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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 ) ) Implementation of Section 304 of the CS Docket No. 97-80) Telecommunications Act of 1996 ) ) Commercial Availability of ) Navigation Devices ) NOTICE OF PROPOSED RULE MAKING Adopted: February 11, 1997 Released: February 20, 1997 Comment Date: May 16, 1997 Reply Comment Date: June 16, 1997 By the Commission: Table of Contents Paragraph I. INTRODUCTION AND BACKGROUND 1 A. Statutory Objectives and Requirements 1 B. Current Distribution Models 5 C. Overview of Proposals 11 II. STATUTORY POLICIES AND REQUIREMENTS 13 A. Introduction 13 B. Entities Covered by Section 629 14 C. Scope of Equipment Covered 16 D. Commercial Availability 20 E. Practical Availability - Portability and Interoperability 24 F. Definition of Affiliate 25 G. Security and Theft of Service 28 H. Multichannel Video Programming Distribution Without Subsidies 37 I. Developmental Waivers 46 J. Sunset of Regulation 49 III. PROPOSALS AND OPTIONS 54 A. Introduction 54 B. Entities and Equipment Covered by Section 629 55 C. Commercial Availability 56 D. Practical Availability - Portability and Interoperability 64 E. Proprietary Technologies 69 F. Security Shall Not by Jeopardized 71 G. Multichannel Video Programming Distribution Without Subsidies 76 H. Developmental Waivers 78 I. Sunset of Regulation 81 IV. CONCLUSION 83 V. ADMINISTRATIVE MATTERS 85 Appendix A -- Initial Regulatory Flexibility Analysis Appendix B -- Section 629 I. INTRODUCTION AND BACKGROUND A. Statutory Objectives and Requirements 1. In this proceeding we seek comment on proposals to implement Section 629 of the Communications Act, entitled "Competitive Availability of Navigation Devices." Section 629, which was added to the Communications Act as part of the Telecommunications Act of 1996 (the "1996 Act"), instructs the Commission to: adopt regulations to assure the commercial availability, to consumers . . . of . . . equipment used . . . to access multichannel video programming and other services offered over multichannel video programming systems, from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor. Rules assuring commercial availability must be developed "in consultation with appropriate industry standard-setting organizations . . . ." In addition, our rules "shall not . . jeopardize security of . . . services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service." 2. Section 629 does not prohibit service providers from offering equipment to their subscribers. Multichannel video programming distributors ("MVPDs") may themselves continue to offer equipment "if the system operator's charges to consumers for such devices and equipment are separately stated and not subsidized by charges for" multichannel video programming and other services. The rules adopted under Section 629 shall cease to apply when the Commission determines that the markets involved are competitive and that elimination of the regulations would be in the public interest. Finally, nothing in the section is to be construed "as expanding or limiting any authority that the Commission may have under law in effect before the date of enactment of the Telecommunications Act of 1996." 3. This section requires the Commission to "assure" that "navigation devices" or customer premises equipment ("CPE"), used in conjunction with multichannel video programming distribution, are commercially available. Its purpose is to provide consumers with the benefits of competition in the manufacture and sale of such devices. These devices, such as cable television set- top boxes or direct broadcast satellite receivers, can be separated from the basic video distribution system but are necessary to the receipt, processing, or display of the underlying communications service involved. In the House Report, Congress noted that "competition in the manufacturing and distribution of consumer devices has always led to innovation, lower prices and higher quality. Clearly, consumers will benefit from having more choices among telecommunications subscription services arriving by various distribution sources." Consequently, the overarching goal of this proceeding will be to assure competition in the availability of set-top boxes and other CPE. 4. At the same time, Section 629 "specifically recognizes that cable and other telecommunications system operators have a valid interest, which the Commission should continue to protect, in system or signal security and in preventing theft of service . . . and does not authorize the Commission to adopt regulations which would jeopardize the security of a telecommunications system." Accordingly, we seek to adopt rules that will not conflict with the maintenance of system security nor inadvertently validate the manufacture and distribution of equipment intended for the unauthorized reception of communications services. We also recognize that in exercising the existing authority we possess to adopt rules, the 1996 Act and its legislative history indicate a preference that standards be market driven and that technical innovation not be impeded. Accordingly, in this Notice of Proposed Rulemaking ("Notice") we seek comment on a number of proposals that incorporate the basic policies of Section 629 and that begin the process of implementing its provisions. B. Current Distribution Models 5. The multichannel video programming distribution systems that are subject to Section 629 -- including at least cable television, direct broadcast satellite, and MMDS systems -- all typically consist of a signal processing center, a transmission network from that facility to user locations, and CPE, such as a set-top box, that controls access to the network and specific communications on it, and displays or stores picture, sound, and data information. In addition, all MVPDs allow customers to interconnect their television receivers, radio receivers, and video cassette recorders to receive and to display video programming. 6. The MVPDs involved, however, typically follow different models with respect to the ownership and commercial distribution of certain types of equipment. In the cable delivery model -- which MMDS operators use as well -- equipment that controls signal security to permit only those who subscribe to receive service has been, for the most part, under the sole control of the service provider and has been available only as part of the overall service offered, generally on a lease basis. Further, home signal security control set-top boxes -- commonly referred to as descramblers -- are often combined with other control equipment, such as signal tuners, and are designed to be operated by remote controls. Combined, the control equipment constitutes a "converter box," that is commonly found attached to the television set in a subscriber's home. Where cable television rate regulation is in place, set-top boxes or converters provided by the system operator that are used in the receipt of basic cable service must be provided to subscribers pursuant to charges that are based on cost and are "unbundled" from cable service charges. 7. In contrast to the cable delivery model, in the DBS and satellite field more generally, retail purchase and customer ownership of CPE, including signal decoding equipment, has been the norm for most service providers. Although customers often purchase their own DBS equipment, that equipment functions only with a single service provider and that provider may defray some of the initial cost of the equipment through a purchase price rebate. In the DBS field, the service provider itself typically has developed the basic technical design of the equipment, controls licensing of the technology, and determines who manufactures the equipment. Because there is no direct electrical connection between the customer and the service provider, no issue is present as to the equipment used harming the network. And because DBS is a relatively new entrant in the MVPD field, it has been able to incorporate more recent digital security techniques. 8. There is a third model -- not generally used by MVPDs -- for allowing consumer access to CPE: that used in the telephone industry. Indeed, it seems likely that many of its Congressional sponsors viewed Section 629 as the application of the Commission's telephone industry CPE model to cable and other MVPDs. This model is one in which, by rule, CPE must be permitted to be attached to the network, may not be provided on a bundled or subsidized basis by the service provider, involves interfaces and transmission systems that are to some extent standardized so that equipment is portable from provider to provider and, because individual transmission lines and switched service is involved, does not have scrambling or conditional access circuitry built into the CPE. Entities providing telephone service at one time maintained ownership and control over both the telephone distribution network and the basic telephone instrument and other CPE. Customer CPE ownership, however, became an option beginning in the late 1960s as a consequence of decisions by the Commission and the courts. 