculations that are made by the opponents of subscription television when they are arguing against it and, there- fore, have to build up as much potential purchasing power against them as they can, I believe they have gone far overboard than what will be the case. I do believe that the UHF station in the community where they are struggling will be able to find events that will supplement or pick up some additional revenue and that can afford to do it and that it will put some revenue, additional revenue, supplementary revenue, if you will, into the hands of the people that have these limited events you have spoken about. Mr. SPRINGER. I think this is a third major problem. I think these are fundamentals that we ought to see just as broadly as we can. Now we have passed the field of programing. The second is, how much money and who is this going to apply to when you talk about UHF? How the third, I would like to know what you think about how broad this appeal will be. Let us review Hartford. It is my understanding they thought they were going to get somewhere between 3 and 6 percent. Did you under- stand that? Mr. HALL. No, sir; I don't know that. Mr. SPRINGER. As I understand it from our staff I think that was their projection. Instead of that they got 0.75, which is three-quarters of 1 percent. Would you think three-quarters of 1 percent would fit this thing if it were put into effect? Mr. HALL. I think I can answer that in a different way. I would not expect Zenith, and I do not represent Zenith, would be down here and spend the kind of money they have spent on experiments in the last 5 years if they did not feel they were going to be successful. Since it is their money and not coming out of me as a taxpayer, more power to them. Mr. SPRINGER. In the Hartford area it is my understanding that Hartford itself is somewhere between 250,000 and 300,000 people. We will say at 5 percent that would be in the nature of 15,000 receivers but this would be in the nature of 2,500 receivers. lam talking about in the city of Hartford. They might go outside the city of Hartford which might be a half million people. That would be 2,500 sets. Do you feel this is a serious problem in opposition if this should be true nationwide? This is a projection I don't know anything about. I am~ trying to apply what we do know to the national situation. PAGENO="0645" 641 Mr. HALL. Before I answer that I would like to make one statement. In the case of the trial in Los Angeles and San Francisco they passed some 100,000 or more homes. They signed up- Mr. SPRINGER. A 100,000 or more homes in both or each? Mr. HALL. In both. rrhey had subscribers waiting for the service, until the referendum put the thing out of business, some 45,000 sub- scribers. One other thing, if I may, sir, because you have touched on this programing problem. Unlike the Zenith experiment, in the case of the San Francisco-Los Angeles, the programing involved sports and movies but the amount of sports and movie time was in the area of some ~t5 percent with 25 percent of the time being allocated to other special offerings. Mr. SPRINGER. I have one final question. How much does it cost in Los Angeles and San Francisco on an average per month to receive a reasonable amount of programing? Mr. HALL. I think there was an installation fee. I am sorry, I have the answer here but I do not wish to take the time to look for it. I think the installation fee was in the neighborhood of some $20. Then I think it. was $4 or $5 a month but I am not sure. Mr. SPRINGER. It was my understanding in the Hartford thing that to get about what you wanted was somewhere in the neighborhood of between $30 and $40 a month. Mr. HALL. I did not make myself clear. First, you had an installa- tion fee. I am not clear as to whether from that point on your service was maintained without any further charge and you only paid for what you saw. Bear in mind that in the Los Angeles and San Francisco oper- ation there were supplementary services provided the set owner around the clock so there may have been a slight charge for that supplemen- tary service. But I don't think that is germane to the issue because in the over-the-air you don't have that. Mr. SPRINGER. As I understand in the Hartford experiment it ran between $30 and $40 a month if they wanted to get anything reason- ably substantial. That part I am not sure about but I hope the staff can get this because, I take it, it is not a great deal of trouble to get this particular thing. Mr. HALL. I can only put an observation on that statement. My ob- servation is this: When you are trying to sell somebody something and it is entertainment it is awfully hard to get very much of that enter- tainment dollar for any particular operation. Mr. SPRINGER. In the Los Angeles-San Francisco experiment did they put a coin in the box? Mr. HALL. No, sir; they didn't need to use a coin there. There was a transponder that enabled the base office in the middle of town to sweep set of the subscriber and determine instantaneously whether he was tuned into that pay program. Mr. SPRINGER. In the Hartford experiment was this a coin in the box? Mr. HALL. Some form of payment was made in the home but I am not qualified on that. Mr. SPRINGER. I understood it was a coin in the box but I am not making that as a categorical statement. Mr. MACDONALD. It was a billing device. PAGENO="0646" 642 Mr. SPItINGER. Do we have anything in the record how much that cost? Mr. MACDONALD. Yes. To correct the witness, it was my recollection that in Hartford the total cost averaged about $100 a year. Mr. SPRINGER. Thank you, Mr. Chairman. Mr. MACDONALD. I just have one last question if the committee will indulge me. I know one of the members of our subcommittee is very interested in this. I don't know if you are qualified to answer it or not. I know you put together the NCAA package. He was very interested in this so-called fake time outs put on so that the commercials can come on the TV. It was alleged by a number of people that sometimes the peo- pie would have a drive underway but they had a command from the network man down on the field and he would give the signal it is time for a commercial and action on the field would stop then and there. That as I understand it is in professional football, I was wondering if it is also true in college amateur, so-called amateur football. Mr. HALL. This has been a matter of grave concern to, fir~t, the team and the coaches. Obviously since the advertiser dollar is paying for this he has to get an agreed number of commercials. The situation did arise in the past in college football and there was a notable case of a team-as you know, Mr. Chairman, when you are moving-that stopped and that is why the opposing team might take time out to get the steam down, stop the momentum. Every effort has been made and I must say the commercial networks have been very sympathetic with the problem and to my best informa- tion and belief that is not very likely to happen in college football this fall because the men who are on the job there who are assigned by the networks to cover the game are aware of this problem and will use their good judgment but it still does remain the fact they have paid for an x number of commercials and they are entitled to get them in somehow, somewhere. They are just going to try to guard against doing it at the wrong time. Mr. MAcDONALD. It is true in pro but it is also true in college? Mr. HALL. Yes; but they are doing their best not to overdo it. Mr. MACDONALD. They are using their best judgment? Mr. HALL. Right. Mr. MACDONALD. Thank you very much, Mr. Hall. The next witnesss is Sidney Dean. Is he in the room? He represents Americans for Democratic Action. If not, with unanimous consent if he submits a statement it may go into the record at this point. (Mr. Dean's prepared statement follows:) STATEMENT OF SIDNEY W. DEAN, JR., CHAIRMAN, COMMUNICATIONS COMMITTEE, AMERICANS FOR DEMOCRATIC ACTION ADA'S CONCERN ADA is a non-partisan, independent organization of private citizens in local chapters throughout the country, concerned that the social, economic, and po- litical institutions and policies of the United States serve the public interest in a free, just, humane, and expanding nation. ADA'$ exclusive concern in national policies for subscription television is that they serve, and not thwart our vital needs and objectives for a national system of high-eapacity, broad channel car- riers of communications services to the public and business over the air and by cable. ADA concurs with leaders in the communications industries and tech- PAGENO="0647" ~43 nology who believe that such an integrated system will become the carrier, not only for television and radio as we now know them, but will take over the func- tions of the greater part of our present systems of print media and telephone services. ADA has previously communicated to the FCC and to the Congress its concerns with the public-interest aspects of broadcasting policy; in [955, ADA called for the development of audience-payment television as a new, independent system of public communica~ions under common carrier utility regulations. ADA has con- sistently called for FCC and Congressional restrictions over the common owner- ship and control of the public media in our metropolitan markets, including news- papers, radio, TV, and CATV. ADA was among the first to support the reserva- tion of educational channels, the all-channel receiver requirement to open up UHF, and, more recently, the establishment of a comprehensive system for public broadcasting. ADA gives high priority to the development of audience-payment television as a lyrecursor of many new communications services which will become feasible when a public payment system becomes available. Under forward-looking and wise public policies, such public payment systems can finance a vast new range of diversified information, educational, commercial, and cultural services which cannot be financed by the economics of mass advertising These new services can- not be free to grow and compete in response to the needs and free choices of the public and business if they are to be organized only as "beneficial supplements' (to use the terminology of the Committee) to commercial broadcasting and net- working, which must give paramount consideration to advertising revenues. The U.S. now possesses all of the requisite technical and economic resources for such an integrated on-the-air and cable system. Within a comparatively brief time-span, such a system will be established for the public distribution and sale of news, -entertainment, education, data processing and retail services; the services will be "live" or "dialled" from central exchanges to "libraries" of information and cultural resources. Subscribers may rent receiving and sending instruments for audio-video, facsimile, printing, or computer terminals: there will be `elec- tronic editions" of our newspapers, magazines, and books. The equipment may be used live, or programmed to make recordings for future reference. The rapidly expanding demands of the public and business for these services will require the most efficient, integrated use of on-air transmission by existing stations. microwave and laser interconnections, relay satellites, plus high-capacity cable like OATV which will soon interconnect nearly every home, place of business, and institution in the United States, precisely as the telephone system now functions. The over-riding criterion of public policy for this fulbservice national system is that it be made available at reasonable and equitable rates and conditions to all who wish to distribute or market communications services to the ~ublic whether for direct public payment or for sponsor or advertiser payment. It is 1ne~mpatible with this criterion that carrier stations, interconnecting networks and cable systems, which are temporarily in short or monopoly supply, exercise unilateral privileges to control public access to the system by media and services, and offer competition with their own services. It would `be equally opposed to the public interest if these carriers be permitted to fix ratesand terms at will contrary to constitutional safeguards of free press and free competition which have been historically applied to all other carriers of public communications, including the telephone and telegraph systems, the postal system, goods carriers, and even the motion picture industry. STJMMARx OF ARGUMENT The establishment of public policies to inaugurate a new national system of direct public payment television and other feasible electronic services can be regarded in either of two ways: as a set of minimum niodifications and adapta- tion's to accommodate present broadcast services unchanged, or as a framework for a new yet clearly projectable public cOmmunications system to meet the needs of the immediate future. The report of the STY Committee has chosen the firs't alternative, with little or no recognition of the requirements and safeguards for our needs of the future. In fact, two far-ranging studies of future U.S. requirements for electronic com- munications have been ignored; one, by the President's Commission on Tele- communications; the second by the Federal Communications Commission itself. ADA submits that the adoption of the Committee's recommendations for a new direct public payment `system owned and operated by the present commercial system would be irresponsible. It would foreclose the rights of the Congress, PAGENO="0648" 644 given access to these two studies, to make a determination as to the effect of public needs on future policies ; it would preclude recommendaUons from the Executive Branch that may fo1l~w from its own study. It would deprive the Corn- mission, itself, `of the opportunity to apply the findings of its own study. Furthermore ADA submits that there are major defects in the Committee s assumptions `and findings, cited later `in this argument. SPECIFIC ARGUMENTs ADA believes that many of the defects of the Committee's proposal stern from underlying assumptions which are often not identified or evaluated in t:he public interest For the sake of brevity and Conciseness ADA arguments are addressed to those assumptions as well as to specific provisions of the proposed regulations ~TV as a "beneficial supplement" to commercial broa'clca$ting: ADA considers this basic premise of the Committee's Report to be fallacious. Educational pro- gramming was also first regarded as a beneficial supplement to commercial broadcasting; it required twenty years of experience to learn that the two were incompatible, and required separately licensed channels. FM channels were re- garded as beneficial supplements to AM; only recently, the two services have been severed to permit `development of their individual capabilities for diversity in the public interest. separate ohaoiisels: STy operations can be profitable on fractions of `one per cent of sets-in-use. This economic fact contravenes all of the economic' and profit principles of `the commercial broadcaster who can produce greater revenues by advertiser payment mass programming and who cannot accommodate such SPy audience flows into his advertising programming Under commercial broadcaster control, therefore, there will be no incentives for specialized `audience program- ming to students, cultural interests, vocational groups such as doctors' and `tech- nicians, etc., possible on a full broadcast day schedule. This situation illustrates only one of the irreconcilable conflicts that flow from authorizing STV for com- mercial licensees, as opposed to licensing STy in exclusive channel's, like educa- tional broadcasting The conflict of interest is irremediable because it flows from the commercial broadcasters' and networks' revenue, profit, `and economic incen- tives. These incentives compel the commercial licensee to: 1. Maximize the audience for each program. 2. Maximize the advertising rate per thousand audience. 3. Stabilize both his audience deliveries and rates. He can accomplish `these objectives by: a. Striving to minimize the number of channel choices available to his potential audience, on-the-air or by cable. b. Opposing and delaying the activation of new bands, channels, and serv- ices which may erode his audiences, whether educational, CATY, or "pub- lic"-paid or free. c. Acquiring or controlling his program sources of supply (film, sports, talents, etc.) as well as all channels to markets (syndication, records, foreign, etc.). d. Acquiring the political, legal, economic, and journalistic capabilities to accomplish the above objectives from growth through multiple station acqui- sition, supply and marketing integration; employing these capabilities to influence the Congress, the FCC, and public opinion. The principles of common carrier structure and regulation, which have been imposed on all other public communications systems like the telephone and postal sytems, carry with them beneficial incentives to operate in the public interest. The common carrier's profits and stability are a function of the number and total capacity of his systems, since his earnings are fixed by return on invest- ment or revenue. The common carrier Is therefore ceaselessly striving to promote new, improved, and lower-cost services to communicators in order to maximize the channel capacity on which his profits are based. ADA believes that common carrier principles are not only the best, but the daly system which can protect and advance the public interest in STV and other public electronic communi- cations. Perhaps the most disastrous effect of authorizing STV in commercial chan- nels will be to create huge economic vested interests in the perpetuation of the control of all public payment electronic communications, whether broadcast- ing, data processing, banking and retailing, of electronic equivalents of news- papers and magazines, by private, virtually unregulated carriers. A public pol- PAGENO="0649" 645 icy of this magnitude and imj~act on the future of our media of communica- tions and the emerging non-entertainment communications services certainly requires Congressional action. The awarding of exclusive franchise rights to commercial stations for the development of STV, the precursor of a national system of public payment elec- tronic communications, would constitute a shocking give-away of our public domain to private interests which have proven to be virtually unregulatable. Pre-einption as an Evil: Granting the public interest in reserving four full-time channels per market for "free" programming (advertiser sponsored), it does not follow that STY should be authorized for only one channel in five, six, seven, or ten channel markets, thus unnecessarily creating a monopoly situation. A more reasonable rule would authorize STY service on any number of active or inactive channels per market provided it did not reduce the number of "free" channels below four, or exceed the total number of free channels. $iphoning as an Evil: Granted the wisdom of reserving a minimum of four full-time "free" stations in each area, the imposition of further direct FCC controls over STY programming for the purpose of controlling competition be- tween public-payment and advertiser-payment systems violates basic American principles of free press and free competition. FCC Consideration of Broadcaster Profltabifity: Throughout the Report, an assumption is clearly made that commercial licensees are entitled, as a matter of right, to freedom from the possible competitive effects of STY on their profita- bility. This doctrine has no sanction in law or in the free market-place. Even if commercial licensees were to pay franchise taxes for the use of a pablic domain, profit protection has no place in public policy. Minimum Free Time per ~TV Channel: Granted the reservation of a minimum of four full-time "free" stations per area, the requirement that an ~TV station must find advertiser sponsorship, or pay for sustaining time to meet the minimum "free" time requirements of commercial stations, is irrelevant, uneconomic, and an unworkable intermixture of two incompatible forms of broadcasting. A broadcast channel divided against itself cannot function in the public interest. Block-booking: The sanction, on request, of STY's contracts to procure the entirety of their programming from a single source is a pernicious invitation to suppliers of programs and technical `systems to constrain block-booking. (73.642: (e)(3)). kS'TV on cable or CA TV: ADA can find no reason for not mandating the carriage of STY by CATY systems on an optional-to-tbe-CATY-subScriber basis. However, the far-reaching future potentials of cable distribution may doubtless justify ample time and fact-finding opportunity to study the potentials of a system whose ultimate revenues will surpass all present broadcasting revenues by ten times and exceed those of A.T. & P. CATV loophole: Assuming the prudence of delaying STY carriage, there is no justification for exceptional treatment of private agreements for carriage be- tween STY stations and CATY operators (paragraph 309 of the "Report"). The effect of such agreements would be to aid and abet the common ownership of CATV and broadcast stations and give improper comn~ercial advantage to such combines, which ADA opposes as a matter of principle. FCC direct responsibility for rates and terms to the public: A broadcast license is a franchise for use of a public domain for private gain. While broadcast ad- vertising rates are restrained by intet-inedia conitietition (print, mail, display, radio, TV, etc.), there will be no effective competitive restraint over STV rates. There would be no restraint whatsoever under the Committee's proposal for single SPV station market monopolies. For this reason alone, common carrier utility regulation is essential to the public interest. Common ownership and control of technical systems and program sources: With diversified, highly competitive program sources available, there is no justification for permitting, even on an exception basis, restrictive agreements between systems operators and prograni sources. ADA has already affirmed its conviction that STY stations should be operated as common carriers, assured fair return on capital, and regulated to ensure carriage to all program and services suppliers at uniform, regulated rates and terms. Moreover, the precedent of technical system control over programming will have unfortunate consequences when cable carriage of STY is authorized, since proprietary and patented tech- nical systems are not required for control of cable services. Non-uniform technical systems: The proposal that a multiplicity of technical systems be authorized for various markets can readily lend itself to use as an instrument for furthering the growth and concentration of station chain systems. PAGENO="0650" 646 Exclusive technical system controls can also be instruments of restraint over network affiliations other than on the competitive merits of programming and services This provision is one of many in the Committee s Report that strongly suggests that the entire rule-making is premature It appears to be a second phase of highly restricted STY market-testing ra:ther than a wisely conceived, national system. CONOLIYSION In conclusion, ADA urges the FCC to avoid pre-eihptii~e, premature, and uni- lateral action on policies which would establish guide-lines or precedents for any segment of direct public payment mass electronic communications on the-air or by cable, until the findings of the FCC's own study and of the Pre~1dent's Commission on Telecommunications become available We urge the FCC to re study national requirements for public-payment, broa~d channel, electronic com- munications by the essential criteria of public interest. We urge the FCC to reject the premises of the Committee Report which would constitute a give away of the public domain of unmeasured and massive potentials for social usefulness and economic yield, to regressive and virtually unregulatable private interests. Mr. MACDONALD. We will hear next from Mr. Thomas A. Banning, Jr., .5520 South Shore Drive, Ohicago, Ill. STATEMENT OP THOMAS A. BANNING, PATENT ATTORNEY~ CHICAGO, ILL. Mr. BANNING. Mr. Chairman and members of the subcommittee: I am pleased to be able to speak to you this morning on this subject but I am not going to talk about baseball games or football games or details of that kind. I am going to talk about pay television in its broader aspect In the first place, I will introduce myself by reading the first para- graph of this monograph which has been passed around. My name is Thomas A. Banning. My address is 5520 South Shore Drive, Chicago, Ill By profession, I am an attorney specializing in patent practice, as I have clone since 1910. Before commencing my legal education, I earned my undergraduate degree in electrical en- gineering and throughout my career I have followed the develop- ments in the fields of communications and electronics. I presume to read that because, as an individual not connected with any of the conventional organizations that are presenting them- selves either for or against pay TV, I view the matter not only from my own standpoint but from that of the public. Now, in the first place, what is pay TV l We have been brought up to believe for the last 15 years that pay TV is something that is bad, something that the public is not going to benefit from, something that is going to be exclusively for a very small percentage of the viewing public and therefore in the nature of a monopoly that will not benefit either the viewing public or television industry as such. You give the dog a bad name and that dog will operate badly. I am going to give pay television a good name. I am going to show you a pay television operation which is free to the public. In other words, when the pay program is put on the air not only the sub- scribers who pay a fee of a dollar or $2 or $3 or whatever it may be for that program, are going to be able to get it but every member of the public within viewing range, receiving range, of the broad- casting station is going to receive that same program. in just as fine a quality as is going to be received by the subscriber. PAGENO="0651" 647 But the public nonsubscribers will receive it in monochrome or black and white whereas the pay subscribers, who may wish to have it dressed up better, will pay their dollar or $2 to get it in color. Now, this is not a double broadcasting system although it is a com- pletely over-the-air system. But it is a system in which the color pro- grams are put out from the broadcasting station in such a manner that a color receiver will normally receive them in monochrome but in such - a manner that the subscriber by a slight attachment to his receiver, which we will call the "little black box," is able to supplement the reception which he gets over the air by a locally produced "burst" signal as it is called which he has to pay for and that immediately converts his reception. into a color reception. Now, in order to emphasize what this means, I will presume to call your attention to the single sheet which is set into the monograms as a flyer, and under the caption of "B" we find the listing of special or pay programs broadcast without "bursts" as a color program~ That program can be received in monochrome by an ordinary monochrome receiver. It can be received in monochrome on a color receiver. in the hands of the public because they don't get this burst signal but when it comes to the subscriber he can receive it also in monochrome if he does not care to make payment but if he wants to make payment his receiver, the supplemental unit, will supply the burst signal so that he now gets the program in color. Now, I followed the tests of Zenith at Hartford, the tests of Tele- meter up in Canada near Toronto. There has been a great deal of effort placed in a careful analysis of how many persons in a given area or what percentage are probably going to be willing to subscribe. As near as the estimates which have been made at the present time, I think there the estimates run about 5 or 10 percent of a total viewing population of an area of 20,000 receivers and up. I am going to present a system which doesn't require any change in the subscriber's receiver. It does not require any change in the receiv- ers, television receivers, of a million viewers within the viewing area if there are that many; it doesn't require any change in the complexity of the circuitry in the broadcasting station with the exception of the addition of one or two simple switching operations. It doesn't require a complex supplemental unit for decoding or elim- inating the scrambling signal. It requires in place of that only a very simple unit which produces the burst signal which has not been sent out by the broadcasting station for this particular special program Now, due to that circumstance, due to the fact that when a special program is to be put on the `ur the attendant at the sending station pulls the switch that eliminates a burst, signal, as it is called, from the broadcast, all the viewing public having any kind of televison receiver will be able to receive that same special program in black and white without pay but, as I have explained before, the subscribers may also receive either in black and white without pay or in color with pay.. Now, what is the result of this ~ The result is that that special pro- gram is made available not to zero persons of the nonpay public, it is made available to 100 percent of the nonpay public as well as to the members who subscribe and who are willing to pay a $1 or $~ or $3 to have the program' in color.. PAGENO="0652" 648 Now, the result is that all of the objections which I have heard against pay television on the ground that it will create a monopoly, on the ground that it will tend to create moneyed classes, on the ground that it will, as I heard over in the FCC hearings a couple of weeks ago, tend to inspire and bring on race riots; I don't know where in the world anybody ever got that idea but it was so declared. It will place every member of the public, subscribers and nonsubscribers, on the same parity that they are today with the single exception ~that the subscriber is able to get the program in color, by making `a payment for it. If he does not care to make the payment for it, he does not have to do so and he will not get it in color; he will get it in black and white. Now, this approach is entirely consistent with the American way. We have classes in this country. Let us face it. I go over to the station to get a train to go back to Chicago or I go to the airport to buy my transportation on the airline. I am given a choice. I can go back in a coach on the train and get through and sit up all night if I am willing to do so and save money, or I can go up in the Pullman, first class, pay a little more money. Even up there I have a choice between a roornette, a compartment, a bedroom, drawing room or even the whole car if I want to, or if I can do so I can rent a train. In other words, these are all recognized as a part of the American system. Not only that, they are placed under the control of the Interstate Commerce Commission or this commission or that commission so that these differences are recognized. Now, I say in view of the circumstances here it seems entirely proper to offer a pay television system to the public which is not one that is limited in its reception to that 5 or 10 percent that Zenith has been telling about after the Hartford test. I say it ought to be a pay tele- vision system that is open to everybody in the country to get the pro- gram; if it is a good program they can get it but they can get it~ in monochrome if they don't care to pay for it. Now, I am not asking that any system, any one system or another, be given a monopoly of the pay or subscription television business. It is open to anybody who can enter it properly. The only monopoly that the owners of this particular system would ask is that that is granted naturally under the patent system and is recognized as such. Even so, the patent holders are subject to the regulations of the FCC in regard to granting licenses to anybody who is entering the business. Now, if I may, I would like to pass over to the written text which I have supplied and read very shortly from that I have requested this opportunity to appear before the subcommittee because the debate in the past between the advocates and the opponents of subscription television has been proceeding on the' basis of an erro- neous assumption. That erroneous assumption is that whenever a tele- vision broadcast transmission channel is used for subscription televi- avon service, such channel in the reception area of the transmitter would necessarily be unavailable for the benefit of all those members of the general public who are unable, or do not choose, to pay a charge. `The term "pay television" has been widely used as `being synonymous with and limited to a system in which the picture is scrambled as sent out from the broadcasting station so that no member of the public who is not a subscriber to the service is able to secure that program ifl an intelligible form. PAGENO="0653" 649 Thus, it is argaed that the nonsubscribers to the system are being deprived, for the time and duration of the pay program, of reception of any program on that particular channel. I am here to explain an alternative system of subscription or pay television, using that term in a broader and more correct sense. This alternative system makes it possible for a program broadcast on a single television transmission channel of standard width to be received in two satisfactory intelligible forms. One form is a color rendition available only for a charge and by the use of subscription equipment. attached to a subscriber's receiver; the other form is black and white reception receivable on any conventional television set without any additional equipment. At this point, I would like to inject that one of the changes or one of the modifications which has been extensively discussed by the FCC and those who have been talking about pay television up to this time is the fact that the system must be one, if possible, which does not necessitate the allocation of any new channel or does not include or does not require the enlargement of a presently allocated channel. The system that I am proposing here and trying to enlighten you on does not require any of these changes whatsoever. Any broadcast- ing station in the city of Washington or in the State of Illinois or in the country that is equipped today to emit color signals can use tlii~ system without putting a single additional piece of equipment into their sending station with the exception of a simple switching opera- tion which will enable them to discontinue temporarily during the sending of this special program, to discontinue the burst signals. Then when that program is completed, then the ordinary so-called commer- cial programs are back on the air, the attendant throws the switch back in again and color programs that are sent out can be received by any- body with a color receiver without pay for the duration of that com- mercial program or 10 others during the day. In other words, this not only meets the requiremen±s which were established and set forth in some of the modified rules of FCC govern- ing pay television, it goes beyond those requirements. Now at this point I want to emphasize that under this proposed sys- tern all nonsubscribers to the pay or subscription system are never- theless able to receive not only the conventional programs which they are today receiving free~ but also they may receive any and each of the special or pay or subscription programs in monochrome (black and white) and without pay or charge. This is an additional dividend which is offered to the public, which they will not and could not possi- bly receive under the scrambled type of operation. Thus, I first call attention to the fact that we must dispel the mis- conception-widely held, I'll admit-th~t the use of any pay television system would deprive the public of the use of the channel in question, and above all would forbid the public from receiving that particular program. Up until now whenever talk has beemi indulged in with reference to pay television, people have thrown up their hands in holy horror, why that is going to deprive 90 percent of the p~tblic of that pai~ticu1ar very fine program. It is not, under this arrangement. The pay system which I am now proposing and discussing has no such limitation or handicap. Under this new system, which may per- PAGENO="0654" 650 haps be described as a two-level system, the public is not deprived of anything. On the contrary, the public nonpay viewers are able to gain free access to pay programs of the very highest quality and many of which would not otherwise be put on the air because of their cost of production. Under this two-level system, any owner of a receiver, whether mono- chrome or color, who is within receiving range of the broadcast sta- tion may receive that special program in just as fine a rendition, as far as picture is concerned, as the person who makes the payment. The differenôe is only that the nonpayer has the picture presented to h~m in monochrome whereas the subscriber and payer pays money to re- ceive the same program in color. Thus, all TV sets could be tuned into the same programs-but only those having color sets and who could afford to pay would be paying for the advantage of color, if they wish it. Having thus briefly outlined this proposed two-level pay or sub- scription television system, I pass to certain other observations which are of importance from the practical standpoint of television broad- casting and receiving techniques. These I have already referred to but I would like to summarize them at this point. 