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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington D.C. 20554 In the Matter of ) ) Turner Vision, Inc., Satellite Receivers, ) CSR-4676-P Ltd., Consumer Satellite Systems, Inc., ) CSR-4677-P and Programmers Clearing House, Inc. ) CSR-4678-P ) CSR-4706 v. ) ) Cable News Network, Inc. ) MEMORANDUM OPINION AND ORDER Adopted: June 26, 1998 Released: June 30, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. Turner Vision, Inc., Satellite Receivers Ltd., Consumer Satellite Systems, Inc. and Programmers Clearing House, Inc. ("Complainants") filed program access complaints pursuant to Section 628(b) and (c) of the Communications Act of 1934, as amended ("Communications Act") and Sections 76.1001 and 76.1002(b) of the Commission's rules against Cable News Network, Inc. ("CNN"). The Complainants are C-Band programming retailers who allege that CNN has engaged in price discrimination and unfair practices because CNN charges substantially lower rates for Cable News Network and Headline News ("CNN/HN") to Complainants' competitors than it charges to Complainants. 2. Complainants request that the Commission direct CNN to allow the Complainants to inspect programming contracts, rate cards, and other pertinent data reflecting the rates charged to the competitors. The Complainants also request damages, rebates, or credits equal to the difference between the license fees it has paid to CNN and the license fees that the Complainants should have paid. The Complainants seek prospective contractual adjustments reflecting future nondiscriminatory treatment. CNN filed a consolidated answer requesting dismissal and taking the position that its price differentials are justified and that Complainants did not demonstrate price discrimination between themselves and similarly situated multichannel video programming distributors ("MVPDs). The Complainants filed a reply. 3. After a review of the record in this case, the Commission sought additional information from the parties through a Letter of Inquiry ("LOI"). In its answer to the complaints, CNN stated that the price differential that exists for CNN/HN programming between Complainants and other program distributors is attributable to a number of factors and that the Commission's rules allow for price differences based on these factors. The Commission's LOI noted that CNN attempted to provide rationales for this price difference based on these factors, but did not attempt to quantify the actual price difference, i.e., provide specific data to support the differential between the license fee that CNN charges to other program distributors and the license fee charged to national programming retailers, such as Complainants, serving the C-Band market. The Commission's LOI requested that CNN provide this information. Additional information in response to the LOI was provided by CNN and the Complainants filed a reply to CNN's response. 4. Based upon the record before us and pursuant to the Communications Act and the Commission's rules, we find that although CNN has justified a significant portion of the price differential, it has engaged in unlawful price discrimination and violated Section 628(c) of the Communications Act and Section 76.1002(b) of the Commission's rules for failure to justify the entire amount of the disputed price differential pursuant to the relevant statutory factors. As we reach this decision, in part, on the basis of the confidential and proprietary information submitted by the parties, we have attached as a Confidential Appendix a discussion of this information. This Appendix shall not be part of the public record. In light of this finding, we need not address the Complainants' allegations relating to Section 628(b) of the Act. 5. We have been presented with a differential between the prices charged to C-Band retailers and those charged other distributors of CNN's programming. Our rules recognize that there may be valid justification, consisting of several elements, for the differential. In order to decide allegations of price discrimination, the record must be able to reflect how these elements demonstrate legitimate additional costs that the programmer would not otherwise have incurred. Just as significant, a quantitative value must be related to these elements. In both areas this has proved a difficult challenge to the parties and to us in our attempt to decide this matter. 6. As we have stated, we think that CNN has justified to a degree its differential. We note that many of the elements used to justify the differential overlap, thereby distorting efforts to assign costs accurately. Moreover, CNN's quantitative valuation of the elements of its justification exceeds the actual differential significantly. This is not only an obstacle to determining what the appropriate rate should be, but makes it difficult to make conclusions that are other than approximations. Yet we are unsure that a broader and more extensive process to ascertain these factors, with more information and analysis, would bring a more precise resolution, as we do not think that the parties purposely avoided providing more specific information. The process does not lend itself to definitive information, although we note that the parties should comprehend that the more specific information submitted, the more a precise decision can be reached. II. BACKGROUND 7. Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act") to promote competition, with the view that regulation would be transitional until the video programming distribution market becomes competitive. In enacting the program access provisions, which are codified in Section 628 of the Communications Act, Congress was concerned about the market power of wired cable companies and vertically integrated cable programmers. The program access provisions were designed to ensure that competition to cable develops and to encourage competition from emerging competitors. Consistent with this purpose, Congress sought to minimize the incentive and ability of vertically integrated program suppliers to favor affiliated cable operators over nonaffiliated entities. 8. To achieve this purpose, Congress instructed the Commission, inter alia, to promulgate regulations that prohibit discrimination by a satellite cable programming vendor in which a cable operator has an attributable interest in the prices, terms, and conditions of sale or delivery of satellite cable programming among or between cable systems, cable operators, or other MVPDs or their agents or buying groups. Congress provided limited exceptions to this prohibition. A satellite cable programming vendor in which a cable operator has an attributable interest is not prohibited from: (i) imposing reasonable requirements for creditworthiness, offering of service, and financial stability and standards regarding character and technical quality; (ii) establishing different prices, terms, and conditions to take into account actual and reasonable differences in the cost of creation, sale, delivery, or transmission of satellite cable programming or satellite broadcast programming; (iii) establishing different prices, terms, and conditions which take into account economies of scale, cost savings, or other direct and legitimate benefits reasonably attributable to the number of subscribers served by the distributor; or (iv) entering into an exclusive contract that is permitted [if the Commission finds that such contract is in the public interest pursuant to criteria set forth in the statute]. The Commission adopted implementing regulations and explanatory notes in Section 76.1002(b) of its rules and regulations and set forth procedures for adjudicating complaints in Section 76.1003. 9. The Commission stated in Implementation of Sections 12 and 19 of the Cable Television Consumer Protection and Competition Act of 1992, MM Docket No. 92-265 ("Program Access Order") that discrimination exists "when the same or essentially the same programming service is sold to competing distributors at different prices or pursuant to different terms or conditions. Such discrimination is prohibited if not justified under one or more of the specific factors listed in the statute." 