9. The telephone model had its genesis in the Commission's Carterfone decision.Telephone companies had argued to the Commission that a device known as the Carterfone, designed to connect telephones with mobile radio systems, should be considered a prohibited interconnecting device under the companies' existing tariff. The Commission found that "the Carterfone fills a need and that it does not adversely affect the telephone system," and held that "the tariff is unreasonable in that it prohibits the use of interconnecting devices which do not adversely affect the telephone system." Following this decision, the Commission progressively adopted regulations that ensured that telephone customers could freely connect CPE equipment to the telephone network so long as the connections did not cause harm. 10. Although there are technical, marketplace, and regulatory differences between the telephone facilities and MVPD facilities that preclude a literal translation of this model into the MVPD context that is governed by Section 629, we nevertheless believe it provides a useful starting point. We note, however, that there are at least three important differences that need to be taken into account. First, when a customer attaches equipment to the telephone network, there are generally few, if any, security issues relating to the intellectual property distributed. Second, in the telephone context, there is little potential for interference with other network users. In contrast, attaching customer equipment to cable and other MVPD networks raises significant concerns about signal security, as well as the potential for harmful interference both to over-the-air services and to the network itself. Unlike narrowband telephone signals, MVPD broadband signals used for video service will likely span the radiofrequency ("RF") spectrum, thus creating an interference potential to over-the-air users licensed to certain frequencies. And third, at the time when customer ownership of telephone CPE became an option, the telephone network was effectively a national monopoly, which already had a well developed set of technical standards incorporated throughout the network. As a result, CPE was generally compatible with the telephone network. Contrasting the telephone model and those currently used by MVPDs -- the cable and DBS models -- helps to highlight the important and difficult issues the Commission faces in attempting to craft rules to implement Section 629. C. Overview of Proposals 11. Recognizing that a complete resolution of the task assigned to the Commission in Section 629 will require an extended consideration of a number of complex technical and economic issues relating to the markets involved, we plan to commence the process by proposing rules in a number of major areas. We propose at the outset, as a core requirement, that there be a right to attach. We propose to adopt the basic principle that equipment that is not part of a MVPD's network distribution plant may be acquired by subscribers and attached to the network, limited only by the requirement that any such equipment attached to a MVPD's network not cause it any harm. This basic principle parallels that adopted in the telephone context by the Commission's Carterfone and subsequent decisions -- devices that do not adversely affect the network and are privately beneficial without being publicly detrimental, may be attached to the network. MVPD requirements and protections regarding harm to the network would be needed in conjunction with any attachment right. We further seek comment and information regarding portability and interoperability issues -- that is, the ability of equipment to work with networks of other similar MVPD providers in different geographic locations or to work interchangeably with networks of different types of MVPD providers -- that we may need to address or that may be the focus of subsequent phases of this proceeding. We seek comment on the definition of commercial availability and on equipment bundling and subsidy issues. Finally, we also seek comment on protection of the means and devices by which MVPDs maintain security -- that is, how MVPDs control access to the programming they distribute. We also seek information regarding separation of security from nonsecurity features of CPE both to protect security features and to facilitate the broader availability of equipment performing nonsecurity functions. Separate provisions of the Communications Act make it a criminal offense to intercept or receive or assist in intercepting or receiving any communications service offered over a cable system, unless specifically authorized to do so by a cable operator "or as may otherwise be specifically authorized by law." Similar restrictions are applicable to radio communications more generally. To protect the legitimate security interests of MVPDs, we would not interpret Section 629 or any of the rules adopted to implement it as "authorizing" equipment designed to pirate signals to be manufactured, imported, or sold. All existing legal restrictions on the use or sale of equipment intended to facilitate service theft would be maintained. 12. In seeking to develop a policy framework for the implementation of Section 629, we believe that information regarding the current state of the market for navigation devices will play a useful role. Accordingly, we seek data on the marketplace today with respect to both analog and digital CPE. We seek data about the different types of CPE devices currently used by MVPD subscribers. Also important is collection of data regarding the cost of manufacturing such equipment, its anticipated life cycle, and how such equipment is obtained by subscribers. We also seek any other information about the current marketplace for CPE that will assist the Commission in carrying out the goals of Section 629. In the same vein, we seek information about what role private standard setting bodies have played, if any, in the current CPE marketplace and may play in the future. We are especially interested in whether there are any past voluntary standard setting proceedings that could be used as a model for this proceeding. II. STATUTORY POLICIES AND REQUIREMENTS A. Introduction 13. The core requirement of Section 629 is that navigation equipment used in conjunction with multichannel video programming distribution be commercially available through unaffiliated outlets. Before turning to specific proposals to implement this policy, we seek comment on a variety of issues relating to the statutory language and policies incorporated in Section 629. We seek comment on the equipment and service providers that are covered, the meaning of commercial availability, the extent of affiliation between the service providers and retail outlets permitted if compliance is to be achieved, and on industry standard-setting issues. We seek comment on the restrictions on regulation to avoid jeopardizing system security. We also seek comment on the scope and requirements of the antisubsidy provision; the waiver process for the development or introduction of new services, technologies, and products; and on the regulatory "sunset" at the point where sufficient competition is present. We then, in the next section of the Notice, seek comment on proposals to implement these provisions. B. Entities Covered by Section 629 14. Section 629 is applicable by its terms to equipment used to access services offered over multichannel video programming systems. Although the term "multichannel video programming system" is not defined, we note that Section 602(13) defines a multichannel video programming "distributor" as "a person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming . . . ." We seek comment on whether a multichannel video programming system is a system operated by an MVPD. Section 629 appears to be jurisdictionally broad in terms of the entities to which it applies. It appears to bring within its coverage equipment used to access a wide range of video distribution systems, including cable television, high and medium power DBS and satellite service (C-band, Ku band FSS, and Ku band BSS), satellite master antenna systems, wireless cable (multichannel multipoint distribution service, instructional television fixed service, and local multipoint distribution service) systems, multichannel digital television broadcast stations, and, as discussed below, possibly wireline multichannel programming distributors on common carrier systems. We seek comment on this conclusion and on the discretion the Commission may have to differentiate between the various systems for providing multichannel video programming based on the technologies used, the competitiveness of the specific markets involved, and the maturity of the technology, as well as its capability to function subject to a common set of rules. To the extent a separation exists between control or ownership of the distribution facility and the entity providing the programming to the consumer, we seek comment on whether, in order to meet the requirements of Section 629, the rules should apply only to the entity that has a direct relationship with the ultimate consumer, just to the facilities' owner, or to the facilities' owner and the entity providing the programming to the consumer. 15. Section 302 of the 1996 Act adds a new Section 653 to the Communications Act, which creates a potential new category of the open video system ("OVS") operator. Section 653(c)(1), however, provides that the provisions of Part III of Title VI of the Communications Act, which includes Section 629, does not apply "to any operator of an open video system for which the Commission has approved a certification under this section." It appears, therefore, that requirements found solely in Section 629 do not apply to OVS operators. We seek comment on this conclusion, and on whether a different conclusion is warranted with respect to programming distributors making use of an OVS system. C. Scope of Equipment Covered 16. Section 629 by its terms applies to "converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems. . . ." Thus, it appears that the coverage of Section 629 is broad in terms of the kinds of equipment to which it applies. We seek comment on issues associated with the scope of the equipment covered. To what equipment should any rules apply? What does it mean to "access" programming and other services? What, if any, discretion does the Commission have in limiting the application of any rules adopted to certain types of equipment or to establish priorities as to how regulation can best be applied? 17. Some CPE does not appear to require Commission action to assure that its availability fulfills the mandate of Section 629. For example, for video programming viewers, the primary device to access video programming is the television receiver or display. Video cassette recorders are another common device consumers use to access video programming. Such devices have historically been available for retail purchase and the problems associated with coordinating distribution networks and reception and recording equipment (frequencies, standard channels, common modulation or transmission schemes) have been resolved without undue difficulty through a combination of private and governmental standards. Computers, although not yet in common use to receive video programming, are also readily available through retail channels as are computer modems and basic telephones. Such devices tend to be both portable and interoperable. 18. In addition to the above, other devices, existing or under development, might be within the scope of the statute: -- cable television converters -- cable television descrambler/security boxes -- cable television addressable converters -- satellite integrated receiver decoders -- MMDS/ITFS receiver/digital signal converter/tuners (down converters) -- electronic program guides or channel navigator (e.g., Starsight) -- program control and blocking devices (e.g., "v-chip" devices) -- video game controllers used with an MVPD system -- modems (modulators/demodulators) or digital or data signal receivers -- DBS, MMDS, or TVBS antennas -- in-home wiring used with an MVPD system -- "network interface modules," "residential gateways," or other electronic devices performing some of the same security or access control functions as devices listed above but that are physically located at the point of entry (either outside or inside) the consumer's residence. 19. Within this universe of devices there is considerable variation as to the present commercial availability, the size and state of development of the potential market involved, and the difficulties of changing existing market practices to increase commercial availability. We seek specific data and information on the current commercial availability of those devices within the possible scope of Section 629. We are aware that the devices in question perform a variety of functions, including reception, transmission, display, tuning, security, storage, translation, and return transmissions. The various functions can also be packaged or bundled in different combinations. Accordingly, we also seek comment on whether we should attempt to distinguish between reception and display devices, access control and security devices, and upstream transmission devices and first address those devices presenting the least difficult security and standardization problems. Should we address devices used in the DBS and cable television industries first because they constitute the largest market involved? Should different types of MVPDs, i.e. cable and DBS, be examined separately? Should we first address emergent markets such as cable modems, in which a significant embedded base of equipment does not yet exist? D. Commercial Availability 20. Section 629 requires that we adopt rules to assure the "commercial availability" of navigation equipment. The Conference Report accompanying the 1996 Act states that one purpose of this section is "to help ensure that consumers are not forced to purchase or lease a specific, proprietary converter box, interactive device or other equipment from the cable system or network operator." We seek comment on how to define "commercial availability" and the scope of this requirement. The basic issue here is the degree of separation that Congress intended to mandate between the video service provider and the equipment manufacturers and retailers. Several different levels of separation could each conceivably meet the statutory requirement between the video service provider and the equipment manufacturers and retailers. That is, to what extent may the retail outlet involved function as a practical matter as an agent for the service provider and to what extent may the service provider retain control over or the ability to influence technology and manufacture of the products involved? 21. Several examples from current distribution models in the satellite field may help to illustrate these issues. Primestar satellite service receivers are advertised and are available through some electronic retail outlets but those stores appear to function largely as an agent for Primestar and have a contractual relationship with it. Primestar is at somewhat of a disadvantage in the satellite field because its service requires a larger receiver. Primestar has sought to overcome this disadvantage by installation service and receiver rental policies that avoid large upfront investments by consumers. Thus, where Primestar's service is sold through retail outlets, this is more a point of contact for leasing rather than off-the-shelf availability of the equipment. Nevertheless the retailer is permitted to participate in the transaction and face-to-face competition in the store between the various satellite services is facilitated. We seek comment on the extent to which this form of equipment availability satisfies the "commercial availability" standard. 22. A second example from the satellite field, involving the development and marketing of integrated receiver decoders for use in connection with larger home satellite dishes, is described in some detail in our Report in Gen. Docket 86-336 and Second Report in Gen. Docket 86-336. In this market, the "Videocipher II (VC II)" receiver descrambler has become a de facto industry standard. Although the technology is proprietary, manufacturers are licensed to produce integrated receiver decoders using decoder modules obtained from the patent holder. These devices are then sold through retail distribution outlets. As a result of this, there is competition in the manufacture and distribution of the receiver units but, within this de facto standard, the basic technology involved and decoder units come from a common source. Roughly the same situation appears to exist with respect to high power, small dish DBS services such as DIRECTV/USSB. Equipment for receipt of this service is readily available for consumer purchase through retail outlets. Moreover, there is abundant competition in the manufacture of the equipment. The core equipment technology, however, is controlled by the MVPD and is manufactured under license from it. This control may be used, for example, to restrict the addition of other types of equipment that would facilitate reception of service from additional satellite providers. We seek comment on the extent to which this form of equipment availability satisfies the "commercial availability" standard. We note that the legislative history of Section 629 does not appear to reflect any concern with this mode of operation. 23. In addition to the above, we seek comment on other questions that we must answer in order to define commercial availability. Must multichannel video programming access equipment be available through any vendor wishing to distribute the device or is it sufficient that a device be available through some but not all vendors not affiliated with an MVPD? In this regard, does commercial availability require that CPE be made available by retailers or manufactures not selected by MVPDs? If so, how do we assure that unaffiliated manufacturers are able to produce navigation devices that are compatible with a given MVPD's network? Does the provision of equipment by one manufacturer, under a license from a service provider, to one or two select retailers meet the requirements of Section 629, or must the equipment be made available to any retailer wishing to distribute the equipment? Does the use of the plural in the statutory language -- i.e., "manufacturers, retailers, and other vendors" -- require that equipment must be available from at least two manufacturers? Would retail sale of CPE by means of a toll free telephone number constitute availability? E. Practical Availability -- Portability and Interoperability 24. Section 629 indicates that the rules adopted to assure commercial availability must be developed "in consultation with appropriate industry standard-setting organizations . . . ." If a retail market for navigation equipment is to develop, it may be necessary for there to be some degree of standardization so that the devices involved are either geographically portable and will work with similar types of MVPDs in different parts of the country or are interoperable and will function with different types of MVPDs in the same area or are both interoperable and portable. Is it necessary that devices simply operate with the particular MVPD's system that they are purchased for? Is it necessary that devices be operable on all MVPDs' systems in the same industry -- for example, on all cable systems, or on all MMDS systems? Is it necessary that devices work for all multichannel video programming services -- that is, must a navigation device that is operable with a cable system also be interoperable with MMDS, DBS, and other multichannel video programming services as well? F. Definition of Affiliate 25. The 1996 Act requires that navigation devices be commercially available from manufacturers, retailers, and other vendors "not affiliated with any multichannel video programming distributor." Thus, in order to implement the statute, it will be necessary to have an understanding of the meaning of "not affiliated with." 26. The 1996 Act does not specifically alter the definition of "affiliate," which remains applicable for purposes of Title VI of the Communications Act. This definition states that "the term 'affiliate,' when used in relation to any person, means another person who owns or controls, is owned or controlled by, or is under common ownership or control with, such person . . . ." Although this definition remains unchanged, Section 3 of the 1996 Act sets forth a new definition of "affiliate." Under its terms, affiliation is established when a person "owns or controls, is owned or controlled by, or is under common ownership or control with another person." This statutory definition further provides that ownership can be established through an equity interest "or the equivalent thereof" of ten percent or more. Section 3 of the 1996 Act states that "[e]xcept as otherwise provided in this Act, the terms used in this Act have the meanings provided in section 3 of the Communications Act of 1934 (47 U.S.C. 153), as amended by this section." 27. We note that the Section 3 definition of "affiliate" does not strictly apply to matters under Title VI, since, as we have noted above, Title VI contains a separate definition of that term that does not set a percentage threshold as to what constitutes ownership. Nevertheless, we believe this gives us the discretion to apply the 10% ownership threshold of Section 3 for purposes of Section 629, and we note as well that both Section 629 and its legislative history do not prohibit us from so doing. We tentatively conclude, as we have done before, that the Section 3 definition of affiliate should be applicable to Section 629, and seek comment on this conclusion. We also tentatively conclude that both passive and active ownership interests should be attributable and seek comment accordingly. If commenters believe that some other definition should be applicable, we seek comment on how product distribution relationships would be affected by any other definition. For example, we seek comment on the extent to which a relationship may remain between the MVPD and the equipment manufacturer or seller. If the MVPD has developed the equipment involved, has patent or other proprietary rights in the equipment or its critical components, or selects a technology that has only a single source supplier through a contractual process, questions arise as to whether these relationships raise affiliation issues. We seek comment on the above. G. Security and Theft of Service 28. Section 629 requires that the rules we adopt "not . . . jeopardize security of . . . services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service." We seek comment on what it means in this context to "jeopardize" security and to "impede" a provider's legal rights to prevent theft of service. In addition, we seek specific data and information concerning the operation of existing security methodologies employed by the various MVPD industries. 29. Cable operators typically protect cable programming service tiers and premium services from unauthorized reception through scrambling or encryption techniques. Other MVPDs such as MMDS and DBS operators use such techniques to protect all of the channels of service they offer. In these situations, the subscriber must make use of a navigation device -- decoder or descrambler -- to receive an intelligible signal. Many of the analog techniques that are used to accomplish this are relatively unsophisticated, involving, for example, suppressing the synchronous pulse of the television signal and inversion or transposition of various parts of the video picture information so that the picture is unstable or distorted when viewed on a standard television receiver. To unscramble the signal, the descrambler box, generally located in the subscriber's premises, must contain the electronic circuitry to reverse the alteration of the analog signal. It is this descrambling circuitry that is most prone to attack by those who would obtain service without paying for it. Such techniques can be relatively easily defeated by subscribers if the necessary equipment can be purchased. In addition, signal thieves may obtain a descrambler set-top box to study its circuitry and electronic response characteristics. Subsequently, they attempt to alter or to reproduce the descrambling circuitry, or to replace the descrambling component. In some instances, the signal thieves also insert circuitry that confuses, or simulates the response signals of a legitimate descrambler box back to, the video provider. Should an analog descrambling method be breached on a wide scale, the MVPD must replace both the scrambling hardware at its headend or control center and in each descrambler box in its subscribers' homes, at great expense. In order to limit the availability of descrambler boxes -- using scarcity as a component of security -- operators typically lease the box to subscribers and then recover the box on termination of service. If analog decoders were readily available for purchase, existing security methods would become completely ineffective. 30. Digital signal delivery methods, however, will increasingly be used by MVPDs to transmit programming to consumers and facilitate more sophisticated access control systems. Digital and analog delivery methods can be used singularly or in combination, depending on the MVPD system design. The cable television portion of the MVPD industry primarily employs analog delivery methods and is only just starting to utilize digital methods, whereas high and medium power Ku band satellite services use digital systems. Major shifts towards the use of digital delivery systems are taking place, due mainly to digital technology's ability to increase dramatically the number of video channels or the amount of information that can be delivered in the same bandwidth. From a security standpoint, digital systems appear to be appreciably less vulnerable to security breaches due to the inherent nature of the digital signal. This is due to the general nature of digital delivery, which encodes all information into bits. Because all the information is already encoded, more sophisticated encryption of the digital streams (bit streams) can be used to secure the signals. As a result, digital signals do not possess the same degree of susceptibility to theft as do analog signals. Further, a system's digital technology can be configured so that should security be breached on a wide scale, changing the security involves the replacement of fewer hardware components than in the analog environment. That is, the security component can be contained in a "smart card" or similar device provided by the MVPD independent of the digital box and the smart card can be replaced if a problem with security develops. 31. Service theft is a serious matter. Failure of access control or security systems will both interfere with incentives to produce programming for the market and to increase the cost of service to those who do subscribe. According to one estimate, in 1992 cable television service theft resulted in $4.7 billion in unrealized revenue annually. The difficulties that exist in the development of a market for the distribution of television programming in an environment in which compensation mechanisms do not exist or have been defeated have been well documented in the history of the C band satellite home video programming distribution market. 32. Congressional concern with the general question of unauthorized service reception is reflected in Section 629(b), which states that the Commission is not to prescribe regulations under Section 629(a) that "would jeopardize security of multichannel video programming and other services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service." It is also reflected in Section 705 of the Communications Act, which generally prohibits theft of service, as well as in Section 633 of the Communications Act, passed as part of the Cable Communications Policy Act of 1984, which is specifically directed to theft of cable service. The legislative history of this latter provision reflects the Congressional view that: theft of cable service poses a major threat to the economic viability of cable operators and cable programmers, and creates unfair burdens on cable subscribers who are forced to subsidize the benefits that other individuals are getting by receiving cable service without paying for it. Civil actions including injunctions, damages, and attorneys' fees and criminal penalties with fines of up to $100,000 are available to enforce this section of the Communications Act. Each of the above provisions allows for the adoption of coordinate state or local laws, and more than 30 states have made it illegal to own or be in possession of an unauthorized cable descrambler. The use of unauthorized cable television converter-decoders to view cable programming, as we have previously stated, violates Federal law. 33. Based on the specific language and policy concerns underlying these anti-piracy provisions, it is important that whatever action is taken to implement Section 629 does not conflict with the maintenance of system security nor inadvertently validate the manufacture and distribution of equipment intended for the unauthorized reception of communications services. Thus, we seek comment on how to proceed to accomplish the underlying objectives of Section 629 to assure commercial availability while also meeting Section 629's requirement that the security of services not be jeopardized. 34. A potential solution to the problem of assuring the commercial availability of navigation equipment while permitting MVPDs to retain control over system security would be to require MVPDs desiring to retain control over the security equipment to provide it to consumers on a separated or unbundled basis. In theory, it would be possible to take a typical decoder box and divide it into two separate parts. One part would contain operational and functional components such as the tuner, the remote control circuitry, the power supply, and any other non-access control features. A second part would contain the access control features. With an interface, it would be possible to have the first part of the device available through retail outlets and the second part, containing the more sensitive access control apparatus, available only from the service supplier. To make such a separation of function practical, however, would appear to require a standard interface, or publication of interface specifications, permitting security control apparatus obtained from the service provider to be combined with other equipment obtained by the subscriber from retail outlets. Such an effort to separate access control from other features and migrate the functional and operational components back to the television receiver is essentially what has been involved with the "decoder interface connector" that has been the subject of discussion in the Commission's proceeding in ET Docket 93-7. We seek comment here on our authority to require such a separation as a means of accomplishing the objectives of Section 629 and in particular on our authority to provide for a standard interface in light of the 1996 Act amendments to Section 624A ("Consumer Electronics Equipment Compatibility") of the Communications Act. 35. The Congressional interest in assuring the commercial availability of navigation equipment that is reflected in Section 629 overlaps to some extent with the cable television "equipment compatibility" provision of Section 624A, that was adopted in 1992. Section 624A was intended to provide for compatibility between the facilities provided by cable system operators and the advanced features of television receivers and video cassette recorders and to promote commercial availability from retail vendors not affiliated with cable systems, of compatible converter boxes and remote control devices. Section 301(f) of the 1996 Act adds new text to existing Section 624A of the Communications Act, stating the Congressional finding that: compatibility among televisions, video