1. Any broadcasting station can be brought within the sphere of the operations already outlined. It is not necessary to provide special broadcasting equipment to enable production of the results and opera- tions which I have described. In other words, the additional equipment necessary in a conventional broadcasting station would be minimal, and the required alterations would be neither extensive nor expensive. Furthermore, the system is one that does not require the use of any new channels to carry special program signals. The operations already defined require no change in the channel frequencies, no enlargement of the channel width or other interferences with previously estab- lished and assigned channels. Mr. MAcDONALD. Mr. Banning, I know you have come a long way to testify before us. We appreciate it.. The House is in session. We have one more witness and technically we should not be sitting. Any member of the committee may make a point of order that the House is in session and we can't sit. We have one more witness. We were very hopeful that we could wind up the complete hearing today. Since you have summarized your testimony, it might be possible for you to insert your entire statement in the record and it will be as if you had gone through it word for word. Actually, I am not sure that we are the right forum or you to be testifying before, because it seems to be a matter of more concern to the FCC than to ourselves. Techni- cally, we are sitting on a bill introduced by Mr Dingell, of Michigan, to ban pay TV, prohibit pay TV. So, therefore, if you would not mind, if you would insert the rest of your statement which, as I say, you have already summarized, into the record, it would certainly help the committee. Mr. BANNING. I was going to say that I can summarize in 2 or 3 minutes, if that is what you mean, and then I will be through. Mr. MACDONALD. All right. Mr. BANNING. I was just going to read these other two short para- graphs. I appreciate very much the opportunity to explain this. 2. This proposed system does not require any change in the circuitry PAGENO="0655" 651 of any receiver, either monochrome or color, in the hands of nonsub- scribers to the service. All such receivers will be able to receive the secia~ pay program without pay or charge operation, but in mono- chrome. 3. This proposed system does not require any change or modific~i- tion of the internal circuitry of the color receivers used by the sub* scribers to the service; neither does the use of this system require any connection into the circuitry of such receiver other than connection to existing external terminals. 4. The operations by which the system is made available are ex- tremely simple in themselves. I will then conclude by simply saying t.his, that I am not here to urge the adoption or rejection of any particular system of pay tele- vision. I think that the good American system of selling those ques- tions in the marketplace should be available. All I ask is that any rules or statutory enactments that may b~ made, I would like to see them such that they would not forbid this type of operation as well as allowing those. I thank yOu very much. (Mr. Banning's prepared statement follows:) STATEMENT OF THOMAS A. BANNING, PATENT ATTORNEY, CHICAGO, ILL. Gentlemen, my name is Thomas A. Banning. My address is 5~20 South Shore Drive, Chicago, Illinois. By profession I am an attorney specializing in patent practice, as I have done since 1910. Before commencing my legal education I earned my undergraduate degree in electrical engineering and throughout my career I have followed the developments in the fields of communications and electronics. I am not appearing on behalf of any client. In addition to my work for clients in highly technical fields I have myself been the inventor of a number of devices and methods in electrical and mechanical fields and my various inventions are covered by approximately 70 patents issued by the Patent Office. J~hgbt of those patents issued to me are in the field of television and additional developments by me are covered by a number of pending patent applications I am appearing before you to explain certain of my developments in the field of subscription or pay television which are particularly relevant to the hearings you are now conducting. While I am appearing on behalf of myself, I feel that in a very true sense I am appearing for the benefit of the public in general. This is because I hope to show that developments of mine, if permitted to be put into practice in television broadcasting, will have substantial and far reaching benefits for the public, which might not otherwise be made available to them. The Communications and Power Subcommittee is presently holding bearings on the subject of pay television and whether authorization of pay television would be in the public interest Fears have been expressed from very respect able sources that subscription television would substantially interfere with the quantity and quality of television broadcasting which would otherwise be available to the public without charge. Last week the Federal Communications Commission heard oral arguments regarding the proposed establishment of over the air subscription television service for the nation and proposed rules governing such service Those propo~ als included various provisions designed as safeguards against diminution in the quantity and quality of free television programming available. Various op- ponents of subscription television have maintained that proposed safeguards would be insufficient and ineffective. I have requested this opportunity to appear before. the Subcommittee be- cause the debate in the past between the advocates and the opponents of sub scription television has been proceeding on the basis of an erroneous assunip- tion. That erroneous assumption is that whenever a television broadcast trans- mission channel is used for subscription television service, such channel in the reception area of the transmitter would necessarily be unavailable for the PAGENO="0656" 652 benefit of all thc~e members of ~ the general public who are unable, or do not choose, to pay a charge. The term "pay television" has been widely used as being synonymous with and limited to a system in which the picture is scrambled as! sent out from the broadcasting station so that no member of the public who is not a sub- scriber to the service is able to secure that program in an intelligible form. Thus, it is argued that the non-subscribers to the system are being deprived, for the time and duration of the pay program, of reception of any program on that particular channel. I am here to explain an alternative system of subscription or pay te1e~viuio!n, using that term in a broader and more correct sense. This alternative system makes it possible for a program broadcast on a single television transmission channel of standard width to be received in two satisfactory intelligible forms. One form is a color rendition available only for a charge and by the use of sub scripflon equipment attached to a subscriber's receiver; the other form is black and white reception receivable on any conventional television set without charge and without any additional equipment. Now at this point I want to emphasize that under this proposed system all non-subscribers to the pay or `subscription system are nevertheless able to receive not only the conventional programs which they are today receiving free, but also they may receive any and each of the special or pay or subscription programs in monochrome (black and white) and without pay or charge. This is an additional dividend which is offered to the public which they will not and could not possibly receive under the scrambled type of operation Thus I first call attention to the fact that we must dispel the misconception-widely held Ill admit-that the use of any pay television system would deprive the public of the use of the chan- nel in question, and above all would forbid the public from receiving that par ticular program. The pay system which I am now proposing and discussing has no such limitation or handicap Under this new system which may perhaps be described as a two4evel system, the public is not deprived of anything. On the contrary, the public non-pay viewers are able to gain free access to pay programs of the very highest quality and many of which would not otherwise be put on the air because of their cost of production. Under this two-level system, any owner of a receiver, whether monochrome or color, who is within receiving range of the broadcast station may receive that special program in just as fine a rendition, as far as picture is concerned, as the person who makes the payment The difference is only that the non payer has the picture presented to him in monochrome whereas the subscriber and payer pays money to receive the same program in color Thus all TV sets could be tuned into the same program~bu~ only those who could afford color sets would be paying for the advantage of color, if they wish it. Having thus briefly outlined this proposed two-level pa~ or subscription tele. vision system I pass to certain other observations which are of importance from the practical standpoint of television broadcasting and receiving techniques 1. Any broadcasting station can be brought within the sphere of the operations already outlined. It is not necessary to provide special broadcasting equipment to enable production of the results and operations which I have described. In other words, the additional equipment necessary in a conventio!na.l broadcasting station would be minimal, and the required alterations would be neither extensive nor expensive. Furthermore, the system Is one that does not require the use of any new channels to carry special program signals The operations already defined require no change In the channel frequencies no enlargement of the channel width or other interferences with previously established and assigned channels. 2. This proposed system does not require any change in the circuitry of any receiver, either monochrome or color, in the hands of non-subcribers to the serv- ice. All such receivers will be able to receive the special pay program without pay or charge operation, but in monochrome. 3. This proposed system does not require any change or modification of the internal circuitry of the color receivers used by the subscribers to the service; neither does the use of this `system require any connection into the circuitry of such receiver other than connection to existing external terminals. 4. The `operations by which the system is made available are extremely simple in themselves I will try to explain in brief non technical terms why the system is entirely feasible. Not only can it be achieved at a very minimum of cost for change of equipment in the sending station, but the possibilities of trouble developing after long usage are minimized. In brief: PAGENO="0657" 653 Under conventional practice and FCC rules and regulations, color signals broadcast in a manner to be translated by color receivers include the following. At the broadcasting station the video signals include a luminance component a chrominance component, the line synchronizing signals, and what are known as color burst signals. Without these color burst signals, the chrominance or color signals for production of the color picture cannot be translated into color. If the color burst signals are absent, the color receiver (whether owned by a non-subscriber or a subscriber to the system) will translate the received broad- cast signals as a monochrome picture. It is therefore evident that when the color burst signals are not included in the transmission broadcast from the sending station, all color receivers (as ~vell as all monochrome receivers) tuned to that station will translate the signals as a monochrome or black and white picture. Since, as I have explained, the subscriber may receive the program in color by making pay or subscription operation, it then becomes necessary to make provi- sion for supplying the color burst signals locally to the color receiver of any particular subscriber who desires to have the special or pay program rendered in color and is willing to pay for it. Accordingly, my system makes provision for locally delivering to the color receiver of each subscriber properly synchronized color burst signals when such a subscriber operates either a prepayment device or a device for recording charges. All of the foregoing special operations are produced without entering the circuitry of the subscriber's color receiver. This result is obtfllned by the use of a small receiver supplemental unit, including a color burst generator, which is attached inductively to the antenna of the subscriber's receiver, or to the line extending from such antenna to the r.f. input element of such receiver. To sum up, pay or subscription television operations need not deprive the general non-paying public of the use and benefit of available television broad- casting channels. I submit that this is a fundamental consideration in the whole field of authorizing and regulating television service, including subscription tele- vision service. While certain possible applications of some of my developments relating to subscription television would not require free monochrome reception of any program receivable in color for a charge, the particular development I have outlined to you today affords one entirely feasible method whereby subscrip- tion television operations can be commenced on a basis which, beyond question, is beneficial to all of the public. Beyond question. it would result in a greater variety and quality of programming being available to all of the public thai' would be the case if no subscription television service were permitted. I am not stating any conclusion that other systems of subscription television are not in the public interest. Nor am I stating any conclusion that FCC rrgula- tion of other systems would not adequately safeguard the quantity and quality of available free television. Further, I am not attempting here to project far various localities and various future periods the economic feasibility and attrac- tiveness of the system I have outlined to you today. What I am urging is that (1) here is one system which clearly would not harm but rather would benefit all of the public and (2) any investors willing to risk their capital in endeavoring to establish a market for the subscription television system I have outlined should not be barred from doing so. In conclusion, it is my sincere hope that the Federal Communications Com- mission and the Congress will recognize that it is in the public interest to give due weight to the foregoing considerations when providing for and regulating the future development of subscription television in the United States. Thank you, gentlemen. CHART SHOWING VARIoUs BRoADCASTING OPERATIONS PossIBLE UNDER PilE Pao- rosno BANNING SYSTEM ron SUBscRIPTION TELEVISION ("STV"), AND SHOWING TIlE VARIoUs RECEPTION RENDITIONS PosSIBLE TINDER Sr~cn PROPosED BANNING SYsTEM A. Conventional broadcast Non-Pay Program: 1. Broadcast in Monochrom~ (a) Rendered in Monochrome by Monochrome receiver. (b) Rendered in Monochrome by Color receiver. (c) Rendei~ed in Monochrome by SPV receiver. 2. Broadcast in Color Signals with Color Bursts: (a) Rendered in Monochrome by Monochrome receiver. (b) Rendered in Color by Color receiver. (c) Rendered in Color b~ STV receiver (F~ree). 86~-399 O-67---42 PAGENO="0658" 654 B, "Special" or `~Pay".Progra~rn: Broadcast without Bursts (Color Signals): 3. Received by Non-Subscribers ($`ree): (a) Rendered in Monochrome by Monochrome receiver. (b) Rendered in Monochrome by Color receiver. 4. Received by Subscribers: May be rendered by STY receiver in- (a) Monochrome, without m~aking pay or charge operation; or (b) Color, by nuilcing pay or charge operation. Note particularly: That under the Banning proposed system any non-subscriber member of the public may receive any "B" program ("Special" or "Pay" program) without pay or charge, Free, being thus on a complete parity with Subscribers to the Banning system, when ~uch Subscribers do not desire to make payment or charge operation for the particular Special' or Pay program The benefit recei~ ed by the Subscriber when he makes payment or charge opera- tion consists of having the program rendered to him in Color instead of Monochrome, whereas the non-Subscriber is restricted to Monochrome reception. C. Provision may be made for eliminating any "Commercials" from the audio (Sound) component of the Special or Pay Progrims as received and rendered to Subscribers; such Commercials may either be allowed or dis- allowed on the renditions of such "Special" or "Pay" Programs as produced by Non-Subscriber receivers in the hands of the general public. This Is a matter of policy to `be decided by the F.C.C., or elsewhere. D. Reception and rendition of the "Special" or "Pay" Programs by Non-Sub- scribers, in Monochrome, is as perfect a rendition as may be produced by the particular receiver when rendering any conventional or Non-Subscription Program. Mr. MACDONALD. Mr. Brotzman. Mr. BROTZMAN. Mr. Chairman, I want to take this opportunity to thank Mr. Banning for coming down here, at his expense, to present his testimony. I note you have been practicing since 1910, which means you have been doing it for a long while. I. do want to thank you very much, Mr. Banning, for coming. Mr. `BANNINO. I am very happy to come down. I was happy many years ago to be a classmate of Barrett O'Hara. We graduated from college in the same class. Thank you very much, gentlemen. Mr. MACDONALD. Thank you, sir. The last witness is Mr. Robert McKinsey, president of WJR.J-TV., Atlanta, Ga. STATEMENT OP W. ROBERT' McI~INSEY, PRESIDENT, WJLT.-TV, ATLANTA, GA. Mr. MCKINSRY. Mr. Chairman and members of the subcommittee, I am William Robert McKinsey, president and general manager of WJRJ-TV, channel 17, in.Atlanta, Ga. I thank you for this opportunity to appear before you and express my views on the very important issue you are considering-subscrip- tion television broadcasting. I come here before you to give the viewpoint of a UHF television broadcaster on subscription television programing. I will not leave you in doubt about where I stand-and where I believe almost every other present or future UHF broadcaster stands on this issue. I am in favor of subscription television and I urge this committee to' do what- ever it can to encourage its development. PAGENO="0659" 655 By way of background, I am a graduate of Oklahoma State Univer- sity, in three areas of study-in business administration, electrOnics, and music. During World War II, I was a major in the infantry, serv- ing as communications director on the staff of the 2d Army. I have been in broadcasting for the past 21 years, starting out in 1946 in Oklahoma where I built and commenced the operation of a radio station in Stiliwater. Since then I have served in a variety of ex- ecutive capacities with radio and television stations in Minneapolis, Baltimore, Rochester, San Antonio, and now in Atlanta. I think it might be helpful in this discussion if I briefly describe the Atlanta market, a fairly typical one in which subscription tele- vision programing might develop if allowed. We are the 19th largest television market, with over 800,000 tele- vision homes, according to the latest statistics. We have three VHF net- work-affiliated stations which have been on the air for approximately 20 years. There are three commercial UHF and two educational TTHF channels allocated to Atlanta. One of the educational television chan- nels has been operated by the Atlanta School Board for the past 9 years. On September 1 of this year, we became the first commercial UHF station to go on the air. A construction permit has been issued for one of the other UHF channels, and an application is pending with the Commission for the third available channel. Gentlemen, let me assure you that in a market like Atlanta it takes considerable nerve, courage, and financial resources to put a UHF station on the air in competition with the three established network affiliates. Our monthly cash requirements just to keep the station oper- ating are approximately $65,000. It will be many months-probably two and a half years-before our monthly billings or income will match that figure, and we expect to absorb losses in excess of $600,000 before we cease to have a monthly cash deficit. How much longer it will take before we show an actual net profit on the books is anyone's guess. Is it any wonder then why we are looking for an opportunity to increase our income by providing the people of Atlanta with programing that is unavailable to them on the three network affiliates The most difficult part of a successful television operation is obtain- ing good programing that will attract viewers. If this is difficult for a network affiliate, think how much harder it is for me, under the circumstances and the present rules of the game which govern my operation. We are on the air from .4 to midnight, and while naturally we are trying to provide the most attractive programing available, I am frank to say that our present programing is not the type of program service we hope to render in the future. When I go out shopping for programs, what is available on the shelf at a price we can afford to pay? I assure you, gentlemen, that shelf is rather bare, and all that's on it for me to buy are programs the network affiliates in Atlanta have rejected, very old movies which have been shown already five to six times in the Atlanta market, and re- runs of old network serial and situation-type comedies. I know you will agree that, if we are to perform a meaningful public service for the people of Atlanta by providing them with better programing than it is now possible for us to do, there must PAGENO="0660" 656 be a new development in the marketplace. This is why we are inter- ested in subscription television programing. You gentlemen are very familiar with the FCC's proposed rule authorizing subscription television programing, and I know you have heard much about it from many witnesses during the past week, so there is no need for me to discuss it in detail. There are parts of it, however, which I would like to see modified. For example, the five-station.market rule would have to be modi- fied or waived in our case to permit us to broadcast subscription tele- vision programs in Atlanta, since, as I have indicated, we are pres- ently only the fourth station on the air. However, I believe the pro- posed rule is basically sound and provides a good point of departure for further experimentation and innovation in subscription television programing~and I earnestly hope that the Commission will proceed to issue the rule. Now, let's assume that the Commission does issue the rule and either as a result of modification or waiver of the five-station provision, channel 17 can commence to offer subscription television programs. What's going to happen? Well, for the first year there would be no significant change in our operation because I assume it would take at least that long to negotiate a contract with an equipment manufac- turer who could provide us with the studio scrambling devices and the decoders required for subscription television broadcasting. But, at some point in the following year, I would hope we could com- mence some subscription programing. What our penetration of sub- scribers in the Atlanta market might be is obviously a matter of conjecture at this time. I believe, however, it is reasonable to expect that at the end of 2 years, after we commence subscription programing, we might achieve a lO-percent penetration. In the Atlanta market, this would be about 80,000 homes. With this as my box office, I assure you will be able to provide a type of programing that is not now-and I do not believe ever will be available on the so-called free or conventional system. op- erating within the framework of the proposed rule, we could provide our subscribers with the very best movies within a few months after their release. As you know, 4~tlanta is very proud of its newly acquired status in professional football and baseball, and the Atlanta Falcons and the Atlanta Braves keep our flew stadium filled, or nearly so, when they are playing at home. I would hope that we could bring to our sub- scribers the home games of the Falcons and the Braves which are not presently available on TV, with the exception of two or three out of 80 baseball games played at home each year. I realize that, in the case of baseball, this would require a waiver of the Commission's 2-year rule on sports programing, but I would hope that, with the assurance of the Braves that they would continue to provide on "free" television at least the same number of games as they are now making available to the public, that the Commission would grant such a waiver. Atlanta is a great community for college and high school sports, particularly football and basketball. Presently, with few exceptions, these games are not available for televising, for the simple reason that PAGENO="0661" 657 the economics of the present system will not support their program- ing; or, in the case of Georgia Tech and University of Georgia, their ±o9tball games cannot be shown on television because of NCAA restric- tions. I believe there would be a substantial demand to see Georgia Tech's and the University of Georgia's football games on subscription tele- vision and that the schools would find it in their interest to make them available, and that this could be done with the approval of the NCAA, and within the framework of the Commission's proposed rule. We have an excellent repertory theater in Atlanta whose produc- tions we could show on subscription television in prime time several times a month. As you know and I know, the network-affiliated stations in Atlanta are never going to devote their prime time to this type of programing. These three stations seek and must find an audience in the Atlanta market each night of more than 400,000 people. We will be able to show the productions of our repertory theater on a basis that is profitable both to them and to us if only 10,000 people are willing to pay $1 for the privilege, and I am confident that there are at least that many people in Atlanta who will do just that. Now remember, I have only been talking about what we might do in Atlanta with 80,000 subscribers. If subscription television is per- mitted to develop throughout the country and a 10-percent penetra- tion of subscribers is attained, the potential box office approaches 6 million people. Then the range of programing that might be offered runs the gamut of your imagination, and the very existence of this large box office will necessarily encourage the development of new talent in the creative arts. The smash Broadway musical comedy can be brought to the homes of viewers across the country in its first year, whereas, now, people in Atlanta-and in every other city except New York, for that mat- ter-do not have the opportunity to see a road show performance for more than 3 years after a big hit opens on Broadway; and it is 5 or more years before they can see the filmed version, and 10 to 20 years before they have the opportunity to see the filmed version on "free" television and, I might add, with 21 commercial interruptions. Do you realize that when "My Fair ~ady~~ opened in New York it played to standing-room-only audiences for 3 years and during all that time only 600,000 people in this entire country had the oppor- tunity to see it ~ And at scalpers' prices I suspect the average viewer paid $25 for the privilege. If we had had nationwide subscription tele- vision, and a 10-percent subscriber penetration, and if only 20 percent of the subscribers tuned in, more than twice as many people through- out the country-at less than 10 percent of the price-would have had the opportunity to see that lovely work of art in one night than were able to see it in 3 years on Broadway. To me, the case for subscription television seems so overwhelming it is difficult to understand why the Commission has not authorized it long before this. Everyone, including its opponents, recognizes the great benefits that might be derived from subscription television. But the opponents say that these benefits are outweighed by many alleged detriments, so that the net effect of subscription television is contrary to the public interest. PAGENO="0662" 658 You have heard from many of these opponents during the past week and almost without exception they have represented a vested interest in the existing system. The opponents are easily identified. They are the networks, the network-affiliated broadcasters, and the theater owners. They are so content with the existing system, and the huge profits they are reaping, that they dor~'t want to give me and other UHF broadcasters a chance to compete. The principal argument advanced against subscription teleinsion is that somehow or other it will result in program siphoning so that people will have to pay for what they now see "free." I might add that there is a form of economic siphoning going on right now with the networks and the stations outbidding me by many thousands of dollars, for example, for the movies that are approxi- inately 2 to 3 years old. It is impossible for me to compete in the economic market in buying this type of programing. One opponent said that once people pay to see a program, they will never again have the opportunity to see it free. The fact is once people have seen a program free they will never pay for it, and there is no possible chance that subscription television will succeed if it attempts to charge the public for the type of programs presently available on the so-called free system. The FCC has gone to great length to devise restrictions on sup- script.ion television designed to prevent program siphoning. In my opinion, these restraints are unnecessary, since the economics of the marketplace will achieve the same objectives. Those of us who are interested in subscription television see it as an opportunity to provide the public with a supplement to the programing made available by the network's, and we know that unless we offer something truly new and distinctively different from what is available on the networks, we are doomed to an early failure. Remember that under the Commission's proposal, when'ever a sta- tion is offering a subscription program, it will d'o so in competition with the three- networks at the very same time and in the very same market. How, then, can subscription television possibly succeed under such adverse competitive circumstances unless it is offering something genuinely different from what the networks are providing? Representatives of the networks who have appeared before you have attempted to justify the many commercial interruptions which occur on `their programs by saying that the income derived from. these com- mercials is necessary to support the 25 percent of their programing devoted to news and public affairs. What I would like to know is how our `station in Atlanta under the present system will ever be able to finance the `type of news and public affairs programing oriented to the Atlanta community which I think the people in Atlanta deserve? If we are `able to broadcast subseriptionprograms part of the day, I am confident we can do `this at a profit, which will enable us to con- tinually improve the balance of our program day when we are operat- ing conventionally-and, in particular, to develop the very best in news and public affairs programing of special interest to the Atlanta community. Gentlemen, I have talked only about Atlanta because this is the only market in which we are on the air. However, what I have said as a UHF broadcaster `struggling to compete in the Atlanta market against PAGENO="0663" 659 the three network affiliates applies to UHF broadcasters throughout the country. The problems I face are the same ones that have caused many of them to go off the air and huge financial loss for those who have struggled to stay on the air. Subscription television will provide us with the means of providing healthy and vigorous competition with the network affiliates-from which the public is bound to benefit I urge you, gentlemen, to give subscription television a chance. That concludes my statement. Mr. MACDONALD. Thank you very much, Mr. McKinsey. Obviously you acknowledge a prejudice and an understandable one for subscription or toll TV, whatever name you want to give it. But do you not think there would exist a problem of siphoning of pro- grams? Mr. MOKINSEY. I honestly don't think so, Mr. Macdonald. Mr. MACDONALD. The argument has been matle, and persuasively by some witnesses, that the good programs would tend to go, through the natural law of economics, to those who would pay to see the good pro- grams, just leaving the really bad programs on so-called commercial I am not saying who is right or wrong about it but it is a problem in my judgment. Mr. MOKINSEY. I believe the FCC would be watchful and certainly would have the authority to step in if this were to happen. I honestly don't think it will happen. Now the present networks are not able to present brandnew movies. I think they never will be. This would immediately destroy the box office value of a movie. But we would be able to do that, we would be able to put them on and 2 or 3 years later the people without subscription television would still be able to see those movies just as they do now. Mr. MACDONALD. Mr. Brotzman. Mr. BROTZMAN. Thank you, Mr. Chairman. I will just acknowledge the fact that you have given us this testi- mony and thank you very much. Mr. MCKIN5EY. Thank you. Mr. MACDONALD. Mr. Brown, Mr. BROWN. I also want to thank you for your testimony. I am uncertain about where you are going to get the programing that you can't afford to get now if you have STV. Do you really think you will get that much income from 10 percent of your market? Mr. MOKINSEY. We would be putting our money on the line to the extent that we think we would. Mr. BROWN. At what kind of prices? Mr. MCKINSEY. I would say at approximately slightly under the price you would pay if you went to see the event in person. Mr. BROWN. Let me ask you just two other questions if I may. You say the cost was $65,000 a month to stay on the air. Is that a minimum cost or are you a Cadillac kind of station? Mr. MOKINSEY. This is a very minimal operation. I have 22 full-time employees and three part-time employees as compared to, for example, WSB television which has 27 men in its news department alone. PAGENO="0664" 660 Mr. BROWN. What would. a station need to get on the air with UHF at a minimal cost? The other question after that is what does it cost to get this 10 percent of your market where they could watch pay TV? Mr MCKIN5EY The cost of getting on the air with equipment you are talking about and plant, that sort of thing? Mr. BROWN. I don't want to ask you what it cost you to get on the air because you may not want to reveal that figure. What does it cost a UHF station to get on the air as a minimal figure? Mr. MCKINSEY. The only direct experience is mine and I don't mind telling you it cost $1.2 million. There would be additional cost, not great, in the nature of maybe 6 or 8 percent more to provide our equipment with the necessary scrambling devices. Let us say $1.25 million to put a station on the air with the maximum power which would be required. Mr. BROWN. A minimum, to get on the air, let us say, a very low cost UHF station, is about a million dollars, is that right? Mr. MCKINSEY. Yes Mr. BROWN. Another $75,000 to get into the STV business? Mr. MCKINSRY. That is correct.. Of course, that does not count the cost of decoders and that sort of thing which is a matter entirely-- Mr. BROWN. The subscriber bears that cost, does he? Mr. MOKINSEY. The decoders would cost, I don't know what the market price might `be at the time they are ready but anywhere from $75 to $120. Mr. BROWN. Let us say $100. You want 80,000 of them. So you are going to have a cost of a considerable amount. Mr. MCKINSEY. That is right. We would certainly pass along part of this cost. With the experiment in Hartford they tried it several different ways, charging the whole cost, I believe, a portion of that cost and in some instances not charging them at all to install the decoder. We would have to arrive at some compromise here and probably arrive at maybe half of the cost as a so-called installation charge to the customer. Mr. MACDONALD. I have just one last question. Everyone always has one last question. Everyone says "My Fair Lady" could be seen by only hundreds of thousands of people. Tha~t would be true but how many "My Fair Lady's" will ever happen. You know it is hard to keep good programs on. Mr. MCKINSEY. That is correct. On the other hand there was a show that opened and closed one night on Broadway this past season. If that had been available to subscription television, sight unseen, there would have been sufficient subscribers watching that brandnew Broad- way musical, written and produced by top people, it had top stars, with just the advanced promotion they could have paid off what they call the net on that production in that one night and it could have continued to run on Broadway. Maybe they could have gotten over that hump. We might help the creative arts that way. Mr. MACDONALD. Thank you very much. Mr. MCKINSEY. Thank you, sir. Mr. MACDONALD. At long last the hearings are closed. PAGENO="0665" 661 (The following material was submitted for the record:) STATEMENT OF KAISER BROADCASTING COin'. Kaiser Broadcasting Corporation has a vital stake in the future of advertiser- supported television broadcasting. It now operates or is constructing four UHF television stations: KHJK-TV, San Francisco (request for call letter change to KBIIK-TV pending); KMTW-TV, Chrona (serving Los Angeles); WKBD-TY Detroit; and WKBS-TV, Burlington (serving Philadelphia). In addition it holds 50% interests in UHF Stations WAFT-TV, Cleveland (request for call letter change to WtKBF-TV pending) and WKBG-TV, Cambridge (serving Bos- ton). Moreover, Kaiser Is considering the establishment of an advertiser-sup- ported network, utilizing these stations as a nucleus. If we believed that subscription television would destroy the advertiser-sup- ported system, we would have every reason to oppose it. However, we have con- siderable confidence in the vigor and health of the advertiser-supported system. Our decision to invest large sums in television broadcasting rests essentially or' that confidence. Moreover, we believe that carefully designed subscription tele- vision operations, of the kind represented by the TECO system, can offer new sources of programming and revenues to the television industry, and new pro- gram services to the public, without impairing in any way the vitality of adver- tiser-supported television. Accordingly, Kaiser Broadcasting Corporation has obtained an option to acquire a franchise for the use of the TECO system in the Los Angeles area. More generally, Kaiser firmly believes that the public will be best served if new ideas are given a reasonable chance to prove their worth. The concept of subscription television has been subjected to exhaustive scrutiny by the Con- gress, the Federal Communications Commission, and. the governments and courts of several states over a period of years. No one now proposes that responsible government authorities should close their eyes and permit subscription television operations to proceed on any uncontrolled, unscrutinized basis. The only issue is whether an idea which is still alive after so much study should be given an opportunity-free from artificial and unnecessary restrictions-to show in practice whether it can produce the public benefits that are claimed for it. We think subscription television has earned a right to that chance. STATEMENT OF LAWRENCE H. ROGERS II, PRESIDENT, TAFT BROADCASTING Co. Gentlemen, I appreciate the opportunity the Subcommittee has given me to share with you my thoughts on the serious problem of Pay TV. You have beard a great deal of testimony about numerous facets of that problem. I would like to focus on one facet which, in my judgment, is of controlling significance. Pay TV forces vigorously contend `that Congress and the Commission should let the people decide whether or not Pay TV is in the public interest by letting Pay TV freely compete with free TV. This invocation of the tenets free com- petition i~ chimerical `and deceptive. "Market determination," "consumer dollar voting" and "competition rather than regulation" are not barren shibboleths. They describe free enterprise-the American way. I believe in them, Taft believes in them and, I have no doubt the members of this Subcommittee believe in them. Regulation is no substitute for competition. Regulation is appropriate only where competition cannot func- tion. That is the case here. Contrary to what Pay TV advocates would have us be- lieve, the relevant arena of competition is not the competition between Pay TV and free television for audiences. Rather, it is the competition in the televi- sion program product market between free television and Pay TV for advertisers dollars, on the one hand, and the public's dollars on the other. To illustrate the importance of `this fact, assume that a nationwide system of Pay TV is permitted to come into existence and achieve the iiiodest penetration of 15%. A first run film comes onto the market for television exhibition. Pay TV can show it in 7.5 million homes if it charges $1.Q0, yielding a gross revenue o $7.5 million. It therefore bids $5 million, knowing that, at that price, it can make a 50% profit. No advertiser or gro'up of advertisers, however, are willing to pay that much. For, based on their realistic estimates of the markets for the products which PAGENO="0666" 662 they sell, the value to them of the advertising minutes which they would obtain during the course of the film's broadcast is less than $5,000,000. The result is that, in the television program product market, Pay TV bids the first new film away from free television networks. But, from the point of view of American viewers, what is the result? They see the same film, but pay for it' rather than receiving it free. If they cannot afford to pay, they will not see it. The public interest has been injured, not advanced. Moreover, it makes no sense to say that we will meet the problem I have described by limiting those kinds or types of programs which Pay TV can carry. Definition of what is to be included and excluded is virtually impossible. Even the seemingly rigorous limits suggested in the FCC's Pay TV Report are loaded with loopholes, escape hatches, and opportunities for gimmickry and evasion. For example, as Mr. Lindow and Mr. Anello made clear, the apparent two year limit on Pay TV's siphoning off the sports programming now available on free television is illusory. Under the Pay TV Report proposal it would not take two years. It could be done in one year and, in many cases now. We need look but a very short way into the future to foresee the time when most Americans will enjoy not only the programming of two or three major net- work affiliated stations, but also two, three, or even more independent tTHF stations in addition to educational television stations. The availability, free of charge, of virtually every type and kind of television programming fare imagina- ble will be a reality. The specialized tastes of small groups of Americans will be served, as well as `the wants and interests of the majority. We know from our experience in major market radio that, as the number of stations increases, the amount of specialized programming, e.g., foreign language programs or fine music, also increases. This will and is happening in television. Washington, D.C. is a good example. Today, served by seven television stations, and soon to receive an e'ighth, our Na'tion"s Capitol enjoys a wide diversity of programming fare, ranging from `ballet to bull fights, from lacrosse games to symphony concerts, from Ed Sullivan to `birth control lectures. I seriously doubt that there is a single interest or taste for which Pay TV could reasonably hope to program, as a practical economic matter, which is n*ot~'today served by one of the seven Washington television `stations. It is `true that the programs in which Pay TV will be most interested and for which it will pay the most are the World Series, professional football, first run films and top rated entertainment shows-he programs which all of us now enjoy without charge. But `the Congress `and the Commission cannot ignore Pay TV's threat to the countless educational and independent commercial stations now coming on the air throughout America. If Pay TV carries art films, ballet or opera, it will also directly deny that programming to free broadcasting. I have heard it suggested that, because the Hartford experiment did not sub,- stantially injure local broadcasting, free television and the American people have nothing to fear. This is incorrect. The economic power of Pay TV to siphOn programming from free `television cumulates geometrically as Pay TV penetra- tion grows. One isolated Pay TV station cannot bid programs away from free television. Many Pay TV stations can. Pay TV does not, therefore, offer the American people a viable choice of pro- grams. It offers them the requirement of paying for programs which would otherwise be free, or not seeing them at all. `The multi-million dollar competition `between Pgy TV executives and major advertisers will cast the die. The American people will only pay the piper. COLUMBIA BROADCASTING SYSTEM, INC., New York, N.Y., October 23, 1967. Hon. Tonnnn~ MACDONALD, Chairman, Subcommittee on Communicatjon,s Of the Committee os~ Interstate and Foreign Commerce, House of Representatives, Washington, D.C. Dn~n Mn. CHAIRMAN: This letter is submitted for incorporation in the record of your recent bearings on the subject of subscription television and on HR-12435. In submitting it, it is not our intention to burden the Committee with a repetition of the voluminous Comments and Statements which CBS has presented over a period of years before committees of the House and of the Senate, as well as before the Federal Communications Commission. We do, however, submit for your con- venient reference~ as attachment A, a copy of the Statement of Frauk Stanton, President of CBS, before the Committee on Interstate and Foreign Oominerce on PAGENO="0667" 663 January 22, 1958, in which Dr. Stanton sets forth the basic position of CBS on the issue of subscription television, and, as attachment B, a copy of the Comments filed hy CBS in FCC Docket No. 11279 on October 7, 19G~, in which the results of the liartford trial of subscription television are analyzed. We continue to adhere to the views there expressed. We at CBS are encouraged that your Committee has undertaken its study of subscription television. We have always been of the opinion that the Commission does not have the authority under the existing statute to authorize subscription television and that the question whether it should be authorized is one properly for the Congress. As long ago as 1955, at the time of our First Comments in the Commission's subscription television proceeding, we said: "When all of its elements are considered together, it must be concluded that pay television is a hybrid which defies classification under the statute because it does not fit within its framework. That hybrid character would make it im- possible for the Commission to deal effectively with the regulatory problems which have been suggested. Any effort to solve these problems would carry the Commission far beyond the function delegated to it by the present statute. The problems of regulation involve serious social and economic questions~ as Well as questions as to the proper area for governmental action. Such questiens should be answered by the Congress." The need for Congressional Intervention in this matter cannot be better shown than by reference to the Proposed Fourth Report and Order, devised by the Com- mission's Stihscription Television Committee and currently under consideration by the Commission. The Proposed Fourth Report and Order not only illustrate the inability of the Commission to deal effectively under the existing statute with the regulatory problems presented by subscription television proposals but also presents in bold relief the grave issues of public policy which underlie stich proposals. The Proposed Fourth Report and Order- reflects concern about the blackout of free television channels, capable of serving large audiences, for the purpose of devoting such channels to pro- gramming for the privileged few, but in attempting to limit the scope of such blackout, would permit an absolute monopoly for such operations In the communities where they would be permitted; reflects concern over the cost to the public of subscription television but- operating under a statute that provides for no rate making authority over broadcast licensees-fails to make possible any competition between sub- scription television entrepreneurs which will protect the subscriber from price-gouging practices; reflects concern that subscription television, if it succeeds, may permit a small but economically advantaged subscription television audience to siphon away many of the attractions which all members of the public may now see without charge, but proposes as a solution to such siphoning un- precedented-and we think unconstitutional-restraints which would forbid the presentation on subscription television operations of large categories of program material; reflects concern for the scarcity of spectrum space and recognizes that wired services may have the potentiality for furnishing subscription televi- sion programming to the public, but makes no adequate assessmentS of the criteria which would justify the allocation of broadcast spectrum space to a service which-in the only test authorized by the Commission-has failed to demonstrate the presence of a significant public demand. It seems clear that if the Commission were to adopt the Proposed Fourth Report and Order, or any similar proposal for a permanent nationwide system of over-the- air subscription television, it would have decided important issues of national communications policy which it is not empowered to decide under the authority previously granted to it by the Congress. Your Committee can make an important contribution by strongly reasserting the authority of the Congress in this area. In so doing, we hope that you will agree that it i~ self-evident that the free tele- vision system, while sharing the imperfections of other democratic institutions. is an affirmative public good, both as a communications medium and as an integral part of the American economy and we would urge you not to take any action which would hazard its existence and vitality, certainly not in the absence of the most compelling showing that the public interest would be served ~y an alternative system. We believe that your inquiry Into this matter will establish that the facts do not justify a finding that subscription television would be in the public interest. PAGENO="0668" 664 If CBS may be of any further assistance in connection with your Committee's consideration of these questions, please do not hesitate to let me know. Very truly yours, LEON R. BaOoKs, Vice President and Genera~ Counsel. ATTACHMENT A STATEMENT or FRANK STANTON, PRESIDENT, COLUMBIA BROADCASTING SYSTEM, IN~i, BEPOBE THE COMMITTEE ON INTERSTATE AND PORETON COMMERCE, JANUARY 22, 1958. Mr. Chairman and members of the committee, my name is Frank Stanton. I am President of the Columbia Broadcasting System. In the interest of conserving the time of this Committee, I ask permission to submit, for the record, the Comments that we have filed in the pay television proceedings before the Federal Communication Oommission. I also ask permis- sion to introduce into the record an analysis of pay television, "Free Television and the American People." We prepared this for a meeting last week with the affiliates of the CBS Television Network. CONGRESS IS THE PROPER FOiWM With all deference to the FCC, I am comforted by the feeling that the issue of pay television is now in the proper forum. The Comments Which I am sub- mitting for the record set forth the reasons why our lawyers entertain profound doubts that the Commission has the power to authorize or regulate pay television. Quite apart from the legal considerations, however, pay television involves a question of national policy in which the pu~blic has an enormous stake As I will develop in the course of this statement, public tests are inadequate to resolve the issues in this case. Therefore, we stand in the right place now when we ask the Congress, as the representative* of the people, to decide the fundamental public policy question of pay' television. Now, let me state in most summary terms: first, the position of CBS on pay television and second, the reasons for that position. Then, I shall move as quickly as possible to a statement in somewhat more detail of the basic question before this Committee-the question of a public test, and why we believe that such a test, whether limited or unlimited, is fundamentally fallacious. THE CBS POSITION ON PAY TELEVISION The basic position of CBS is this: We are for free television. We are for it as it is today and as we are confident that it will develop and improve in the future. Since we are deeply convinced that pay television and free television are incom- patible, our stand for free television means that we necessarily must be against pay television. We believe that it is impossible to be for both, because there can be no coexistence between pay television and free television `as we know It. Therefore, we support legislative action which would prevent administrative authorization of the use of the free airwaves for pay television, until the Con- gress itself has granted that authority. I should make clear that our position concerning closed-circuit or wired pay television-which I do not understand to be before this Committee and which is not before the FCC-is a little different. Closed-circuit pay television does not involve the use of the airwaves dedicated to free television. We feel that for us to seek prohibitory legislation would put us in the position of asking Federal protection from competition which does not use the airwaves which free tele- vision has done so much to develop. Therefore, we do not ask for legislation which would prohibit closed-circuit pay television. Nevertheless, I would point out (1) that closed-circuit pay television proposes to ride piggy-back on free television since it must use existing television sets which were bought to re- ceive free programming; and (2) except for the fact that closed-circuit pay television would not. directly black out the airwaves, it will have all the same injurious effects on free television as will over-the-air pay television. THE REASONS FOR CBS' OPPOSITION TO PAY TELEVISION We do not believe that our own ultimate economic interests are at stake in the resolution, one way or the other, of the Issue of pay televiSion. If the Con- PAGENO="0669" 65 gress should decide that pay television is in the people's interest, and if pay tele- vision then begins to take hold and to supplant free television, we shall partici- pate in it, if we must, to survive economically. We would have all the facilities, the know-how and the experience for providing entertainment on the television screens in the American home. If we must go into it we believe we would get our fair share of the multi-billion dollar bonanza which the pay-television promoters portray. So we do not think that the economic fate of CBS Television hangs in the bal- ance on the issue. But we do believe that the fate of free television as we know it today does hang in the balance. We believe that the major-the only impor- tant-stake in the issue is the public's. We believe that if pay television becomes a reality, not we, the networks and the broadcasters, but the people will be the losers. Since other witnesses have already ably stated the reasons against pay tele- vision, I want to review briefly why we have become convinced that the public would most surely be the loser if pay television goes forward and should succeed. Pay television, by its very nature, must be essentially subtractive rather than additive. It is subtractive because it proposes to use channels now dedicated to free television. Each time a scrambled signal goes over the air, it necessarily blocks out a free signal. Thus ultimately here in Washington, for example, pay television would use Channels 4, 5, 7 and 9-not the unused ones in between because those are occupied in neighboring population centers. Pay television is also subtractive because of its enormous potential for siphon- ing programs from free television. It cannot and will not limit itself to "new" programming not now on the air. It must turn to the programs, the people, the talent now making up free television. And with the enormous number of dollars which just a small minority of the audience can bring in, pay television will most certainly be able to take those free porgrams away. It will have to do so if its promoters are to amortize their tremendous initial costs. But I need not labor the point, for the pay-television promoters have already made it for me. It is they-not we-~--who have talked about seizing baseball, professional and college football, star talent and plays from free television. I agree that the World Series might be one of the last programs to go, but what the lawyers for the promoters say to you about the World Series Is different from what the promoters say to prospective investors. Telemeter recently said: "The World Series in the future conceivably will be able to gross as much as $25,000,000." (They were talking about pay television.) The siphoning process has nowhere been summed up more simply than by the only station applicant which has ified with the FC'C for a iice~ise to go forwiard with pay television~ That a~plicant has said: "We ask merely for the authority to sell, if we can, something which is now being given away." I cannot say it any better than they have said it. The consequence's of pay television will be a real misfortune for the American people. Viewers will have to pay for what they now receive free. And for the first time, television, now a democratic unifying force, will be divisive. Where now the best in television is available to all Americans, pay television will fence off the best for the carriage trade. One prosperous viewer can pay-and deprive a dozen of his neighbors of the programs they are now enjoying. The costs to the American people will be enormous. Eadh family would have to buy or rent a decoder costing between $4~ and $85. On top of that will be the charges for programs. To watch pay television for two-thirds of the number of hours that it now actually watches free television. the average family would have to pay $473 a year. This is seven times what the average family spends annually on shoes; three times what it spend's on beating and lighting its home; and, more than it spends on all medical and dental bills. plus all drugs and medicines, plus all cosmetics and shaving suppics, plus all dentifrices. Even if we take a figure of only $100 a year, which has been suggested by the pay-television promoters as the anticipated average collection per family, that amount is more than three times what the average family now spends for all admission fees put together, and substantially more than it spends for shoes. And for this $100,, at an average of 50 cents an hour, the family would get only four hours of viewing a week-which is only a little more than one4entb of the time it now devotes to free television. Again, not we, but the pay-television promoters have put this problem of cost to the American family moat forcefully. "We can," said an officer of Telemetef, "nickel-and-dime them to death." PAGENO="0670" 666 Those, briefly, are some of the reasons why we feel compelled to oppose pay television: it will black out free channels; it will siphon away free programs; and it will divide the audience along economic lines. THE FALLAcTY OF THE TEST Let me turn now to the imminent issue-the issue on which the controversy concerning pay television has tended to focus. That issue is whether there should not be some sort of test of pay television. I think that perhaps confusion arises out of the fact that different people are talking about different tests-and sometimes the same people are talking about different tests at different times. And nobody has really stopped to analyze whet, if anything, needs to be tested or how success or failure can be measured. What I want to do now is to demonstrate: first, that no test is necessary; second, that the entire concept that there can be a democratic public choice with respect to pay television is fallacious; and third, that the test proposed by the FCC cannot achieve the Oommission's objectives, A TRIAL IS UNNECESSARY You have been told that a trial is necessary because the FCC lacks the dod. sional facts required to determine whether pay television would he in the public interest. But the decisional facts sufficient to justify denial of the pay television proposals are available in abundance. There is no dispute with respect to the blackout of free channels. When a station i's broadcasting pay television, it is blacked out for those who want to see free programs. There is no dispute with respect to divisiveness. It must be clear that the prosperous family will be able to view more programs than the average family. There is no genuine dispute with respect to the siphon The pay television promoters have said, over and over again, that they intend to put on the air the mass-appeal attractions which are now on free television. And the FCC itself has stated in its Report "that some kinds of programs hitherto available under the present system would Probably be subjected to a charge on the viewer.t~ Indeed, ordinary common sense shows that producers, stars, writers, motion picture companies and others will respond to the lure of higher pay just as everybody else does. If they can make more money out of pay television than out of free television, they will move to the greener pastures. In addition, it is clear that people would rather see a baseball game free than pay for It. And all available evidence indicates that people would pay for the programs they like best if they could not get them without paying A Gallup Poll found that 31 percent of those interviewed said that they would pay for the Ed Sullivan Show if they could n'ot see it free. Surveys by Politz, Pulse, Roper, and the major league baseball owners have reached similar con- clusions. On the other hand, there is a striking absence of decisional facts to demonstrate the advantages of pay television. The briefs led by the proponents' lawyers contain only the vaguest and most illusory promises. No principal of any major proponent has appeared before the FCC or this Committee. Where a small group of people are proposing a scheme, which bears within it so much danger and disadvantage to the public, one wonders what has happened to the old-fashioned concept of asking a proponent to meet a burden of proof. The Canadian Royal Commission on Broadcasting, a Government body com- posed of distinguished citizens, had these same proponents before it. This Commission had no difficulty in making the predictions which resulted in their rejection of pay `television. They said "subscription television would tend to canalize for its own use the great popular programmes now offered free to the viewing public." We feel that `the decisional facts for free television and against pay television are clear. A test is unnecessary. An informed decision can `be made now. A TEST CANNOT ESTABLISH MAJORITY PUBLIC CHOICE Not only is `the test unnecessary, but the very concept of a test is, in this case, fallacious. The `broad argument is made that America is built on new enter- prises which must have an opportunity to succeed or fail in the market place. Therefore it is urged that the public should `be permitted to decide the fate of pay television by accepting or rejecting it. This sounds overwhelmingly sensible PAGENO="0671" 667 and in the best traditions of free enterprise. But, in this case, it just doesn't workout. There are two reasons for this, First, there is no majority choice involved. Nobody is proposing that the test be whether a majority of the people want pay television. That is a test which pay television cannot meet. The concept of a test by public choice in the market place is nothing more than a test to determine whether pay-television promoters can make money. This is only a test of whether a minority will pay enough to make pay television profitable. But proving economic profitability does not prove public interest. We know right now that it is not in the public interest to permit one viewer to black out a dozen. Second, there is a vital distinction which destroys the analogy involving competition between new and traditional products. Let me demonstrate this with some examples. The ball point pen competes with the fountain pen and the electric razor competes with the safety razor. But, although the ball point pen is a competing means of writing, it does not prohibit the founain pen from occupying a place in a pocket. The electric shaver is a competing means of shav- ing, but it does not forbid the safety razor from occupying a place in the medi- cine cabinet. There is a crucial distinction between pay television and such examples; pay television does propose to occupy the scarce television channels dedicated to public use. It does propose to oust free television from these very channels. It is these fundamental distinctions which make the notion of a people's choice during a test of pay television wholly unrealistic. THE TEST PROPOSED DY THE FCC I ~rigina1ly came here to oppose the Commission's Report, which set forth the conditions of the test. I have since learned, from statements made before you last week by members of the FCC, that the conditions will be varied from case to case and improvised from station to station as applications, are processed, without continuity, uniformity or certainty. It seems to me, however, that I must initially take the Report at face value. It is our conviction that the so-called test there proposed is neither limited nor controllable and that, in fact, it Is no test. According to the Report, each pay television system may operate in three of iiiore than 20 eligible areas. These areas include more than 40 different cities `In which stations, assigned to those cities, are actually on the air. In these areas are the largest markets in the nation, precisely where the advocates of pay television have said they want to operate if there were no restrictions at all. There is no limitation on the number of pay-television systems. Five have al- ready been proposed, and more may be feasible. The so-called test could, during its duration, become effective in all 20-odd markets. On the assumption that only the three principal proponents will elect to participate and that they will decide to operate in the nine largest markets, 15 million television families-843 per cent of the nation's total-will be within the test area. The period of the trial authorization is three years. The Commission has stated in its Report that it would not terminate the tests before the three-year period without evidentiary hearings; and that it might permit them to continue, after the three years, during the time required to conduct hearings, and reach a final decision. The Report places no restrictions on the number of stations in a market which may participate, or on the number of hours during which each station may broad- cast pay programs (except that it must broadcast 28 hours of free television a week), or on the times of day during which pay programs may be broadcast, or on the prices that may be charged to the public, or on the kinds of programs, or on the use of advertising. The Commission stated In the Notice which preceded its Report that it did not want to encourage "inordinate investment" during the trial. But it has done just that. If only the nine largest markets were involved, the cost of equipping only 1 out of 4 of the television homes in the test area with decoders would, on the assumptions most favorable to the proponents, be just under a quarter of a billion dollars. In addition, `huge investments would have to be made, largely by local business- iiien, in establishing and maintaining the expensive organizations for distribut- ing decoding information and collecting program charges. All of these expenses the public would, of course, be expected to bear in one way or another. PAGENO="0672" 668 These inordinate investments will inevitably generate their own pressures. It will be extremely difficult to terminate this test and, thus, to destroy these ei4er- prises and investments. I am not under the illusion that th~ test will immediately bring about all of the evils of pay television or that it will demonstrate the full power of a perma- nent authorization. But during the trial, the power to siphon will be present. If only ten per cent of the television families now viewing the Ed Sullivan Show in the nine-market test area paid 50 cents for the program, the promoters of pay television could pay the stations, take $100,000 for their own costs and profits, and still offer the talent appearing on the show 2'/2 times what is now being paid. Certainly, during the protracted period of the test, the blackout will be in operation. This would be true even if only one station in the eligible markets were broadcasting pay programs. In many of the eligible markets there are rural, outlying and fringe areas of considerable extent which receive Grade A service from only one of the four (or more) stations serving the area. For instance, in the Milwaukee area, if WISN-TV went to pay television, approximately 180,000 people would lose their only Grade A free service during the period of pay operations. The shift to pay television by a single station in each eligible test area will deprive, in total, more than one million people of all free Grade A service. Beyond this, there is nothing in the~ Report to prevent all of the stations in the market from presenting pay programs at the same time during the peak viewing hours of the evening, and during that period from producing a total blackout for everybody in the market. Broad as this test is, it may not show the full impact of pay television on free television. It is reasonable to expect the pay-television promoters to be on their best behavior pending full authorization. They may indeed occasionally give us differential calculus, as they have promised, instead of Jayne Mansfield. They may Indeed leave Perry Como an'd the World Series alone. With so much at stake, self-restraint would simply be self-preservation. An attempt to pass judgment on the ultimate programming of pay television on the basis of a trial is like attempting to write a book on child