10. The Commission has identified as allowable justifications under statutory category (i) above, some examples of the kinds of factors that may be considered in the "offering of service" category. Such factors include penetration of programming to subscribers or to particular systems; retail price of programming to the consumer for pay services; amount and type of promotional or advertising services provided by a distributor; a distributor's purchase of programming in a package or a la carte; channel position; importance of location for non-volume reasons; prepayment discounts; contract duration; date of purchase, especially purchase of service at launch; and other legitimate factors as standardly applied in a technology neutral fashion. 11. The Commission has indicated that, under category (ii), price differentials may be based, in whole or in part, on differences in the cost of delivering a programming service to particular distributors, such as differences in costs, or additional costs, incurred for advertising expenses, copyright fees, customer service, and signal security. 12. Under statutory category (iii), the Commission has determined that vendors will be permitted to establish pricing schedules based on volume-related factors reflecting direct economic benefits to the extent that such pricing schedules are standardly available to similarly situated distributors. When relying upon standardized volume-related factors that are made available to all MVPDs using all technologies, vendors may be required to demonstrate that such volume discounts are reasonably attributable to the number of subscribers served by the distributor if questions arise about the application of that discount. However, in such demonstrations, vendors will not be required to provide a strict cost justification for the structure of such standard volume-related factors, but may also identify non-cost economic benefits related to increased viewership. 13. Before filing a discrimination complaint, an aggrieved MVPD must give the programming vendor notice of its belief that discriminatory behavior has occurred and must include sufficient detail so that the vendor can determine the specific nature of the complaint. In the Program Access Order adopting the program access regulations, the Commission stated that complaints failing to include evidence of this notice will be dismissed. 14. The Program Access Order places the burden on the complainant to make a prima facie showing that there is a difference between the prices, terms or conditions charged or offered to the complainant and its competitor by a vertically integrated satellite cable programming vendor that meets the Commission's attribution test. To make this showing, the complainant must establish that: (1) the defendant is a satellite cable programming vendor; (2) the complainant competes with the MVPD to which it seeks comparison; and (3) the vendor has provided or offered different terms and conditions, or different prices to the complainant and its competitor. The complainant can establish different prices, terms, and conditions using a rate card, other generally available information, or the current contract between the vendor and complainant's competitor. If a complainant lacking access to comparative information seeks such information from the vendor by certified mail and is refused that information, it can file a complaint based on information and belief of an impermissible price, term, or condition. 15. To avoid a decision in favor of complainant where the vendor has offered different prices, terms, and conditions to complainant's competitor, the vendor must show either that the difference is justified by the factors set forth in the statute for permitted differentials, or that the complainant and the competitor are not similarly situated. If arguing that the complainant and its competitor are not sufficiently similar, the vendor can state its reasons for this conclusion and submit an alternative contract for comparison with an MVPD it believes is similarly situated to the complainant and that used the same distribution technology as the competitor selected by the complainant. III. POSITIONS OF THE PARTIES 16. The Complainants allege that CNN has violated the Commission's program access rules by engaging in unfair methods of competition in order to prevent the Complainants from providing satellite broadcast programming to its subscribers. The Complainants also allege that CNN is discriminating in the prices, terms and conditions of the sale of its satellite broadcast programming to Complainants by charging them a higher rate for CNN/HN as compared to other MVPDS and that such discrimination is not reasonable or justified. The Complainants state that their competitors include cable operators, multichannel multipoint distribution systems ("MMDS" or wireless cable), direct broadcast satellite operators ("DBS"), and master antenna television systems ("SMATV") collectively known as facilities-based operators. The Complainants also contend that CNN offers its programming to its affiliated company, Turner Home Satellite ("THS"), on terms which are more favorable than the terms offered to the Complainants. The Complainants argue further that CNN's parent company, Turner Broadcasting System, Inc. ("TBS"), in conjunction with a proposed acquisition by Time Warner Entertainment, Inc., agreed to grant favorable rates and terms for programming for 20 years to TCI/Netlink, a competitor of the Complainants. 17. In its answer to the complaints and response to the LOI, CNN justifies its price differential between the Complainants and facilities-based operators based upon the following factors: (1) Additional Costs of Serving the C-Band Market; (2) Penetration; (3) Impact on Advertising Revenue; (4) Provision of a Programming Delivery System; (5) Meeting Competition/Shelf Space; (6) Signal Security Risks; (7) Packaging v. A La Carte; (8) Channel Position. According to CNN, each of these factors represents a distinct benefit and/or cost which CNN is entitled to take into account in establishing wholesale rates. CNN acknowledges that there may be some overlap between the quantitative value that it attaches to some of these factors; but contends that each constitutes a separate criteria which Section 628 of the Communications Act allows programmers to consider for pricing purposes. CNN asserts that by merely taking into account penetration and the additional costs of serving the C-and market, the disputed differential is eliminated or is rendered de minimis, without even taking the other factors into consideration. Nevertheless, CNN provides an analysis for each of the enumerated factors and contends that these factors fully and completely justify the challenged price differential. IV. DISCUSSION 18. When filing a program access complaint alleging discrimination, the burden is on the complainant to make a prima facie showing that there is a difference between the terms, conditions or rates charged or offered to the complainant and its competitor by a satellite broadcast programming vendor or a vertically integrated satellite cable programming vendor that meets the Commission's attribution test. In addition, the complainant must also establish that it competes with the MVPD to which it seeks comparison. The Commission has determined that the complaint must include: . . . documentary evidence such as a rate card or a programming contract that demonstrates a differential in price, terms or conditions between complainant and a competing multichannel video programming distributor or, if no programming contract or rate card is submitted with the complaint, an affidavit signed by an officer of complainant alleging that a difference in price, terms or conditions exists, a description of the nature and extent . . . of the differential, together with a statement that defendant refused to provide any further specific comparative information. 19. The Complainants allege that they operate in competition with numerous MVPDs, including cable and wireless cable operators, DBS operators, and other home satellite dish ("HSD") MVPDs. With regard to documentary evidence to support their claim of a discriminatory price differential, the Complainants provide the Commission with CNN's rate card for cable, SMATV, MMDS, and private cable systems, which the Complainants refer to collectively as "Competitive Systems." The Complainants do not provide the Commission with rate cards or programming contracts for DBS or HSD competitors, THS and TCI/Netlink. The Complainants, however, each provide an affidavit stating that the rates they pay for CNN programming is more than the rates paid by "cable operators and other MVPDs," as well as THS and TCI/Netlink. 