Carriage of Digital Television Broadcast Signals: Amendment to the Commission's Rules

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Commission finds it in the public interest to allow the viewability rule to sunset as scheduled. The Commission reinterprets the statutory viewability requirement to permit cable operators to require the use of set-top equipment to view must-carry signals, provided that such equipment is both available and affordable (or provided at no cost). The Commission establishes a transitional period of six months after expiration of the current rule during which hybrid systems will be required to continue to carry the signals of must-carry stations in analog format to all analog cable subscribers. The Commission also concludes that the small-system HD carriage exemption continues to serve the public interest and extends the existing exemption for three more years.

DATES:

Effective June 18, 2012.

FOR FURTHER INFORMATION CONTACT:

For additional information on this proceeding, contact Steven Broeckaert, Steven.Broeckaert@fcc.gov, or Evan Baranoff, Evan.Baranoff@fcc.gov, of the Media Bureau, Policy Division, (202) 418-2120.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Fifth Report and Order, FCC 12-59, adopted on June 11, 2012, and released on June 12, 2012. The full text of this document is available electronically via ECFS at http://fjallfoss.fcc.gov/ecfs/or may be downloaded at http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0612/FCC-12-59A1.doc . (Documents will be available electronically in ASCII, Word 97, and/or Adobe Acrobat.) The full text of this document is also available for public inspection and copying during regular business hours in the FCC Reference Center, Federal Communications Commission, 445 12th Street SW., CY-A257, Washington, DC 20554. The complete text may be purchased from the Commission's copy contractor, 445 12th Street SW., Room CY-B402, Washington, DC 20554. Alternative formats are available for people with disabilities (Braille, large print, electronic files, audio format), by sending an email to fcc504@fcc.gov or calling the Commission's Consumer and Governmental Affairs Bureau at (202) 418-0530 (voice), (202) 418-0432 (TTY).

I. Introduction

1. With this Fifth Report and Order (Fifth R&O) in the DTV cable carriage docket, we announce the sunset of the Commission's current “viewability” rule, which mandates that cable operators with hybrid systems carry digital must-carry signals in an analog format for the benefit of analog-service customers. As explained below, we believe the statutory viewability requirement is best read to give the operator of a hybrid system greater flexibility in deciding how to comply with the viewability mandate. In particular, while such an operator may continue to carry a must-carry signal in a format that is capable of being viewed by analog-service customers without the use of additional equipment, rapid changes in the marketplace and technology—in particular the widespread availability of small digital set-top boxes that cable operators are making available at low cost (or no cost) to analog customers of hybrid systems—provide alternative means by which must-carry television signals can be made viewable to all analog customers who are served by hybrid systems, as required by statute. Because a cable operator's exercise of this additional flexibility would involve operational changes that affect must-carry broadcast stations and viewers, we establish a six-month transitional period, until December 12, 2012, during which hybrid systems will continue to carry the signals of must-carry stations in analog format to all analog cable subscribers. In addition, we find it is in the public interest to extend for three more years the HD carriage exemption for eligible small cable system operators.

II. Viewability Requirement

A. Background

2. Pursuant to section 614(b)(4)(B) of the Communications Act of 1934, as amended (the “Act”), the Commission initiated this proceeding in 1998 to address the responsibilities of cable television operators with respect to carriage of digital broadcast stations in light of the nation's transition to digital television. After Congress selected a date certain for the digital transition of full-power broadcast television stations, the Commission, in 2007, adopted the Viewability Order which, among other things, established a rule to ensure that after the DTV transition, cable subscribers would continue to be able to view broadcast stations, as required by statute. The Commission was concerned that there would “continue to be a large number of cable subscribers with legacy, analog-only television sets after the end of the DTV transition.” In 2007, the Commission estimated that about 35 percent of all television homes, or approximately 40 million households, were analog-only cable subscribers. Although all cable systems were expected to eventually transition to all-digital systems, the Commission recognized that there may be two different types of cable systems in operation for some period of time after completion of the DTV transition. Some operators may choose to deliver programming in both digital and analog format (“hybrid systems”), i.e., in addition to a digital tier, the operator would offer an analog tier and continue to provide local television signals and, in some cases, a subset of cable channels, to analog receivers in a format that does not require additional equipment. Other operators may choose to operate or transition to all-digital systems, providing cable service in only digital format. Thus, in anticipation of the approaching end of the digital television transition and in light of the state of technology and the marketplace, the Commission adopted a rule providing cable operators of hybrid systems two options to comply with the statutory viewability requirement for must-carry broadcast television stations: (1) Carry the digital signal in analog format to all analog cable subscribers in addition to any digital version carried, or (2) transition to an all-digital system and carry the signal only in digital format, provided that all subscribers have the necessary equipment to view the broadcast content.

3. The Commission did not make the viewability rule permanent. Instead, the Commission decided to have the rule remain in force for three years after the date of the digital transition, subject to review by the Commission during the last year of the three-year period. With respect to the viewability rule, the Commission stated that “[i]n light of the numerous issues associated with the transition, it is important to retain flexibility as we deal with emerging concerns.” The Commission explained that a three-year sunset “provides the Commission with the opportunity after the transition to review these rules in light of the potential cost and service disruption to consumers, and the state of technology and the marketplace.” The Commission identified certain factors it believed would be relevant to its later review, including digital cable penetration, cable deployment of digital set-top boxes with various levels of processing capabilities, and cable system capacity constraints.

4. The full-power digital television transition was successfully completed on June 12, 2009, after Congress chose to delay it from the originally scheduled conclusion on February 17, 2009. Accordingly, under the terms of the 2007 Viewability Order, absent Commission action, the viewability rule is scheduled to sunset on June 12, 2012.

5. On February 10, 2012, we initiated the Fourth Further Notice of Proposed Rulemaking (“Fourth FNPRM”) in this docket to determine whether it would be in the public interest to retain the viewability rule, given the current state of technology and the marketplace. We received four comments, five reply comments, and numerous ex parte submissions in response to our Fourth FNPRM. In their comments, broadcasters support retention of the viewability rule, while cable operators urge us to let it expire.

B. Discussion

6. Based on significant changes in the marketplace and technology that have occurred over the past five years, and our current understanding of the statutory viewability requirement as explained herein, we find it in the public interest to allow the viewability rule to sunset as scheduled, on June 12, 2012. Because we anticipate that our revised interpretation of the statutory viewability requirement will lead to the widespread deployment of small, affordable set-top boxes, we establish a transitional period of six months after expiration of the current rule—that is, until December 12, 2012—during which hybrid systems will continue to carry the signals of must-carry stations in analog format to all analog cable subscribers. This transitional period will give consumers, cable operators, and broadcasters that rely on must-carry access an opportunity to prepare for that deployment and to take other necessary steps resulting from changes in cable carriage.

1. Statutory Analysis

7. Section 614(b)(7) of the Communications Act, which covers commercial stations, states that broadcast signals that are subject to mandatory carriage “shall be viewable via cable on all television receivers of a subscriber which are connected to a cable system by a cable operator or for which a cable operator provides a connection.” Similarly, section 615(h) for noncommercial stations states that “[s]ignals carried in fulfillment of the carriage obligations of a cable operator under this section shall be available to every subscriber as part of the cable system's lowest priced tier that includes the retransmission of local commercial television broadcast signals.” In the 2007 Viewability Order, the Commission found that these statutory requirements “plainly apply” to cable carriage of digital broadcast signals, and, “as a consequence, cable operators must ensure that all cable subscribers—including those with analog television sets—continue to be able to view all commercial and non-commercial must-carry broadcast stations” after the DTV transition. The Commission interpreted the viewability mandate to require that a cable operator “ensure that the broadcast signals in question are actually viewable on their subscribers' receivers.” The Commission rejected cable commenters' argument that the viewability mandate is satisfied when a cable operator transmits broadcast signals and offers to sell or lease a set-top box to their customers that will allow those signals to be viewed on their receivers. The Commission found that argument “at odds with both the plain meaning of the statutory text as well as the structure of the provision,” explaining that “[t]o the extent that such subscribers do not have the necessary equipment, * * * the broadcast signals in question are not `viewable' on their receivers.” To implement the viewability mandate, the Commission concluded that cable operators that choose to operate a hybrid system—i.e., operators that offer both analog and digital service tiers—were required to carry the must-carry stations' signals in analog format to their analog cable subscribers, while also ensuring the signals were viewable to digital subscribers.

8. After consideration of the statutory arguments raised by the parties to this proceeding, and upon further review of the statute, we find that the language of the Act is less definitive than our earlier decision suggested. Nothing in the language of the statute plainly prohibits cable operators from offering equipment to satisfy the viewability requirement, i.e., the statutory sections at issue do not state that a signal is not “viewable” if the consumer needs to use additional equipment. (We disagree with NAB's contention that the Fourth FNPRM did not ask for comment on the Commission's prior statutory analysis of the viewability requirement in section 614(b)(7) and that cable commenters, having failed to seek timely review or reconsideration of the 2007 Viewability Order, are barred from reopening the issue now. To the contrary, the Fourth FNPRM specifically asked for parties to include a statutory analysis with any proposals for changing the viewability rule. As requested in the Fourth FNPRM, cable operators provided a statutory analysis to support their alternative proposal for satisfying the viewability requirement. ) Accordingly, we do not believe that section 614(b)(7) unambiguously requires that cable subscribers must be capable of viewing must-carry signals without the use of additional equipment. We instead conclude that “viewable” can reasonably be read to mean that the operator must make the broadcast signal available or accessible to its subscribers by an effective means, which may include offering the necessary equipment for sale or lease, either for free or at an affordable cost that does not substantially deter use of the equipment. We believe this interpretation is reasonable in light of marketplace changes that have occurred over the past five years. This reading ensures access to must-carry stations as a practical matter—rather than just a theoretical option if the customer is willing to incur significant additional expense. It is consistent with both the ordinary meaning of the word “viewable”—defined as “capable of being seen or inspected” —and also prior interpretations of the Communications Act. Accordingly, we disagree with broadcasters' sweeping arguments that requiring any sort of equipment use at all by subscribers would be “contrary to the statute” and “flatly inconsistent” with section 614(b)(7). Indeed, even NAB suggested that a cable operator could satisfy the statutory viewability requirement by providing “free equipment to subscribers that enables access to digital broadcast signals for a period of three years,” which acknowledges that the statute is not as inflexible as NAB otherwise argued. We thus agree with cable commenters that the term “viewable” does not unambiguously require that must-carry stations must be capable of being seen without the use of additional equipment. In reaching this conclusion, we note that agencies may change their interpretation of an ambiguous statutory provision and that such a revised interpretation is entitled to deference.

