1 Cable Regulation in an Evolving IP World Washington Association of Telecommunications Officers and Advisors Spring Conference – Chelan, WA May 1-2, 2014 Brian T. Grogan, Esq

Cable Marketplace Homes Passed130.7 M Basic Cable Subscribers57.3 M Basic Cable Penetration44.4% Homes Passed by Internet125.4 M High Speed Internet subs50.3 M Cable Phone subs26.7 M 2011 cable operator revenue –Video revenue = $57 B –Broadband/telephone revenue = $41 B No programming costs for non-video services Source: SNL Kagan – NCTA website (visited August 2013) 2

Marketplace Challenges Decreasing Subscriber Base –Over the top (OTT) competition –Satellite and telephone competition –Franchise Fees paid by cable $3.2 B (2011 est.) Cable gross revenues Nearly Flat –Subscribers decreasing –Rates increasing –Is the cable pie getting smaller? Will 2015 franchise fees = $3.2 B 3

Chromecast OTT Video Device $35 4

OTT Devices Chromecast Apple TV, Boxee Box (with Live TV dongle), Xbox 360 (with Kinect), Nintendo Wii, Roku XDS, Seagate GoFlex TV, Sony PS3, Logitech Revue, Sony SMP-N200, TiVo Premiere, ViewSonic NexTV, WD TV Live, OnLive All DVD players 5

OTT Platforms 6

Netflix, Hulu Plus, HBO GO, iTunes, VUDU, Zune Video, Amazon Prime Streaming, DISH/Blockbuster Sony PlayStation Network, Google TV, MLB.TV, EPIX, UFC, ESPN, YouTube, EPIXHD, OnLive and others. 7

Impact of OTT on Renewal Limited ability to communicate with OTT subs Reduced consideration –Franchise fees –PEG fees –I-Net Same burden on ROWs – limited regulation 8

Regulating Cable When City is not in Renewal Six steps you should take during the franchise term Dont wait until renewal to worry about compliance Delaying enforcement is not helpful to City position 9

10 Periodic Franchise Fee Audits Are you collecting the correct amount of revenue? Gross Revenue definition –Fee on Fee –Advertising, home shopping, non-subscriber revenue –Launch fees –Bundled rates Annexation

11 Bonds, Letters of Credit and Security Funds Does your franchise require these? –Do you know where they are? –Have they expired? –Are the levels of coverage accurate? Has anyone reviewed the terms –Notification –Statute of limitations –Waivers Dont wait until you need to enforce franchise

12 Customer Service Standards Do you have unique standards in your franchise? – You can impose FCC standards What reports is the operator required to submit? Are you enforcing compliance? Adopt separate ordinance?

13 Technical Audits When was the last tech audit conducted? Is the system in compliance with all local, state and federal standards? – Unique franchise provisions – National Electric Safety Code – Separation of facilities – Grounding – FCC Technical Standards Health, safety and welfare at stake

14 PEG Programming How many channels are required under your franchise? –Triggers? What level of capital funding? –Timing of payments –Verification Two-way capacity and I-Nets

15 Free Service Drops Have you read the franchise requirement? –What level of free service? –Does it include equipment? Are all eligible institutions hooked up? Does the franchise impose distance limitations? –How are they measured?

16 PEG Fee The term "franchise fee" does not include: –Capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities U.S.C. § 542 What is a capital cost? –Depreciable asset –Fixed, one-time expense –Land, buildings, construction, equipment –Total cost needed to bring a project to a commercially operable status Is that what the Cable Act intended? What is a capital cost in the production of a television show or movie? –Total cost of production – including labor, production and marketing

PEG Fee Who pays for the equipment required to deliver a PEG HD signal? –After it leaves city hall – demarcation point –Is city responsible for production equipment? –Is operator responsible for transport? –Are all of the these costs capital? PEG signals transported over an I-Net –Is the I-Net a PEG capital cost? –Is I-Net management a capital cost? 17

Offsets From Franchise Fee PEG fees offset from franchise fees? –Operator may seek language to allow offset –Based upon 47 USC 542 Capital v. operational –Watch out for: as permitted under federal law or So long as payment of PEG fees does not serve to reduce the amount of franchise fees paid to City If an operator offsets fees what can City do? –Violation proceeding? –Court challenge? –Contract terms are critical 18

Schools and Public Buildings How many free drops are in place today? How many additional outlets are in use? –Has digital conversion occurred? –Is equipment required for every TV set? Who pays for equipment and service? Existing drops v. new drops –Construction cost allocation for new drops Can operator offset all in-kind costs? –From franchise fees? –Operator will cite FCC 621 Order 19

20 Institutional Network I-Net A communication network which is constructed or operated by the cable operator Generally available only to subscribers who are not residential subscribers §611(f) [531(f)] A franchising authority may require as part of a cable operators proposal for a franchise renewal –that channel capacity... on institutional networks be designated for educational or governmental use, and –may require rules and procedures for the use of the channel capacity designated pursuant to this section. 47 U.S.C. §531(b).

Institutional Network I-Net In practice an I-Net is typically : –a dedicated network built by an operator –used by a city free of charge or at a low cost –for voice, video and data transmissions Operators may want to convert I-Nets to: –commercial services contracts - increase profits –can the operator mandate a commercial contract? 21

22 Can an Operator Say NO to a Requested I-Net? Cable operator usually cites to: Cable Act §621(b) [541(b)] A franchising authority may not impose any requirement that has the purpose or effect of prohibiting, limiting, restricting, or conditioning the provision of a telecommunications service by a cable operator or an affiliate thereof. Cities should look to: Cable Act §621(b) [541(b)] Except as otherwise permitted by sections 611 and 612, a franchising authority may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks, as a condition of the initial grant of a franchise, a franchise renewal, or a transfer of a franchise.

23 Customer Service Simple path -Use FCC standards in franchise -Look to both 47 C.F.R. § and (notices) –Reporting/enforcement - not in FCC regs Specify in franchise or city code Aggressive path - Adopt separate Customer Service Ordinance Part of city code

Competitive Equity Operator will demand Level Playing Field language –Nothing in federal law requires such a provision –Check for state obligation Why should the city agree to any language more burdensome than state or federal law? Fairness? Issues to watch for in proposed language –Opt-out provisions that allow operator to avoid franchise obligations without city approval –Line item veto - allows the operator to unilaterally modify franchise if different than competing franchise –Consider all or nothing approach operator can have the same terms as the competitor but it must take all requirements – no pick and choose 24

25 Thank You! Brian T. Grogan, Esq. Moss & Barnett 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN Phone: Facsimile: Web site: