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Cable Modem Revenues and Franchise Fees
Many cable operators are now offering high-speed Internet access via cable modems. As the high-speed Internet market grows, this will be an important source of income to cable operators. This service, which is much faster than dial-up telephone modem service, is delivered using the same infrastructure that delivers cable television. Does this mean that the cable operator’s revenues from this cable modem service are included in the gross revenue base on which its cable franchise fees are calculated?
A key question here is whether this cable modem service is a “cable service” as that term is defined in the Cable Act. This is because the 1996 amendments to the Cable Act cap the franchise fee at five percent of gross revenues “from the operation of the cable system to provide cable services” (47 U.S.C. § 542(b)). Thus, if the community is charging the full five percent franchise fee, cable modem service must be a “cable service” to be subject to the cable franchise fee.
The Cable Act (47 U.S.C. § 522(6)) defines “cable service” to include not only video programming, but also “other programming service.” Thus, the fact that Internet access isn’t conventional television does not necessarily mean it isn’t a cable service. The Act also defines “cable service” as including both “one-way transmission to subscribers” of the service, and “subscriber interaction, if any, which is required for the selection or use” of the service. Thus, the definition could be read broadly enough to include the interaction by which a subscriber clicks on a Web link to download a Web page.
Cable operators have taken ambiguous positions concerning cable modem service. In many cases, they have argued that it is in fact a cable service. This generally ensures that they can provide such service under their existing cable franchises, and also allows them to avoid other obligations (such as contributions to the universal service fund) that might attach to non-cable services. On the other hand, cable operators have often sought to argue that Internet access falls outside the cable franchise jurisdiction of local governments – most notably in the “open access” controversy (discussed as of March 2000 in an earlier feature). At the same time, cable operators have been reluctant to assume the regulatory burdens that apply to providers of “telecommunications service” – the normal alternative to “cable service.”
The FCC and the courts have also been ambivalent on this issue. The Commission suggested that Internet service is not a telecommunications service in a 1997 rulemaking order, Federal-State Joint Board of Universal Service, First Report and Order, 12 FCC Rcd. 8776 – but did not state whether it considered Internet access a cable service.
The courts that have addressed this issue have reached widely differing conclusions. In AT&T v. Portland, 216 F.3d 871 (9th Cir. 2000), the Ninth Circuit held that cable modem service is not a cable service, but includes elements of both telecommunications service and “information service.” On the other hand, in MediaOne Group v. Henrico County, 97 F. Supp.2d 712 (4th Cir. 2000) (now on appeal to the Fourth Circuit), the district court held that cable modem service is a cable service. In Gulf Power Co. v. FCC, however, the Eleventh Circuit found that Internet access is neither a cable service not a telecommunications service. Finally, in Comcast Cablevision v. Broward County, 124 F. Supp.2d 685 (2000), the court did not explicitly reach a conclusion as to the Cable Act classification of Internet access.
Based on the Ninth Circuit’s decision, some cable operators, including AT&T and Cox, have asked local communities to cease requiring franchise fees on cable modem revenues. These providers claim that they are passing through these franchise fees to consumers, as authorized under federal law, and that by charging these fees to consumers they are exposing themselves to class action lawsuits by subscribers who might be seeking refunds on unlawfully collected fees. (One such case has actually been filed in the Western District of Virginia. Bova v. Cox Communications, Civil Action No. 7:01CV00090, filed Feb. 6, 2001. In March, 2001, Cox filed to have this case dismissed on procedural grounds.)
The arguments made by cable operators in this respect are based on fundamentally mistaken assumptions about franchise fees. To begin with, franchise fees are not charged to consumers; they are charged to the cable operator as part of the compensation for the public property used by that operator. Thus, strictly speaking a subscriber does not pay the franchise fee, any more than the subscriber pays the cable company’s heating bills or employee salaries – or any other cost of doing business.
The only way a subscriber would have a claim against the cable operator would be if the operator’s charge to the subscriber for the cable modem service exceeded some rate prescribed by law. But rates for cable modem Internet access service are unregulated. Thus, the operator can charge the cable modem subscriber whatever it pleases, and the subscriber will have no legal ground to object. (The operator may choose to itemize the franchise fee, but that only has to do with how the charge is stated on the subscriber bill; it doesn’t mean the subscriber is paying any more than the cable company could otherwise charge.)
This issue is often confused by describing the cable company as “passing through” its costs to subscribers. But the phrase “pass-through” really has meaning only in the context of a regulated rate. Where there is a legal limit on the rate the company can charge subscribers, and that limit can be raised based on a cost incurred by the operator, one can say that the operator is “passing through” the cost to subscribers, because the operator can charge the subscriber more because of the cost involved. But, again, cable operators’ charges for Internet access are not subject to rate regulation. Thus, it is misleading to speak of a “pass-through” in connection with charges for cable modem Internet access.
The issue of franchise fees on cable modem revenues is far from resolved. In the meantime, cable operators have sometimes agreed to stipulate that cable modem service is a cable service, pending a more final legal decision. As the Supreme Court is now reviewing the Gulf Power case, there may be a final resolution to this matter in the not-too-distant future.
A final point: if cable modem revenues are in the end excluded from cable franchise fees, this does not necessarily mean that they are immune from any compensation to the community. In some states, non-cable use of the public rights-of-way may subject the user to telecommunications franchise requirements, telephone excise taxes, or other financial requirements. Communities are advised to look closely at the issues before accepting uncritically any position put forward by a cable operator.
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