9. Broadcasters argue that allowing cable operators to satisfy the viewability requirement by requiring subscribers to purchase or lease equipment would “make the second sentence [in] section 614(b)(7) surplusage, and remove any meaning from the word `additional' in the third sentence of section 614(b)(7).” We disagree. The first sentence of section 614(b)(7) requires that each must carry signal “shall be provided to every subscriber to a cable system.” As the Commission has explained, this provision requires that every class of subscriber must receive all must carry signals. Cable operators have complied with this requirement through the use of a basic service tier, i.e., a level of service to which subscription is required in order to be eligible for access to any other tier of service at additional charge. The second sentence of section 614(b)(7) is concerned with a subscriber's ability actually to “view” the must carry signals that have to be provided under the first sentence. The second and third sentences of section 614(b)(7) likewise are distinct mandates, as we observed in the 2007 Viewability Order. The second sentence covers “all television receivers of a subscriber which are connected to a cable system by a cable operator or for which a cable operator provides a connection,” whereas the third sentence covers the situation where a “cable operator authorizes subscribers to install additional receiver connections, but does not provide the subscriber with such connections, or with the equipment and materials for such connections.” Because of this difference, allowing cable operators to satisfy the viewability obligation of the second sentence either without the use of additional equipment or by making equipment available at no cost or an affordable cost does not render the second sentence “irrelevant” or “surplusage” in light of the third sentence, which requires operators, in a more limited situation, to offer to sell or lease converter boxes to subscribers at regulated rates. In short, our interpretation of the term “viewable” in the second sentence is different in scope and substance from the requirement set forth in the third sentence, which requires cable operators to offer or sell converter boxes to certain subscribers “at rates in accordance with section 623(b)(3).”

10. NAB further argues that allowing cable operators to satisfy the viewability requirement by providing equipment conflicts with the “signal quality” provision set forth in Section 614(b)(4)(A), and in particular the requirement that “the quality of signal processing and carriage provided by a cable system for the carriage of local commercial television stations will be no less than that provided by the system for carriage of any other type of signal.” NAB argues that reliance on set-top equipment “would allow cable operators to discriminate by, for example, offering non-broadcast programming in a viewable format but not local broadcast signals,” or to provide some local signals to analog subscribers, but not others. It is not clear, however, that this provision applies here. Section 614(b)(4)(A) speaks specifically to the issue of “nondegradation” and “technical specifications,” and does not address the issue of viewability. In any event, even if that provision were to apply, it is not clear that carrying must-carry signals only in a digital format would violate the terms of 614(b)(4)(A). From a technical standpoint, a must-carry signal carried in standard definition (SD) arguably has the same “quality of signal processing and carriage” as a signal carried in analog format because both versions received at the headend should have the same resolution—480i—and thus there should be no perceivable difference between them. Moreover, there is no evidence in the record to suggest that cable operators intend to use digital compression or other bandwidth saving techniques to “degrade” must-carry signals in such a way as to affect the subscriber's viewing experience.

11. Based on the foregoing, we agree with cable commenters that the statutory viewability requirement is ambiguous, and reasonably can be read in a manner to permit cable operators to require the use of equipment to view must-carry signals—although we emphasize that such equipment must be both available and affordable (or provided at no cost). We here choose a reasonable interpretation of the statutory text that best effectuates the statutory purpose in light of current marketplace conditions. Moreover, the doctrine of constitutional avoidance counsels us to interpret the Act as not imposing a rigid analog-carriage requirement on cable operators, where the record establishes a reasonable, less burdensome alternative that meets the statutory objectives. Specifically, we are persuaded by cable commenters' argument that the dramatic changes in technology and the marketplace over the past five years render less certain the constitutional foundation for an inflexible rule compelling carriage of broadcast signals in both digital and analog formats. (NAB observes that compliance with the viewability rule remains voluntary as operators have the option to convert their systems to all-digital operation, and thereby obviate the need to comply with the rule's analog carriage requirement. Cable commenters, on the other hand, maintain that forcing operators to carry must-carry signals in analog format unduly hampers the efforts of cable operators to manage their own gradual transition to all-digital service in a manner that attracts customers to digital services while retaining value for those customers who still choose to rely only on analog service. ) The current record lacks evidence that infringing on cable operators' discretion by requiring both digital and analog carriage of the same broadcast stations is necessary to protect the viability of over-the-air broadcasting where an affordable set-top box option, that will achieve the same viewability, is readily available to customers. Nor is there evidence showing that allowing the viewability rule to sunset where the cable operator makes the digital signal available to its analog subscribers by offering the necessary equipment at an affordable cost will diminish the availability or quality of broadcast programming. (We are not persuaded by broadcasters' argument that allowing the rule to sunset will threaten the viability of local broadcasters because their analysis assumes that elimination of the viewability rule will automatically result in the broadcaster's signal being unavailable to all analog subscribers. Their analysis fails to take into account that those analog customers who value must-carry channels may opt for equipment made available by the cable operator to continue accessing must-carry channels and other programming offered by the cable operator in a digital format.) We thus find that the burden placed on cable operators by the viewability rule is not justified on the current record, which demonstrates that a less burdensome alternative is available. Based on our analyses of current technology and marketplace conditions, set forth in detail below, we now find that the most reasonable interpretation of the statute is that an operator of a hybrid system may comply with the viewability mandate by carrying a must-carry signal in a format that is capable of being viewed by analog customers either without the use of additional equipment or alternatively with equipment made available by the cable operator at no cost or at an affordable cost that does not substantially deter use of the equipment.

2. Changes in Technology and the Marketplace

12. Significant changes that have occurred in the marketplace and technology over the past five years confirm our determination that it is in the public interest to allow the 2007 viewability rule to sunset. At the time the rule was adopted, the Nation was preparing for the digital television transition, and a significant number of television viewers were unequipped to receive a digital signal. In 2007, about 58 percent of television households subscribed to cable service and 46 percent of these cable subscribers (40 million households) received analog service. Moreover, there was no low-functionality and/or low-cost digital set-top box option available to ensure analog cable subscribers could access digital must-carry signals. Consequently, the Commission faced the very real possibility that a significant number of cable customers could lose access to must-carry channels if hybrid cable systems were permitted to carry such signals only in digital format. Based on the state of the marketplace in 2007, the rule requiring hybrid cable systems serving analog subscribers to carry must-carry stations in analog format was a reasonable measure to ensure that must-carry signals were “viewable” and “available” to all subscribers as required by statute.

13. The state of technology and the marketplace is significantly different now. About 50 percent of television households now subscribe to cable service (down from 58 percent in 2007), about 20 percent of these cable subscribers (about 12 million households) receive analog service (down from 40 million households in 2007), and the latter number is expected to drop to 16 percent (or fewer than 10 million households) by the end of 2012. We continue to expect most cable operators will eventually transition to all-digital systems.

14. More importantly, unlike in 2007, low-functionality/low cost digital equipment is now readily available as an option to cable consumers. The cable industry has encouraged the development of small, low-cost set-top boxes, called “Digital Transport Adapters” (“DTAs”), to enable customers to view digital signals, without having to obtain full-featured digital set-top boxes. NCTA states that “some cable operators * * * are already providing digital transport adapters (DTAs) to some or all of their customers at minimal or no cost.” According to industry reports, about 27 million DTAs were already deployed by year-end 2011. In addition to DTAs, NCTA explains that “[o]ther operators * * * are providing other types of affordable digital set-top boxes, with lesser capabilities and/or at substantially reduced prices for basic-only customers.” Moreover, NCTA states that “the eight largest incumbent cable operators” have committed to “make available to analog-only households, upon request, low-cost set-top devices capable of displaying basic service tier signals on analog television sets.” Therefore, we expect that DTAs, or similar devices, will be made broadly available on cable systems throughout the country. The low cost set-top box offers reflected in our record will satisfy our new interpretation of the viewability requirement, permitting a cable operator to make the must-carry signals available by offering analog customers the necessary digital equipment at an affordable cost. Specifically, the record reflects that Comcast, for a period of time after migrating a system to all-digital, typically offers two or three free DTAs to customers at no cost, and charges less than $2 for additional boxes. Similarly, Time Warner Cable states that in transitioning one of its systems to digital it has offered subscribers “one or more” DTAs free of charge for the first two years and 99 cents per month thereafter. In addition, Bright House states that it offers set-top boxes to basic service tier subscribers for $1 a month. We find that this range of charges for DTAs and set-top boxes—i.e., free or a monthly fee of no more than $2—would satisfy the requirement for affordable equipment because the minimal additional cost, if any, is unlikely to discourage use of this equipment. Materially higher leasing fees, however, could deter subscriber willingness to order the equipment needed to ensure viewability on a hybrid cable system. Accordingly, such fees would not meet the statutory viewability requirement as we interpret it.

3. Effect on Must-Carry Stations, Cable Operators, and Consumers

15. We are not persuaded by the broadcasters' analysis that allowing the current viewability rule to expire on schedule will threaten the viability of must-carry stations. According to the broadcasters, approximately 12.6 million households receive only analog cable service, representing approximately 11 percent of all U.S. television households, and removing that percentage of a station's audience “could well have a profound impact on affected stations.” As NCTA points out, however, the broadcasters' analysis overstates the impact on such stations because it assumes that elimination of the rule will automatically result in the broadcaster's signal being unavailable to all analog subscribers. To the contrary, our new statutory interpretation—which hinges on a cable operator making equipment available at no cost or an affordable cost —will ensure that subscribers on hybrid systems may continue to access these signals at little or no additional expense. As cable commenters explain, a must-carry signal carried only in digital format would still be included in the basic service tier; analog cable subscribers would not be required to subscribe to an enhanced tier of service to view the digital version of a must-carry channel. We also expect this issue to diminish over time given that the number of analog cable subscribers is expected to continue to decrease as more cable customers choose to upgrade to full digital service and as more hybrid cable systems complete their transition to all-digital systems.

16. The record further reflects that eliminating the rule will result in significant benefits to cable operators in meeting the increasing demands of the large majority of their customers, i.e., those subscribing to digital services. NCTA explains that “cable operators face capacity demands from an increasing proliferation of HD programming services as well as from broadband video services” and need flexibility to “serve the needs of all their customers while transitioning from analog to digital service.” NCTA explains that there are currently more than 183 HD cable networks (including basic, premium, and regional sports channels), up from only 22 in September 2007 when the Commission adopted the viewability rule. According to staff review of the 2011 Annual Cable Operator Report data and the 2010 Cable Price Survey data, more than 96 percent of cable systems carry at least one must-carry station, and, on average, each system carries more than seven must-carry stations. Each must-carry station carried in analog occupies 6 MHz of bandwidth that the cable operator could otherwise use for 10-12 standard definition (“SD”) digital streams, 2-3 HD video streams, or significant broadband capacity. Thus, as cable commenters explain, elimination of the viewability rule will provide operators the needed flexibility to meet fast-changing consumer demands for HD cable services and high-speed broadband services.

4. Six-Month Transition Period

17. To facilitate a smooth transition, we adopt, for a six-month transition period following the sunset of our viewability rule, an interim requirement that operators of hybrid cable systems must continue to carry the signals of must-carry stations in analog format to all analog cable subscribers. Critical to our decision to allow the viewability rule to sunset is the availability of affordable set-top boxes to affected cable subscribers. A six-month transition period will provide cable operators an opportunity to acquire an adequate supply of equipment for subscribers impacted by any carriage change. It will also provide time for cable operators to comply with our existing rules requiring notification to broadcasters and customers about any planned change in carriage or service and the operator's equipment offerings, as well as allow consumers sufficient time to make any necessary arrangements. As part of the cable operators' required notification to their subscribers of any carriage changes, the cable operators have committed to inform affected subscribers that equipment is required to continue viewing the must-carry signal and how to obtain that equipment. We believe informing consumers about equipment is a critical part of a hybrid operator's viewability obligations in these circumstances and thus rely upon this commitment in rendering our decision today. Similarly, we rely upon the cable operators' commitment to give broadcasters a minimum of 90 days notice before undertaking any carriage changes. We believe that such advance notice will provide repositioned must-carry stations sufficient time to communicate with their viewers. Advance notice about planned carriage changes will allow must-carry stations to notify their viewers—through on-air messages, Web site postings, mailings or other forms of communications of their choosing—about the planned change in carriage, and about the viewers' options to ensure continued access to the station's programming. We believe effective consumer outreach, particularly during the six-month transition period, will greatly minimize the impact that sunset of our viewability rule may have on consumers and must-carry stations.

18. We remind cable operators that the sunset of our viewability rule does not otherwise affect the must-carry requirements of § 76.56 of our rules. Cable operators providing digital cable service must continue to carry local broadcast stations electing mandatory carriage, including in HD format when broadcast in such format, and cable operators providing only analog cable service (no digital service) must continue to carry local broadcast stations electing mandatory carriage in analog format. By allowing our current viewability rule to sunset, however, we provide hybrid cable system operators the flexibility to best meet the needs of their subscribers during their move to an all-digital system. Under our more flexible statutory interpretation, operators of hybrid systems may choose to comply with the statutory viewability mandate by continuing to down-convert digital must-carry stations to analog format in addition to carrying those stations in digital SD and/or HD format if that best suits their individual business plans. Alternatively, after December 12, 2012, an operator of a hybrid system may choose to satisfy the viewability mandate by making must-carry signals available to analog subscribers by offering the necessary equipment for sale or lease, either for free or at an affordable cost that does not substantially deter use of the equipment. Additionally, sunset of the current viewability rule allows hybrid cable system operators the flexibility to benefit from future marketplace and technology developments through possible methods of compliance not contemplated on the record now before us. We emphasize that, while we allow our viewability rule to sunset, the statutory viewability requirement remains in effect. Therefore, a must-carry station may file a complaint pursuant to § 76.61 of our rules if it believes a cable operator has failed to meet its statutory carriage obligations. In addition, we will consider informal consumer complaints when evaluating compliance with the statutory viewability requirement. If we receive a significant number of well-founded consumer complaints that an operator is not effectively making affordable set-top boxes available to customers in lieu of analog carriage of a channel, one of the possible remedies would be to require the operator to resume analog carriage of the channel.

III. HD Carriage Exemption

A. Background

19. The Act requires that cable operators carry broadcast signals “without material degradation.” In the context of the carriage of digital signals, the Commission has interpreted this requirement to contain two parts: First, cable operators may not discriminate in their carriage between broadcast and non-broadcast signals, and, second, HD broadcast signals must be carried to viewers in HD. In response to concerns from small cable operators about cost and technical capacity, the Fourth Report & Order afforded a temporary exemption from the HD carriage requirement for certain small systems. Specifically, the Commission exempted small cable systems with 2,500 or fewer subscribers that are not affiliated with a cable operator serving more than 10 percent of all MVPD subscribers, and those with an activated channel capacity of 552 MHz or less. The exemption from the material degradation rules allows such systems to carry broadcast signals in standard definition (SD) digital and/or analog format, even if the signals are broadcast in HD, as long as all subscribers can receive and view the signal. The Commission provided that the exemption would expire three years after the conclusion of the DTV transition, but said it would consider whether to extend the exemption in the final year. The Fourth FNPRM undertook this review and tentatively concluded to extend the existing exemption for three more years, given small cable systems' apparent widespread reliance on it. In response to the Fourth FNPRM, cable commenters support extension of the HD carriage exemption, while broadcasters suggest that the exemption should not apply if a system carries any signal in HD.

B. Discussion

20. We find that the small-system HD carriage exemption continues to serve the public interest and adopt our tentative conclusion to extend the exemption for three more years. The record shows that a significant number of small systems with financial or channel capacity constraints continue to rely on the HD carriage exemption and require additional time to come into compliance in a cost-effective way. For example, ACA reports that at least 52 of its members, representing more than 385 small systems, still rely on the exemption.

21. We find that the same financial and capacity constraints that faced small cable operators when we initially adopted this exemption continue to exist today. For example, cable commenters persuaded the Commission in 2008 that, without an exemption from the material degradation rules, “small systems [would] be forced to absorb or impose significant and unsustainable price increases, or in some instances to shut down altogether.” This is because some small systems did not have the technical capability or system capacity to carry high definition digital signals, and in some cases had so few subscribers that per-subscriber costs to upgrade to that capacity would be so high as to make it not worthwhile to continue operating the system. The record shows that the challenges facing small systems have not diminished since the Commission adopted the exemption and that requiring small systems to comply with the HD carriage requirement would result in these systems dropping existing channels or shutting down. Thus, as ACA points out, the result for subscribers of these systems could include “increased rates, loss of desired channels, loss of not only video service, but the potential for broadband Internet access, and the loss of the benefits that flow from competition.” NCTA explains that eliminating the HD exemption would also impede small operators' “ability to offer new services like video-on-demand, deploy broadband, or introduce enhanced new speed tiers of broadband to more rural, smaller market customers.” ACA maintains that, for most capacity-constrained small systems, the unused channel capacity available has actually decreased over the past three years. In addition, ACA reports that, for most financially-constrained small systems, operation costs have increased more than revenues over the last three years, leaving these systems without the financial resources to purchase the necessary equipment to upgrade service. Notably, these small systems often serve rural and smaller market consumers, making the potential loss of such service particularly troubling. As noted in the Fourth Report & Order, the loss of a small cable system could mean the effective loss of all MVPD service for some customers. Moreover, in some areas, due to poor over-the-air reception, the loss of a small cable system could mean the loss of any access to some or all broadcast signals as well. Accordingly, we find that the exemption remains necessary to protect the viability of small systems and their service to rural and smaller market consumers.