20. The Commission also has stated that when filing a price discrimination complaint, the complainant must establish that it competes with the MVPD to which it seeks comparison, either on a national or local basis. Section 76.1000(d) of the Commission's rules states that different MVPDs are considered to be "competing distributors" if there is overlap in the MVPDs' actual or proposed service area. The Complainant must demonstrate that there is some overlap in actual or proposed service area with the alleged "competing distributor" in order for the Commission to make a finding that such competition exists. 21. The Complainants allege that they operate "in direct competition with Competitive Systems, including THS and TCI/Netlink," although they have not submitted a specific showing in their complaints demonstrating that there is any overlap in actual or proposed service areas between themselves and the other MVPDs they allege to compete with in this case. In addition, the Complainants allege that as national C-Band programming retailers they each have "subscribers located in all 50 states and territories of the United States." As a general matter, cable, as a programming distributor, competes in a variety of geographic markets targeting single family residences as well as multiple dwelling units ("MDUs") and commercial establishments. In addition, the Complainants generally assert with regard to the C-Band industry that approximately 40 percent of all C-Band systems are located in cable service areas. The Complainants have presented documentary evidence, in the form of a rate card, to show that a price differential does exist between themselves and cable, SMATV, MMDS, and private cable systems, collectively referred to by CNN on the rate card as "Competitive Systems." For purposes of this proceeding, however, we believe that it is reasonable to conclude that Complainants compete with cable, SMATV and MMDS, and will consider Complainants to have made a prima facie showing. We will evaluate the Complainants claims of price discrimination with regard to the difference in rates charged by CNN to the Complainants and those rates charged to cable and the other facilities-based operators included on the "Competitive Systems" rate card submitted by the Complainants. 22. The Complainants have not made a prima facie case that a discriminatory price differential exists between themselves and DBS, THS, and TCI/Netlink. The Commission has stated that any MVPD can file a price discrimination complaint with the Commission based on information and belief of an impermissible rate differential, supported by an affidavit, along with a statement that the vendor refused to provide the necessary specific comparative information. While each of the Complainants has filed a general affidavit alleging that a price differential exists between each complainant and all MVPDs that distribute CNN programming, as well as THS and TCI/Netlink, the Complainants have not shown that CNN has refused to provide the necessary information, such as a rate card, for the Complainants to establish a prima facie case for DBS, THS, and TCI/Netlink and they have not submitted a statement indicating that CNN refused to provide that information. Based upon Complainants' failure to state a claim against CNN with regard to DBS, THS, and TCI/Netlink, we do not address in this Order whether a discriminatory price differential exists between themselves and DBS, THS, and TCI/Netlink. 23. We note that CNN argues in response to the Complainants claim of unlawful price discrimination between competitors that the Commission must look to see not only whether the alleged competing program distributors being compared are actually competitors, but also whether they are similarly situated to one another. CNN argues that Complainants cannot be compared to cable operators and other facilities-based operators for purposes of determining a discriminatory price differential and that Complainants are similarly situated only with other national C-Band programming retailers who purchase CNN at wholesale rates. According to CNN, when Complainants are compared with other national C-Band programming retailers, the MVPDs similarly situated with them, no unlawful price discrimination exists. 24. In evaluating a discrimination complaint, the Commission offers the following two-step analysis: First, we will compare the difference in programming prices (or terms and conditions) paid by (or offered to) the complainant and the competing distributor. Second, we will allow the programmer to justify the difference under the statutory factors by either (i) submitting a showing that one or more of the factors is involved and the price differential reflecting those factors is reasonable, or (ii) submitting an alternative contract for a more reasonably comparable, or more "similarly situated," distributor. For purposes of evaluating alternative contracts offered by programmers in order to defend the disputed price differential, the Commission defines a distributor as "similarly situated" with respect to the complainant if it operates within a proximate geographic region, has roughly the same number of subscribers, and purchases a similar service, while also using the same distribution technology as the competing distributor with whom the complainant seeks to compare itself. 25. While CNN argues that the Complainants and the facilities-based operators to whom the Complainants compare themselves with as competitors, are not similarly situated for purposes of determining a discriminatory price differential, CNN offers no alternative contract to be used as an alternative defense for purposes of an analysis regarding a more "similarly situated" distributor. 26. CNN has submitted information to demonstrate that one or more of the statutory factors is involved in setting the prices, terms, and conditions for the sale or delivery of its programming and that the price differential reflecting those factors is reasonable. Those factors include: Additional Costs of Serving the C-Band Market; Penetration; Impact on Advertising Revenue; Provision of a Programming Delivery System; Meeting Competition/Shelf Space; Signal Security Risks; Packaging v. A La Carte; and, Channel Position. Based upon our review of the record, we find that CNN has proffered sufficient justification for some price differential based upon two factors: Additional Costs of Serving the C-Band Market and Penetration. Our analysis of the factors proffered by CNN to justify the disputed price differential is relevant only in the context of the unique facts presented to us in this case. 27. Our analysis of CNN's justification of the disputed price differential based on a number of cost, benefit, economic and business factors will not provide a "penny-by-penny" analysis of the dispute based on the specific data submitted by CNN. Throughout this proceeding, in an effort to resolve the issues, we have attempted to analyze the information presented both in the initial filings provided by the parties and in the filings made pursuant to our requests for additional information. We have had to balance requests for additional information, and the burden these entail, against the need to bring this matter to resolution. This has proven to be a difficult process. The information received is not conducive to resolving this matter from a strictly cost-accounting perspective. CNN has attached a monetary amount to each of the eight factors it uses to justify the price differential, but as CNN acknowledges, there is some overlap between the quantitative value of these factors. Our decision seeks to establish the parameters where we think a differential has been justified as well as where we think a rationale is lacking. 