behavior based on the actions of children during the week before Christmas. But here the stakes are not a tricycle or a doll-they are $6 million a year. The proponents will have the incentive, the resources, and the patience to walk carefully. Thus far, I have been discussing the proposed test specified by the FCC Re- port. When appearing before this Committee, however, members of the Com- mission stated that they might depart from the Report and adopt varying rules on an applieation~by-applicati.on basis. In these circumstances, it is difficult if not impossible for us, or this Com- mittee, to assess the test since its rules are still being improvised. But even to the extent that the improvisation has begun, new difficulties have already emerged. For example, although no such limitation appears in the Report, the Chairman of the FCC indicated that all stations in a market might not be per- mitted to participate in pay television and that he might be reluctant to grant the last two or three applications in an eligible area. If this suggestion should be adopted, a built-in incentive to abandon free television would be provided. The first station to apply might have an advantage to the point of monopoly bY squatters' rights. It would put a premium on early desertion from free television. The stations which remained loyal to free television would be subject to the great risk o!1~ being frozen out of pay television. In any event, it would appear that the FCC is improvising new rules which cannot result in a meaningful test. For example, if it will not grant the applica- tions of the last three stations in a market, or if it will allocate different hours to different stations in the same market, it may well alleviate some of the evil conse- quences of the test. But by the same token, it will have robbed the test of all possible validity for it will have made it impossible to prove thu basic point at issue-the impact of pay television on free television. CONCLUSION To launch an explosive missile from Cape Canaveral over the lonely wastes of the ocean is an experiment. To drop that missile on Pennsylvania Avenue is not an experiment. The impact of the so-called pay-television experiment which is proposed will have immediate effect upon 15 million television families. Thh Commission apparently believes that after inordinate investments have been made, after pay television has `been in oper~tion for years, after artists PAGENO="0673" 669 and producers have been accustomed to vastly higher pay, after millions of view- ers have become habituated if not reconciled to the pay -system, hearings will be held to determine whether the fait accompli created by the Commission should be reversed. It may well be too late at .that point to 1!everse the course of his- tory. People will be paying to unscramble pay-television signals, but the pay- television test itself will be hard to unscramble. The difficulties of these tests are not difficulties of details; they cannot be fixed by a little patching here and there. These difficulties are symptomatic of the fundamental fallacy and impracticability of the basic concept of these tests. Forty-two million American families watch telveision on an average of five hours a day. They have invested $22 billion on the assumption that they would continue to have free access to the channels which have been dedicated to the public use. We feel that the investment and the reliance of the public in these airways deserve Congressional protection. In the final analysis, there is no easy way out-the matter has to be voted up or down. Tests provide no escape from decision. The decision can be reached by analysis and expert judgment. That must be done here-by you gentlemen who represent the people. ATTACHMENT B Before the Federal Communications Commission, Washington, D.C. Docket No. 11279 IN THE MATTER OF AMENDMENT OF PAnT 73 oF THE COMMISSION'S RULES AND REGULATIONS (RADIo BROADCAST SERvICES) To PRovIDE ron SUBsCRIPTION TELE- VISION SERVICE Comments of Columbia Broadcasting $ystem, Inc., October 7, 1966 I. INTROJYtJOTION In its First and Third Reports in this Docket, adopted on October 17, 1957 and on March 23, 15i~, respectively, the Commission declared that it was in no position to determine whether the adoption of subscription television would be in the public interest `without the benefit of any significant demonstration of the proposed systems in operation". (First Report, para. 47) Now, almost nine years after the Commission first determined that a trial of subscription television was necessary and should be `authorized, the time has come to assess the result of the only trial which was bad pursuant to the Com- mission's action, that which began in Hartford in June 1962. On the basis of that trial Zenith Radio Corporation and Teco, Inc. (herein referred to as "Petitioners") requested the adoption of rules authorizing sub- scription television on a nationwide basis and contend that the trial demon- stration has now provided a sufficiently adequate basis for concluding that an authori~atiofl of subscription television would be in the public interest. The Commission adopted on March 21, 1966 a Further Notice of Proposed Rule Making and Notice of Inquiry in this Docket inviting interested parties to com- ment on whether subscription television should be' authorized on a permanent nationwide basis and, if so authorized, on the possible conditions and limitations which might be appropriate. The Notice invited parties to "focus their comments particularly on whether permanent nationwide subscription television would be in the public interest . . ." and on the issues directly relating to that question (Notice, para. 44). In addition, in its Notice of Inquiry, the Commission for the first time in this Docket requested comments as to "the appropriate Federal role, if any, with respect to the establishment and manner of operation of wire or cable subscription television, and how that role should be effected." (Notice. para. 48). We submit that the results of the trial do not support the conclusion which Petitioners urge. If anything, they demonstrate that the public interest would not be served by the Commission's authorization of subscription television and they do so in more dramatic terms than we could have anticipated. The Hartford trial shows that subscription television would not provide a beneficial supplement to the program choices now available to the public through free television but in fact would be duplicative of the programming of free television. The Hartford trial shows that subscription television furnishes programming aimed almost exclusively at the mass audience, that any hopes that it would 86-899 O-67-----43 PAGENO="0674" 670 be ~ vehicle capable of furnishing significant artistic, cultural or informational programming for minority interests were without foundation and that free television in fact is better suited by far to perform this function. The Hartford trial, while resulting in a clear-cut failure to achieve, any sig- nificant degree of audience penetration and casting doubt on the viability of subscription television, nevertheless prompts Petitioners to project audience penetration levels which would enable subscription television to bid away from free television selective mass appeal attractions which free television now offers to the public. And, finally and importantly, the Hartford trial shows that subscription television would furnish such attractions for pay to an audience which would for all practical purposes exclude the economically less advantaged 30% of the nation's population. We note that the Petitioners rely exclusively on the Hartford trial and con- tend that in every respect it has established an adequate basis for the permanent nationwide authorization of subscriptiQn television. In that connection we note the statement of Petitioners that since the Commission's Third Report adopted on March 23, 19~9 the ". . . only new facts developed concerning broadcast subscription television . . . are those available from the Hartford subscription trial." (Petitioners' Comments, p. 6~) We would point out that additional "new facts" necessarily arise from the changes in the broadCast environment during the past seven and a half years, particularly those relating to the program choices which free broadcasting~-both commercial and educational-offers to the general public, and we propose to relate such changes as well to the public interest issues which are at stake. In response to the Commission's Notice of Inquiry with respect to wire or cable subscription television, our comments will urge that the Commission does not have jurisdiction over a system of subscription television not using the broadcast spectrum, for the same reasons expressed in our comments in the OATV proceeding, Docket No. 15971. n. THE HARTFORD TRIAL SHOWS THAT SUBSCRIPTION TELEVISION, FAR FROM PROvrDIN~ A BENEFICIAL SUPPLEMENT TO TI~E PROGRAM CHOICES AVAILABLE TO THE PUBLIC ON FRRR TELEvIsIoN, WOULD DRVOTE ALMOST ALL OF ITS PROGRAM TIME TO TYPItS OF PROGRAMS DUPLICATIVE OF PROGRAMMING OFFERED IN QUANTITY BY FREE TELEVISION The most important single issue before the commission is whether subscription television would provide, in the Commission's phrase (Notice, para. 15), "a beneficial supplement" `to the program choices now available to the public through free television. If it would, doubts which arise ~s to other public interest aspects of subscription television operations might conceivably be resolved in its favor. But if a subscription television operation in any communit~r will merely duplicate types of program offerings already available to the public in quantity on free television, it would not appear that any other considerations of public interest could justify the authorization of such a service using broad- cast channels. Some confusion is di$cernible in the Commission's Notice as to the distinction which is drawn between prograipmjng which beneficially supplements free tele- vision and that which duplicates its offeripgs. The Commission's Notice (Notice, para. 12) appears to accept Petitioners' underlying assumption that if subscrip- tion television offers programs which, as individuajl units, were not available on free television its function would be supplementary. Elsewhere in the Notice (Notice, para. 42) the Commission invites "comments on Whether there should be any limitation on the type of programming that subscription operations may present, and if so, what types should be excluded, or how a line might be drawn to determine what types of programs could be shown and what could not." (Emphasis added.) Surely the whole thrust of the Commission's. concern over the threat posed to free television is not whether subscription television can at times present individual programs not otherwise available to the public- any network or individual station licensee often does present programs not otherwise 50 available-_but upon whether, taken as a whole, subscription tele- vision operations will provide "a different service from that of conventional television . . ." (Notice, para. 42). Petitioners `themselves are confused or disingenuous with respect to this distinction. While generally urging that their programming constituted box office attractions not otherwise available on conventional television Petitioners, PAGENO="0675" 671 in specifically addressing themselves to whether subscription television should be limited to programs of a box office nature, define such programs as follows (Petitioners' Comments, p. 64) "Generally defined, a box office attraction embraces any type of program which is not seen on a regular or frequent basis on conventional television and for which the public would ordinarily pay an admission charge." (Emphasis added.) We propose, with this distinction in mind, to ask whether the programs in fact presented to the public during the Hartford trial' constituted, by any reasonable test, a beneficial supplement to the programming offered by free television. A. Feature-Len~gth~ Motion Pictures Petitioners ask the Commission to accept the proposition that a programming schedule in which 86% of the time is devoted to the broadcast of feature-length motion pictures-each film, on the average, broadcast more than three and one- half times-is a beneficial supplement to the program choices available on free television. No reference is made by Petitioners to the fact that feature films were then and are now abundantly available on free television and a reader of their Oomments, unmindful of free television programming, might well believe that the nation's television stations do not offer high quality feature films to the public. We have made no calculation of the number of feature films which were in fact presented on free television in Hartford during the trial period but the three nationwide commercial networks offered to their affiliates in Hartford a total of 160 feature films during that time.' It may therefore, be useful, since Petitioners' claims rest almost entirely upon the nature of the feature film product which they sold to subscribers, to analyze their product in some detail. Of 432 feature films presented during the trial period only one, an obscure British film, is listed by Petitioners under "First Run Films". An additional 116 are listed by Petitioners under `Fir~t Subsequent Run Films (Shown several weeks after first theater run) ". These 117 films, as the listing indicates, were presented to subscribers during the period of their release in motion picture theaters. The remaining 315 films, however, comprising 297 films characterized by Petitioners as "Older Feature Films (Over 6 Months in Theater Release)" and 18 films characterized as "Foreign-Language Films", and representing 73% of the total number of feature films presented, Included films released to theaters as early as 1940 and, on average, were first released, in theaters in 1960.' If we are to rely on the information disclosed by Hartford, and not on mere speculation, the question presented is a concrete one. In its consideration of the subject, the Commimission has consistently assumed that ~he feature films to be offered by subAcription television would be so-called "first run feature films'. noting that ~f1rst run feature films have not, with rare exceptions, been made available for television broadcasting". (First Report, para. 50). The Commis- sion observed that such films would not be likely to become available in the fore- seeable future for free broadcasting and concluded: "Thus, to the extent that first run film might become a substantial feature of on-the-air transmissions they would provide a kind of entertainment not now generally avallable to the tele- vision audience.." Even if we treat "First Subsequent Run Films" as fully satisfying the Com- mission's expectations we would still find that only 27% of the films presented to the Hartford subscribers did so. In this respect itis worth noting that the Hartford trial confirms what we in television already know-that the public will view high-quality films even though they are not shown on television for some time after theatrical release. Petitioners who originally placed great reliance on the ability of subscription television to bring to the American public feature films while the negatives were not yet dry, are silent about the fact that, of those films shown in Hartford obtaining a cumu- lative subscriber viewing percentage of over 30%, 43 were listed in Petitioners' Exhibit 1 as "First Subsequent Run Films (Shown several weeks after first theater run)" while 47 were "Older Feature Films (Over 6 months in theater `Since Petitioners' Comments include detailed data only as to the first 104 weeks of the trial we have confined our analysis to the programming o1~ered to Hartford subscribers during that period. Programming references to the "trial period" herein are to such 104- week period. We are not aware of any contention that programming offered during the third year of the trial differed in any material respect. `Source: Broadcast Information Bureau. . 3 Id. PAGENO="0676" 672 release) ". Thus, It would appear, the Hartford subscribers placed greater stress on film quality than they did on film release date.4 Upon analysis, it appears that of the 432 films for which the Hartford sub- scribers spent 83% of their dollars (Petitioners' CQmments, p. 19) 228 have since been released to free television.5 Of these 76 had been released prior to the end of the second year of the trial period. It therefore appears that, to a very large de- gree, the advantage which subscription television promises to the public is not that it will receive programs of a type not otherwise available on free television but that, for a price, subscription television will somewhat accelerate the pre- sentation of feature films to the public. The Hartford findings serve to underscore the plain fact that the function of reducing the lag between theatrical and television release dates is hardly impor- tant enough to warrant the use of broadcast channels for a system depending al- most completely on such fare. There is, moreover, every indication that the function which subscription television might perform in somewhat accelerating the availability of feature films is becoming of even less significance as free television continues to develop its potential. When the proceeding in this Docket was first begun, it may have been possible to argue, as subscription television proponents in fact did, that feature films available on free television were older features, of comparatively minor calibre, many of them obtained from foreign sources. This was due to a combination of reasons, among them the inability of free television circulation to support the costs of film rights, union and guild restrictions on the use of recent films and, not unimportantly, the belief of major film producers and distributors that subscription television, or a variant thereof, would replace the theater box office and be a new market for their output of current films as well as for their backlog of existing films. However the number of major theatrical feature films released to free tele- vision increased rapidly during the late 1950's and that increase continues today. There are presently more than 12,000 feature films released for free television broadcasting.6 During the current (1966-67) season 120 feature films of high calibre have been scheduled for television broadcast by the networks alone. These include such outstanding films as Fail Safe (1964), the Bridge on the River Kwai (1957), Music Man (1962), Bye Bye Birdie (1963), Advise and Consent (1962), Breakfast at Tiffany's (1961), Lilies of the Field (1963), a Raisin In the Sun (1961), Two for the Seesaw (1962) and the Ugly American (1963). Thus the progress of events since the Commission's First Report and Order in 1957 has almost completely negated the prime program claim of subscription television.7 B. Sports Other than feature films the audience attraction of greatest popular appeal to the Hartford subscribers was the presentation of spectator sports. This type of programming occupies a significant portion of the program schedules of both network and independent stations throughout the country. Indeed the sports diet offered on free television-comprising as it does professional baseball, football, basketball and ice hockey games played in the professional leagues, together with a heavy schedule of championship golf, college football, bowling, as well as outstanding attractions of tennis, track and field and lesser sports- has led some observers to question whether the American public can continue to absorb so large a quantity of sports programming. Again, as in the case of feature pictures, Petitioners' real claim is not that the Hartford trial presented programming of a different type than that available on free television but that it presented a number of specific sports events which in fact were not carried by free television. We concede the contention of Peti- This phenomenon was recently demonstrated by the huge audience obtained for the network showing of a 1957 feature, The Bridge on the River Kwai, which was estimated to have been viewed by 60 million people. Variety, September 28, 1966. ~` Source: Broadcast Information Bureau. 6 TV Feature Film Source Book, Vol. 7 (1966). This fact has not been lost on outside observers, Columnist Jack ~lould in the New York Times of September 28, 1966, commenting on the recent decision of major motion picture producers to agree to release large additional blocks of feature films to the networks, wrote: "As a result of the separate agreements, more than 112 features, including so-called `blockbusters' that commanded record box-office grosses in theaters, will be reaching the home screen over a period of five years." Mr. Gould had reference to acquisitions announced in late September 1966 by CBS and ABC. The CBS films to be acquired from MGM, include at least 14 films released to theaters in 1965 and 196é. PAGENO="0677" 67~ tioners that heavyweight championship boxing has been absent from free tele- vision for a number of years. This is due partly, as Petitioners note, to the fact that promoters of such fights have found it more profitable to distribute them to closed-circuit theater outlets and partly, we believe, because of a variety of other factors, including the quality of the bouts themselves and the unhealthy aura which has surrounded heavyweight boxing in recent years. The other sports offered to Hartford subscribers are all seen regularly and frequently on free television and Petitioners' contention with respect to such sports essentially boils down to an assertion that subscription television could circumvent existing limitations imposed by college and professional sports organizations to protect teams from the loss of gate receipts in their home areas. Thus Petitioners urge that subscription television could carry local and regional college football games in "which there is a strong local interest without being restricted to the so-called `game of the week' now permitted by NCAA" (Petitioners' Comments, p. 14) and that "one of the major sports program supplements which subscription tele- vision could provide in . . . cities having major league professional baseball or football would be the broadcast of home games" (Petitioners' Comments, p. 15). Even Petitioners' contention that a "home game" is *a box office attraction not available on free television i.s not entirely correct. In New York City, for example, the Yankees' and Mets' home games have long been carried on free television, and the experience in New York and elsewhere suggests that whatever adverse effect, if any, the televising of home games may have on the box office is offset by receipts from free television as well as heightened interest in the sport. Indeed, in some major league cities there is evidence that honie games are being kept off free television in anticipation of some form of subscription television.8 Passing the question whether home games will, with the passage of time, become more generally available to free television, we believe that the restrictions im- posed by coil~ge and professional sports represent at this time a reasonable accommodation of conflicting economic and social interests, an accommodation in the case of major -professional sports, recognized and confirmed by Federal legislation which sanctions the black~out arrangements. If the offering by subscription television of such home games be regarded as a supplement to the sports fare being offered in large quantities by free television, is it so beneficial as to justify an authorization of subscription television in the public interest? An audience accustomed to see "home games" of a professional football, baseball or basketball team on subscription television would, of course. have an undiminished desire to continue to see the "away games" of their honie team, now generally available on free television. If subscription television was able to make home games available to subscribers it would appear probable not only that it would bid away from free television the right to import ~away games", but that it would no loii~ger be advantageous for it to permit audiences to be diluted by permitting free television to import distant games of other teams. It strains credibility to believe that free television could continue to obtain the rights to these events under such circumstances. (1. $pcoial entertainment, cultural, educational and informative progra mining We have dealt in the above discussion with motion picture feature films an(1 sports presentations which together, according to Petitioners' Comments, made UI) 91% of the first two years of Hartford subscription television programming. ac- counted for 95% of subscribers' expenditures and for 96.3% of the number of subscribers viewing all offerings of stFbscription television during the Hartford trial. We have urged that in these two categories subscription television is duplicative of free television programming and not supplemental to it. We turn now to the remaining programs presented during the Hartford experiment-programs which Petitioners divide into two general categories, "Special Entertainment Programs" and "Educational and Instructional Pro- grams". These furnish a crucial test of whether the authorization of nationwide suhscription television would be in the public interest. For the bright promise of subscription television was never that it would be devoted almost entirely to presenting mass appeal programming to the American public and certainly not that it would preempt such programming from free television. Its greatest appeal to all critics and students of the television art, as well as to the Com- mission itself, has been the allegation that "subscriber financed broadcasts could 8 Thus, for example, in Los Angeles and San Francisco, home game broadcast rights were granted by the Dodgers and Giants to the now defunct Subscription Television Inc. PAGENO="0678" 674 and would provide a wider choice to members of the public interested in the fine arts, operas, educational and informative material and other similar lçind.s of programs." (First Report, para. 48) It should be clear from the Hartford trial that this bright promise was merely an illusion. Even a casual review of the 35 "Specially Produced Entertainment Features" listed by Petitioners as presented during the trial period shows that they are of a type which free television presents in abundance through programs of outstanding excellence. The light entertainment items on the list-4he Kingston Trio, Eddie Fisher in Las Vegas, The McGuire Sisters, The Limelighters, etc-obviously are attrac- tions of a type familiar to viewers of free television. Excluding regularly sched- uled variety programs on which such talent is commonly utilized we point out that among entertainment specials presented by the networks during the trial period were The Bing Crosby Show with Mary Martin, The World of Benny Goodman, Richard Rodgers Concert with Diahann Carroll, Peggy Lee, Roberta Peters and Cesare Siepi, An Evening With Carol Burnett, The Victor Borge Show, Here's Edie, The Danny Kaye Show, As Caesar Sees It, Judy Garland and Her Guests and The Bob Rope Show. Turning to musical items of a more classical nature Petitioners point to four concerts as well as four presentations of opera and ballet. These included Even- ing With Carios Montoya, Piano Recital-Lateiner, a Joan Sutherland Con- cert, and Menotti's opera The Consul. Network attractions in this same vein included such examples as concerts with Leonard Bernstein and The New York Philharmonic, the St. Matthew Passion, Montemezzi's opera The Love of Three Kings, Menotti's opera The Labyrinth, Donizetti's Lucia Di Lammermoor and Triptych-The Nativity in Music an4 Dance. Ability to present theater attractions has always been a major claim of sub- scription television proponents and eleven plays were presented to the Hartford sulbscribe.rs during the trial period, including Hedda Gabler, and Androcles and the Lion. In the field of drama the networks presented among others, Celeste Holm hi Cry Out in Silence, David Wayne in The Teahouse of the August Moon, Christopher Plummer in Cyrano de Bergerac, Ralph Bellamy In Impact of an Execution, Julie Harris in Pygmalion, Mary Martin and Cyril Ritchard in Peter Pan, Trevor Howard and Greer Garson in The Invincible Mr. Disraeli, Maurice Evans and Richard Burton in The Tempest, Charlton Heston in Sidney Kingsley's The Patriots, Jason Robards, Jr. in Robert Sherwood's Abe Lincoln in Illinois and Julie Harris and Dirk Bogarde in Little Moon of Alban. The same kind of comparison can easily be made with respect to the 50 so-called "Educational and Instructional Programs" presented during the trial period in Hartford. While Hartford subscribers were paying for 50 programs in this cate- gory-but not in very large numbers, for all 50 educational features which were seen by a cumulative total of only 838 subscribers-the networks were presenting, in addition to their regular series offerings of neWs, documentaries, public affairs and cultural broadcasts, such special broadcasts as The River Nile; Winston Churchill-The Valiant Years; Shakespeare: Soul of An Age, with Michael Red- grave and Ralph Richardson; 109 Days to Venus, An Account of Mariner II's Probe of Venus; Parnassus `63, Readings from Shan-, Frost and MacLeish; The Death of Stalin, Study of Six Crucial Years in the Kremlin; The Great Chal- lenge, Appraisals of Aspects of the American Democracy; Exhibitions: Twelve American Painters, Survey of Contemporary Artists at Work; The Kentucky Coal Miner, Story of a Distressed Industry; American Landmark: Lexington and Concord, narrated by Frederic March: 1492, A Decisive Year in the Saga of Western Man; Greece: The Golden Age; and innumerable others. The offerings of commercial television in the areas enumerated have not di- minished since the Hartford trial and indications are that the forthcoming 1966- 67 season will set a new high water mark in special entertainment and cultural programming. I may be superfluous as well as somewhat unfair to cite, in comparison with the limited offerings made to the Hartford subscribers, these examples of vari- ous special entertainment and cultural programs presented by the commercial net- works during the same period. We cite such examples, however, only for the purpose of reminding the Commission that in this area as well Hartford fails to demonstrate that subscription television will offer program types not available on free television. We turn now to the consideration of a development in American television which has emerged almost entirely since the Commission's First Report in this PAGENO="0679" 675 Docket, which the Petitioners have paid no attention to in their Comments, and which represents a crucial part of the "new evidence" presented since the Hart- ford trial was authorized. Tb~t new development is the emergence of a strong and creative educational television service in this country whose prime purpose is to do what subscriptioii televisioli claimed it could do best, the presentation of cultural and informaional programming of scope and quality. It is an irony of circumstances that only three months after the subscription television experiment began in Hartford an experiment of a different nature was commenced there with the establishment of an educational television service. The Hartford ETV station (Channel 24) began on October 1, 1962 with 171/2 hours per week of programming on a five-day per week basis. During the trial period Channel 24's programing consisted almost exclusively of that furnished to it by National Educational Television (NET), but that pro- graming by far eclipsed the cultural, educational and informational offerings made available on subscription television. In the fall of 1962 alone NET's schedule included 62 hours of programing under the general heading "Festival of the Arts" (including 15 90-minute programs in the Shakespearean drama series, "An Age of Kings," and twelve two-hour pro- grams in the NET Drama Festival series); 38 hours of programing under the general heading of "Fine Arts" (including a series each of master classes with Jascha Heifetz, Pablo Casals and Lotte Lehmann) ; 18 hours of programing under the general heading "The Light Show" (including programs on jazz and folk music) as well as children's programing and a wide assortment of informational programs in the physical and social sciences. During the remainder of the trial period NET's programing was, if anything, even more distinguished. Interestingly enough, the comparative merits of subscription television and educational television in Hartford which we have been discussing were the sub- ject of an informal public debate which took place at the close of the trial period. Writing in a local newspaper9 in response to an editorial which had praised sub- scription television in Hartford the General Manager of Channel 24, Mr. Ben Hudelson, presented the issue in sharp relief: "It is surprising that you characterize the service rendered by the subscription television station as `a new and more effective use of television' since by and, large this service offered 114 hours of theatrical motion pictures while presenting only seven and one-half hours of any other kind of programing during the period June 6 through July 3. "During this same period of time, Channel 24 was on the air slightly less (94~/2 hours vs. 121'/2) than the pay TV service of the other station and offered an infinite variety of programing-none of which was strictly instructional in nature since in-school programs were suspended for the summer as of May 29. "Aside from movies, pay TV viewers were treated to three performances of a two hour special program featuring Carol Channing and one ninety minute show with The Limelighters. "Channel 24 viewers were able to see concerts by four leading American sym- phony orchestras-Pittsburgh, San Francisco, Cleveland and National; four thirty minute programs featuring outstanding jazz personalities like Muggsy Spanier and John Coltrane; four thirty minute portraits of Sweden; four pro- grams with well-known Connecticut journalists discussing important develop- ments of the day; four delightful and informative sessions with Julia Child, the French Chef; a fine television performance of Shakespeare's `A Midsummer Night's Dream'; programs on science, art, the dance, psychology, antiques, bridge and many more. "And Channel 24 presented three movies, too; `Moana,' `Man of Aran' and `Louisiana Story,' three of the most celebrated documentary motion pictures of all time, products of the `father of the documentary,' the late Robert Flaherty.' * * * * * * "In fact, it appears that much of the promise which was predicted for pay TV is now being delivered by Channel 24 an4 the other non-commercial educational stations across the eonntry. This sentiment has been ea~pressed by a number of Channel 24 viewers and is borne out by a comparative analysis of the two sta- tions' schedules." (Emphasis added.) Recent developments, of which the Commission is well aware, make it prob- able that the educational television service throughout the country will be °Farmiagton Valley Heral.