22. This exemption will sunset on June 12, 2015, unless the Commission takes action to extend it in light of the potential cost and service disruption to consumers and the state of technology and the market at that time. We note that this exemption is not intended to be permanent and that its purpose is to provide small systems with additional time to upgrade and, where necessary, expand their systems to come into full compliance with the material degradation provisions of the carriage rules by carrying HD versions of all HD broadcast signals without having to make relatively large expenditures over a short period of time.

23. We decline, at this time, to further restrict the exemption for small systems by eliminating it for systems that carry any signal in HD, as suggested by NAB. The Commission has already crafted the exemption quite narrowly to excuse only a limited number of systems with particularly limited channel capacity or low subscribership. We agree with ACA that a small system's ability to offer some HD service does not refute an argument that it may be significantly burdensome to offer additional HD service. Further, we do not want to create a disincentive for these systems to take incremental steps toward offering more HD programming to their subscribers by using the carriage of any HD signals as a threshold for applying the HD must-carry requirement to small cable systems. Although we understand NAB's concern that small systems could possibly misuse the exemption of the HD carriage requirement to unfairly discriminate against must-carry HD signals in favor of other HD signals, broadcasters have not presented any evidence to suggest that this is, or ever has been, an issue. Moreover, to the extent that cable operators utilizing the exemption do start to carry a wide range of HD channels, broadcasters are free to bring such evidence to the Commission's attention, and we will then be able to evaluate whether the exemption's contours should be adjusted.

IV. Conclusion

24. For the reasons stated above, we find the viewability rule is no longer necessary to ensure must-carry signals are viewable to all subscribers and therefore will allow the rule to sunset. As an interim measure, we require hybrid systems to continue to carry the signals of must-carry stations in analog format to all analog cable subscribers for six months after expiration of the viewability rule, until December 12, 2012. We extend for three more years the existing HD carriage exemption for eligible small cable system operators.

V. Procedural Matters

A. Final Regulatory Flexibility Act Analysis

25. As required by the Regulatory Flexibility Act of 1980, as amended (“RFA”) an Initial Regulatory Flexibility Analysis (“IRFA”) was incorporated in the Fourth FNPRM in this proceeding. The Commission sought written public comment on the proposals in the Fourth FNPRM, including comment on the IRFA. The Commission received no comments on the IRFA. This present Final Regulatory Flexibility Analysis (“FRFA”) conforms to the RFA.

1. Need for, and Objectives of, the Fifth Report & Order

26. Viewability Requirement. Sections 614(b)(7) and 615(h) of the Communications Act require cable operators to ensure that commercial and non-commercial must-carry broadcast stations are “viewable” or “available” to all cable subscribers. 47 U.S.C. 534(b)(7), 535(h). In the 2007 Viewability Order, in anticipation of the approaching end of the digital television transition and in light of the state of technology and the marketplace, the Commission adopted a rule providing cable operators operating hybrid systems (i.e., cable systems that provide both digital and analog cable service) two options to comply with the statutory viewability requirement: (1) Carry the digital signal in analog format to all analog cable subscribers in addition to any digital version carried, or (2) transition to an all-digital system and carry the signal only in digital format, provided that all subscribers have the necessary equipment to view the broadcast content. Thus, the “viewability” rule required cable operators with hybrid systems to carry digital must-carry signals in both digital and analog format. The Commission, however, decided that the rule would remain in force for three years after the date of the digital transition, subject to review by the Commission during the last year of the three-year period. The Commission explained that a three-year sunset “provides the Commission with the opportunity after the transition to review these rules in light of the potential cost and service disruption to consumers, and the state of technology and the marketplace.” Therefore, absent Commission action, the viewability rule is scheduled to sunset on June 12, 2012. The Fourth FNPRM considered whether to retain the viewability rule or allow it to sunset, given the current state of technology and the marketplace.

27. The Fifth Report and Order finds it in the public interest to allow the viewability rule to sunset as scheduled, on June 12, 2012. The Fifth Report and Order determines that the statutory term “viewable” is an ambiguous term. It then chooses a reasonable interpretation of the statutory text that best effectuates the statutory purpose in light of current marketplace conditions and technology developments that have occurred over the past five years (e.g., 80% of cable customers now subscribe to digital cable service and the widespread availability of small digital set-top boxes that cable operators are making available at low cost (or no cost) to analog customers of hybrid systems). The Fifth Report and Order reinterprets the statutory viewability requirement to permit cable operators to require the use of set-top equipment to view must-carry signals, provided that such equipment is both available and affordable (or provided at no cost). Therefore, until it completes its transition to all-digital service, a hybrid system operator may comply with the statutory viewability requirement in two ways. The operator can carry a must-carry signal in a format that is capable of being viewed by analog customers either (1) without the use of additional equipment or (2) alternatively with equipment made available by the cable operator at no cost or at an affordable cost that does not substantially deter use of the equipment. The Fifth Report and Order establishes a transitional period of six months after expiration of the current rule—that is, until December 12, 2012—during which hybrid systems will be required to continue to carry the signals of must-carry stations in analog format to all analog cable subscribers. This post-sunset transitional period will give consumers, cable operators, and broadcasters that rely on must-carry access an opportunity to prepare for the widespread deployment of small, affordable set-top boxes and to take other necessary steps resulting from changes in cable carriage.

28. HD Carriage Exemption. Sections 614(b)(4)(A) of the Communications Act requires that cable operators carry broadcast signals “without material degradation.” Accordingly, at the same time the Commission adopted the viewability rule, it adopted a related rule prohibiting material degradation of broadcast signals when carried by cable systems. The rule requires that any signal broadcast in HD be carried by cable operators in HD. In response to concerns from small cable operators about cost and technical capacity, the 2008 Fourth Report & Order afforded a temporary exemption from this HD carriage requirement (“HD carriage exemption”) for certain small systems. Specifically, the Commission exempted small cable systems with 2,500 or fewer subscribers that are not affiliated with a cable operator serving more than 10 percent of all MVPD subscribers, and those with an activated channel capacity of 552 MHz or less. The exemption from the material degradation rules allows such systems to carry broadcast signals in standard definition (SD) digital and/or analog format, even if the signals are broadcast in HD, as long as all subscribers can receive and view the signal. The Commission, however, decided that the HD carriage exemption would remain in force for three years after the date of the digital transition, subject to review by the Commission during the last year of the three-year period. Therefore, absent Commission action, the HD carriage exemption is scheduled to sunset on June 12, 2012. The Fourth FNPRM considered whether to retain the HD carriage exemption or allow it to expire.

