Caption Regs May Raise Barrier to Success

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The Telecommunications Act of 1996 directed the Federal Communications Commission to establish rules governing closed captioning of television and cable programming.


The FCC in August 1997 adopted rules governing closed captioning of video programs that required that all new video programming first published or aired after Jan.1, 1998, be closed captioned according to an eight-year transition schedule.


These rules also covered long form advertising. A number of parties asked the commission to reconsider various aspects of the rules and the FCC recently released its decision regarding those petitions. Although advertisements less than five minutes long remain exempt, long form ads (including infomercials and television shopping programs) are not exempt and generally will have to be closed captioned absent an individual waiver from the FCC. The first benchmark for measuring compliance is not until Jan. 1, 2000.


Legal responsibility for complying with the new captioning requirements generally falls on "video programming distributors," which are defined as all entities providing video programming directly to a customer's home, regardless of the distribution technologies that they employ.


Broadcasters and all multi-channel video programming distributors are thus required to comply with the captioning rules. Multi-channel video programming distributors include cable operators, wireless cable operators, local multi-point distribution service operators and providers of direct broadcast satellite, home satellite dish and similar systems.


The FCC anticipates that while distributors will be legally responsible for compliance in most situations, they will incorporate their captioning requirements into contracts with program producers and owners, since it is generally most cost-effective to caption at the production stage. The result is that, at least by Jan. 1, 2000, and perhaps earlier, infomercials will have to take closed captioning requirements into account.


Or will they? There are at least two exemptions available to long form advertisers, although the initial rules did not spell out either very well. First, no programming provider will need to spend more than two percent of its gross revenues from any channel to caption new, non-exempt programming. Second, program providers "with annual gross revenues of less than $3 million during the previous year" are exempt from the captioning requirements.


Both exemptions were designed to offer economic relief for smaller programming providers. The question was how the exemption applied to advertisers, since the revenue base appears to be tied to revenues derived from a particular channel. Because most advertisers buy rather than sell time, they do not derive their revenue from a specific channel and the Electronic Retailing Association asked the FCC to clarify how long form advertisers, if not completely exempt, may avail themselves of the exemption.


In reply, the FCC advised that providers of long form advertising could use "any reasonable attribution methodology" to determine whether or not they may be eligible for one of the revenue exemptions. And, although warranted by advertisers' unique position, this is a significant, more flexible standard than is applied to other video programming providers, as illustrated by an example provided by the FCC: "A provider could simply divide its total sales attributable to long form advertising by the number of channels on which that programming is distributed in order to determine the per channel revenue."


Interestingly, the FCC did not specify whether it would be "reasonable" to base this calculation on long form advertising revenues from a particular product or line of products divided by the number of channels on which advertising appears for that product or line of products. The commission's own example makes clear, however, that it would be reasonable to determine per channel revenues based on all long form advertising revenues divided by the number of channels on which such advertising appears.


Thus, an infomercial producer having $300 million in annual revenues that advertised on 150 channels would, arguably, have annual, per channel revenues of only $2 million and, therefore, be exempt from the captioning requirement.


Some advertisements may fit within other exemptions. For instance, programming on new networks, for the first four years, is exempt, and so is late night programming, generally between 2 a.m. and 6 a.m., with allowances for programming that airs in multiple time zones. Of course, advertisers rarely buy time only during these hours and most television shopping programs are on the air virtually 24 hours a day.


Another possibility that some advertisers may want to consider is seeking a waiver. The FCC regulations allow a programming provider or owner to petition the Commission for an exemption from the closed captioning requirements based on individual circumstances if complying with the rules would impose an undue burden. An "undue burden" is defined as "significant difficulty or expense" and the Commission must consider the program provider's or owner's financial resources and type of operations, the nature and cost of captioning, and the impact captioning would have on the business operations.


The effect of these rules, in the short run, will be to increase uncertainty about the cost of infomercial production. If the new rule requires infomercials to be closed captioned even at the test stage, bearing in mind that a large percentage of shows never make it to "roll out," the effect may be to further increase the barriers to success in this already heavily-regulated industry.


Ed Glynn is a partner and Heather McDowell is an associate at Venable, Baetjer, Howard & Civiletti in Washington, D.C.
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