28. Some of the factors themselves, while constituting separate criterion under Section 628 for price-setting purposes, are not mutually exclusive in the context of analyzing this case. For example, "Penetration" and "Impact on Adverting Revenue" are factors so interrelated that we cannot consider each as a separate factor justifying the disputed price differential, further indicating that the information submitted by the parties does not lend itself to a precise result. Below is an analysis of the information submitted in the context of the eight factors seeking to justify the price differential. Additional Costs of Serving the C-Band Market 29. Section 628(c)(2)(B)(ii) of the Communications Act and the Commission's rules allow for establishing different prices, terms, and conditions to take into account actual and reasonable differences in the cost of creation, sale, delivery, or transmission of satellite cable programming. CNN claims that in distributing its programming service to the C-Band market, it incurs additional costs serving that market. These costs, CNN claims, are above and beyond any costs incurred when furnishing its programming to facilities-based operators. These "Additional Costs of Serving the C-Band Market" appear to fall under three broad categories of costs: 1) the costs associated with providing 24-hour customer service to non-THS C- Band customers, including personnel, equipment, supplies, and overhead; 2) the costs associated with the authorization of service to C-Band customers; and 3) the costs associated with C-Band retail business failure and the risk of bad debt resulting from those failures. Each of these costs, CNN contends, have no corresponding or comparable costs when examined in the context of the provision of service to facilities-based operators. 30. The Complainants respond that the costs and scope of services provided by CNN in the delivery of its programming are overstated. In particular, Complainants state that CNN unjustifiably uses the facilities-based operator retail rate as a base and adds additional costs to that rate. Complainants note that many of these additional costs (e.g. salaries and benefits, travel, overhead, marketing, and other miscellaneous costs) already are included in the facilities-based operator retail rate. The Complainants argue that before CNN adds on any additional costs of serving the C-Band market, CNN should first reduce the facilities-based operator retail rate by the costs it incurs in serving that market. Complainants state that they would not argue that CNN or THS, a CNN affiliate, is not entitled to recover its reasonable expenses and a profit margin. The Complainants state, however, that the costs incurred in marketing, administration, advertising, and similar costs are not unique to the C-Band market. 31. With regard to customer service, CNN asserts that this cost is entirely unique to the C-Band market because many C-Band retailers fail to maintain a customer service center, 24 hours or otherwise, while facilities-based operators often do maintain customer service centers. CNN argues that given C-Band retailers' failure to provide customer service, (and sometimes even in spite of customer service operations maintained by C-Band retailers) C-Band customers are inclined to call CNN directly when there are service interruption or break-down problems with the programming, instead of calling the C-Band company through which they subscribe. CNN argues that to provide continuous service in the case of satellite transponder switches, or if there is an interruption in service by failed C-Band retailers, CNN must maintain the personnel, administrative resources, and equipment necessary for providing customer service to all C-Band subscribers. 32. The Complainants disagree with these claims, arguing that they maintain customer service centers, and that CNN only needs to maintain a customer service center to service its own retail arm, THS. Complainants dispute CNN's contention that customer and administrative services are an inherent cost of doing business in the HSD market, and note that programmers such as Discovery, Family Channel, TNN, CMTV, ESPN, USA, A&E, and Lifetime only have one or two people dedicated to their HSD operations. Additionally, the Complainants claim that they often field customer support calls from THS's own customers because THS provides no technical support to its subscribers whatsoever, unlike the Complainants. The Complainants argue that CNN's maintenance of a customer service center as it exists is primarily, if not solely, for THS's own benefit as a retail packager, not as a service to Complainants. 33. Based on the information provided regarding customer service and administrative costs, we accept that there is some extra cost to CNN for doing business in the C-Band wholesale market that is not incurred when conducting business with facilities-based operators or its own C-Band retail service. CNN, however, has been unable to substantiate the entire amount it claims for this justification; therefore we believe that only part of what CNN claims regarding providing 24 hour customer service to non-THS C-Band customers, including number of personnel, equipment, supplies, and overhead can be applied to the rate differential. CNN claims that in distributing its programming service to the C-Band market, it incurs additional costs per subscriber per month above the costs incurred to competing distributors. We find that CNN's claim of additional costs is overstated. CNN enumerates a list of expenses attributable to serving the C-Band market, such as general administrative expenses relating to normal daily business operations. Given the complexity of the issues involved, we find it difficult to analyze precisely and quantify the amount of each of the additional costs cited by CNN. 34. The following reflects our evaluation of the justifications. CNN claims that it undertakes certain marketing and advertising efforts intended to heighten interest in and increase awareness of its programming (improve the CNN brand name). Although these efforts likely benefit C-Band retailers to some degree, these costs would be incurred by CNN absent the existence of the C-Band market. Thus, this cannot be considered an "additional cost." We also find that CNN's telephone calculations are too high. When CNN calculates the costs incurred from answering calls from CNN C-Band viewers, it fails to remove the "commissions paid" to its THS employees from the Salaries calculation. Commissions cannot be earned by THS employees when servicing non-THS retail customers. 35. CNN also claims that there are additional costs that result from doing business with a financially unstable C-Band retailer market. CNN claims that programmers not only incur financial risks due to instability among national C-Band retailers and dealers, but they also incur risks to their goodwill. CNN asserts that past incidences of C-Band retail failure have forced CNN to choose between a loss of goodwill or a loss due to bad debt. 36. The Complainants contest CNN's justification of a price differential based on business failures in the C-Band retailer market, arguing that such costs may only be allocated on an individual basis, not market- wide. Because CNN's "costs" do not take the individual Complainants into account, they argue, these claims are not legitimate. Furthermore, the Complainants argue that there are corresponding credit problems in the cable, SMATV, and private cable industries. 37. We accept that there are additional costs associated with credit risks related to the C-Band market that may create the need for CNN to assess an additional charge to recover such costs associated with doing business in the C-Band market. Based on the facts presented us, we believe that most of the costs to CNN under this justification take the form of bad debt. We think it reasonable for CNN to spread this risk across the C-Band market instead of the difficult task of predicting which individual C-Band retailer will impose financial burdens upon CNN. Additionally, Complainants have not demonstrated that CNN's rate for cable, SMATV and private cable industries does not encompass a bad debt factor. We agree that CNN is justified in assessing some additional fee to recoup past losses and future risk of loss. 38. CNN also asserts that it incurs special technical costs when servicing the C-band market that are not incurred when servicing facilities-based operators. In order to make the reception of programming via C-band dishes possible, CNN claims it is forced to construct uplink facilities, lease transponder space on satellites, establish and maintain a tier-bit at the General Instruments Access Control Center ("GI Center"), and develop and maintain software and other equipment needed for authorizing and deauthorizing access to programming signals. Additionally, CNN asserts that the advent of the C-Band dish market forced programmers to invest in scrambling technology in order to compensate for the growth in unauthorized and uncompensated reception of programming signals by C-Band dish owners. 