29. The Fifth Report and Order concludes that the small-system HD carriage exemption continues to serve the public interest and adopts the Fourth FNPRM's tentative conclusion to extend the existing exemption for three more years. The Fifth Report and Order finds that a significant number of small systems with financial or channel capacity constraints continue to rely on the HD carriage exemption and require additional time to come into compliance with the material degradation rules in a cost-effective way. Accordingly, the HD carriage exemption will sunset on June 12, 2015, unless the Commission takes action to extend it in light of the potential cost and service disruption to consumers and the state of technology and the market at that time.

2. Summary of Significant Issues Raised by Public Comments in Response to the IRFA

30. The Commission did not receive any comments in response to the IRFA.

3. Description and Estimate of the Number of Small Entities To Which Rules Will Apply

31. The RFA directs the Commission to provide a description of and, where feasible, an estimate of the number of small entities that will be affected by the rules adopted. The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction” In addition, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. A “small business concern” is one which: (1) Is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). The final rules adopted herein affect small television broadcast stations and small cable operators. A description of these small entities, as well as an estimate of the number of such small entities, is provided below.

32. Television Broadcasting. The SBA defines a television broadcasting station as a small business if such station has no more than $14.0 million in annual receipts. Business concerns included in this industry are those “primarily engaged in broadcasting images together with sound.” The Commission has estimated the number of licensed commercial television stations to be 1,387. According to Commission staff review of the BIA Kelsey Inc. Media Access Pro Television Database (BIA) as of January 31, 2011, 1,006 (or about 78 percent) of an estimated 1,298 commercial television stations in the United States have revenues of $14 million or less and, thus, qualify as small entities under the SBA definition. The Commission has estimated the number of licensed noncommercial educational (“NCE”) television stations to be 396. We note, however, that, in assessing whether a business concern qualifies as small under the above definition, business (control) affiliations must be included. Our estimate, therefore, likely overstates the number of small entities that might be affected by our action, because the revenue figure on which it is based does not include or aggregate revenues from affiliated companies. The Commission does not compile and otherwise does not have access to information on the revenue of NCE stations that would permit it to determine how many such stations would qualify as small entities.

33. In addition, an element of the definition of “small business” is that the entity not be dominant in its field of operation. We are unable at this time to define or quantify the criteria that would establish whether a specific television station is dominant in its field of operation. Accordingly, the estimate of small businesses to which rules may apply do not exclude any television station from the definition of a small business on this basis and are therefore over-inclusive to that extent. Also, as noted, an additional element of the definition of “small business” is that the entity must be independently owned and operated. We note that it is difficult at times to assess these criteria in the context of media entities and our estimates of small businesses to which they apply may be over-inclusive to this extent.

34. Cable and Other Program Distribution. Since 2007, these services have been defined within the broad economic census category of Wired Telecommunications Carriers; that category is defined as follows: “This industry comprises establishments primarily engaged in operating and/or providing access to transmission facilities and infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using wired telecommunications networks. Transmission facilities may be based on a single technology or a combination of technologies.” The SBA has developed a small business size standard for this category, which is: all such firms having 1,500 or fewer employees. According to Census Bureau data for 2007, there were a total of 955 firms in the subcategory of Cable and Other Program Distribution that operated for the entire year. Of this total, 939 firms had employment of 999 or fewer employees, and 16 firms had employment of 1,000 employees or more. Thus, under this size standard, the Commission believes that a majority of firms operating in this industry can be considered small.

35. Cable Companies and Systems (Rate Regulation Standard). The Commission has also developed its own small business size standards, for the purpose of cable rate regulation. Under the Commission's rules, a “small cable company” is one serving 400,000 or fewer subscribers, nationwide. Industry data indicate that, of 1,076 cable operators nationwide, all but 11 are small under this size standard. In addition, under the Commission's rules, a “small system” is a cable system serving 15,000 or fewer subscribers. Industry data indicate that, of 6,635 systems nationwide, 5,802 systems have under 10,000 subscribers, and an additional 302 systems have 10,000-19,999 subscribers. Thus, under this second size standard, the Commission believes that most cable systems are small.

36. Cable System Operators. The Act also contains a size standard for small cable system operators, which is “a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1 percent of all subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceed $250,000,000.” The Commission has determined that an operator serving fewer than 677,000 subscribers shall be deemed a small operator, if its annual revenues, when combined with the total annual revenues of all its affiliates, do not exceed $250 million in the aggregate. Industry data indicate that, of 1,076 cable operators nationwide, all but 10 are small under this size standard. We note that the Commission neither requests nor collects information on whether cable system operators are affiliated with entities whose gross annual revenues exceed $250 million, and therefore we are unable to estimate more accurately the number of cable system operators that would qualify as small under this size standard.