~Z, July 2, 1964. PAGENO="0680" 676 better financed in the future than it has been in the past and will be able to enhance and strengthen its already excellent program offerings. Needless to say its service, like that proposed by subscription television, is free of com- mercial interruptions.10 We have dealt at some length with educational television only because we believe that it has in fact, during the almost nine years since the Commission's First Report on subscription television, provided that "beneficial supplement" to commercial television programming which, it was first thought, might be the contribution of subscription television. During that nine-year period the number of educational television stations has increased from 23 to well over 100, reaching a number of markets which exceed the number which could ac- commodate a subscription television service under Petitioners' "conservative" 10% penetration projections. Entirely apart from any specific comparison between the cultural, educational and informational offerings of free television-both commercial and educa- tional-and those of subscription television we would urge on the Commission the proposition that subscription television by its very nature is not suited to give "a wider choice to members of the public interested in the fine arts, operas, educational and informative material and other similar kinds of programs". (First Report, para, 48) Early in the debate over subscription television, in a 1956 statement before the Senate Committee on Interstate and Foreign Com- merce, Richard S. Salant, Vice President of CBS, stated: "But we doubt that pay television's promise of more educational and cul- tural programming will be kept. Nothing in the history 01' those mass entertain- ment media which are dependent for their revenues on direct payment by the public supports the likelihood of more culture and more education. One need only look at the history of Hollywood and its motion pictures. Exactly the same factor of the economic interest for mass audiences am operative in pay television, which will be dependent on obtaining the most dollars directly from the largest possible audience." The Hartford trial bears out Mr. Salant's prediction concerning the reliance of subscription television on mass audiences. Over 90% of all Hartford offerings were theatrical features and sports events and these accounted for over 96% of all viewing. Hartford shows that a single Liston-Clay fight obtained almost four times as many viewing subscribers as the cumulative total of sub- scribers viewing all 50 so-called "educational features" broadcast during the trial period and that the six heavyweight championship fights obtained 89% of the cumulative number of subscribers who looked at all 35 "Specially Produced Entertainment Features." Should it not now be abundantly clear, as Mr. Salant predicted in 1956, that subscription television is not a medium suited to provide a wider choice to members of the public interested in cultural, educational and informative material? And-to the extent that subscription television is of only questionable viabil- ity-it will have to depend more, and not less, on mass appeal programs. III. WHILE THE HARTFORD RESULTS ARE INCONCLUSIVE ON THE sIPHONING ISSUE, PETITIONERS' PROJECTIONS SHOW THAT NATIONWIDE SUBSCRIPTION TELEVISION WOULD BID AWAY SELECTIVE MASS APPEAL PROGRAMMING FROM FREE TELEVISION As we have already shown, Hartford clearly demonstrates, and the Comments jointly filed by Petitioners confirm, that the program service to be offered by nationwide subscription television is duplicative of the program types now being offered the American public without charge. This fact alone should lead the Commission to conclude that the allocation of scarce spectrum space for this type of service Would be against the public interest. Authorization of nationwide subscription television, far from providing a "beneficial Supplement to the program choices now available to the public" (Notice, pam. 15), Would-based on Petitioners' financial Projections-seriously impair free television's capacity to present types of programming made available now and in the foreseeable future. Such impairment would result from subscription television's reliance for prod- uct on the same program sources currently utilized by free television and its pro- 10 Although subscription television would not be free of commercials advertising its own offerings. These, under Petitioners' Proposed Subscription Television Rules, are excluded from the definition of commercial advertising. Petitioners' Comments, p. 67. PAGENO="0681" 677 jected financial ability to siphon significant programs away from free television. While Hartford obviously establishes subscription television's reliance on the same program sources, RKO's decision to limit Hartford subscribers (Petitioners' Comments, p. 4) to 5,000 (rather than the 50,000 it originally contemplated as a maximum) prevents any meaningful conclusions to be drawn from Hartford on the issue of program diversion. Thus, the Commission is not now possessed with any more data on the issue of subscription television's ability to siphoti away programming from free television than it had prior to Hartford. The Comznis- slon must therefore make a determination on the issue of possible siphoning without the aid of empirical data. Petitioners' own projections, if correct, make clear that subscription television would have the financial resources to siphon significant amounts of quality programming from free television. Petitioners' most "conservative" assumption contemplates a 10% penetration of television homes by subscription television in the top 91 United States markets. At a 20% penetration, they claim economic viability for subscription television in the top 175 United States television markets. According to Petitioners, a nationwide subscription system achieving a 20% penetration of television homes would produce $650 million annually In subscrip- tion program revenues (Petitioners' Comments, p. 44) based upon a $63 per year expenditUre on programs per subscriber (although they state that $70 or $75 would be "equally realistic"). At these revenue levels, we submit that the Com- mission must conclude, at least, that selective programming now being seen with-. out charge by the public will in the future be seen only by those willing and, more importantly, able to pay for such programs. It should also be clear that those programs selected for siphoning by subserip tion television will be in the most popular programming categories. Hartford dem- onstrates what we all already knew-that for bet~ter or worse the American pub- lic is more interested in seeing a major sports event than an educational feature. Thus in the Hartford trial, 829% of subscribers paid to see a Liston-ClaY fight. while not one subscriber could be found who was willing to pay to see a feature called "Presidential Leadership." If events such as the World Series, the NFL and AFL Professional Football Championship Games, the major Bowl games, the Kentucky Derby and feature films such as Music Man and The Bridge on the River Kwai were unavailable for free home viewing we know that a significant number of Americans would pay to see them on television. The Commission must realize that the $650,000,000 projected by Petitioners w-ill be dedicated to outbidding free television for major sports events and high qual- ity feature films-not to the acquisition of such titles as "Meet Your Federal Gov- ernment" or "Planning For Spending" which appear in Peitioners' Exhibit 1. Petitioners suggest that only 35% of the projected program revenues (35% of $650,000,000 or $227,500,000) could be available for program procurement purposes. While we do not for purposes of this discussion quarrel with Peti- tioners' 35% figure it is our view that in allocating program revenue to types of attractions Petitioners have arbitrarily related such allOcations to the percentage of expenditures by the American public for admissions to specified spectator events. (Petitioners' Comments, Table 9, p. 45) Thus, $152,425,000 or 67% is allocated to "Motion Pictures"; $43,225,000 or 19% is allocated to "Legitimate Theaters and Opera and Entertainments of Nonprofit Institutions (Except Athletics)"; and the remaining sum of $31,850,000 or 14% is allocated to "Specta- tor Sports". While Petitioners' Comments contain no information on how program procurement dollars were actually allocated iii Hartford, it should be noted that the various programming categories available to Hartford subscribers signifi- cantly differed from the percentages contained in Petitioners' Table 9. Since Hartford suggests that a major sports event would produce the highest single paying audience. we note with interest PetitiOners' Comments to the effect that financial limitations would prevent a nationwide subscription television system from siphoning major sports events now seen on free television: "If we apply the percentage of the public's spectator event recreational dollar which is spent on sports (14%), this would allow a national subscription televi- sion system, under the above assumptions, $31,850,000 a year for acquiring sports evenils. But this amount is only E~0% of the approximate fifty million dollars that conventional television is now paying to the promoters and owners for the tele- vision rights to the following top sporting events: (1) AFL professional football games, including championship and all-star games; (2) NFL professional foot- ball games, including title games; (3) baseball, including local, regional, network. weekend, world series and all-star games; (4) NCAA college football games, in- PAGENO="0682" 68 eluding Sun, Orange, Rose, Cotton, Gator, Bluebonnet, East-West Shrine and Senior Bowls; (5) Kentucky Derby, Preakness and Belmont Stakes: and (6) Masters playoff, U.S. Open and PGA Championships. In addition are the amounts which conventional television is now paying for specially staged golf tourna- ments, professional basketball, track and field events and numerous otl~er special sport attractions such as the U.S. Olympics." (Petitioners' Comments, p. 45) While subscription television's $31,000,000 possibly could not outbid free tele- vision's $50,000,000 for all the sports events listed above, subscription television, given its limited programming needs, would be able to concentrate its dollars on the lion's share of the major events listed above. Thus, it is quite conceivable that at least 60% of the major sports events listed above could be siphoned by a nationwide subscription television system from free television. In point of fact, subscription television would allocate its procurement resources so as to obtain the most subscribers. Since it can restrict Its pro- gramming to prime time availabilities, it can concentrate its procurement dollars on the relatively few programs it needs. In the case of feature films it could (as it did in Hartford) repeat them a number of times. Petitioners do not contem- plate that subscription television systems will offer a news service, which fact will, of course, conserve dollars for other program procurement needs. Finally, subscription television may well be in a position to siphon "box office" pro- gramming from free television without even offering as much money for these events as free television. This, as Petitioners suggest because "* * * subscription television can show box-office attractions while conven- tional television cannot. The reason is not that subscription television will neces- sarily have more money available for program procurement than conventional television. The reason lies primarily in other economic factoraL" * * * * * * * "Subscription television exhibitiOn can be combined with simultaneous theater rOlease without significant hiss of box-office revenue by program producers and distributors; Plie combined amount of these box-office revenues will ordinarily exceed what sponsors can pay for a single conventional television release ~vhlch largely exhausts all residual value of the feature. Furthermore, subscription release will have little effect on the residual value of motion picture film when ultimately released to conventional television. In short, subscription television and theatre box-office release are compatible while conventional television and theater box-office are incompatible." (Petitioners' Comments, pp. 19-~20) Hartford shows that it was never realistic to assume that a nationwide sub- scription television system would limit itself tO those types of programs not presently being broadcast by free television. Quite obviousl~ the Introduction of a nationwide subscription television system would cause proprietors of major box office events now seen on free television to invite offers from both subscription and free television. Petitioners in their Comments concede the threat of siphon- ing in a most eloquent fashion; "In the final analysis, it would not only be contrary to our national policy which encourages competition, but also impo~sihle as a practical matter for the Commission to erect a fence around conventional television which would protect it from all competition for talent or for audience. When people noiv go to the theater, concert ball or sports arena to see events which are not available on conventional television, they have been diverted from television viewing during the time that they see these box-office events. The motion picture industry, the theater industry, and the record business now compete with television for talent. This competition will continue whether or not subscription television exists. In addition, closed circuit theater television, in competition with conventional television, *has taken over many types of programing, such as championship boxing matches, the Indianapolis Speedway races, and the home games of some of the teams in the professional football leagues. Finally, despite wired sub- scription television's misadventures in California, other such ptojects are re- ported to be well beyond the planning stage." (P. 47) ~L Petitioners request In conclusion that the Commission "simply let the public itself evaluate subscription television in the market place" (Petitioners' Comments, p. 58). Without addressing ourselves to the constitutional questions Involved, it is interesting to note that the California public rejected by a margin of almost 2-1 such an opportunity to evaluate pay televiSion in connection with a wired pay teJevision system that involved no use of the spectrum space. In reporting the outcome, the New York Times of November 5, 1964, noted: "The key reason for the outcome, observers agreed, was that a majority of the voters were convinced that they would eventually have to pay to watch the same TV shows that they now get free were Proposition 15 not approved." PAGENO="0683" 679 Finally, we remind the Commission ;~f the conclusions reached cor~eerniflg proposals to authorize a subscription television service in the United Kingdom in the Report of the Committee on Broadcasting 1960-the so-called Pilklngton Report, published in 1962: "We do not doubt the intention's of those `who propose to put on minority programmes. But the dynamic of profitability would compel the `pursuit of the biggest audiences. We are unable to accept that a service financed by subscription would in the event either widen the range of programming, or complement the present services. We conclude that `a service of subscription could provide a few items of programming which `a service financed in any other way could not, but that it would not make good the deficiencies viewers find in the present services." (Paragraph 987) "Subscription television is necessarily much the dearest way of providing a service. If the case for `introducing it is to `be made out its supporters have, therefore, to show that the service would bring marked increases in the range and quality of programming. They have also to `show that these advantages would not `be offset by `a decrease in the range and quality of the existing serv- ices. In our view, it is highly unlikely that a service of subscription television would significantly increase the range and quality of programming. If it were comnwrcially successful, it would certainly and significantly reduce the value to viewers of the present services, Some viewers would, if the service did not have national coverage, be unable to' make this rednction good by paying for the subscription service; others would not be able to afford to; the rest would pay where now they do not. We concluded in `Chapter XVIII that the neEt. two national services to be provided should not be financed `by subscription. We now recommend that no service of sub'scription television be authorized, whether `by wire, or, if frequencies become available, `by radio." (Paragraph 1001, empha- sis added.) iv. THE HARTFORD TRIAL ESTABLISHES THAT SUBSCRIPTION TELEVISION WOULD IN FACT DIVIDE THE AMERICAN TELEVISION AUDIENCE ALONG ECONOMIC LINES Hartford indicates that subscription television must obtain rights to major sports events and motion `picture features to get an audience. Much of this product u oulci be siphoned away from free television Opponents of subscription television, including CBS, have long argued that the `authorization of a nation- wide subscription television system would for the first time divide the American television public on an income basis. If Hartford establishes anything, it estab- lishes `the validity of `CBS' position. It is significant that Petitioners' Table No. 2 ~7' (Petitioners' Comments, `p. 21) indIcates that only 1.5% of the Hartford sub- / scribers had income levels of less than $4,000 while 29.1% of American families fell within such category. Petitioners dismiss 30% of the country's population in the following manner: "The small percentages of subscribers with incomes of less than $4,000 a year in Tables 2, 3 and 4 are not surprising, since a $3,000 annual family budget has been described by President Johnson as the boundary below which any fam- ily must be considered to live in poverty and to which the nation's anti- poverty program is being directed. This so-called poverty segment of our popula- tion unfortunately does not provide a market for any goods and services beyond minimal shelter, food, clothing, and medical care. Economic Report of the Presi- dent, transmitted to the Congress January 1964, pp. 58-59. A considerable por- tion of those in this poverty classification may also represent that 8% of U.S. families who do not own televisIon receivers." (Petitioners' Comments, p. 22) At a time when this nation's domestic resources are being directed towards eliminating poverty and integrating those in the lowest economic strata of our population into the mainstream of American life, we submit that the public convenience, interest and necessity will not be advanced by using scarce spectrum space for a subscription television service that would for all practical purposes be unavailable to 30% of our population. This unfairness to a substantial ele- ment of our population is further compounded by the fact that major program- ming now seen on free television would be siphoned away by subscription television. Petitioner'~ tall of the impo',slbility of setting up fences to protect free television. The only fences being contemplated in this proceeding are those designed to keep out 30% of the public from an alleged "beneficial supplement" to the existing free service. PAGENO="0684" ~68O V. TEE HARTFORD TRIAL DOES NOT SUPPORT THE VIEW THAT SUBSCRIBERS COULD BE OBTAINED IN SUFFICIENT NUM~ER5 TO MAnE SUBSCRIPTION TELEVISION A VIABLE BUSINESS The Commission decided in its First Report that it was unable to make a determination that the authorization of subscription television would be in the public interest without the benefit of empirical data. In considering the eco- nomic viability of a nationwide subscription television system the Commission wrote in its First Report: "An important factor-the degree of acceptance and support which the serv- ice might be able to obtain from members of the public in a position to make a free choice-could be reasonably tested in suitably limited trial demonstra- tions. We think it is neither necessary nor desirable that decisions upon which this factor and other important factors have an immediate bearing should be made on the unsatisfactory basis of speculation and conjecture which, With few exceptions, is the only ground available In support of the argument that even a limited trial would disserve the public." (Paragraph 54) Petitions suggest in their Comments that Hartford now has furnished the Commission with sufficient empirical data on Which to authorize a nationwide subscription television system. However Petitioners arrive at their financial projections, we submit that they cannot be based on the results of the Hartford trial. Nor does the Commission view Hartford as establishing the economic viability of a nationwide subacripton television system. On this issue, the Commission's Notice states: "Finally, although the Hartford trial, together with the experience of Inter- national Telemeter in Etobicoke and of Subscription Television, Inc., in Cali- fornia, has demonstrated that a subscriber market does exist where such service is offered, we cannot conclude from such a small sample that subscribers can be obtained In sufficient numbers to make this a viable business." (Paragraph 17) We are in no position to determine how many subscribers RKO could have obtained in the Hartford tests if RKO bad continued its efforts in that direction. RKO's decision to limit the number of Hartford subscribers to 5,000 resulted, according to Petitioners, from RKO's determination that "business prudence and fairness to the subscribers did not warrant further substantial expansion with- out some assurance that the Commission would authorize the trial beyond the third year." (Petitioner's Comments, p. 4) In approving RKO's application for testing in Hartford, the Commission took note in its findings of the fact that RKO (whose application proposals were endorsed by Petitioners) was prepared to invest on an unrecoverable basis up to ten million dollars' in Hartord ançl was looking toward 10,000 subscribers by the end of the first year and a maximum of 50,000 during the trial. it is surpising that the considerations of "business prudence and fairness to the subscribers" which lcd RKO to limit their test operation in Hartford were not apparent to RKO and Petitioners at the time they submitted their application for testing wih the Commission. If RKO and Petitioners intentionally limited their Hartford subscribers to 5,000 It would appear that they misled the Commission at the time of their original Hartford application. In any event, a decision to limit the subscribers to 5,000 had the effect of torpedoing the Commission's ability to obtain valid empirical data from Hartford. There is, of course, a further possibility-that the 5,000 subscriber "limit" was not a voluntary decision on R~O's part, but reflected its inability to sign up additional subscribers.12 The Commission ap- pears to recognize this possibility in paragraph 13 of the Further Notice: "While the fact that RKO decided not to increase the number of subscribers at the end of the second year of the trial could account in part for that low figure, there is a question whether if it had elected, instead, to continue to promote new subscriptions, it would have achieved a subscription penetration of much more than 1%." The Commission's recognition of the inconclusiveness of the Hartford data bearing on the issue of the economic viability lead's it now to suggest that this ~ Or to keep them. We note that Petitioners, In explaining the high voluntary cancella- tion rate among Hartford subscribers, attributed it In their Comments to "such factors as subscribers moving from the community (the average American family moves once every five years), discontinuing service during extended vacation ~erlods, credit dellilqueneles and related economic reasons, such as loss of employment, Insufficient use by customer to ~ustlfy expense, etc." However, In supplemental Information filed with the Commission covering all three years of the trial Petitioners list the three principal reasons for subscriber cancella- tions as "Non-use", "Dissatisfaction with programming" and "economic reasons'. Of a total of 3,478 voluntary cancellations during the entire trial period over 62% were due tO these reasons, PAGENO="0685" issue can be resolved by requiring "a showing by the applicant of potential for sustained operation". (Notice, para. 17) While the "sustained operation" stand- ard is now applied by the Commission to applicants for free television construc- tion permits, the public, of course, is not there required to expend any money (other than in connection with television sets themselves) in reliance upon such "sustained operation". We assume it was the prospective inducement of addi- tional consumer expenditures that led the Commission to request, in its First Report, data on the degree of acceptance and support by the public of a sub- scription service. Petitioners state in their Comments that Hartford accomplished "what it wa~ designed to do; namely, the gaining of empirical knowledge and the obtainiug of significant and reliable data which would serve as a basis for appraising the potentials of subscription television in other types of circumstances. The experi- ence so gained and the demonstrable facts so developed offer for the first time the parameters for reasonable business projections of the potentials of subscrip- tion television to provide additional economic and program resources which would facilitate significant increases in the number of television services avail- able to the public." (Petitioners' Comments, p. 25) Hartford demonstrated for whatever reasons an inability on the part of a subscription television system to obtain more than 1% of the net weekly circula- tion of the market. Even conceding that this figure can be improved upon in a na- tionwide subscription television operation, we doubt that there is any empirical data to support Petitioners' projections of a 10% or even 20% market penetration for subsuription television. In sum we can see no grounds for the Commission to conclude that economic viability of subscription television has been established by its proponents. VI. WHAT, IF ANY, ROLE SHOULD TIlE FEDERAL GOVERNMENT PLAY WITH REGARD TO SUB- SCRIPTION TELEVISION BY WIRE OR CABLE, NOT USING THE BROADCAST SPECTRUM? By its Notice of Inquiry the Commission for the first time has enlarged this proceeding to include an inquiry into subscription television transmitted by wire or cable. We do not believe that the Commission has jurisdiction over wired subscrip- tion television. An exercise by the Commission of purported regulatory authority in this area would in our view go beyond any Previous assertion of its authority. We argued in our comments in the CAPV proceeding, Docket No. 15971 that: "The form of regulation which the Commission attempts to adopt over CAPV systems is not based upon a licensing structure. The Commission would apply a regulatory scheme to non-licensees under a statutory structure designed for licensees. This is unique in Commission regulation. The Commission has never asserted that its jurisdiction can reach the networks, or other program produc- ers, directly, and without reference to their status as station licensees. The hearings that resulted in the passage of Section 508 of the Communications Act. and in the all-channel receiver legislation, furnish persuasive legislative history establishing that, absent specific statutory grant of authority over the persons affected, only Commission licensees are subject to regulatory authority-under reasonable standards set by the Commission and derived from the Act." While the Commission ultimately did assert jurisdiction over community an- tenna television systems, its Jurisdictional Memorandum made clear that in so doing an all important element was the fact that television stations' signals were extended by CATV system's beyond the area or zone to be served by the originat- ing station, a factor not involved here. Even if we believed that the Commission does have jurisdiction to regulate wired subscription television, we would oppose such regulation. This is not because we think wired subscription television would represent a beneficial supplement to free television. On the contrary, we believe that many of the ad- verse effects resulting from the anthorisation of an over-the-air subscription tele- vision service could also be presented by wired subscription television. Yet, the fact that wired subscription television does not involve the utilization of scarce spectrum space should convince the Commission that, given our plural- istic society, it best not regulate wired subscription television. For again, as we stated in our (1ATV comments: "Over the years, CBS has emphasized the basic nature of American broadcast- ing as a system operating in the context of free competith~e enterprise. In general. historically OBS has urged that, except for such areas as technical interference or direct impingement on the exercise of licensee responsibility, the Commission PAGENO="0686" 682 should not, as a matter of public policy, intrude in the programming or the business and economic aspects of broadcasting. "It is precisely because of this philosophy, for example, that CBS took the position, before the Congress, that no legislation should be enacted which would forbid wired pay television (as distinguished from over-the-air pay television, where the government must make a choice between uses of broadcast spectrum space). CBS took this position in recognition of the fact that wired pay tele- vision could, if successful, present a serious~compefitive challenge to the present system of broadcasting. "The same philosophy compels CBS to refrain from supporting the proposed Rules. While it is possible that unrestricted and unregulated CATV may eco- nomically hurt the present system of broadcasting, CATV does not propose to use broadcasting spectrum space." As indicated in the above-quoted Comments CBS has previously urged the Con- gress not to enact legislation which would forbid wired subscription television. CONCLUSION We submit that the Hartford subscription television trial does not furnish support for the conclusion that the nationwide auhorization of over-the-air sub- scription television would be in the public interest. Because we strongly believe that Hartford, if anything, supports the contrary conclusion, we have not undertaken to comment on the restrictions which might be applied to subscription television were it authorized by the Commission or the rules under which it might operate. Respectfully submitted. COLUMBIA BROADCASTING SYSTEM, INC., LEON R. BRooKs, RICHARD W. JENCKS, ALBERT II. DWYER, RALPH E. GOLDBERG, Its Attorneys. ASSOCIATION OF MAXIMUM SERvIcE TEIECASTE1iS, INC., Washington, D.C., October 20, 19~7. Hon. PORJ3EIST HART MACDONALD, U.S1. House of Representatives, Raqburn House Oj~Zce Building, Washington, D.C. DEAR CHAIRMAN MACDONALD: I appreciated the privilege of appearing before the Subcommittee on Communications and Power of the House Committee on Interstate and Foreign Commerce on October 13, 1967. In my prepared statement I presented the position of MST in opposition to the establishment of a system of pay television by the FCC Although copies of my prepared statement were made available to each of the members of the Subcommittee, it may be of interest to you to see my analysis of the FCC's proposed "two-year" sports rule, since this is a matter which was not covered in detail in my prepared statement. It was quite evident during last week's hearings that there was considerable confusion as to what the FCC's Pay-TV Committee recommended regarding the availability of sports events now broadcast on free television for showing on pay-TV. Moreover, this confusion was compounded further by the testimony of Mr Robert Hall the sports expert' for Skiatron Electronics and Television Corporation, when he appeared before the Subcommittee on October 16, 1967. What has come to be called the "two-year rule" on sports events was intended by the Pay-TV Committee to prevent pay-TV from siphoning sports events now presented on free television. In my presentation to the Subcommittee I analyzed how the proposed FCC rule intended to accomplish the desIred result `of limiting siphoning, and whether the proposed FCC rule would be successful in achieving this result. I pointed out that, contrary to what appeared to be a common mis- conception, the proposed "two-year" limitation on siphoning amounted at the most to only a one-year limitation and in. many instances was no limitation at all. In making this point I quoted from the relevant paragraphs of the Pay-TV Com- mittee's Report. I cited specific language that was used by the Report in making clear that regularly televised by free television in the pay TV community for two years preceding the proposed pay-TV broadcast meant free television broad- cast in each of two consecutive years. Therefore, if the sports event were "regu- PAGENO="0687" 68g larly televised" in oneS but not both of those two years preceding the proposed pay-TV showing, the event could be siphoned by pay-TV. In addition I made clear in my presentation that wholly apart from the con fusion over the length of time involved in the "two-year" rule, there could be siphoning of sports events from free television by pay-TV even if there were a true two-year limitation for the reasons set forth in the attached transcrtpt of my remarks. Since this is a matter of some importance, I am taking the liberty of supplying you with a copy of the official transcript of my remarks on the proposed sports rule for your files. Sincerely, Lnsr~r~n W. LINDOW, lixeoutive DirectOr. SUPPLEMENTAL STATEMENT OF LESTER W. LINDOW, EXECUTIVE DIRECTOE, AssoolArioN OF MAXIMUM SERvIcE TELECASTERS, INC. "There has been considerable discussion this week about the proposed FCC rules for pay TV as they would affect sports events. Quite understandably, there has been a certain amount of confusion. Let me say, first of all, that the proposed rules regarding sports are quite complex. It is certainly understandable that confusion has been created I do not blame you one bit for having problems with these things. "Ilowever the proposed FCC Fourth Report and Order does set forth the proposed rules although, as I say, they are somewhat complicated. First of all it is important to understand that there are two kinds of sports e~ ents established by the proposed rules. The first type is what are called specific sports events. These Include such features as the World Series, the All Star Game, the various Bowl games, League Championships, and, of course, they ex- tend not only to baseball but other kinds of sports, as well. "The second type is what is described as non-specific sports events. Generally speaking, these include those games played as a part of a regular season, in other words, all the regular games of the Washington Redskins or the Washing- ton Senators. "Within the non-specific type there is a further breakdown of categories, again applying to all types of sports having a regular season. It includes home games, games away from home, pre-season games or exhibition games, or the so-called Games of the Week. These matters are set forth in detail on page 91, para- graph 261 of the proposed FCC Report as well as in paragraph 262 which im- mediately follows that. "Let us refer back to the type described as specific sports events; the World Series, the All Star Game. The proposed Commission rules would provide that if such an event had been broadcast on free television for two consecutive years in the community, and I emphasize "in the cothmunity", where the pay television station is located, not nationwide but in the community, pay television cannot broadcast it. I refer now to page 92 of the proposed Report at paragraph 264. "Let us take the World Series as an example. If the Series were on free TV in that community in October 1965 as well as in October 1966, both years, pay television could not show it in October 1967 on the pay TV station licensed to that community. Here I quote from the Report, `If the Series were oii free TV in that community in either October 1965 or 1966 but not in both years it w-ould be viewed as not having been regularly televised there and an STV station could show the Series in October 1967.' "This is the rule. Would it prevent siphoning? I don't think that it would. Let us see how this could conceivably work. It could work in several ways. Assume that the Series was broadcast on free television in 1966 and again this year, in 1967. The pay television station operator in Washington, D.C. could go to the baseball people, offer them a sufficient amount of money if they would refuse to sell the World Series rights for Washington for free television in 1968-they only have to do it in Washington-and agree to make up the dif- ference in income. The following year it could be placed on pay TV and every year thereafter. "Another method to get around this might well be to keep it off free television in 1968 but through mutualh agree'ible arrangement'~ put the Series in 1968 into theater pay television in Washington, in near-by Maryland, Virginia, all through our whole area, with the idea of bringing it on pay TV the following year. Under this method, the baseball people would not stand to lose any revenue PAGENO="0688" 684 and the public could see the Series provided they were able to go to the theater and pay for it for one year. "Now, we do not say that this would necessarily happen on a national basis overnight but it could happen on a selected basis in Market A and B this year in C and D next year and incidentally Zenith said that they did not expect to go into operation all over the country; they are just talking about a couple of markets at a time; Mr. Wright made that point the other day-'--they could do this progressively and so on until in a relatively short time, for all practical Purposes, the World Series would be taken out of the realm of free television and into a completely pay TV setup. "Certainly there would be outcries from the public. There were outcries from the public when Championship fights were put into the theaters on a pay basis and taken off free television You have reminded us on several occasions again this week, that there were very serious outcries from Arizona this Spring on this very matter in the case of the Clay Foley Championship fight But the situa tion still exists. That is part of what we are up here talking about today. "Now let us turn to the second type of sports event set up by the proposed Ooiñmission rules, that of the non-specific sports event; the game which is played as a part of a regular season. The proposed Commission rules cover this as well. I refer you now to paragraphs 266 and 267 commencing at the bottom of page 92 of the proposed FCC Report. "If a substantial number of non-specific events, such as home games or away. from home games, or the so-called Games of the Week, were televised over free television in the pay TV community and were, and I quote from the proposed FCC Report, `within each of the two years preceding the proposed STV broad- casting thereof', then no games in that category may be presented by pay tele- vision in that community. "As the proposed FCC Report states, the standard is to be applied on a category by category basis, and, here I quote again from the Report, `If during one but not both of the two years preceding proposed STV broadcast, a substantial num- ber of events in a category were not televised in a community the category will be considered not to have been regularly televised therein and STV may show the contests in that category.' That means all such contests. "Now, that is the rule that is proposed. Does it prevent siphoning? A pay TV promoter could use his economic leverage to purchase the games in a category of non-specific sport events such as regular season home baseball games, which may not have been broadcast in the community over free television, and present them without any delay. For example, assume that a baseball team plays 80 home games - and no games in this category are broadcast on free television in the home com- munity. Pay TV could purchase the television rights to all of the home games in this category the very next season, while the away from home games previously broadcast by television could be withdrawn from free television by the ball club during that season so that they, too, could be made available to pay TV the follow- ing year. The same situation could exist if some but not all of the home games were broadcast on free television. "Now, I hope this may help clear up the so-called two-year provision which I think is a snare and a delusion." WASHINGTON, D.C., October 9, 1967. Housu OF REPRESENTATIVES, SUBCOMMITTEE ON COMMUNICATIONs AND Pownn, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Rayburn House Office Building, Washington, D.C.: The attached "Comments of International Telemeter Corporation" were filed with the Federal Communications Commission in Docket No. 11279, on October 10, 1960, in the Commission's rule-making proceeding looking toward the adoption of Rules and Regulations to provide for subscription television service. It is respectfully requested that the attached Comments be incorporated in the record of the Hearings on Subscription Television to be conducted before the House Subcommittee on Communications and Power. These comments set forth in some detail the position of International Telemeter Corporation with respect to the various issues pending before the FOderal Communications Commission in the subscription television rule-making proceeding. Respectfully submitted, ARNOLD & PORTER, Coun~sei for International Telemeter Corp. PAGENO="0689" BEFORE TH]~ FEDERAL COMMUNICATIONS COMMISSION WAsrnNGT0N, P. 0. IN TH~ Mi~a OF: A~MENDMENT OF PART 73 o~ ~ra~ OOMMISSION'a EULES AND REGULATIONS (RADIO BROADCAST SERVICES) To PROVIDE FOR SUBSCRIPTION TELEVISIoN SERVICES Docket N~. 