39. The Complainants admit that any additional costs that CNN may incur in serving the C-Band market attributable to the maintenance of a "tier bit" at the GI Center and to the provision of a data stream are valid. Regarding software and equipment used for the authorization and deauthorization of subscribers, the Complainants argue that such costs, if any, are attributable to CNN's retail division, THS, and are not an inherent cost of doing business in the C-Band market. The Complainants argue that only programmers who operate a retail sales division, such as THS and HBO, incur the costs of creating and maintaining such software and equipment. The Complainants believe that such costs are voluntary and not properly allocated to C-Band retailers and that CNN's attempt to pass these costs on to the Complainants is not justified. 40. We agree that there are costs incurred by CNN related to tier bit access to the GI Center and there are some costs associated with maintaining software and equipment. We do not think that CNN can attribute all the costs relating to developing and maintaining software and equipment to C-Band, as the record does not differentiate between costs relating to its own services and that of C-Band retailers. With regard to scrambling, CNN also claims compensation for that cost under a separate factor entitled "Signal Security." CNN cannot be credited with additional costs attributable to scrambling under two categories. While we will allow some credit to CNN for the costs associated with scrambling, it is not appropriate to attribute the entire cost of scrambling its programming signal to the C-Band market. CNN also invests in scrambling technology in order to prevent signal theft in other markets, such as SMATV, MMDS and cable. 41. We believe that CNN has shown that there is some cost differential in serving the C-Band market that it does not incur in serving facilities-based operators. However, we agree with the Complainants that many of the costs CNN attributes as additional costs of serving the C-Band market are intertwined with CNN's expenses related to THS, its retail packager, and are not costs related to services provided exclusively for the benefit of the Complainants. Additionally, in CNN's justification for "Additional Costs of Serving the C-Band Market," it incorporates elements of its arguments regarding its "Signal Security Risks" factor and provides a separate monthly per-subscriber amount for that factor to justify the price differential. Yet, CNN also allocates scrambling fees as a component of its "Additional Costs of Serving the C-Band Market." CNN has not demonstrated that these are separate costs. Even if there is a legitimate additional fee CNN must pay for scrambling, it cannot use it twice in justifying the price differential. While we think CNN has justified some additional expense in serving the C-Band market, the amount CNN allocates has not been fully justified by CNN. Penetration 42. Section 628(c)(2)(B)(i) of the Communications Act allows programming vendors to establish a price differential based on factors related to offering of service. The Commission's rules state that penetration is an example of the kind of factor that may be considered in the "offering of service" category. In its justification of the price differential, CNN argues that maximum penetration of a distributor's subscriber base is of critical importance to advertiser-supported cable programming networks, such as CNN, because it directly affects both its subscription and advertising revenue levels. According to CNN, being able to offer potential advertisers a high penetration level, and particularly a geographically concentrated group of subscribers, ensures advertisers that many subscribers will be watching. Stimulating a high demand and a high market price for advertising spots on CNN is a premise of its marketing strategy. It is the underlying revenue base upon which most programmers depend for growth and success. Low penetration undermines this marketing strategy. CNN contends, therefore, that it structures its license fee arrangements in a manner that promotes maximum penetration of each distributor's subscriber base. According to CNN, its contractual requirements have enabled it to achieve maximum penetration of the total subscriber base of virtually every cable company carrying CNN, which in turn assures advertisers that when they buy time on CNN they will reach virtually every cable household in every local community throughout the country. By contrast, CNN contends that the lower penetration levels in the C-Band market, along with the C-Band market's emphasis on a la carte program distribution, demonstrates the need for different license fee structures for C-Band programming retailers. 43. CNN also argues that it actually understates the amount that it attributes to the penetration factor in its price differential justification because C-Band programming retailers do not have the technical capability to provide local advertising, and therefore C-Band retailers lack the incentive to increase CNN's penetration among their subscriber base. CNN argues that because of the provision of local advertising availabilities, facilities-based operators have the incentive to maximize their subscriber base so that they can maximize their local advertising revenue. 44. CNN argues, that as a result of the importance of penetration levels on advertising revenues, it requires that all facilities-based operators attain a high predetermined company-wide level of penetration to qualify for carriage. According to CNN, failure to satisfy this distributor threshold penetration requirement denies the operator distribution rights to CNN at any rate. Once the company-wide penetration rate has been satisfied, the actual rate charged is determined on a system-by-system basis. If a specific system within a qualifying distributor's jurisdiction fails to meet CNN's system-wide penetration requirement, that system must pay a penalty rate which currently amounts to a license fee that is double the base rate. The base rate is simply the rate the system would otherwise pay for any given package of programming before discounts or other types of penalties. 45. With regard to carriage requirements for C-Band retailers, CNN states that it does not require that a company-wide threshold penetration requirement be met to qualify to carry CNN. C-Band retailers are allowed to purchase CNN programming regardless of the CNN penetration level and sell the programming to C-Band subscribers on an a la carte basis. C-Band does not use multiple, local systems to distribute programming and, therefore, individual system penetration is not relevant in the C-Band context. Although C-Band is not held to either the threshold penetration requirement that all facilities-based operators are held to in order to carry CNN programming or to the individual system-by-system penetration requirement that certain facilities-based operators are held to, CNN does penalize C-Band retailers for low penetration. The penalty charged to C-Band appears to be double the base rate. CNN's "Competitive Systems" rate card reflects that this is the same penalty rate charged to smaller systems that fail to meet the system-by-system penetration requirement. 46. CNN asserts that if the Complainants were held to the same high standard as facilities-based operators, they would never be eligible for the rate giving rise to the challenged differential because the penetration of CNN in the C-Band subscriber base is so low. CNN states that during the relevant time period, Complainants Turner Vision and Consumer Satellite Systems had CNN/HN penetration levels below 50 percentand Programmers Clearing House had a penetration level just above 50 percent. CNN notes that Complainant Satellite Receivers failed to submit any evidence to show that its CNN penetration level is any different from the other three Complainants. With regard to the overall penetration level in the C-Band market, CNN states that it ranges from 42 to 54 percent of all C-Band households, as opposed to 97 percent of all cable television households. CNN arrives at its penetration range by dividing the number of CNN/HN C-Band subscribers (1.922 million) by the total number of C-Band satellite dishes sold (ranging from 3.5 to 4.5 million). 