cassette recorders, and cable systems can be assured with narrow technical standards that mandate a minimum degree of common design and operation, leaving all features, functions, protocols, and other product and service options for selection through open competition in the market. This provision further states that the Commission shall consider, in prescribing implementing regulations, "the need to maximize open competition in the market for all features, functions, protocols, and other product and service options of converter boxes and other cable converters unrelated to the descrambling or decryption of cable television signals." In adopting such rules as are necessary the Commission must seek "to ensure that any standards or regulations developed . . . do not affect features, functions, protocols, and other product and service options . . . ." The amended language of Section 624A by its terms applies only to rules required or prescribed by Section 624A. 36. These amendments to Section 624A are intended to restrict the Commission's standard setting authority and to respond directly to issues associated with the "decoder interface standard" that is the subject of the Commission's proceeding in ET Docket 93-7. The decoder interface standard that has been the subject of industry discussions in ET Docket 93-7 would separate security from other functions performed by cable television set-top boxes. The issue thus arises as to the scope of the Commission's authority to establish interface standards that govern the separation of access control from other CPE features in this proceeding. The text of the 1996 Amendments to Section 624A would appear, if applicable to Section 629, to direct the Commission to set only minimal standards in implementing Section 629 in both the analog and digital environments. However, the House Report states that the amendments to Section 624A were "not intended to restrict the Commission's authority to promote the competitive availability of converter boxes, interactive communications devices, and other customer premises equipment as required by [Section 629]." We seek comment, based on the foregoing, as to the scope of our authority in the context of Section 629 and the extent to which it may be limited by Section 624A. We seek comment on the relationship between these to provisions and how this relationship affects any proposal that seeks to separate security from other CPE functions. H. Multichannel Video Programming Distribution Without Subsidies 37. According to Section 629(a), the rules adopted by the Commission: shall not prohibit any multichannel video programming distributor from also offering converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, to consumers, if the system operator's charges to consumers for such devices and equipment are separately stated and not subsidized by charges for any such service. As previously noted, however, Section 629(f) states that this section neither "expand[s] nor limit[s] any authority that the Commission may have under law in effect before the date of enactment of the [1996 Act]." In light of this, we seek comment on the intended application and coverage of Section 629(a). What are the limits of our jurisdiction in this area? What types of contractual or financial arrangements relating to equipment involve subsidies and are a matter of concern? As a matter of policy, and assuming the requisite jurisdiction, should we exercise that authority over non-cable MVPDS and cable companies that face effective competition? 38. Congress was concerned that regulated MVPDs with market power in programming distribution could use that power, through equipment cost subsidization, to frustrate competition in the equipment market. The economic literature suggests that such subsidization is most likely to occur in a situation where there is a cost-of-service regulated monopolist in one market that also competes in another market. Because cost-of-service regulation generally makes the rates of regulated firms dependent on their accounting costs, it encourages regulated firms to shift costs from competitive to non-competitive markets through "creative accounting". This enables regulated firms to raise rates and earn higher profits in the regulated market. Therefore, a cost-of-service regulated MVPD may attempt to subsidize its equipment business by raising rates for regulated video programming. However, if the MVPD is an unregulated monopolist serving both competitive and non-competitive markets with no limits on its profits, there is no incentive for it to "cross-subsidize" costs, since such action would reduce the MVPD's monopoly profit. 39. Section 623 of the Communications Act sets forth the general structure and process for cable television rate regulation. In general, where "effective competition" is absent, basic subscriber rates are subject to regulation by local franchise authorities and cable programming service tier rates are, until March of 1999, subject to Commission regulation on a complaint basis. The majority of equipment rate regulation is undertaken locally. Section 623(b)(3) specifies that Commission rules regarding cable equipment: shall include standards to establish, on the basis of actual cost, the price or rate for -- (A) installation and lease of the equipment used by subscribers to receive the basic service tier, including a converter box and remote control unit and, if requested by the subscriber, such addressable converter box or other equipment as is required to access programming described in paragraph (8); and (B) installation and monthly use of connection for additional television receivers. In adopting rules to implement this "at cost" equipment regulation, the Commission indicated its belief that the rate rules and associated rules requiring the "unbundling" of equipment charges from programming charges were "consistent with the development of a competitive market for equipment and installation." 40. Under the Communications Act, only the rates of cable systems not subject to effective competition may be regulated. The applicability of this policy in relation to Section 629 was recognized in a colloquy during the Senate debate on the bill: Mr. FAIRCLOTH. Do you also agree that the intent of this provision is that the use of rate regulated services to subsidize equipment might unfairly penalize the general rate-payer? Mr. BURNS. I agree. However, when those services are no longer rate regulated such subsidy cannot be sustained and the prohibition on bundling is no longer necessary. The bill's prohibition on bundling and subsidization no longer applies when cable rates are deregulated. Thus, in areas where competition to cable exists, this suggests that anti-subsidy rules, beyond a possible separate itemization requirement, are not contemplated. 41. Those offering multichannel video service on a wireline common carrier basis or over the facilities of local exchange carriers tend not to have had rate regulations or policies specifically applicable to their offering of video "navigation" equipment in connection with a video communications service offering, but there is a long history of regulation applicable to the provision of CPE by or in connection with such service. Section 629(d), which is entitled "Avoidance of Redundant Regulations," appears to be a recognition of some of that history. It provides: (1) Commercial availability determinations.--Determinations made or regulations prescribed by the Commission with respect to commercial availability to consumers of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, before the date of enactment of the Telecommunications Act of 1996 shall fulfill the requirements of this section. (2) Regulations.--Nothing in this section affects section 64.702(e) of the Commission's regulations (47 C.F.R.  64.702(e)) or other Commission regulations governing interconnection and competitive provision of customer premises equipment used in connection with basic common carrier communications services. Section 64.702(e) of the Commission's rules, which is referenced in the above statutory language, states the following: (e) Except as otherwise ordered by the Commission, after March 1, 1982, the carrier provision of customer-premises equipment used in conjunction with the interstate telecommunications network shall be separate and distinct from provision of common carrier communications services and not offered on a tariffed basis. 42. Equipment that is sold or rented by other MVPDs has not been subject to rate or anti- subsidy regulation. As is permitted under existing rules, DBS service providers are currently offering sizable rebates on system receivers and satellite dishes. Such arrangements would appear likely to be highly effective as a competitive tool. Whether they ought in some sense to be considered "subsidies" within the meaning of the above referenced provisions of Section 629 that might conflict with its requirements, is a matter on which we seek comment. Assuming that such arrangements are not properly the subject of regulatory concern, the specific analysis that would lead to that conclusion is nevertheless of interest in order that any rules adopted not bias the market toward or against one particular kind of competitor. In this regard, the markets in which DBS operators participate appear to be highly competitive both because there are a number of DBS providers that are competitive with each other and because DBS faces competition from cable service. Thus, it appears that DBS providers are in the same category as cable systems facing effective competition and that there is thus no Congressional grant of authority for antisubsidy rules with respect to DBS providers. 43. Some assistance in understanding how to address this issue might be derived from the cellular telephone experience and the fact that cellular telephone providers' use of a bundling approach has significantly increased cellular phone subscribership. Cellular phones are often provided as part of a package bundled with a monthly rate for service, as well as with charges for usage of the network. This model appears to have mitigated the marketing impediment of customers paying large up-front costs for cellular phones and, although subject to some regulatory scrutiny, has not been found to be contrary to the development of a competitive equipment market. 