37. Open Video Services. Open Video Service (OVS) systems provide subscription services. The open video system (“OVS”) framework was established in 1996, and is one of four statutorily recognized options for the provision of video programming services by local exchange carriers. The OVS framework provides opportunities for the distribution of video programming other than through cable systems. Because OVS operators provide subscription services, OVS falls within the SBA small business size standard covering cable services, which is “Wired Telecommunications Carriers.” The SBA has developed a small business size standard for this category, which is: all such firms having 1,500 or fewer employees. According to Census Bureau data for 2007, there were a total of 3,188 firms in this previous category that operated for the entire year. Of this total, 3,144 firms had employment of 999 or fewer employees, and 44 firms had employment of 1,000 employees or more. Thus, under this size standard, most cable systems are small. In addition, we note that the Commission has certified some OVS operators, with some now providing service. Broadband service providers (“BSPs”) are currently the only significant holders of OVS certifications or local OVS franchises. The Commission does not have financial or employment information regarding the entities authorized to provide OVS, some of which may not yet be operational. Thus, again, at least some of the OVS operators may qualify as small entities.

4. Description of Reporting, Record Keeping, and Other Compliance Requirements for Small Entities

38. This Fifth Report & Order does not impose any reporting, record keeping, or other compliance requirements.

5. Steps Taken To Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

39. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its approach, which may include the following four alternatives (among others): (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, or any part thereof, for small entities.

40. Viewability Requirement. In this Fifth Report & Order, the Commission allows the viewability rule to expire, subject to a six-month post-sunset transition period (as described above in Section A of this FRFA), and revises its interpretation of the statutory viewability requirement to afford greater flexibility to cable operators, including small operators, for complying with the statute. Specifically, whereas hybrid cable operators were previously required to carry both the digital and analog versions of a must-carry broadcast station, hybrid operators may, instead, comply with the statute by carrying only the digital format and making set-top equipment available to their analog cable customers, at no cost or at an affordable cost that does not substantially deter use of the equipment, that will enable such customers to view the digital format. As a result, small hybrid cable system operators will have a choice for complying with the statutory viewability requirement. In addition, we do not believe the expiration of the viewability rule will have a significant impact on small broadcasters. We believe our new statutory interpretation of the viewability requirement—which hinges on a cable operator making equipment available at no cost or an affordable cost—will ensure that subscribers on hybrid systems may continue to access these signals at little or no additional expense, thereby mitigating any adverse impact on broadcasters. We note that a must-carry signal carried only in digital format will still be included in the basic service tier; analog cable subscribers would not be required to subscribe to an enhanced tier of service to view the digital version of a must-carry channel. We also expect this issue to diminish over time given that the number of analog cable subscribers is expected to continue to decrease as more cable customers choose to upgrade to full digital service and as more hybrid cable systems complete their transition to all-digital systems.

41. HD Carriage Exemption. The HD carriage exemption provides temporary regulatory relief to small cable systems with 2,500 or fewer subscribers that are not affiliated with a cable operator serving more than 10 percent of all MVPD subscribers, and those with an activated channel capacity of 552 MHz or less). This Fifth Report & Order extends this exemption for three more years. As noted in the IRFA, the HD carriage exemption does not impose a negative economic impact on any small cable operator, and, indeed, provides a positive economic impact to any operator of a system that chooses to take advantage of the exemption. In addition, the exemption does not impose any significant burdens on small television stations.

6. Report to Congress

42. The Commission will send a copy of this Fifth Report & Order, including this FRFA, in a report to be sent to Congress pursuant to the SBREFA. In addition, the Commission will send a copy of this Fifth Report & Order, including the FRFA, to the Chief Counsel for Advocacy of the SBA. A copy of this Fifth Report & Order and the FRFA (or summaries thereof) will also be published in the Federal Register.

B. Final Paperwork Reduction Act of 1995 Analysis

43. This Report and Order has been analyzed with respect to the Paperwork Reduction Act of 1995 (“PRA”), and does not contain any new or modified information collection requirements. In addition, therefore, it does not contain any new or modified “information collection burden for small business concerns with fewer than 25 employees,” pursuant to the Small Business Paperwork Relief Act of 2002.

C. Congressional Review Act

44. The Commission will send a copy of this Report and Order in a report to be sent to Congress and the Government Accountability Office, pursuant to the Congressional Review Act.

D. Additional Information

45. For more information on this proceeding, contact Steven Broeckaert, Steven.Broeckaert@fcc.gov, or Evan Baranoff, Evan.Baranoff@fcc.gov, of the Media Bureau, Policy Division, (202) 418-2120.

Ordering Clauses

46. Accordingly, it is ordered that pursuant to sections 4, 303, 614, and 615 of the Communications Act of 1934, as amended, 47 U.S.C. 154, 303, 534, and 535, the Fifth Report and Order is adopted, and the Commission's rules are hereby amended by removing § 76.56(d)(3) through (d)(5), as set forth in the final rule changes in Appendix B of the Fifth Report and Order.

47. It is further ordered that, pursuant to 5 U.S.C. 553(d)(3) and 47 CFR 1.427(b), the Fifth Report and Order and the attached rule amendment shall be effective immediately upon publication in the Federal Register.

48. It is further ordered that, pursuant to the Congressional Review Act, 5 U.S.C. 801(a)(1)(A), the Commission will send a copy of the Fifth Report and Order in a report to Congress and the General Accounting Office.

49. It is further ordered that the Commission's Consumer and Governmental Affairs Bureau, Reference Information Center, will send a copy of the Fifth Report and Order, including the Final Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 76

• Cable television

For the reasons discussed in the preamble, the Federal Communications Commission amends 47 CFR part 76 as follows:

PART 76—MULTICHANNEL VIDEO AND CABLE TELEVISION SERVICE

1. The authority citation for part 76 continues to read as follows:

Authority: 47 U.S.C. 151, 152, 153, 154, 301, 302, 302a, 303, 303a, 307, 308, 309, 312, 315, 317, 325, 339, 340, 341, 503, 521, 522, 531, 532, 534, 535, 536, 537, 543, 544, 544a, 545, 548, 549, 552, 554, 556, 558, 560, 561, 571, 572, 573.

2. In § 76.56, remove paragraphs (d)(3) through (d)(5).