47. The Complainants dispute the C-band penetration level that CNN attributes to them. The Complainants claim that it is illogical for CNN to measure penetration against all C-Band systems ever sold. Complainants state that many of the C-Band dishes sold over the last fifteen years no longer work, were sold for cable headends and for installation at radio and television stations, or for some business or commercial use. The Complainants argue that C-Band penetration figures are higher than those projected by CNN if the measurement base used is "technology that enables receipt" in contrast to CNN's measurement which is the amount of C-Band systems ever sold. The Complainants state that the technology that enables receipt of CNN's programming in the C-Band market is a functioning authorized VideoCipher receiver. According to the Complainants, there currently are 2.208 million VideoCipher systems operating in the C-Band market. When using that figure against the 1.922 million CNN C-Band subscribers, the Complainants argue that CNN's overall penetration rate in the C-Band market is approximately 87 percent, not the 42 to 54 percent penetration rate claimed by CNN. 48. Given the information provided to us, it appears that using any of the proffered methods of measuring penetration, that the Complainants still would not be eligible for the rates provided to facilities-based operators because the Complainants could not reach the high predetermined levels of threshold penetration that facilities-based operators are required to attain before being allowed to carry CNN/HN. CNN allows C-Band retailers to carry the programming despite not meeting these predetermined levels of penetration. Essentially, CNN is waiving the threshold penetration level that it requires for all other distributors and still allows C-Band retailers to provide CNN/HN. We believe that CNN has justified the penetration factor as an element in explaining the disputed price differential. Since CNN estimates a range of values for its penetration factor based on the type of CNN programming package taken by facilities-based operators, we must determine which programming package is relevant for determining the specific amount in that range of values to be credited to CNN for the penetration factor. We have determined that the relevant CNN programming package shown on CNN's "Competitive Systems" rate card, or facilities-based operator rate card, is the package that most closely resembles the CNN-related programs taken by the Complainants. We find that CNN has justified the smallest value or amount within its estimated range of values that it attributes to the penetration factor. Impact on Advertising Revenue 49. Pursuant to Section 628(c)(2)(B)(i) of the Communications Act and the Commission's rules, the amount and type of promotional or advertising services provided by a distributor is an appropriate factor to consider in evaluating a price differential. CNN attempts to justify its price differential by arguing that its advertising revenue stream is critical to its survival as both a programming service and a business. CNN contends that access to a nationwide audience represents the cornerstone of its revenue stream and its license fee structure reflects, in part, the degree a particular distributor contributes to the formation and support of that cornerstone. According to CNN, facilities-based operators compensate CNN both through license fees and through the per-subscriber advertising revenue stream that CNN receives as a result of its presence in major markets in the country, which are particularly valuable to national advertisers. 50. Furthermore, CNN contends that C-Band retailers make virtually no contribution to generating CNN's monthly per-subscriber advertising revenue stream. CNN claims that its advertising revenues would not be affected if it lost the 1.922 million C-Band households that receive its programming, but that its advertising revenue would be eliminated if it lost the cable households that receive its programming. According to CNN, advertisers have little or no interest in C-Band households because they are not located in urban and suburban markets, but primarily are located in rural areas. CNN argues that, at best, C-Band distributors represent a "niche supplemental technology" the primary function of which is to bring in pockets of rural viewers dispersed throughout the country. CNN argues that cable operators and other facilities- based operators offer CNN access to a consolidated group of homes in each local community around the nation, while C-Band retailers do not contribute to this community-by-community market-building function. 51. CNN also notes that C-Band households make little contribution to its Nielsen ratings points which are a measure of its advertising revenue. According to CNN, C-Band households may actually depress CNN's advertising revenue because scattered viewing patterns result in lower ratings points. CNN again argues that because Complainants lack the capability to insert local advertising, Complainants fail to provide CNN with the benefits to its national advertising revenue stream that are engendered by the provision of local advertising to facilities-based operators. In addition, CNN notes that facilities-based operators also provide a valuable service because they use some of their local advertising avails to cross-promote CNN. 52. The Complainants respond that CNN has not supported its claim that advertising revenues justify the price differential between C-Band retailers and facilities-based operators. The Complainants dispute CNN's contention that the C-Band homes do not have any value to advertisers and state that many of the C-Band households are not passed by cable and, thus, without C-Band, CNN advertisers would not even reach these households. The Complainants dispute CNN's claim that if there were no C-Band distributors, CNN still could reach C-Band households. The Complainants contend that CNN does not know the identity of the Complainants' subscriber base and would have to expend considerable time and resources to reach the 500,000 or so households served by Complainants. 53. The Complainants also state that C-Band retailers do not serve only rural markets because as much as 45 percent of the C-Band subscriber base is located in urban and suburban markets. Complainants state that Nielsen metering equipment does exist in C-Band households and that CNN has presented no quantitative evidence to show that C-Band households are more difficult to measure for ratings purposes. Complainants contend that CNN's claim that C-Band programming distributors fail to provide benefits to CNN because of their inability to insert local advertising is not supported by any data and the loss is not quantified by CNN. 54. Although we accept this factor as a theoretical basis for justifying a price differential, we believe, based on the information provided, that the impact on advertising revenue discussed here is encompassed by, and comprises a portion of the price differential assigned to penetration since the greater the penetration, the more advertising dollars commanded. As CNN points out, its advertising revenue stream is related to a nationwide audience and the presence of CNN programming in major markets throughout the country. Although audience location and concentration may reflect differentially on its value to advertisers, we do not agree, as CNN appears to argue, that C-Band has no value at all to advertisers. We do agree, however, that the ability to achieve the valuable mass penetration that facilities-based operators provide supports a difference in the license fee structure that CNN sets for different distributors. We find, however, that rather than demonstrate that these two factors - "penetration" and "impact of advertising revenues" - are separate contributing factors to the disputed price differential, the record indicates that both are closely related. We cannot justify these overlapping factors to both account for a portion of the price differential. Provision of a Programming Delivery System and Meeting Competition/Shelf Space 55. Section 628(c)(2)(B)(ii) of the Communications Act and the Commission's rules also provide that price differentials may be based on differences in the cost of delivering a programming service to particular distributors. In further justifying its price differential, CNN argues that it avoids costs when its programming is distributed by facilities-based operators because these distributors, as opposed to C-Band retailers, provide CNN with a programming delivery system which CNN describes as a network infrastructure and distribution path into CNN subscribers' homes that CNN itself could not construct or duplicate. CNN argues that C-Band retailers provide no delivery system and, therefore, CNN's programming signals never travel over facilities controlled by Complainants. According to CNN, C-Band retailers are "nothing more than order-takers who sell subscriptions to customers which CNN could reach on its own." CNN contends that the C-Band retailer provides a vastly less valuable service to the programmer than is provided by facilities- based operators. 