44. In light of the above, we therefore generally seek comment on the intended application of this Congressional directive. In those situation where anti-subsidy rules are applicable, how should the term "subsidy" be defined? Does the language of Section 629(a) preclude MVPDs from selling navigation devices below cost? Does the language prevent MVPDs from "bundling" equipment with service? Should bundling, instead of representing prohibited subsidization, be more properly viewed as a gradual capture of the equipment's cost through increased programming or service revenue that the MVPD would not otherwise receive? Over what period would an MVPD need to demonstrate recoupment of equipment cost? As a procedural matter, when an allegation of subsidization is made, how should the burden of proof be allocated? 45. The above discussion suggests three broad directions that we might take in this area. First, we could continue with the existing forms of regulations which govern only some of the entities involved but which are in a broad sense intended to constrain the subsidization of equipment prices from regulated service revenues. Second, we could seek to exercise some general control to make sure that equipment rates are unbundled from service rates and that equipment charges are not so low as to frustrate the functioning of a competitive equipment market. And third, we could seek to apply some controls over all of the entities involved except in markets where there is effective supplier competition. Tentatively, we conclude that the first course of action is most consistent with the 1996 Act as a whole and with the limitations on our authority set forth in Section 629(f). We seek comment on this conclusion and on other alternative means of addressing the problems involved in defining and controlling possible equipment charge subsidies. We specifically note that, under this option, MVPDs that are in direct competition could fall under different regulatory regimes in terms of equipment bundling and subsidization. For example, a DBS provider could market bundled equipment and service or could provide equipment rebates whereas regulated cable system in the same geographic area could not. This situation would persist until "effective competition" to cable, as defined in Section 623 of the Communications Act was in place. We seek comment on whether this difference in treatment is appropriate in light of the differences between the MVPDs in question or whether it weighs in favor of a different -- more parallel -- outcome. I. Developmental Waivers 46. Section 629(c) provides that the Commission shall waive any regulation adopted under subsection (a) for a limited time: upon an appropriate showing by a provider of multichannel video programming and other services offered over multichannel video programming systems, or an equipment provider, that such waiver is necessary to assist the development or introduction of a new or improved multichannel video programming or other service offered over multichannel video programming systems, technology, or products. Upon an appropriate showing, the Commission shall grant any such waiver request within 90 days of any application filed under this subsection, and such waiver shall be effective for all service providers and products in that category and for all providers of services and products. 47. The provision appears intended to address problems that are likely to arise in coordinating product and service design, manufacture, and marketing during the initial stages of product and service development. Thus, for example, considerable experimentation and testing may be necessary before a service/equipment package is ready for marketing. "Beta testing" of new products is an extremely important element of the process but it must necessarily take place with a controlled group of users. It may be difficult to find retail vendors to sell equipment needed to receive or to navigate through a new service before the service proves itself in the market. Necessary standardization to provide for interoperability or portability or to protect against network harm may take an extended period of time to develop. The risks and rewards associated with new product or service introduction may be difficult to allocate without actual knowledge from market trials. Given the economies of scale associated with electronic products and communications services, some mechanism may be needed to assure that the initial product run is large enough to capture these efficiencies. The waiver process appears to provide the statutory mechanism for recognizing these problems and for achieving the basic goals of Section 629 without creating obstacles to the introduction of new services and equipment. 48. Given the very high value placed on technical and service innovation, we believe that situations where there is a need for a waiver (as contrasted with a complete exemption) should be minimized and that when waivers are required and requested, it is consistent with the objectives of Section 629 that they should be looked on sympathetically and expansively to avoid unnecessary procedural obstacles to innovation. In this regard, Section 7 of the Communications Act is clear that it is the policy of the Act to "encourage the provision of new technologies and services to the public" and that those who oppose "a new technology or service proposed . . . shall have the burden to demonstrate that such proposal is inconsistent with the public interest." Section 629 references both technologies and services, suggesting that concern ought be given to both technology and marketing issues in the waiver process. We seek comment on this analysis and on the scope and coverage of the statutory waiver process. J. Sunset of Regulations 49. Section 629(e) provides that the regulations adopted under this section shall cease to apply when the Commission determines that: (1) the market for the multichannel video programming distributors is fully competitive; (2) the market for converter boxes, and interactive communications equipment, used in conjunction with that service is fully competitive; and (3) elimination of the regulations would promote competition and the public interest." 50. Section 629(e) is written in a conjunctive rather than a disjunctive manner so that each of the three conditions must be met before the implementing regulations adopted by this Commission shall cease to apply. In order to carry out this instruction it is particularly necessary to have clear definitions of the relevant service and equipment markets involved. In particular, how should the markets involved be defined in geographic terms and should the product and service markets be defined broadly or addressed as a series of separate markets for particular types of service and equipment? Our tentative view is that local geographic markets, akin to Nielsen's "designated market areas," or Standard Metropolitan Statistical Areas, as determined by the Office of Management and Budget, might provide a useful geographic market definition. Alternatively, the market could be more closely tied to the service area of the programming distributors. This would suggest the possibility, for example, of a national evaluation for satellite firms, a more regional analysis for "wireless cable" providers, and a franchise area analysis for cable systems. 51. In addition to conducting a "sunset" analysis with discrete geographic markets, it would seem logical to consider discrete types of equipment in terms of separate equipment markets and discrete MVPD markets or submarkets in terms of their competitiveness and availability for rule "sunset." For example, it seems likely that the markets for certain types of equipment will develop in a fully competitive fashion from the outset, or that the regulation adopted will set a path that builds in enduring incentives for commercial availability of a particular type of equipment. Other equipment, including in particular, equipment that embodies security or conditional access features, may develop along a different path. Thus, we seek comment on categories of equipment that might be reviewed separately for sunset purposes. In addition, it may be that there are service provider markets, such as for example the DBS market, where intra-DBS competition is robust and might meet the "fully competitive" test. Thus, we seek comment on whether in understanding this subsection the relevant market is the market for all MVPDs or if there are relevant submarkets that should be considered. For example, can we look at intra-DBS competition to justify relaxing or forbearing from regulation? Although Section 629(e) speaks of ceasing to apply existing regulations, it would also appear to be broad enough, in appropriate circumstances, to suggest that regulations for certain type of equipment need not be adopted in the first instance. We seek comment on this and suggestions as to what equipment types might fit within this category. 52. The public interest component of the sunset provision invites a broader analysis as to the circumstances in which regulatory involvement might terminate. In particular, there may be situations where service and product markets are competitive but rely on certain regulatory controls to remain competitive. An obvious example might be a "harm to the network" (Part 68) kind of rule, that functions in the presence of service supply and equipment competition to protect a communications network and those who use it from equipment whose functioning is incompatible with the "rules of the road" of network operation. Consumer labeling or disclosure of network standards requirements might similarly assist the functioning of fully competitive markets. Assuming that some forms of regulation may need to be retained longer than others, we also seek comment regarding how the various types of regulations involved should be categorized for purposes of a "public interest" sunset analysis. 