11279 COMMENTS OF INTERNATIONAL TELEMETER CORPORATION October 10, 1966 685 86-399 0 - 67 - 44 PAGENO="0690" 686 TABLE OF CONTENTS Page I. SUMMARY OF PELEMEIqJ~~'$ CONCLUSIONS .. A. Telemeter Has Developed the Equipment and Has the Experience. to Implement a Successful Subscription Television Service B. Subscription Television Service Offers the Only Path to Improved Television Programming 2 C. Subscription Television Will Not "Syphon" Programming Far from Existing Television Services but Will Present "Box Office" Entertainment Not Now Regularly Available to Television Viewers 2 D. There Should Be No thwecessary Limitations Imposed Now Upon the Ability of Subscription Television Concerns To Do Everything Required To Institute Successful Operations 2 B. Closed-Circuit Subscription Television Takes No Spectrum Space From Other Uses. The Commission Does Not Have Jurisdiction Over Closed-Circuit Subscription Television and the Public Inter- est Requires That It Be Permitted To Grow, Irrespective of the Role of CATV 3 F. Recommendation II. TELEMETER'S PREVIOUS SUBMISSIONS 3 III. DESCRIPTION OF TELEMETER'S SYSTEM 4 A. The "Cash or Credit" Decoder 4 B. VHF-UHF Capability 6 C. Video Scrambling 6 D. Sound Fidelity 6 B. Transmission Characteristics 7 IV. BACKGROUND CONSIDERATIONS 7 A. The "Free" Programming Contentions 7 B. The "Monopoly Strawman" 9 V. COMMERCIAL ORGANIZATION OF THE TELEMEPEF~ SYSTEM 12 PAGENO="0691" 687 Page VI. COMMENTS ON SPEcIrIc QTJESPIONS RAIsnu BY rim Norion 13 (1) Should Subscription Television Be Limited to C~nnmunities Receiving a Minimum Number of Television Signals . . . or Whether It Should Not Be So Limited but Should, in Communi- ties Not Lying Within Four Commercial Grade A Contours Be Restricted to a More Limited Scope, Especially as to Hours of Operation, Than in Four-Service Communities? 13 (2) (a) Should Stations Engaged in Subscription Television Broad- casting Be Required To Broadcast a Minimum Number of Hours of Conventional Television Daily? If So, how Many HoursQ 13 (b) Should Subscription Television Be Restricted to Certain Segments of the Broadcast Day and, if So, What Segments? 13 (c) Should a Maximum or Minimum Number of Hours of Subscription Television Per Day or Week Be Specified? .. 13 (3) Should Subscription Television Be Permitted Over Any Tele- vision Station (Subject to Possible Qualification Concerning the Number of Stations in the Market), UHF Stations Only, or Should Some Other Limitation Be Imposed? 14 (4) Should More Than One Station Be Permitted To Engage in Subscription Television in Any Market and, if So, Should These Stations Be Permitted To Transmit Subscription Television Simultaneously? 15 (5) Should More Than One Subscription Television Technical System Be Authorized and, if So, Should More Than One Technical System Be Authorized To Operate in Any One Community? .. 15 (6) Should a Party, Manufacturing or Selling Equipment, or a Holder of a Subscription Television Franchise in More Than One Market, Be Permitted To Engage in the Procurement and Supply of Programs to Television Stations for Subscription Use? 16 (7) What Requirements Should Be Imposed Upon Subscription Licensees To Assure Licensee Control? 17 (8) The Nature of the Technical Rules That Should Be Adopted .... 17 (9) Whether and to What Extent the Commission Should Regulate the Charges, Terms and Conditions Pursuant to Which Sub- scription Television Service Will Be Offered the Public~ 18 (10) Whether a Subscription Licensee Should Be Required To Fur- nish Service to All Persons Within Its Service Area Who De- sire It? 18 PAGENO="0692" 688 Page (11) Should Requirements Be Imposed To Insure That the Pub1j~ Would Not Be Adversely Affected by Obsolescence of Subscrip. tion Television Equipment or Cessation of Service and Should the Commission Require That Such Equipment Be Leased Rather Than Sold? (12) What Restrictions Should Be Adopted Concerning the Nature of Arrangements Among Patent Holders, Patent Licensees, Franchise Holders, and Television Station Licensees, Concerning Such Matters as Whether and Under What Terms and Condi- tions, Patents on Any Particujar Subscription Television System Will Be Required To Be Made Available to Franchise Holders and Station Licensees, and Whether Stations Engaged in Sub- scription Television Should Be Permitted To Enter Into Con- tracts That Would Give Them Exclusive Rights To Use a System in a Particular Community~ 19 (13) Whether Means Should Be Provided To Insure That Subscription Television Will Be Available to. All Eligible Stations on a Non- Discriminatory Basis? 20 (14) Should a Limitation Be Placed on the Type of Programming Which Subscription Television Operations May Broadcast and, if So, What That Limitation Should Be and Whether Appli- cation.s for Subscription Authorizations Should Be Required T~ Make a Showing of How Their Programming Will Differ From Conventional Programming? 20 (15.) Whether Various Sections of the Act, Rules and Policjes~ e.g., the "Fairness Doctrine," Should Be Modified as They Affect Subscription Television ~ 23 VII. RESPONBE P0 NOTICE OF INQUIRY REGARDING Wmm SUBSCIUPTYION TELEVISION 24 (1) Would it Be Necessary To Have Built-in Antennas in the De- coders Attached to Sets of Subscribers ~j 25 (2) Would a Single Decoder Attached to the Antenna of a CATV Which Delivered the Unscrambled Signal to Subscribers Suffice ~ If So, What Arrangement~ for Collection of Subscription Fees Could Be Made `~ 25 (3) Would the Rules on Carriage of Signals; of Local Stations Over CATVs Apply to Carriage of Subscription Programs? 25 VIII. Omoi~rio~ OF SUBSCRIPTION TELEVISION ON CATV 25 IX. CONCLUSION 27 PAGENO="0693" 689 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D. 0. 20554 In the Matter of Amendment of Part 73 of the Commission's Rules and Regulations (Radio Broadcast Services) to provide Docket No. 11279 for Subscription Television Services For Action by the Commission COMMENTS OF INTERNATIONAL TELEMETER CORPORATION International Telemeter Corporation (hereinafter Telemeter), by its attorneys, respectfully submits the following comments in response to the Commission's Further Notice of Proposed Rule Making and Notice of Inquiry in Docket No. 112W, released March 24, 1966. I. SUMMARY OF TELEMETER'S CONCLUSIONS 1. Telemeter `s principal conclusions, as developed herein, are as follows: A. Telemeter Has Developed the Equipment and Has the Experience To Implement a Successful Subscription Television Service. 2. On the basis of sixteen years of development and five years of experimental operation, International Telemeter Corporation has developed a subscription television system permitting maximum operating flexibility. The system may be operated on a cash or credit basis, over-the-air or via coaxial cables, and in color or black and white. It is low in cost and compatible with television stereophonic sound. The Telemeter broadcast decoder functions as a UHF con- verter on free programs. It converts VHF only receivers to all- channel receivers. PAGENO="0694" 690 2 B. Subscription Television Service Offers the Only Path to Improved Television Programming. 3. Today, those who watch trends in television programming are expressing alarm that the "wasteland" will become even more arid because of the accelerating depletion of feature motion pictures avail- able for television showing. Subscription television, on the contrary, because of its vastly superior economic base, will be able to supply fresh, new programming of top quality to its viewek's. The trans~ mission of "Show Girl" from Broadway, and of' "blacked-out" championship sports events on Telemeter's experimental system, has demonstrated this capability. C. Subscription Television Will Not "Syphon" Programming Fare From Existing Television Services but Will Present "Box Office" Entertain- ment Not Now Regularly Availableto Television Viewers. 4. Subscription television will be able to furnish current motion pictures, blacked-out sports events, and cultural programs which can- not be presented on commercial television because' of economic fac- tors. In addition, subscription television will bring current Broad- way plays and similar entertainment into viewers' homes at' a fraction of the cost involved' in box office ticket purchases. By broadening the base of support of the' legitimate theatre and other cultural at- tractions, subscription television will give an impetus to the growth and improvement of these media at the same time that it makes their productions available to more people at lower price's. D. There Should Be No Unnecessary Limitations Imposed Now Upon the Ability of Subscription Television Concerns To Do Everything Required To Institute Successful Operations. 5. The financial investment required to enter the subscription television industry is significantly large. Fnrthermore, a subscrip- tion television operation is a complex business, involving the pro- duction and distribution of entertainment, transmission, reception and billing facilities, as well as related components. If any aspect of this complex operation is deficient-for example, if programs are not available' when they are needed-the operation will not succeed and the investment will be l~st. Therefore, at the outset, the sub- scription television concern should be allowed complete control of the various ingredients necessary to its success. This means in practice that there should be no limitation on the ability of broadcasters to be subscription television franchise holders, to engage in program-\ ming activities, to own and maintain subscription television devices in homes and to' engage in other activities essential to success. PAGENO="0695" 691 3 E. Closed-Circuit Subscription Television Takes No Spectrum Space From Other Uses. The Commission Does Not Rave Jurisdiction Over Closed- Circuit Subscription Television and the Public Interest Requires That It Be Permitted To Grow, Irrespective of the Role of CATV. 6. Experience in existing subscription television systems shows that only about five percent of public viewing time goes to the medium. In view `of this figure, the arguments urging the regulation, or pro- hibition, of closed-circuit subscription television border on the mdi- croiis. Its viewers spend such a small percentage of their viewing time watching subscription television that it is not truly competitive with existing commercial television-it is a new entertainment medium. Closed-circuit subscription television results in no diminution of existing or potential services because it does not use the air-waves. Obviously, the same remarks are applicable to closed-circuit subscrip- tion television in conjunction with community antenna television. Here the opponents *of subscription television have used `the argu- ment that such closed-circuit operations ought to be prohibited because, with `OATV operations sharing the expense, the ultimate cos't to the public will be lower. It is a strange doctrine that something which costs the public less should, for that reason, be made illegal. P. RecommendatIon. 7. Telemeter recommends that subscription television be instituted as a regular service without del'ay and that, to the exten't that it is consistent with the public interest, there be no limitations on the ability of subscription television opera~ing companies to do every- thing necessary to develop successful operations, all to the end ,of providing a new, vital and viable service to the public. II. TELEMETER'S PREVIOUS SUBMISSIONS 8. This proceeding was commenced in 1955, over eleven years ago, by the issuance of a Notice of Proposed Rule Making inviting comments as to whether the public interest would be served by `the adoption of rules authorizing and governing subscription television operations. Tinder date `of June 9, 1955, Telemeter submitted extensive comments directed to the various aspects of `the proposed rules originally under consideration. On May 25, 1965, Telemeter submitted `additional comments in support of the Joint Petition of Zenith Radio Corporation and Teco, Inc., which urged the prompt authorization of subscription television service. On June 17, 1966, Telemeter filed with the Com- mission a technical description `of its system. PAGENO="0696" 692 4 9. Over the eleven-year period since the filing of Telemeter's original comments, numerous changes and improvements have evolved, both in the technical system offered by Telemeter, and in the business and economic patterns in which subscription television may be expected to operate. `The comments to follow may thus be at variance in some particulars with those filed in 1955. Telemeter requests the Com- mission to take notice `of the matters and facts set forth in its earlier comments and filings, much of which remains valid. To the extent, however, that the earlier comments vary from those now filed, the latter should, of course, prevail. 10. The background of Telemeter in the pay television field has been amply documented in the submissions cited `above and need not be here detailed. Briefly, however, Telemeter has been engaged in research and development in the subscription television field for seventeen years, has had five years of extensive field experience in commercial operation `of its closed-circuit subscription television system and has had five years of experimental operation `of its broad- cast system. As will `be evident from the following comments, Telemeter, as a result of its research `and development, and of its operating experience, has arrived `at several basic changes in its approach to the institution of widespread subscription television operations. IlL DESCRIPTION OF TELEMETER'S SYSTEM 11. The technical submission `of .June 17, 1966, contains a detailed description of the Telemeter system operation. For convenience, however, a brief summary is included here. A. The "Cash orCredlt" Decoder. 12. Although Telemeter originally proposed `a cash system `only, one of the results of Telemeter's five-year field test in a Toronto, Oanada, suburb (Etobicoke) was the decision to develop a combined cash and credit subscription television system. As part of the Toronto operation, the company conducted a credit experiment In which a number of customers, some of whom had previously had cash units, were equipped with credit, or billing, units. On t'he basis of com- parisons of gross income, customer reaction, preference and con- venience, and `other considerations, Telemeter ascertained that there is a sufficient requirement on `the part of certain segments of the public for a credit unit to warrant development of a compatible cash and credit `system. PAGENO="0697" 693 5 13. This cash and credit system is capable of operating both on cable and over-the-air. The system is compatible in the sense that both cash and credit units operate using the same transmissions. The price demand and control mechanism in the cash unit are controlled by the same set of pulses and tones that control the billing mechanism in the credit unit. Thus, the system provides maximum convenience and flexibility for the public, as well as the subscription television operator. 14. The heart of the Telemeter system is the Telemeter decoder- either the cash `or credit version-which is placed in the subscriber's home. The decoder is connected between the lead wires from the subscriber's antenna and the antenna terminals on the back of his television set. No modifications are required in the set in order to install the decoder, regardless of make, model, year, or other factors. After the decoder is installed, the set continues to *be usable for the reception of non-subscription programming. If the subscriber wishes to discontinue the service, removal of the decoder involves merely the reconnection of the antenna lead to the antenna terminals of the subscriber's receiver. The receiver is totally unchanged in the process. In the course of installing, repairing, removing, or otherwise per- forming operations connected with the `Telemeter decoder, the back of the subscriber's receiver is never removed. 15. In the Telemeter broadcast system all television viewers, regardless of whether they have decoders, are provided with a message in the normal television sound channel giving them information about subscription programs when they turn to a subscription television channel. Included in the message is information about the identity of the program, its price, and for the benefit of subscribers only, its code number. At the same time, all viewers see a scrambled picture on the screens of their television receivers. 16. A credit subscriber who wishes, on the basis of the informa- tion he has heard, to purchase a program, need merely "dial" the code number into his unit by moving four levers so that the four numbers of a code appear in a window on the unit. Following this, he pushes a purchase button to receive the program. Instead of pushing the purchase button, the cash subscriber deposits cash in a mechanism in order to purchase a program. 17. In either case, a printed record is made automatically within the decoder, consisting of the identity number and price `of the program which has just been purchased. One copy of this record is delivered PAGENO="0698" 694 6 to the credit customer by the unit monthly, and another copy is retained within the decoder. The credit subscriber's unit is furnished with a key so that it is possible for him to lock it against unauthorized use. 18. All Telemeter decoders contain a special code card. The subscriber must remeve this code card monthly, .and substitute a new one for it. Unless the correct code card is in place, the Telemeter decoder will not unscramble subscription television programs. Since the Telemeter operator is able to withhold mailing code Oards to delinquent subscribers, the card gives' the operator a mechanism for controlling the utilization of decoders. 19. In the case of cash subscribers, of course, a collector visits the home periodically to remove a cash drawer within the decoder, and substitutes a new one for it. B. VHF-UHF Capability. 20. The Telemeter decoder is fully transisterized and contains both all-channel VHF and UHF tuners. If a subscriber's television set does not have a UhF tuner, the Telemeter decoder on free programs serves as a UHF' converter. In operation, the subscriber's television set is tuned to an output channel. This may be either channel 2 or channel 3. There is no need for further tuning of the television set. In watching subscription `television programs, the subscriber uses the VHF and UHF tuners on his decoder. C. Video Scrambling. 21. The Telemeter system of scrambling and unscrambling the picture is unique in that the picture signals themselves are never subjected to distortions. Instead, the synchronizing signals which control the operation of the scanning circuits in the subscriber `s set are sent in a manner different from normal television, so that the picture is scrambled because normal receiving sets cannot use these new synchronizing signals. As another result, the Telemeter decoder functions equally well on monochrome and color transmissions. D. Sound Fidelity. 22. It is inherent in the Telemeter sound system that the frequency range and freedom from noise of normal television are retained. The Telemeter sound system is fully compatible with television stereo- phonic sound transmissions, currently under consideration by the Commission. PAGENO="0699" 695 7 E. Transmission characteristics. 23. Finally, from the point of view of the television broadcaster, switching from normal to subscription operation and vice-versa, is extremely simple. All of the Telemeter encoding and special trans- mission equipment is contained in a package and can be easily con- nected to the existing transmission equipment. Switch~over can be accomplished remotely under the control of a master switching unit. IV. BACKGROUND CONSIDERATIONS 24. Since the inception of the idea of subscription television, and particularly since the institution of this rule-making proceeding eleven years ago, those who oppose subscription television have been active and. vociferous in their denouncement `of the concept. It is therefore as important to point out `and underscore what subscription television is not as it is to describe what it is. A. The "Free" Programming Contentions. 25. Telemeter predicted in 1955 that conventional television programming was headed for the type of "vast wasteland" in which it now resides. With the rising costs `of television production, necessitating multiple sponsors among the nation's largest industries to support even average programs, and with the constant depletion of feature motion pictures available to television, conventional television progamming has reached a level of mediocrity that constitutes a near abuse of the potential which the medium could achieve. 26. Subscription television in contrast, bec'ause of its highly superior economic base,1 promises to irrigate the vast wasteland with box-office type attractions not now available via conventional television. 27. For example, during Telemeter ~s Toronto experiment, which continued for a period of five years, Telenieter brought to the sub~ scribing public not what it already received "free," but rather top quality, box-office attractions, such as current feature motion picture films, not available on conventional television; a live transmission from the stage of the Eugene O'Neill Theatre in New York of a performance of "Show Girl," starring Carol Channing; taped per- 1 Telemeter's original comments in 1955 contain a detailed economic analysis of the potential of subscription television as compared with sponsored television. As is there described, the broader economic base provided by subscription television will enable it to bring to the public programs vastly superior to and beyond the economic reach of sponsored television. PAGENO="0700" 696 8 formances of Broadway and off-Broadway productions; especially produced drama for Telemeter viewers; the re-creation of the night- club performance of the McGuire Sisters; a specially produced presentation by Gracie Fields `and Stanley Holloway; the away-from- home games of the Toronto Maple Leafs Hockey Club, never before available locally on television; the ot'herwise "blacked-out" home games of the Toronto Argonauts professional football club; "blacked- out" championship boxing matches; and other attractions not avail- able to the public on conventional television. It must be noted that the "blacked-out" Clay-Patterson Championship Fight last year, available to Telemeter `s subscribers in Toronto, was brought into the home via the same closed-circuit facilities that carried the major boxing event to theatres throughout the United `States and Canada, but at a fraction of the cost, per viewer. Theatres charged from five to seven dollars per person-Telemeter subscribers paid two dollars for the entire household. 28. When Telemeter terminated the Toronto experiment in April 1965, `a large percentage of the subscribers responded to a question- naire, with 96.9 percent of the respondents expressing regret at `the discontinuance of the service. 29. In its five years of uninterrupted service, Telemeter estab- lished, beyond question, that there is a large audience willing to pay for superior entertainment in the home on a continuing basis. It thus demonstrated that the Telemeter "Theatre in the Home" performs a service to members of the public who are unable, or find it incon- venient, to avail themselves of facilities away from home. 30. Opponents of subscription television, while recognizing `the superior quality of the special programming presented by Telemeter on its experimental system in Toronto, have complained about the paucity of such presentations. It is true that in the 1961-62 season there were only seven special s'hows, apart, of course, from sports- events and hundreds of current motion pictures-but the specials `had to be produced at substantial financial losses because the audience was limited to the number of subscribers in a small experiment. As the' size of the subscription television audience grows, obviously the number and quality of special programs will grow. `Telemeter recognizes `that only with such programming can `subscription television be successful for Telemeter has never assumed, nor does it believe, that the American public will be willing to pay directly for the type of entertainment which it now pays for indirectly on `advertiser- sponsored television. PAGENO="0701" 697 9 31. To the contrary, if subscription television is to be successful, it will be because the vastly larger economic base provided thereby will enable its owners to bring to the public unusual and superior attractions which can never be provided by advertiser-sponsored television because of their prohibitive costs. Sponsored television- even with the giants of industry as its clients-cannot afford, on a regular basis, to bring current feature pictures to the viewer. Sponsored television cannot afford regularly to purchase the rights to otherwise blacked~out major sporting events. Sponsored television cannot afford, on `a regular basis, to bring many of the outstanding events to the viewing public which subscription television can do with comparative economic ease. 32. Yet, those who are entrenched in other entertainment media with whom subscription television would to some extent compete, in- cluding the networks and many broadcasters, persist in the vocal but invalid contention that subscription television will require the public to pay for what it now receives "free";' that existing television programming will be "syphoned off" to subscription television; and that motion picture theatres will close and dire monopolistic con- sequences wil1~ follow. Telemeter's answer to these contentions is the same as it was in 19~5. All that subscription television seeks is a chance to compete openly in the market place. If subscription television offers to the public, at a price, no more than it now receives "free, "it will fail. Telemeter seeks `only a chance to succeed or fail. It believes that it will succeed and that the viewing public will be the benefactor of its success. B. The "Monopoly Strawman." 33. Like the reports of Mark Twain's death, the fears of monopoly in subscription television are "greatly~ exaggerated." Subscription television, as an industry, does not yet exist. Indeed, there is but one subscription television system in operation in the United States today -and the subscribers to this system represent a small minority in their community. This `small minority spends less than five percent of its total viewing time watching subscription television programs. Is `this the monster which is to steal talent, close theatres, `and destroy "free" television? Telemeter believes that the Commission has recognized it is not as is evidenced by its findings in paragraphs 1 As Telemeter's 1955 Comments discuss in great detail, existing television programming is net "free." The public pays for it through consumer purchases of advertised products. The amount expended for advertising is reflected in the purchase price of the product. PAGENO="0702" 698 10 10-17 of its Further Notice of Proposed Rule Making to which these comments are addressed. 34. The fact is that subscription television is not even an infant industry. Its opponents have attempted, by raising false issues, to stifle it before it can be born. Any regulations which the Commission makes at this time should recognize the essential truth of this statement. 35. The elements of a subscription television industry have not yet emerged in any clear-cut form. There are no subscription television programming companies, syndicators, maintenance com- panies or other needed components. The elements of the existing structure which constitutes commercial broadcasting, or which con- stitutes the motion picture production, distribution and exhibiti~n industry, do not yet exist. The Commission must therefore proceed with caution in adopting rules to regulate an industry whose essential character has not yet begun to emerge, lest its natural and successful growth be unduly restricted and inhibited. 36. The subscription television business, regardless `of the form which it will ultimately assume, will have at its core today the sub- scription television entrepreneur. He is the man, or the corporation, which must bring all of the elements required for successful subscrip- tion television into existence. At some time in the future, after the business has been started, there will be producers, maintenance firms, syndicators, broadcasters and others, but these elements do not exist *today. It `serves no useful purpose, therefore, to talk about separating the components and establishing regulations to govern their relation- ships. If a single firm is not allowed to start a total subscription television business including everything from the production of enter- tainment through it's broadcasting, through it's sale to the public, through installation of decoders, and through the collection of money, and every other aspect' of the enterprise, subscription television is unlikely to come into existence. 37. Subscription television, in its present stature, is analogous to the motion picture industry in its beginnings. A motion picture theatre, like any other theatre, is an enclosure containing means for exhibiting entertainment for which the patron must pay. The enclosure of a theatre may be analogized to the scrambling and un- scrambling means of the broadcast subscription television system, `and the box office to its credit or cash charging system. `The projection equipment constitutes a means of communicating the entertainment PAGENO="0703" 699 ii on film to the public, and is analogous to the ~transmitting equipment of a broadcast. The theatre owner picks his programs and determines the timing and duration of their exhibition and their pricing, incidentally, on the basis of his knowledge of his market. 38. In the early days of motion pictures, exhibitors would not go to the expense of building theatres because there was no entertain- ment available to be shown in them. Therefore, in order to get the industry under way, a natural identity developed between producers, distributors, and exhibitors. This identity was an absolute necessity if the industry was to come into existence. 39. At this stage in the development of subscription television, no company (which is truly independent) is going to invest in decoders if it does not control broadcast faeilities, and if it is not able to assure itself that it will be able to make its own efforts to obtain programming by every means physically available. The infant motjon picture industry had a programming problem which was actually simpler than the infant subscription television industry. The problem of the motion picture industry was that entertainment was not available. The problem of the infant subscription television industry is that even where entertainment is available, it has been withheld, so that it is naive to assume that a subscription television operator, at this stage, can sit in his office and expect purveyors of entertainment of top quality to come to him. 40. Furthermore, in view of the obvious and manifest hostility of existing media toward subscription television, it is equally naive to suppose that commercial broadcasters in significant numbers will approach a detached subscription television operator-without his own broadcast facilities-for the privilege of showing an occasional subscription television program. If subscription television is to develop, it is Telemeter's considered judgment that it will, have to be started by those in full control of every aspect of the subscription television business with no, or exceedingly few', limitations upon their ability to solve the multifarious problems which experience has shown they cannot avoid. 