56. The Complainants respond that there are extensive services provided by C-Band distributors in establishing and serving that market. Complainants state the level of service and cost of service incurred by C-Band distributors is higher than comparably sized cable operators. Complainants also question whether CNN's facilities-based operator rate should apply to SMATV and wireless resellers. According to the Complainants, wireless resellers purchase programming, including CNN, and package and market the programming to SMATV operators, wireless cable operators, and others. Complainants state that these resellers provide no programming delivery system yet, SMATV and wireless resellers purchase CNN/HN at the facilities-based operator rate. 57. Section 628(c)(2)(B)(i) of the Communications Act and the Commission's rules allow for consideration of competition at the distributor level and other legitimate factors when examining a price differential. CNN states that there is an increasing scarcity of channel capacity or "shelf space" on cable systems and other facilities-based operator systems.. CNN also contends that competition is increasing within program categories. Because of this competitive dynamic among programming services, CNN argues that facilities-based operator systems with limited channel capacity have more leverage in negotiating carriage agreements. CNN contends that in the C-Band market, this dynamic does not prevail because there are no limits on channel capacity. CNN argues that in order to ensure that its programming continues to occupy the limited channel capacity of cable operators and other facilities-based operators, CNN must make sure that the license fees charged to these distributors do not rise to a level that would prompt them to consider alternative programming services to occupy the channel capacity now utilized by CNN. 58. As an example of competition in the programming distribution market, CNN states that a number of new programmers are offering compensation to cable operators in exchange for carriage. CNN notes that at least five cable networks are willing to pay at least $2 per subscriber in order to obtain carriage, while others are offering free carriage. In addition, CNN contends that some programmers are willing to suspend their license fees during the first few years after gaining carriage. 59. Specifically pointing to CNN's example regarding Fox News, the Complainants dispute CNN's argument regarding a shortage of channel capacity. Complainants contend that Fox News was launched in 1997 and does not explain past price discrimination with regard to C-Band retailers. In addition, Complainants note that given the popularity of CNN/HN, along with the fact that CNN is now owned by Time Warner and TCI who most likely arranged for long term carriage agreements with cable operators, the Complainants doubt whether CNN is unable to meet the challenge of Fox News. Additionally, the Complainants note that CNN applies its facilities-based operator rates to DBS, SMATV, and MMDS, but that CNN has not provided any evidence that these distributors have a problem with channel capacity. 60. We also do not accept either of the above factors as justifying the disputed price differential. CNN argues that C-Band retailers do not provide a delivery system to subscribers and that Complainants' program access protection is somehow dependent upon their ownership of transmission facilities. We reject this contention. CNN also appears to contend that as it avoids costs in distributing its programming because it does not have to build a transmission infrastructure for facilities-based operators this justifies its lower fees to facilities-based providers, such as cable. We believe that this argument invites an extensive discussion of incremental costs. While not disparaging the value of such concepts and the challenge of presenting information quantitatively, CNN has not provided sufficient information for us to approach this argument and arrive at a reasoned determination. 61. Additionally, CNN's reference to Fox News and other cable networks paying fees to obtain carriage is misleading. Fees offered by Fox News and others represent launch fees rather than a payment offered by a well established programmer (such as CNN) to maintain carriage. According to an industry analysts, CNN is the top rated cable news channel, significantly ahead of its next closest rival, CNBC. The popularity of CNN to subscribers is likely to limit the ability of the cable operator (or any facilities-based operator) to drop CNN without losing subscribers and profits. Based on the facts before us, we do not accept as a valid justification the rationale that entities with more limited channel capacity and aggressive competition for that capacity by programming service providers -- such as the competition between Fox News and CNN for cable carriage -- are entitled to a lower price than C-Band providers. The Commission has indicated that price differentials may be based upon a vendor's attempt to "meet competition" at the price level for another vendor's service. The generalized information CNN provides here does not persuade us that a "meeting competition" justification has been made out here. Signal Security Risks 62. Section 628(c)(2)(B)(ii) of the Communications Act and the Commission's rules also allow for signal security to be considered as a factor in evaluating the price differential. CNN further seeks to explain the price differential by arguing that signal security risks justify part of the cost difference. CNN argues that in the C-Band market, as opposed to every other MVPD market, it is programmers who must bear the costs of protecting against signal theft. CNN states that cable operators and other facilities-based operators pay for the scrambling of signals or the installation of traps and filters designed to prevent unauthorized signal reception, while C-Band retailers do not make similar efforts. CNN also notes that programmers must also deal with a higher risk of signal theft in the C-Band market. CNN argues that the C-Band market's history of signal theft, the view among a block of C-Band subscribers that pirated reception of programming is an acceptable substitute for authorized reception, and the prospects for future breaks in signal security, are factors that must be reflected in the license fee rates charged to C-Band retailers. 63. The Complainants respond that the encryption and delivery system in use in the C-Band market since 1992, the VideoCipher RS (VCRS), is one of the most secure systems in use today by any delivery technology. Complainants state that no piracy exists in the C-Band market today. The Complainants argue that CNN's justification for costs associated with piracy is based on outdated and incomplete information. According to the Complainants, CNN is not losing any revenues due to piracy in the C-Band market. With respect to CNN's calculations of past losses, the Complainants argue that there is no firm data upon which such losses can be calculated historically. The Complainants contend that piracy is more of a problem in other distribution technologies than it is in the C-Band market. 