53. Finally, notwithstanding the requirement that the equipment markets involved be fully competitive before regulation is eliminated, Section 629(e) may still contemplate that regulation should end if situations develop in which integrated service and equipment suppliers compete vigorously even if the "commercial availability" of equipment were thereby eliminated. If a market developed in which numerous service suppliers compete based on programming, rates, and technology; proprietary equipment designs and single source supply might emerge restricting alternative commercial sources of equipment. In such a circumstance, program service and equipment in combination could be a highly competitive market, justifying the Commission's forbearance to apply regulations. The DBS market might be considered to fit in such a category. In any event, it appears to us that there are potentially significant benefits to consumers in a flexible approach with respect to the sunset of particular regulations over time and we seek comment on the scope of our authority in this regard and what specific criteria should be used to trigger an end to the application of specific rules. III. PROPOSALS AND OPTIONS A. Introduction 54. The above discussion addressed and sought comment on the statutory objectives and constraints that will guide our implementation of Section 629. We now seek comment on specific proposals and options for implementing rules. Any final decision on these proposals is necessarily dependent on the comments and analysis we receive in response to the discussion above. B. Entities and Equipment Covered by Section 629 55. As is reflected in the discussion above, Section 629 appears by its terms to be broad in its coverage both in terms of the multichannel video programming systems and the types of equipment covered. We propose to consider incorporating those broad definitions of coverage into the rules. In this regard, however, we recognize that as to the types of equipment involved, some equipment, such as basic television receivers, video tape recorders or personal computers, would not seem to be the intended focus of Section 629. Accordingly, we seek comment on methods to narrow the focus of the rulemaking process and the rules we adopt to best accomplish the intended statutory objectives. For purposes of defining affiliation, we propose to use the definition contained in Section 3 of the Communications Act. C. Commercial Availability 56. Right to Attach The core prerequisite for consumers to have the opportunity to obtain equipment from retail outlets and use it in conjunction with MVPDs is that they have a right to attach it to or make use of it in conjunction with the MVPDs service offering. Thus we propose to incorporate the basic Carterfone principle into the rules -- devices that do not adversely affect the network and are privately beneficial without being publicly detrimental, may be attached to the network. In addition, it may be necessary for consumers purchasing equipment to have access to some basic technical information regarding the network to which the equipment will attach sufficient to enable them to make purchasing decisions. If this information is not readily available we would propose to require the MVPD to make it available. 57. In implementing Section 629 we must also be concerned with assuring that CPE does not cause harm to the network to which it is physically attached and that the technical integrity of the network is maintained. There are several different technical issues involved here. 58. Signal Ingress Where there is a physical connection between the network and equipment that is not provided by the network operator it is possible that electrical energy or signals may be introduced into the network and impair its functioning. In order to avoid such harm it will be necessary to have either a method of regulating the functioning of the equipment involved or be assured that there is a technical solution that the service provider can employ to keep out undesired signals. In the telephone field, the Commission has addressed the "harm to the network" issue through the adoption of Part 68 of the rules. These rules include technical standards and review procedures that are applied to CPE before it is available for retail sale. In the cable television field, there has been no significant problem with the attachment of television receivers and video tape recorders. However, these devices are primarily used to receive communications in one direction. The cable industry, and other MVPDs, are quickly moving toward providing two-way communications, where subscribers both receive and send information on their respective MVPD service provider's system. Questions of signal integrity become much more complex in this environment. Two-way capability, allowing for upstream communication, is becoming more prevalent in the design of contemporary cable systems. Signal ingress problems associated with such a capability are exacerbated by the "tree-and-branch" design of cable systems, in contrast to the "star" design of telephone systems that provides telephone customers with separate, individual links to the telephone company switching center. 59. Thus, we may need to develop rules that preclude subscriber owned CPE from causing harm to the system. In this area we see three possible options. First, we could replicate or expand the Part 68 process. Second, we could require network service providers, subject to Commission oversight, to establish and enforce their own standards on what could be attached to the system. Third, we could, either separately or in combination with one of the above options, mandate a technical solution in terms of a network protection device. We seek comment on how best to proceed with this task. It appears likely that any solution reached in this area will require extensive industry technical input and we tentatively conclude that voluntary activities by the affected industries would best promote the goals of the 1996 Act. At this point we seek both interim measures that might prove effective for particular kinds of equipment as well as suggestions as to what type of ongoing process should be employed. Until such time as this issue can be addressed more completely, we believe network service providers must have the ability to establish and enforce their own standards on what can be attached to the system. 60. Signal Leakage Unlike traditional telephone systems, cable systems operate over a broad spectrum of frequencies. As a result, interference with collocated licensed users of spectrum may result if CPE supplied at retail leaks by itself or when attached to a cable system. Because cable systems operate at relatively high power, as compared, for example, with telephone systems, the devices that are attached to cable systems must be designed to operate in the same environment that is occupied by over-the-air spectrum users. In addition, because cable systems operate over a wide frequency band, the potential to interfere with collocated over-the-air spectrum users is a reality, and is especially important when leakage could interfere with safety of life services such as police, fire, and ambulance services. Our regulatory framework makes cable operators responsible for eliminating leakage, including from CPE. For example, Section 76.617 of our rules allows cable operators to discontinue service to a subscriber whose CPE leaks excessively. Furthermore, Part 15 certification rules currently limit signal leakage on all retail CPE including MVPD CPE. 61. We believe our existing Part 15 certification rules should adequately address signal leakage issues that may arise with navigation devices that may now be available from retail sources rather than from service providers. We seek comment on this conclusion, both with respect to attachments to cable systems and to other MVPDs and on whether any changes in these rules, or alternatives to them may be needed to address the expanded availability of such equipment. 62. Signal Quality Among the various existing MVPDs, only cable system operators are subject to rules specifically intended to protect the quality of the technical performance (video and sound quality) that they provide to consumers. The Commission has been required to adopt the cable standards by Section 624(e) of the Communications Act. The standards work back from certain assumptions as to signal levels and signal-to-noise ratios that must be provided at the input of a standard television receiver in order for it to display a good quality picture. Thus, they implicitly assume a certain level of CPE performance. Moreover, one of the functions of the equipment supplied by cable operators is to make it possible to use channels on which strong over- the-air signals exist by providing a completely shielded tuner mechanism. If navigation devices are available on a competitive basis, it would seem logical that the marketplace would address quality issues. However, we ask for comment on whether there are situations where this would not be the case or where desirable engineering tradeoffs between CPE and transmission plant would be adversely affected by an absence of standards applicable to such equipment. 