41. It is within this framework that we shall comment upon the specific questions raised by the Commission in its Notice. PAGENO="0704" 700 12 V. COMMERCIAL ORGANIZATION OF THE TELEMETER SYSTEM 42. Telemeter proposes that, during the initial stages of the development of subscription television, it will grant exclusive franchises for use of the Telemeter system in various television markets. These franchised operators will be broadcasters or affiliated with broadcasting so that they may have access to, and control over, broadcasting facilities. `They will have the right to sub-franchise others, and to allow other broadcasters to use their facilities, but initially, Telemeter believes that these matters must be in the franchisees' sole control. 43. Only under these circumstances will such franchisees invest capital in home decoders, encoding equipment, programming guaran- tees, and all other facets required for the successful introduction of subscription television in each market. This pattern of proposed operations is already reflected in franchise agreements which have been signed for Telemeter `s broadcast system, although these agree- ments, of course, are effectively subject to Commission action. This arrangement is, in fact, the one which has already existed in Hartford, and in Toronto. it is dictated by the total situation existing at this time. 44. On the other hand, Telemeter does not believe that the Com- mission should require subscription television operations to be by * exclusive franchise. `On the contrary, until the service has had a reasonable chance to develop, it is neither possible nor practical to attempt to mold the relationship of system proponent and franchisee into a fixed pattern. Time, experience or conditions in a particular market may indicate that a nonexclusive franchise is desipable. More- over, while it now appears unrealistic to think of franchising anyone but a br&adcas'ter, time and experience may indicate that the fran- chising of broadcasters may be `too restrictive `and that other entrepreneurs may be in a better position to initiate and develop ~` subscription operations, either through appropriate `arrangements with broadcasters or, in some cases, by the restrIcted use of channels not otherwise employed in broadcasting. For `these reasons, Telemeter urges that no rules be adopted that would abridge or restrict the complete freedom of the `system owner to grant exclusive or non- exclusive franchises either to broadcasters or non-broadcasters PAGENO="0705" 701 13 VI. COMMENTS ON SPECIFIC QUESTIONS RAISED BY TEE NOTICE (1) Should Subscription Television Be Limited to Communities Receiving a Minimum Number of Television Signals . . . or Whether It Should Not Be So Limited but Should, in Communities Not Lying Within Four Commercial Grade A Contours Be Restricted to a More Limited Scope, Especially as to Hours of Operation, Than in Four-Service Communities? 45. Telemeter urges the Commission not to limit subscription television to communities receiving a minimum or specified number of Grade A signals. If it is to have a reasonable chance to succeed, subscription television must not be hamstrung by artificial and arbitrary restrictions. Telemeter believes that the new service has a tremendous potential which may find expression and usefulness under varying circumstances in different sized and types of com- munities. Indeed, as Zenith pointed out in its March 10, 1965, petition, subscription television has the potential of "generating the construc- tion of new stations" and this could develop in small, underserved markets as well as in the larger markets. Subscription television could well provide the economic sustenance to support a station which might otherwise not be built in a marginal community. 46. On the other hand, in communities where three network stations and possibly strong non-network affiliated stations flourish, subscription television could well provide the necessary economic basis needed to develop a viable UHF competitor. Particularly is this so in the case of Telemeter's system, where its decoder unit acts as a UHF converter as well as subscription decoder, thus enabling every VHF-only set to receive UHF signals. In short, the nature of the community in which subscription television is permitted should not be controlled by rule but should, at most, be determined on an ad hoc basis in light of all of the factoi\s involved in each particular situation. (2) (a) Should Stations Engaged Subscription Television Broadcasting Be Required To Broadcast a Minimum Number of Hours of Con- ventional Television Daily? If So, How Many Hours? (b) Should Subscription Television Be Restricted to Certain Segments of the Broadcast Day and, if So, What Segments? (c) Should a Maximum or Minimum Number of Hours of Subscription Television Per Day or Week Be Specified? 47. Telemeter agrees with the Commission's proposed rule (Section 73.043[c]), providing that any television station authorized to broadcast subscription programs shall broadcast, in addition to its subscription broadcasts, the minimum hours of programs required by 86-399 0 - 67 - 45 PAGENO="0706" 702 14 Section 73.651 of the present Rules. The experience of Zenith in Hartford and Telemeter in Toronto would indicate that this can be done and still provide adequate. time for subscription programs. In its franchise agreements, Telemeter has provided that a minimum of thirty hours of subscription television be broadcast per week. Since the public has already shown in the experimental operations a tendency to restrict its subscription television viewing to prime time, it would appear that to achieve maximum service to the public the minimum of thirty hours per week of subscription television broad- casting should take place in prime time with appropriate allowance made for weekend events. 48. The time limitations proposed by the Commission in Section 73.643[d] do not appear to be unrealistic in light of the experience gained in experimental operations to date. Telemeter believes, how- ever, that too many variations exist as among markets of differing sizes and nature, e.g., crowded spectrum space in comparatively affluent eastern markets as opposed to ample channel availability in small, less affluent western markets, to permit the easy application of an hour `s limitation as proposed. For this reason, Telemeter again urges that no rules be adopted limiting the hours which stations in particular markets may devote to subscription television. It is believed that free competition as between subscription and conventional programming as well as the limits upon the pocketbooks of the viewing public will provide the hourly limitations most desired by the public. This would be true whether one or more subscription operations are permitted in a given community. (3) Should Subscription Television Be Permitted Over Any Television Sta- tion (Subject to Possible Qualification Concerning the Number of Stations in the Market), UHF Stations Only, or Should Some Other Limitation Be Imposed? 49. Subscription television should be permitted over any qualified station, whether VHF or UHF. Here again, it seems likely that the dictates of competition in the particular market will answer the question which the Commission poses. In cities with *three or more VHF stations, it is likely that subscription operations will be espoused only by the independents, be they VHF or UHF. And the com- munities in which VHF independents might use subscription service would be minimal since only a few of the cities in the top one hundred markets have more than three VHF channels allocated. Thus, it is probable that the numerous UHF `stations and allocations~ in the top PAGENO="0707" 703 15 one hundred markets will provide the likely outlets for subscription television. There would appear to be no sound reason, however, for foreclosing subscription operations by VHF facilities in the limited number of markets where such usage might be made. (4) Should More Than One Station Be Permitted To Engage in Subscrip.. tion Television in Any Market and, if So, Should These Stations Be Permitted To Transmit Subscription Television Simultaneously? 50. Subscription television will not necessarily mean less "free" television. As we have indicated, subscription television has the potential for creating new television stations and causing marginal ones to become viable. Moreover, it will encourage and support UHF growth and development. Competition as between subscription stations in a given market should result in improved program service for the public not only from the subscription television stations but from the conventional stations as well. Both Telemeter and Zenith have pointed out the importance of encouraging competition in the subscription television field. But the decision as to whether to allow multiple station subscription television operations in a given market is a complex one, and should be decided on a case-by-case basis-at least until some pattern emerges. 51. On the other hand, closed-circuit subscription television systems do not use up allocations, and are clearly an additive service, so there is no reason for restricting them in any event. (5) Should More Than One Subscription Television Technical System Be Authorized and, if So, Should More Than One Technical System Be Authorized To Operate in Any One Community? 52. Telemeter believes that it is premature to authorize one system. If this were a purely technical question, the answer might be simple. However, the question of whether to allow one technical system at this time goes to the heart of the commercial organization of subscription television. The advantage which has been given for fixing on one technical system is that the public would be required to have only one decoder in each home. But who is to control this decoder'? If it is to be a broadcaster, how is he to be compelled to encourage the competitive programming of another broadcaster? If it is not to be a broadcaster, how are we to expect a businessman to invest in tens of thousands of decoders without any guarantee that anyone will program for them or broadcast to them? 53. As we have attempted to point out in earlier portions of these comments, Telemeter believes that broadcasters, decoder owners and PAGENO="0708" .704 16 maintainers, and programmers will have to be one and the same in the initial stages of this industry. Moreover, it is probable, at the outset, that exclusive franchise arrangements will be necessary to induce investment by the subscription television pioneer. Tinder these circumstances, the only way for there to be competition is for the government to authorize as many systems as meet general standards *of good practice. Dual standards in other fields have been successful. Indeed, in the automotive field, Buick, Oldsmobile and Pontiac, all made by General Motors, compete with one another while, in the detergent field, soap manufacturers successfully market commonly- owned competing products. 54. Furthermore, from the point of view of the development of the subscription television technology, the effect of picking one standard at this time will be to stifle invention and eliminate com- petition.' There is much room for improvement in the "hardware" of subscription television as well as in system methods. If a single standard is adopted, the incentive for further improvement will be lessened. If more than one technical system is permitted, inventive ingenuity, in the American tradition, will "build a better mouse trap" under free competition-all to the benefit of the consumer and the viewing public. Finally, because the adoption of a single standard would eliminate *competition, it would prematurely necessitate a plethora of rate regulations, patent license regulations, and similar burdens all of which would tend to stifle an as yet non-existent industry. (6) Should a Party Manufacturing or Selling Equipment, or a Holder of a Subscription Television Franchise in More Than One Market, Be Per- mitted To Engage in the Procurement and Supply of Programs to Tele- vision Stations for Subscription Use? 55. As we have indicated above, if the subscription television operator cannot engage in programming activities himself, the chances for initial success of subscription television will be seriously reduced. Those in the normal ohaunels of distribution of entertainment have obvious motives for not dealing with the subscription television entrepreneur as the experience in Hartford has clearly shown (where the threat of lawsuits was required to obtain certain programming). The subscription television operator `should, therefore, be free to develop and procure programming from whatever source `available. But Telemeter agrees with the Oommission in its proposed rule that, 1 The Zenith equipment of four years ago and the Telemeter equipment of five years ago have been improved. It is only logical to expect that further technological improvements will occur in succeeding years. PAGENO="0709" 705 17 within this broad frame of reference, no restrictive agreements in this field he permitted. 56. On the other hand, Telemeter emphatically disagrees with the petitioner who would preclude exclusive franchise agreements between Teleme;ter and television station licensees. As we have indicated previously, an exclusive franchise may well be the only vehicle for instituting service in the early days of the subscription television industry. Moreover, at least in the formative stages of the industry, the subscription franchisee will need help and assistance in program procurement. The individual franchisee in many, if not most, cases will not have adequate financial or bargaining strength to obtain the type of box-office attractions so necessary for the success of a subscription operation. It may well be that the help of Telemeter will be required to obtain such programming fare as major sporting events or Broadway shows. The experiments to date prove that a subscription system is not an easy business to start. For these reasons Telemeter urges that, at the outset at least, there should be no limita- tions placed upon the system proponent, such a Telemeter, or upon the franchises in terms of their ability to produce, acquire, obtain or supply subscription television programming. (7) What Requirements Should Be Imposed Upon Subscription Licensees To Assure Licensee Control? 57. Telemeter urges that the rules designed to assure licensee control over subscription programming be no more restrictive than necessary to assure *that the licensee retains `the power to reject programs which it deems unsuitable and to substitute other programs, whether subscription or conventional, which it deems of greater public interest. Telemeter believes `that the rules proposed by the Com- mission in Section 73.642(e) of Appendix C to t'he Notice would assure `adequate licensee control. It would support `the proposed rules provided it is made clear that they do not preclude exclusive franchise arrangement's and do not impair the contractual arrangements there- under whereby the franchisee undertakes to broadcast a minimum of subscription programs within specified time segments. (8) The Nature of the Technical Rules That Should Be Adopted. 58. As previously asserted, Telemeter urges that subscription service not be limited to `a single technical sys'tem. In its technical comments, ified June 17, 1~166, Telemeter set forth in detail the tech- nical nature of its system. Zenith and other `system proponents have done likewise. Telemeter d'oes not believe that it should undertake PAGENO="0710" 706 18 to draft technical rules designed to accommodate the multiple standards and devices embodied in the differing systems. The rules or technical standards to be adopted by the Commission should be broad and flexible so as to permit the use of all systems seriously advanced. (9) Whether and to What Extent the Commission Should Regulate the Charges, Terms and Conditions Pursuant to Which Subscription Tele- vision Service Will Be Offered the Public? 59. In its previous comments, Telemeter has urged that the Com- mission has no authority over the prices of subscription television programs. Similarly, and particularly since the Commission has determined that subscription television is "broadcasting," it is Telemeter's contention that the Commission has no authority over the price or terms of the service supplied to the subscriber.1 Further- more, since subscription television furnishes "box-office" attractions, it should enjoy the same freedom in pricing these attractions that other "box-office" entrepreneurs enjoy. As a practical and legal matter, it is difficult to envision any other arrangement. 60. We might add in this regard that Telemeter has consistently opposed the broadcast of commercials during subscription programs (and such a restriction is contained in the Telemeter franchise agree- ment) other than the announcements of available subscription programs and rates, similar *to trailers of coming attractions shown in motion picture theatres. (10) Whether a Subscription Licensee Should Be Required To Furnish Service to All Persons Within Its Service Area Who Desire It? 61. Telemeter agrees that all persons desiring subscription service should receive it, provided `only that the franchisee must be free to terminate service for non-payment of subscription fees or for irresponsible or unauthorized damage to or use of the decoder equip- ment leased to the subscriber. Telemeter would, of course, want the right to extend credit to certain customers who will be equipped with credit units, and to equip customers who do not qualify for credit operation with cash units. 1 Rate regulation and the prescription of terms of service have traditionally and legally been limited to the common carrier and public utility fields. Sec Section 3(b) of the Com- munications Act of 11)34, as amended, to the effect that broadcasting shall not be deemed common carriage. PAGENO="0711" 707 19 (11) Should Requirements Be Imposed To Insure That the Public Would Not Be Adversely Affected by Obsolescence of Subscription Television Equipment or Cessation of Service and Should the Commission Require That Such Equipment Be Leased Rather Than Sold? 62. Telemeter proposes that decoders be placed in the homes of the public for a small monthly maintenance fee. The public should not be required to invest in this equipment. In this manner the public will not be adversely affected by obsolescence of equipment, nor will an individual subscriber suffer any penalty should he decide to change from one subscription television company to another. (12) What Restrictions Should Be Adopted Concerning the Nature of Ar- rangements Among Patent Holders, Patent Licensees, Franchise Hold- ers, and Television Station Licensees, Concerning Such Matters as Whether and Under What Terms and Conditions, Patents on Any Par- ticular Subscription Television System Will Be Required To Be Made Available to Franchise Holders and Station Licensees, and Whether Stations Engaged in Subscription Television Should Be Permitted To Enter Into Contracts That Would Give Them Exclusive Rights To Use a System in a Particular Community? 63. Telemeter has already indicated its position on the question of exclusive franchises. As previously stated, it is premature for the Commission to decide at this point how subscription television will organize itself from a business and franchise standpoint. The ç only systems which have existed in this hemisphere have been franchise operations in which franchise holders were also patent ~ licensees, broadcasters, and programmers. Regulation of the type required by a mature broadcast industry with a developed form should not be applied to an as yet nonexistent subscription television industry. Instead, the industry should be allowed freedom `of growth, as we have stated above, and at `an appropriate time, regulations may be formulated, as required, consistent with the form the industry has t'aken and the dictates of fairness and service to the public. `64. If the Commission adopts Telemeter's proposal not to limit subscription television to a single `technical standard or `system, it is possible that some cross-licensing and pooling of patents may `occur. Moreover, some system propon'ents may engage in manufacturing while `others may no:t. For these reasons, and until the shape `of the industry becomes more definite, it is impractical to attempt to become specific about patent licensing terms and conditions. PAGENO="0712" 708 20 (13) Whether Means Should Be Provided To Insure That Subscription Tele- vision Will Be Available to All Eligible Stations on a Non-Discrimina- tory Basis? 65. Whether or not subscription television authorizations should be made `available to all stations, VHF and UHF, or all stations in a given market, has been the subject of comment earlier in this document. Assuming that the Commission establishes a class of eligible stations, be it all *or a more limited group, it is Telemeter's belief that sub- scription service should be available to all within the eligible class on a non-discriminatory basis, subject only to the ability of the system operator to reach satisfactory franchise and business arrange- ments with the station. Just as a network may establish an exclusive affiliation arrangement with one of several stations in a market, dependent upon the business judgment of t'he network and `the `affiliate, so should a subscription system operator be free to negotiate with one of several stati'ons upon an exclusive franchise basis if considered desirable. (14) Should a Limitation Be Placed on the Type of Programming Which Subscription Television Operations May Broadcast and, if So, What That Limitation Should Be and Whether Applications for Subscrip- tion Authorizations Should Be Required To Make a Showing of How Their Programming Will Differ From Conventional Programming? 66. Those who have opposed subscription `television have created the bugaboo that `subscription television will destroy "free" television by "syphoning off" the actors, directors, writers, and other con- tributors to the program product. The simplest quantitative analysis of `the situation shows the absurdity of th'ese fears. With less `than five percent of viewing time going to subscription television in the experiments conducted to date, it is hardly likely that a substantial, or even noticeable, quantity of the available talent will be "syphoned off." 67. Subscription television is not a different variety Øf commercial television. It is a theatre in the home, drawing its talent from that currently involved in box~office attractions of every kind. Its programs are exhibited several times, unlike commercial programs which are exhibited once within a reasonable period of `time. Hence it requires an even smaller fraction of entertainment `time than might at first be supposed. Subscription television must essentially supply quality, rather than quantity programming. As existing subscription tele- vision experiments have illustrated, a major portion of subscription programming will be drawn from box-office attractions such as Broad- PAGENO="0713" 709 21 way plays, operas and revues, which are not now available to more than a small minority of the population. 68. Moreover, if subscription television can offer the public cultural programs of an uplifting quality in which talented actors do not have to step out of their roles in order to advertise toilet water and deodorants, it should be permitted to commit this "crime." 69. It must be said too, that the fact exists that there has been a "syphoning" of all kinds of talent away from the quality media such as the Broadway stage, into the quantity medium of commercial television. The result of this "syphoning" process is that talented writers and artists of every kind, have diverted their talents from the production of entertainment of a high, cultural level, into the pro- duction of vast quantities of endlessly repetitive situation comedies and soap-opera dramas in addition to other forms of mediocrity. Subscription television will provide the opportunity for talented people to work once again upon the creation of entertainment of superior quality. From the point of view of the public, subscription television will allow them to enjoy this superior programming at prices they can afford. 70. In this connection, Telemeter wishes to quote from its sub- mission of May 215, 1965, wherein it stated: "The average motion picture today is seen by only 5% of the population, according to industry sources. A major picture is seen by only 8% or, in rare instances, 10% of the population. A large percentage of the over 90 percent that does not attend movies would like to but does not because of inconvenience to the family or because of cost. "A young couple with children are faced with a cost of $4 to $5 to go out to a movie-in addition to the expense of a baby sitter-much `as they would like to see current pictures. They could afford to pay $1 or $1.50 to see these movies in their home. This does not mean, however, that those able and who can afford a night out at the motion picture theatre will not continue to do so. Nor does it mean that subscribers of Telemeter will not continue to spend five or `six nights a week watching commercial television. "A Broadway show that runs a whole ye'ar in a 1,200-seat theatre is seen by 499,200 persons, if every performance is sold out. A large percentage of the 9,500,000 inhabitants of the New York area and millions of others throughout the U. S. would like *to see that show. They cannot for either of two reasons: price or distance from Broadway. PAGENO="0714" 710 22 "Telemeter~s THEATRE IN THE HOME would enable this huge segment of the populace to buy such entertainment at home and at a price it could well afford, whether in Miami, Florida, or Portland, Ore. Telemeter may not satisfy those who prefer and can afford to see a Broadway show in person and they would continue to frequent the theatre. "In addition to providing a valuable service to the public, Telemeter could well be a great stimulant to theatrical producers, ifim producers and those presenting cultural attractions that require public support to survive." 71. In this regard, however, Telemeter submits that from a regulatory standpoint the Commission does not have the authority to regulate the content of subscription programming. Telemeter does not wish to belabor this point but believes that brief remarks are in order based principally upon the Commission's determination, as reflected in the notice herein, that subscription television is appro- priately considered a broadcast service. 72. Section 326 of the Oommunications Act of 134, as amended, provides that the `Commission has no censorship powers in connection with radio broadcasting. In this respect the Act only restate's, to an extent, an existing and immutable constitutional concept. The Supreme Court has made clear that radio and television are entitled to the protection of the First Amendment `*s guarantees of freedom of `speech and freedom `of the press. United States v. Paramount Pictures, Inc., 334 U.S. 131; Estes v. Teaas, 381 U.S. 532. T'he broadcaster, there- fore, is subject to no greater encroachment in this respect than is the newspaper editorialist or the public orator. 73. Nothing could present a clearer case `of censorship `and abridg- ment of the broadcaster's constitutionally guaranteed freedom, we submit, than governmental proscription of certain program's or the direction `that certain programs or types `of programs be carried. Because of the practicalities of the matter, we need n'ot develop the position further. 74. Without conceding the Commission's jurisdiction to regulate the program content of `subscription programming, as `set forth above, Telemeter nevertheless recognizes the desirability of `a `broad regula- tion which would serve `to cast subscription television into the mold in which it is most likely to develop and succeed if for no other reason than to placate the alleged fears of the medium's `opponents. As `set forth in its `statement in this Docket filed May 25, 165, and already reiterated herein, Telemeter believes that because of its nature, sub- PAGENO="0715" 711 23 scription television programming will be of the box-office nature rather than a duplication of conventional television programming. Therefore, any rule, regulation or policy announcement promulgating a requirement that subscription television not duplicate conventional programming would probably have little influence on the actual program output of subscription television. 75. To assure all interested persons who have exhibited concern in the past, therefore, Telemeter agrees that it may be desirable for the `Commission to make clear that subscription television is not to duplicate conventional programming but rather is to be a theatre- in-the-home type operation providing box-office attractions, such as current motion pictures, major sports events otherwise deleted from commercial television programs, theatrical performances of dramatic and musical offerings, operas, operettas, ballets, recital's, and similar presentations, the precise form and content thereof to be determined by the subscription television licensee or entrepreneur and the viewing public. This differ's from existing commercial television programming which is basically dictated by the networks and sponsors with little regard for viewer preferences. (15) Whether Various Sections of the Act, Rules and Policies, e.g., the "Fairness Doctrine," Should Be Modified as They Affect Subscription Television? 76. As illustrated in the preceding discussion, by its nature, sub- scription television programming will develop as the box-office attraction type of offering, including current motion pictures, operas, Broadway plays, otherwise blacked-out sporting eyents, and the like. In this type of programming, the chance' of the necessity for the application of such policies as the "fairness doctrine" is somewhat remote. To the extent that programming is presented which would bring such policies or rules into play, however, Telemeter see's no reason why they should not apply to subscription programming. It would appear, on the other hand, that no new safeguards, rules or regulations would be necessary to assure the proper discharge `of the subscription licensee `s responsibilities in these areas.' The *Oommis- sion's existing powers have been adequate with respect to conventional programming and `should remain adequate to the task of `subscription television. 1 During the course of Telemeter's Toronto operation, political candidates for public office were presented to viewers, without charge to the candidate or the subscriber, via the closed circuit facilities under policies in accord with the political, broadcast provisions of the Communications Act and the "fairness doctrine." PAGENO="0716" 712 24 VII. RESPONSE TO NOTICE OF INQUIRY REGARDING WIRED SUBSCRIPTION TELEVISION 77. The Commission's Notice of Inquiry indicates (par. 48) that it will take notice of the comments ified in `the inquiry in Docket No. 15971 pertaining t'o subscription television as related to CATV. Telemeter, in its Reply Comments in that Docket as well as in its Statement ified May 25, 1965, in the instant proceeding (pp. 26-27), made the contention that the Commission ha's no `statutory authority to regulate subscription television by wire or cable. As we there set forth: "In its comments filed in 1955, Telemeter contended that since subscription television over the air falls within the definition of broadcasting, a term mutually exclusive with the definition of common carrier service, the Commission obviously doe's not have Title II regulatory authority over subscription TV. "Cable subscription TV, of course, would no't fall within the definition of `broadcasting,' for the simple reasons that it makes no use of the airwaves and that the bridging of the geographic gap between the subscribers' sets and the subscription television studio would not involve the radiati.on of electro-magnetic energy. Nor would this difference in the technique of bringing subscrip~ tion television signals to the subscribers' `sets make the cable subscription television operator a common carrier. WSTV, 1Gw. v. Fortnightly CorporatioGi, 23 RB 184 (1962). In fact, t'he estab- lishment of a cable subscription television `system does not, under existing law, require any authorization from the Commission." 78. Telemeter is aware, of course, of the `Commission's assertion of jurisdiction over non-microwave served C'ATV's and of the pending legislation in C'ongress to support that jurisdiction. In the case `of the closed-circuit subscription operation by wire, however, which involves no use of frequency space whatsoever, and in the case of the CATV system which, itself, originates *subscription television programs (as distinguished from the `off-the-air pick-up or microwave-fed subscrip- tion programs), there `should be no question that no federal regulatory authority exists. 79. Assuming that the Commission's assertion of jurisdiction over CATV "s is affirmed either by the Court's or the Congress, Telemeter `s further comments will be directed to those situations where a regulated CATV system either picks up subscription programs off-the-air from the originating station or receives them on its cable system via microwave from the originating station. Under these circumstances and assumptions, response to the `specific inquiries of the Commission is made. PAGENO="0717" 713 25 (1) Would It Be Necessary To Have Built-in Antennas In the Decorders Attached to Sets of Subscribers? 80. It would not be necessary to have built-in antennas in this case. The coded transmission could be delivered via the CATV system in the same manner that free broadcasts by the same station would be delivered. Subscribers would have decoders connected between the OATV cables and their television sets, and the operation would be exactly the same as has been described earlier. (2) Would a Single Decoder Attached to the Antenna of a CATV Which Delivered the Unscrambled Signal to Subscribers Suffice? If So, What Arrangements for Collection of Subscription Fees Could Be Made? 81. While it would be possible technically to decode subscription television programs at the input to a CATV system and make some kind of flat-rate arrangement with the CATV operator, this is com- mercially impractical. The suppliers of entertainment of high quality have always preferred to participate in gross receipts via percentage arrangements. Clearly, such an arrangement with a CIATV operator as has been described above, would be commercially impossible. Furthermore, the public has shown a reluctance to pay a flat fee for blocks of entertainment, and such an arrangement implies a flat fee for CATV subscribers. (8) Would the Rules on Carriage of Signals of Local Stations Over CATVs Apply to Carriage of Subscription Programs? 82. it seems logical to suppose that the same rules would apply since, as has been indicated above, broadcast stations in the subscrip- tion television service will probably be required to function as commercial stations about half the time. VIII. ORIGINATION OF SUBSCRIPTION TELEVISION ON CATV 83. Although the Commission has not in this Docket called for specific comments regarding this subject, Telemeter respectfully submits the observations which follow. 84. The origination of subscription television on OATV systems is both technically and commercially feasible. Telemeter has already added three channels of subscription television to an eleven channel television system in an experimental operation in Montreal, Canada. The obvious advantages which may accrue to both CATV and sub- scription television from this `arrangement include the following: (a) Sharing of the cost of transmission facilities by subscription television and CATV. PAGENO="0718" 714 26 (b) The provision at low cost to the public of a purely additive service which takes no spectrum space whatsoever from other uses. (c) The provision of subscription television service at a signifi- cantly low investment above and beyond the already existing invest- ment in CATV plant. 