64. We do not accept this factor as a basis for a price differential. CNN does not refute Complainants' assertions regarding the capability of VideoCipher units to help prevent signal piracy. Moreover, CNN's calculations are based on past losses and cannot justify forward-going price differentials. Although no information is given for years later than 1994, we believe that CNN's own estimates of C-Band piracy assume no piracy in the C-Band market at that time. Packaging v. a la carte 65. A distributor's purchase of programming in a package or a la carte is also considered to be a legitimate factor in considering the price differential pursuant to Section 628(c)(2)(B)(i) of the Communications Act and the Commission's rules. CNN attempts to justify the price differential by arguing that carrying its programming in packages is more valuable that offering it a la carte. According to CNN, it is important for its programming to be carried on a distributor's most highly-penetrated programming tier package. CNN argues that carriage in a tier package helps to maximize penetration, audience reach, and ratings, which means that CNN can earn higher revenues. CNN states that carriage on an a la carte basis reduces subscriber penetration and audience reach, which results in lower revenue for CNN. CNN states that because it has a penetration threshold tied to its license fees, facilities-based operators are effectively precluded from carrying CNN on an a la carte basis. 66. By contrast, CNN states that C-Band retailers are more likely to distribute CNN on an a la carte basis, or in a la carte packages, known as "pick-a-paks." CNN states that it gives C-Band retailers more flexibility to distribute its programming on a stand alone or "pick-a-pak" basis, than it gives to facilities- based operators. CNN states that the "cost" of this benefit, in the form of the premium mark-up for a la carte distribution that it provides to C-Band retailers, is lower than the cost for a la carte authorization imposed by other programmers. 67. The Complainants argue that the C-Band market is unlike most other distribution technologies in that the subscriber is not constrained by having to select programming from a monopoly supplier. According to Complainants, a la carte flexibility allows C-Band viewers to purchase the programming that they really want to watch and allows consumers to avoid double payment by having to purchase two or more packages in order to get a desired program. The Complainants also argue that some subscribers might not be subscribers to CNN/HN were it not for a la carte or customer selected packaging. The Complainants also state that if CNN wants one rate card for package sales and one for a la carte, the base rate for package sales should be equivalent to the facilities-based operator rate and the a la carte penalty should be based on real costs to CNN. Complainants argue that a C-Band distributor is forced to incur the built-in a la carte penalty on all sales and that no other distribution technology faces such circumstances. 68. We accepted penetration as a legitimate factor to justify some of the price differential. Cost difference justified by packaging as compared to a la carte appears to replicate this differential. CNN is highly penetrated on competing facilities-based operator systems and the advantages alleged to come from packaging have been captured in large part. The record does not provide sufficient basis to support any additional amount. We agree with Complainants that a la carte flexibility allows some C-Band subscribers to become subscribers to CNN/HN that otherwise may be precluded from getting the programming because of costs involved in having to pay for two or more packages in order to receive desired programming. Channel Position 69. Section 628(c)(2)(B)(i) of the Communications Act and the Commission's rules also note that channel position is a factor to be considered in examining the price differential. In attempting to further justify its price differential, CNN argues that channel position contributes to the cost difference. CNN states that it is important for its programming to occupy a favorable channel position, i.e., near broadcast signals or clustered near popular advertiser-supported cable networks, which translates into enhanced viewership and increased advertising revenue. According to CNN, while cable networks must compete for placement on cable systems, this dynamic does not exist in the C-Band market. CNN notes that because C-Band retailers do not operate a distribution network, they have no channel positions to offer programmers. CNN states that while it does not compensate cable operators for providing favorable channel positioning, CNN does structure its licensing arrangements in order to encourage cable operators to provide favorable channel positions. CNN notes that other programmers are willing to provide rebates between $0.02 and $0.03 per subscriber to facilities-based operators in order to obtain favorable positioning. 70. The Complainants respond that if CNN's rate card reflected all distribution technologies, and that rate card permitted some reasonable allowance for CNN to obtain a preferential channel placement on a cable system, that would be acceptable to Complainants. The Complainants also argue that there is no documented evidence that CNN rate differentials are tied to channel position requirements in cable. In addition, Complainants argue that it is not appropriate that a rate fee adjustment allocated to channel placement should be used as a penalty in the C-Band market and not to other distribution technologies, such as DBS, where channel placement is not an issue. The Complainants also add that in the C-Band market, CNN's services are located on the Hughes Galaxy 5 ("G-5") satellite. The Complainants note that the position held by CNN on G-5 is premier space in the C-Band market. 71. We do not consider it unreasonable for CNN to structure its licensing arrangements to encourage cable operators and other facilities-based operators to provide CNN with favorable channel positioning. CNN, however, does not present enough information to support a quantitative difference that should accrue to distributors that do not offer an opportunity for similar favorable channel placement. V. CONCLUSION 72. As we have stated, this case has presented difficult issues and based upon the record presented by the parties, conducting an exacting analysis of the information submitted has proven to be difficult. The record is multi-faceted and lends itself to a variety of different results, while also lacking sufficient detail to provide a precise result. We find that CNN has justified a significant portion of the price differential in dispute in this matter. To that extent, we find that CNN has engaged in unlawful price discrimination and violated Section 628(c) of the Communications Act and Section 76.1002(b) of the Commission's rules because CNN has not completely justified the entire price differential pursuant to the statutory factors. We find it unnecessary to address the Complainants' unfair method of competition argument pursuant to Section 628(b) of the Communications Act and Section 76.1001 of the Commission's rules. We also direct the parties to renegotiate the price charged to C-Band retailers by CNN for its programming taking into account the discussion herein and the information in the Appendix. VI. ORDERING CLAUSES 73. Accordingly, IT IS ORDERED that the program access complaints filed by Turner Vision, Inc., Satellite Receivers, Ltd., Consumer Satellite Systems, Inc., and Programmers Clearing House, Inc. against Cable News Network, Inc. ("Complainants") ARE PARTIALLY GRANTED and Cable News Network, Inc. and Complainants are required within 45 days of the release of this Order to renegotiate the price charged by Cable News Network, Inc. for its programming to the Complainants. 74. This action is taken by the Acting Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau APPENDIX SUMMARY OF CONFIDENTIAL MATERIAL AND CONCLUSIONS This Appendix summarizes and discusses information which the parties have asserted is proprietary and confidential pursuant to 47 C.F.R.  76.1003(h). This information has been redacted from the published item. (Continued on following page).