85. The `Commission in Docket No. 15971, has under consideration the question of whether C'ATV systems `should be `allowed to originate programming. It is natural to suppose that the question of whether CATV systems should be allowed to originate subscription television programming should be considered in the same context. However, the distinction between the origination of `subscription programming and all other types of programming is so great, that an injustice may be done if the same considerations are applied to both. Therefore, Telemeter urges that the question of allowing CATV systems to originate subscription programming be considered separately in this Docket. 86. The origination of commercial programming on C'ATV systems presents obvious competitive problems, vis-a-vis commercial broadcast programming. The effect of such `origination upon the continued existence of local broadcast stations would therefore be a prime con- `sideration in any determination to be made. *But the'se considerations do not operate in the case of subscription originations because as experience in experimental operations has shown, the viewing public devotes only about five percent `of its viewing time to subscription television. Therefore, subscription television is not really competitive, viewer-wise, with commercial television, either closed~circuit or broad- cast. `Subscription television is a new entertainment medium which is not truly competitive with advertiser-sponsored mass media. 87. The' opponents of subscription television have, of course, attempted to prevent its origination in any form. `They have `objected to subscription television via CATV because this might result in quality program's to the public at lower cost (the cable facilities being shared with the C'ATV operation). The `assumption here is that `somehow it is illegal to supply a quality product at lower cost! The opponents have also attempted t'o stifle' subscription television on CATV because this might be the "back door" to the general institution `of subscription television. If the public is going to receive the benefit of programming of superi'or quality at lower prices, it does not seem germane whether it enters by the front door or the back door. If, however, `the opponents of subscription television would prefer, Telemeter would be happy to institute subscription television at the front door, as soon as the originators of `these phra'ses explain what that is. PAGENO="0719" 715 27 IX. CONCLUSION 88. In conclusion, Telemeter urges that the Commission regularize subscription television operations forthwith by the adoption `of rules authorizing `such service. Eleven years have elapsed since the institu- tion of this Docket. Unlike most proposals, subscription television has not only undergone extensive comment and study but actual experimentation in the market place. These experiments have demon- strated an acceptance by the public of the concept without harm to the conventional television media. 89. The subscription television industry is ready and waiting to provide superior programming in the public interest. Its opportunity to do so should no longer be delayed. WHEREFORE, Telemeter urges the adoption of rules authorizing the regular use of subscription television consistent with the suggestions contained in these and its earlier comments. Respectfully submitted, INTERNATIONAL TELEMETER CORPORATION PAUL A. PORTER REED MIU4ER ARNOLD & PoRTER 1229 19th Street, N.W. Washington, D. C. 20036 Counsel for International Telemeter Corporation October 10, 1966 PAGENO="0720" 716 A~IERICAN CIVIL LIBERTIES UNION, Washington, D.C., October 19, 1967. Hon. HARLEY 0. STAGGERS, Chairman, Interstate and Foreign Commerce Committee, U.S. House of Repre- sentatives, Rayburn House Office Building, Washington, D.C. DEAR MR. CHAIRMAN: I am enclosing copies of comments of the American Civil Liberties Union which were filed with the Federal Communications Com- mission concerning proposals for Subscription TV Service. I believe the comments are self-explanatory, and I would appreciate it if they could be included in the record of the hearings on Subscription TV recently con- ducted by your Committee. Sincerely yours, LAWRENCE SPEISER, Director, Washington Office. Before the Federal Communications Commission Washington, D.C. Docket No. 11279 IN THE MATTER OF AMENDMENT OF PART 73 OF THE COMMISSION'S RULES ANI) REGULATIONS (RADIO-BROADCAST SERVICE) To PROVIDE FOR SUBSCRIPTION TV SERVICE Comments of the American Civil Liberties Union, February 8, 1967-Supplement to the October 7, 1966 Comments INTRODUCTION The American Civil Liberties Union has concluded that subscription or pay- by-the-program television (herein termed STV) offers a means of increasing diversity In broadcasting under regulations Which insure civil liberties objectives. It was not possible for the ACLU to deal with all of the many and inter-related questions raised by the FCC's "Further Notice" in the time allotted for com- ments. In its "Comments" of October 7, 1966, the ACLU therefore stated e intend to present supplementary comment on the broader issues noted above, hopefully by January 30, 1967." In order to place these supplementary comments in context with ACLU's orig- inal comments, as Well as avoid the need to make separate references to them, they are excerpted in the following section. EXCERPTS FROM ACLU COMMENTS OF OCTOBER 7, 1966 we regard diversity1 of expression as an application of the First Amend- ment's free speech guarantees. "We wish to emphasize that our criteria and objectives for STV, whether over- the-air or cable, are that it meets the requirement of diversity preferably through the self-regulatory effects of free and fair competition, but where competition is not, or cannot be, effective, that the government provide equally effective regula- tion including through implementation, where necessary, of the Commission's fairness doctrine and Section 315 of the Federal Communications law. . "The ACLU believes that STV . . . cannot be regarded as simply a `bene- ficial supplement' (in the language of the Commission's notice) to present over- the-air broadcasting, but must be considered to be an indepeudent system of public communications which demands appraisal of its Inherent capabilities. potentials, and regulatory requirements in the public interest. A wholly new relationship between the ptlblic and the producer of the program or service will be created when the public makes a direct payment. "On the premise that (1) STV can be a system for presenting new and different programming, and (2) open competition will enhance diversity, the Civil Liberties Union favors no restriction as to permitting STV to function in all markets, re- gardless of the number of television stations therein. - . consistent with these objectives of fostering STV as a resource for diversity, the ACLU believes that the public will be best served by separation ~ Italic added tbroug~sout e;cerpt. PAGENO="0721" 717 of the two systems, so that both subscription and free (commercially sponsored) television will have the greatest freedom and scope for development of their individual potentials. We therefore recommend that two categories of commercial licenses be established. One category would include commercial licenses author- ized, as at present, to broadcast unscrambled sustaining and commercially sponsored programs. The second-and new-category would include commercial licensees authorized to broadcast subscription and sustaining programs only~ but not unscrambled commercially sponsored programs. Subscription licensees would have no limitations on the proportion or amount of subscription time. ". . . no limitation should be imposed on eligibility of STV for the various categories of stations." (FCC Question) "Should subscription television be permitted over more than one station in a community, and if so, should such stations be permitted to broad- cast subscription programs simultaneously ?" (ACLU reply) "Here, again, the reliance on open competition as fostering diversity causes us to conclude in the affirmative. "The allowance of multiple [technical STV} systems would have a deleterious effect on diversity. "The ACLTJ believes that there should `be complete divorcement between the sources of STV programming and all the other facets of ~TV operation. This is based on our firm belief that diversity is (a) limited by monopolizing pro- gramming in the hands of those who control the means of distribution, and is (b) broadened by developing new entrepreneurs, hopefully with new ideas and approaches to programming. ". . . we oppose any limitation on types of programming presented by ~TV. We find particularly offensive any action by the Commission to dictate directly the specific kinds of programs that may be seen on STV as unwarranted govern- ment intrusion into program content, and a form of censorship." SUPPLnMENTARY C0MM~NPS Shibscription television by wire or cable ACLTJ believes that the initial regulations to establish STV broadcasting should require that STV be made available to the entire population served by SPY carrier stations, both by cable and over-the-air. ACLTJ supported the FCC's responsibility to regulate CAPV, and endorsed the requirement that CATV sys- tems must carry the signals of all local stations. This regulation promotes diversity and should not now be modified to exempt stations that are coded for SPY purposes. Consistent with these principles, all homes served by cable and CATY must have the right to become individual STV subscribers. If the FCC should fall to require that cable and CATV systems carry all STY stations, millions of families could arbitrarily be deprived of "free" programs, without the compensating right to subscribe to the STY services which replaced them. ACLU has noted that leading authorities have predicted startling increases in the diversity and usefulness of public electronic communications by cable sys- tems of distribution which can provide a greater number of channels, higher capacities for new types of services, and eventually multiply choices by the two- way "telephone exchange" principle. Such forecasts have recently been made by such responsible leaders as General David Sarnoff and Dr. Joseph Charyk. In 1963, the Stanford Research Institute predicted that 15 million families might subscribe to pay television by the mid-1970's, of whom 10 million, or two-thirds, would be connected by cable. It therefore seems essential that the basic regulatory structure of STY, from the beginning, incorporate provisions for integration of cable with on-the-air distribution in the interest of maximum diversity. Even now, new types of STV services can be provided on cable channels which are not required for local TV stations. Regulation of STV systems In its October 7, 1966 comments, the ACLU pointed out that direct public pay- inent creates a new type of relationship between the audience and the producers and distributors of program services, arid called for "divorcement between the sources of STV programming and all other facets of SPV operation." Consistent with this objective ACLU re-affirms its belief that all systems of interconnection and networks, whether cable, microwave, or satellite, be directly regulated. Since the public will be making direct payments to STY systems which will be local monopolies, the FCC should carry out its responsibility under Section 1 PAGENO="0722" 718 of the Act, to regulate directly, rather than through station licensees, "the adequacy of facilities and reasonableness of charges." Eligibility of station licensees for $TV Although the FCC notice is silent on thIs question, ACLTJ believes it to be in the public interest to permit educational, municipal, and non-profit stations to employ STY for portions of their broadcasting schedules. STY programming by such stations could be expected to add to the variety of services available to the public, as well as contribute to their financial self-support. COLORADO TRANSLATOR AssocIATIoN, Leadville, Cob., October 5, 1967. Hon. JOHN DINGELL, House of Representatives, Washington, D.C. Mx DEAR Mn. DINGELL: We are enclosing a copy of our comments to the FCC regarding Subscription Television. We fully agree with you on your anti-pay TV bill. We feel the FCC should have more important things to do than to succumb to the pressures of the few who will gain from such a system. We amy need bet- ter TV in the country but we need it for everyone, not just the ones that can pay for it. Pay TV is not the way to better TV for everyone. We see no way that siphoning of programming can be prevented in the long run. Sincerely yours, A. K. SMITH, President. COLORADO TRANSLATOR ASSOCIATION, Leadville, Cob., ~8epternber 27, 1967. Docket No. 11279 In the Matter of Amendment of Part 73 of the Commission Rules and Regulations (Radio Broadcast Services) to Provide for Subscription Television Service: The Colorado Translator Association is comprised of approximately 60 trans- lator organizations and represents approximately 250,000 translator TV viewers throughout the State of Colorado. Most of these viewers would like good quality. good programmed, multiple signal TV to be extended into their areas. We are interested in improvement and expansion of "free" broadcasting. We feel that the rural population of this country should be considered in FCC rule-making and not be forgotten to fend on our own. STV apparently will only be allowed in the top 100 markets and further only in areas having five or more licensed stations. In both the case of CATV importing distance signals and in STY this can only have the effect of decrease or elimi- nating the possibility of a greater number of licensed stations in these areas. Further, this will then eliminate the possibility of a greater number of stations for the remainder of the outlying communities. We, therefore, stand against any form of STY whether by over-the-air meth- ods or by wire. There is just so much programming available to place on TV. Any amount of siphoning will be detrimental to all television now received. It is stated that 85% of programming will be newer movies and combined with sports will take up a maximum of 90% of viewing. If it is felt that the new movies are such a boon to better programming, why is it only considered for a small portion of the popu- lation of the country? If this is the area that is to swell the knowledge of the people and give them the better things of life, maybe it should be considered to allow these on free TV so all could enjoy their benefits. The cultural benefits to be derived from such a system are just about nil. These can be put on ETV just as well where everyone can benefit by them. We see no need for such a system nor any warrant for such a system. The only people who will benefit by this will be the suppliers of the equipment and the col- lectors of the dollars from the sale to the chosen few who can afford it. With just a small percent of the population subscribing to STV there will be enough money involved to outbid any free broadcasting system and gradually siphon all the lucrative programs so that only a few will see them. PAGENO="0723" 719 Apparently, the FCC has been sold a bill of goods in this matter. We think that California in its vote against it showed the will of the people even though It was declared illegal. We are sorry that we can give no constructive criticism on this proposal rule- making because we feel that any part of it is destructive to the TV viewing of the country as a whole. Yours very truly, A. K. SMITH, Pre8ident. WGN CONTINENTAL BROADCASTING Co., UMeago, Iii., October 10, 1967. Hon. TORBERT H. MACDONALD, Chairman, Subcommittee on Comuwnications and Power, House Interstate and Foreign Commerce Committee, U.S. House of' Representatives, Washing- ton, D.C. M~ DEAR CHAIRMAN MACDONALD: As President of the corporate licensees of television stations WGN-TV, Chicago, Illinois, KDAL-TV, Duluth, Minnesota, and KWGN-TV, Denver, Colorado, I am writing in support of H.R. 1243~, a bill sponsored by the Honorable John D. Dingell of Michigan. This bill would pro- hibit the Federal Communications Commission from authorizing over-Ithe-air pay television. The proposed Fourth Report and Order adopted by the Commission's Subscrip- tion Television Committee would authorize over-the-air pay television on a per- manent basis. Such an action by the Commission would run wholly counter to the scope of its statutory jurisdiction and the will of the Congress. The Commerce Committees of both houses of Congress have expressed their vieW~ either ques- tioning the jurisdiction of the Commission to license pay television operations or stating that such operations should not be authorized by the Commission with- out specific authorization by law. The jurisdiction of the Commission to act in this area is at best questionable and is an additional reason why it should be barred from proceeding further with the permanent establishment of pay television without specific Congressional approval. If the Commission were to establish pay television, the rates of this new pay- as-you-go service would have to be regulated to protect the public. However, if pay television is "broadcasting," as the Commission has found, there is no authority in the Communicatiotis Act to regulate the rates charged for pay television. Since the Commission's Subscription Television Committee ad- mits that its "authority to regulate rates for the new service--a broadcast serv- ice-is open to question," the Commission should get Congressional guidance before proceeding any further. Pay television is, by any standards, a basic modification of the American sys- tem of free broadcasting and consequently, any decision on the authorization of such a service should originate with the Congress and not the Commission Oh- vioulsly, the Commission should not be allowed to establish on a permanent basis a service for which there has been neither a public demand nor an indication of public benefit. It has never been established that (1) there is either a substantial need or public demand for pay television or (2) that pay television would pro- vide a meaningful supplement to existing free television broadcasting. The contention that subscription television will provide a beneficial supplement to existing television service is not supported by the record. Ninety-one percent of the programming ultimately provided in the Hartford experiment consisted of sports events and feature films, a current staple of conventional television broadcasts. Even the Commission's Subscription Television Committee noted in its proposed Report that".. . . the major part of the programming as opponents had argued, will be of a kind that will appeal to a mass audience." Thus, in reality, pay television had little to offer that has viewer appeal which is not now offered by free television or which cannot be offered by free tele- vision or public television. We have faith in the capacity of our nation's free television system to meet and grow with the public's changing needs, tastes and interests. This system pre- sently offers and will continue to offer the best way of serving the public. Pay television poses a grave threat to free television as we know it today. If Con- gress allows the Commission to establish pay television, the ability of free tele~ vision to provide effective service to the entire public (including those unable to pay for service) would be drastically curtailed. Indeed, the public, those of means PAGENO="0724" 720 and those without, would be forced to pay for that which they now receive free of charge. For these reasons, we strongly support the enactment of H.R. 12435. We respectfully request that this statement be made a part of the record of your Subcommittee's hearing on pay television. Respectfully submitted. WARD L. QUAAL, Presi&~nt. AMERICAN FARM BUREAU FEDERATION, Washington, D.C., October 17, 1967. Hon. TORBERT H. MACDONALD, Chairman, Power and Commanieations E~ubcommittee, Interstate and Foreign Commerce Committee, UJ~. base of Representatives, Washington, D.C. DEAR CONGRESSMAN MACDONALD: The American Farm Bureau Federation has followed with great interest the hearing conducted by the Power and Commu- nications Subcommittee relative to subscription television. Farm Bureau Is com- posed of more- than 1,700,000 dues-paying farm families in more than 2,700 County Farm Bureaus in 49 states and Puerto Rico. Our interest in this matter is predicated on the importance of television to rural America. In addition to providing entertainment, television has become a working tool for many farm families who depend upon it as a source of up-to- date weather and market reports and also information of a technical nature con- cerning cultural and marketing practices essential for efficient and profitable farming operations. Consequently, the American Farm Bureau Federation for many years has maintained a firm policy position on broadcasting which, in essence, calls upon the Congress and the Federal Communications Commission to take such steps as may be required to assure rural residents the best possible radio and television service consistent with technological developments and within the framework of the American private, competitive enterprise system. Our most recent policy statement dealing with radio and televisIon broadcasting, adopted by the voting delegates to the 1900 annual meeting states, in part: "Adequate daytime and nighttime radio and television `service should be avail- able to farm and rural families in all areas of the nation. Neither Congress nor the Federal Communications Commission should take action to impair existing service in those areas where it is adequate. In cases where broadcasting oppor- tunities become available, we favor allocations to rural areas not now receiving adequate service. "We encourage broadcasters to use their franchises in the public interest and to serve adequately the interests of rural families. . . ." Although this policy statement does not deal specifically with what generally is known as "pay television," it leaves no doubt that Farm Bureau members favor only those governmental actions or utilization of new techniques which will improve-rather than impair-present service to rural areas. We recognize that current proposals for authorization of a subscription tele- vision system at this time would be applicable only to those centers of population which have at least five television broadcasting facilities, Including the one which might be converted to a pay broadcasting basis. On the surface, it might appear that this limitation would not involve stations now serving rural areas and, therefore, would not substantially affect rural viewers. Although the effect on stations serving rural viewers might be inconsequential at the outset, the long- range results would be highly significant. We are concerned in two respects that subscription telecasting, regardless of the degree to which it is limited initially, in the long run will tend to erode the current system of commercial television. First, any alteration of the present com- mercial television system which requires allocation of one or more of the limited number of channels for SPY use obviously would narrow the total scope of tele- casting. The public, including rural residents, would be denied access to the channels so allocated either for existing commercial usage or for expanded service. Second, the erosion of total service doubtless would extend also to the quality of programming. With subscription service in existence, it Is most likely that some of the most popular-and most expensive-productions now made available by commercial sponsors would shift to a subscription basis. In any event, top- flight talent-writers, producers, and entertainers-certainly would tend to be PAGENO="0725" .~21 drawn to the STV productions. Also it appears unrealistic to assume that most major sports events of nationwide interest would not be shifted to a subscription basis as quickly as the proposed FCC ruling would permit4 It is the sincere desire of Farm Bureau that new techniques be applied to broadcasting whenever those techniques will improve the service now available to farmers and residents of small towns in rural areas. We do not favor changes in the present broadcasting practices which will reduce or impair this service. We respectfully recommend that you and Members of the Subcommittee con- sider carefully the effect upon service available to rural America of any altera- tion in the present system of broadcasting. It is our firm belief that decisions of such far-reaching significance as authorization of a system of subscription tele- vision necessarily must rest solely with the Congress. We request that this letter be made a part of the hearing record. Sincerely, JOHN C. LYNN, Legislative Director. B. F. HUTTON & Co., Ixc., Los Angeles, Calif., september15, 1967. Hon. TORBERT MACDONALD, House of Representatives, Washington, D.C. DEAR MR. MACDONALD: In view of your interest in pay television, I am enclos- ing a copy of my recent radio broadcast on the subject. If your committee should hold public hearings, I would appreciate an opportu- nity to appear as an informed witness on behalf of the poor, long-forgotten pub- lic. Very truly yours, ALLAN MACDOUGALL, Jr., West Coast Research. LABOR DAY BROADCAsT, SEPTEMBER 4TH 19437 Telephone rings . . . girl's voice: Good morning, B. F. Hutton and Company. Good morning, Charles Stone speaking for B. F. Hutton . . . In observance of Labor Day, all major stock exchanges are closed today, and instead of the usual Business News, B. F. Hutton & Company brings you a special `transcribed program prepared by Allan MacDougall, Jr., of our West Coast Research De- partment. Some time ago we devoted two of our holiday broadcasts to the subject of pay television, and many listeners expressed an interest in our explanation of this controversial but potentially-dynamic new industry. Last July 14th the pay television subcommittee of the Federal Communica- tions Commission issued a report and a second Notice of Proposed Rules-Making which envisage the creation of a national pay television system by the end of 1967 . . . Therefore, this seems an appropriate time to discuss further the poten- tial of pay television, and, specifically, the rules under which the Commission pro- poses to let it operate. First, by way of review, let me explain that our previous broadcast discussed over-the-air pay television, which really bears no relationship to the local ill- fated cable television venture of a company called Subscription TV, Inc. The rules of the Federal Communications Commission are the result of a five- year experiment conducted in Hartford, Conn., by Zenith Radio, its licensee, Teco Inc., and the RKO Division of General Tire. Under this system, the broad- cast station sends out a scrambled television signal. A subscriber leases a decoder which is attached to the antenna terminals of his set. When he wishes to watch a program, he adjusts certain dials on the decoder and the program is then re ceived in the clear. A built-in recording device keeps a record of the programs watched, and the customer is billed only for those programs that he actua]lv dialed for viewing. This all sounds very simple, but setting up the rules for a new type of broad- cast service is very complicated. Furthermore, pay television has been fought at every turn by the theatre interests, who realize what formidable competition it would be for the public's entertainment dollar. In addition, the television net- works, who have prospered under the status quo, have opposed pay television. It has been a shocking lesson in the procedures of bureaucracy and the political power of pressure groups to realize that pay television Ms been tech- PAGENO="0726" 722 iñeally feastthle for iT years ! The first Federal Communications Commission action the subject took place in 1955 with the issuance of a proposed Rules Making, which invited comments to help it deeide if it would be in the public interest to transmit programs paid for on a subscription basis. By 1957, these comments had been received and evaluated, but the F.C.C. stated that no ap- plications could be filed until after adjournment of the 85th Congress, in order to give the legislators an opportunity to consider the matter. This delay on behalf of C¼)ngress lasted until 1959, when the Commissioii said it would accept applications. By 1962, three applications had been filed. Two were granted, one of which was relinquished, and only the Zenith-Teco- RKO team carried on. The experiment ran for three years on station W.H.C.T. in Hartford, Conn., and on the basis of this experiment, Zenith and Teco applied for a nationwide license in 1965. Based on this data, the Commission issued a further notice of proposed rules-making and again invited comments from interested parties. Now, after an interminable preamble of hearings, tests, and allowance of time for Congressional action, the F.C.C. has issued a proposal to allow nation- wide pay television. Further comments are invited until September 15th, as the opponents make a last stand at preventing a new industry from being born. Doesn't it sound to you as if the matter has had a thorough and lengthy- enough discussion? The Federal Communications Commission, like any government agency is obviously not going to let this infant industry establish itself in the market- place under free competitive conditions. Rather, the Commission has severely limited its potential, which is seemingly the main object of the set of rules we will now discuss and comment on. First of all, no commercials are to be allowed on pay television, which is only to be expected. . . .It will be allowed only in large cities which have five licensed stations. This rule is intended to make sure that ample so-called free television is still available. An ultra-high frequency or very-high frequency station carrying pay television in such a five-station market is not limited as to the amount of subscription time it may broadcast; but not more than 90% of is programming shall be utilized for feature films and sports events. This rule is intended to insure that pay television will create other types of programming not now generally available such as plays, opera, ballets, and the like. Only one pay television authorization will be granted per community, but the permittee may use any technically-qualified unscrambling system. All decoders must be leased to protect the consumer from early obsolescence: and all charges, conditions, and terms must be applied uniformly. Any orga- nization receiving a permit must prove it has the financial capability to main- tain operations for at least erie year. These generally mundane rules seem. quite sensible from the point of view of protecting the public with guarantees that it will receive adequate service, reception, and continuity of operation. But in its rules as to programming. the F.C.C. ranges far afield in its efforts to protect the "sacred cow", free television. Let's consider the progamming rules. As to feature films, a pay television sta- tion can show only films within two years of the date of their release to the theatres. Supposedly, this is to protect the consumer from paying to watch an old film. But is this necessary? Certainly an individual is not going to pay to watch a film he can see for free. But even then, many people might consider it with 5O~ to see an old film without the endless commercials. Why shouldn't we have the option of paying not to have commercials? In the field of sports, the regulations really get complicated. Again the period is two years, and no event can be shown en pay television which has been avail- able for free in the last two years. This will insure that events like the World Series, basketball, football, and golf can still be seen on so-called free television. About the only new programs available will be big championship fights, which heretofore have been pre-empted by pay television in the theatres; also those home baseball and football games which have been "blacked out." It is believed that this ruling raises some very touchy legal questions. If organized baseball owns the World Series, and pay television can afford to pay a higher price than com- mercial television, has the Federal Communications Commission the legal au- thority to deprive the owner of selling his property at the best price available? Why didn't the F.C.C. ban theatres from monopolizing prize fights at $10 a person? The one ruling would be just as logical as the other. PAGENO="0727" 723 Finally, in order to protect special high-rating features, such as Bon- anza, Peyton Place, or whatever, pay television is banned from "siphoning" such programs. Actually this is silly, because 2M from one million tele- vision sets would pay for a program of infinitely better quality than the customary weekly series. The unnecessary complexity of these regulations and the 12-year procrasti- nation in authorizing pay television actually provides an ideal case study of the folly of Government interference with the normal free enterprise system. If over-the-air pay television had been promptly authorized, investors would not have lost $22,000,000 in Subscription TV, Inc. Building a cable system did circumvent the F.C.C. and investors realized the fantastic potential of pay television. But where Subscription TV's proponents erred was in underestimating construction costs and the political power of their opponents. The ruling being here discussed consists of 108 closely-written pages; but in reality it misses the entire point. The Federal Communications Commission is concerned with "protecting" free television, but why does a bureaucracy believe that an industry should be protected from competition? Why can't the bureauc- racy let the American people make its own free choice? Pay television or free television should be allowed to stand or fall on its own merits. If pay television provided superior programming and eliminated the commercials to the extent that everybody preferred to watch it, free television would be wiped out. But it would be eliminated by the popular vote of the viewers! On the other hand, if enough people prefer to watch free television, it will continue to prosper. Why does a government agency feel it should "protect" an individual from exercising his own choice? It should be here emphasized that pay television can fail, but at least it should have a chance to compete! In view of the many problems still to be overcome, the political pressures involved, and further possible litigation, nothing in this discussion should be taken as a recommendation concerning the companies mentioned. Copies of this morning's broadcast (written by Allan MacDougall, Jr.) may be obtained by writing to EL F. Hutton and Company, 623 South Spring Street, Los Angeles 90014. Charles Stone speaking for B. F. Hutton. Tuesday morning at this same time. David Boyle will be here with the usual Business News, now in its 26th year of continuous service to California investors. WIsHING WELL CLUE MomL, INC., Easton, Md., October 15, 1967. Congressman MACDONALD, Washington, D.C. DEAR CONGRESSMAN: Pardon the omission of your first name. I wanted to get this message to you as soon as possible. The newspapers didn't print your first name. I have followed the controversy over the question of TV as is versus Pay T~ and I have not seen where Mr. Average Oitizen or anyone whose business in- eludes TV showing in the package It sells to the public, has testified. Although, I am small in the motel industry with 30 TV sets in use and am only an average citizen I am very much concerned about the possible impact Pay TV would have on consumers and small businesses such as ours. Most motel publicity centers on the well-known chains but it is a fact that 75% of the accom- inodations in the country are in the small motel category. There are also many taverns, cocktail lounges and gathering places where TV has become an integral part of the business. I belong to the National Federation of Businessmen and there are many such organizations plus Chambers of Commerce who could speak out. There is also the Small Business Administration in Washington. If none of these have the energy to speak on this issue I can assure you that I am very able to fill the void. Yours truly, SAMUEL J. SIerrA. (Whereupon, at 1~ :30 p.m., the hearing was concluded.) 0 PAGENO="0728"