63. In this regard, we note that Section 624A, the "Consumer Electronics Equipment Compatibility" provision, does direct the Commission to adopt such regulations as are necessary: (A) to specify the technical requirement with which a television receiver or video cassette recorder must comply in order to be sold as "cable compatible" or "cable ready." Thus, with respect to at least two types of CPE, television receivers and video cassette recorders, the Commission is directed to become involved to protect consumers in the equipment purchases they make. This protection is particularly important with respect to the "tuners" in these devices because if they are not properly designed and shielded they will not function properly when connected to cable television systems. We believe that parallel protection may be appropriate for other kinds of customer premises equipment that become available through retail channels. D. Practical Availability - Portability and Interoperability 64. As we have previously noted, one major difference between the telephone industry and the MVPD industry is that the telephone industry had a well-developed body of standards that facilitated the development of a competitive CPE market. In contrast to the telephone industry, MVPDs in general have little standardization either between different types of MVPDs or between MVPDs in the same market segment. This lack of standardization creates a potential obstacle to the ability of manufacturers to produce and retailers to sell CPE equipment that can be widely used. We understand that to facilitate the Congressional goal of commercial availability for navigation devices, it might be desirable for service providers to adopt industry-wide standards in certain areas to allow the marketing of these devices as widely as possible. Thus, we seek comment on the extent to which such standardization may be necessary and on the process whereby standards might be developed. We note in this regard that there are active ongoing industry standards bodies addressing a number of related standards issues and that these may independently resolve a number of issues in this area. 65. With respect to the applicable policy to be followed, we recognize that the more fully interoperable and portable that navigation devices become, the more the commercial availability of these devices would be enhanced because of the broadening of the market for the devices. On the other hand, requiring portability or interoperability at this time could impede the development and marketing of devices that are intended to work with one specific MVPD and restrict consumer choice to excessively costly units. In general, costs are directly increased as the scope of interoperability and portability are widened. We seek comment on the incremental cost of additional capabilities and on the extent to which it is desirable for consumers to have the option of purchasing less expensive single purpose types of equipment. To what extent, if any, should navigation devices have to accommodate the full range of frequencies and modulation schemes used by MVPDs. To what extent can issues in this area be addressed through devices that are programmable or modular in design? We seek comment on how we can assure that the optimal degree of interoperability and portability of navigation devices among services and providers can best be brought about without unduly impeding retail availability at the outset. In this regard, we also seek comment on how to prevent navigation equipment from being used as a bottleneck to access of competing MVPD providers. Can input selector switches be utilized to address any concerns in this area? 66. To the extent we determine that commercial availability should be defined to include interoperability and portability, we seek comment as to whether standards are necessary. With regard to the process whereby standards might be developed, the Conference Report states that, in adopting implementing rules, "the Commission should take cognizance of the current state of the marketplace and consider the results of private standards setting activities." Voluntary private standard setting efforts are ongoing in a number of areas that are related to this proceeding both within the United States and internationally. We seek not to develop standards ourselves, but rather to urge the adoption of voluntary standards by those affected. Recognizing the legislative indication that deference should be given to private standards setting activities, we seek comment on the techniques that should be used by the Commission should standards prove to be a necessary or desirable method to assist in making navigation devices commercially available. We ask whether voluntary standard setting or publication of interface specifications would be a viable alternative to the Commission developing its own standards. We also ask whether a formal advisory committee process or negotiated rulemaking where the Commission is more directly involved would serve to meet Congress' goals. Bearing in mind the desirable goal of minimizing government standard setting, we seek comment on the best approach, or approaches, to carrying out our responsibilities in this area. 67. As an alternative to standard setting, we also ask whether simply setting performance criteria that must be meet by a date certain would be a viable methodology rather than actual governmental standard setting. For example, could we achieve the commercial availability objectives of Section 629 by simply permitting MVPDs to continue to lease or sell equipment on the condition that equipment serving the same functions also is commercially available, after a date certain, through retail outlets. This would both permit the commercial entities involved to themselves develop the best means of complying with Section 629 and would provide incentives for development of equipment susceptible to retail sales marketing. We seek comment on the utility of this approach to both analog and digital technologies. We also seek comment on whether this approach would be best applied to discrete portions of the CPE marketplace. 68. For example, the cable industry has begun deploying modems to provide high speed internet access and will soon be deploying these nationwide. Industry efforts are in progress to adopt cable modem standards. We seek comment as to whether, in this environment, the type of performance criteria described could be usefully employed to assure the development of a commercial market. We seek comment, too, following this cable modem model, as to whether we should adopt similar requirements for other equipment that does not contain a video tuner function and with respect to which security of the service may not be an issue. We tentatively conclude that this type of rule would suffice with respect to cable modems and similar kinds of devices, and seek comment on this conclusion, including how this proposal would impact network security concerns and over what time frame such a requirement should be phased in. E. Proprietary Technologies 69. A variety of technologies are implicated by the issues in this proceeding and some of these technologies may be wholly or partially proprietary in nature. In this regard, we are aware that the development and use of proprietary technologies, the integration of electronic devices to achieve efficiencies, the bundling of products and services for marketing purposes, and investments in brand identification, can all be useful competitive tools. However, in order to develop rules that will assure the commercial availability of multichannel video programming access equipment, the Commission will have to consider actions that may impact on various proprietary rights, including commercial patents and copyrights. Section 629(f) states that this section neither "expand[s] nor limit[s] any authority that the Commission may have under law in effect before the date of enactment of the [1996 Act]." We seek comment on what authority the Commission currently has to affect proprietary rights, and on what limitations existing proprietary rights may place on the Commission's authority to mandate commercial availability of multichannel video programming access equipment. For example, may the Commission order a manufacturer to license its proprietary security system to others? Should the Commission mandate that intellectual property rights be protected by a safeguard calling for licensing of such on reasonable and nondiscriminatory terms? May the Commission prohibit an MVPD from entering into an exclusive contract with a manufacturer? Such a prohibition would, for example, allow manufacturers of CPE to include various different MVPDs' technologies in a single device. This is of particular note with respect to proprietary software that MVPDs use to control navigation equipment. Without access to the software that MVPDs use to produce their unique programming guides, for example, manufacturers may not be able to build equipment that can effectively be sold at retail. 70. In light of the above, there appears to be the possibility of a conflict between the "commercial availability" objectives of Section 629 and those policies in the law that seek to "promote the progress of Science and useful Arts" by securing exclusive rights to inventors and authors. We seek comment on the question of whether in this context of this proceeding, proprietary rights involved would necessarily, at least to some extent, have to be subservient to any lawful and reasonable rules adopted. If this were not the case, it is possible that the policies reflected in Section 629 could be frustrated in those situations where a particular service provider also "owns" the CPE technology involved. We are cognizant of the fact that the law generally creates and protects such proprietary rights as a means of promoting the advancement of science and rewarding enterprise. Thus, any rules adopted need to take this into account and reflect the overriding importance of these objectives. Accordingly, we seek comment on what steps may be needed to make sure that the rules adopted achieve their intended objective without creating impediments to technological development or unnecessarily interfering with the competitive mechanisms involved. F. Security Shall Not be Jeopardized 71. Fundamental to the operation of these rules is a requirement that the means and devices by which MVPDs maintain security is protected. Section 633 of the Communications Act, entitled "Unauthorized reception of cable service," makes it a criminal offense to intercept or receive or assist in intercepting or receiving any communications service offered over a cable system, unless specifically authorized to do so by a cable operator "or as may otherwise be specifically authorized by law." Similar restrictions applicable to radio communications more generally appear in Section 705. To protect the legitimate security interests of MVPDs, we would not interpret Section 629, or any of the rules adopted to implement it, as "authorizing" equipment designed to pirate signals to be manufactured, imported, or sold. Further, a subscriber would not be "authorized" to use devices that are legitimately sold, but are capable of decoding or decrypting signals, without the express permission of the subscriber's MVPD. All existing legal restrictions on the use or sale of equipment intended to facilitate service theft would be maintained. 72. As noted above, current analog MVPDs -- cable television and MMDS -- typically control access to their networks and specific communications carried on them through the CPE that the MVPDs distribute. However, this CPE may perform functions in addition to access control, such as program selection. A potential solution to the problem of assuring the commercial availability of navigation equipment while permitting MVPDs to retain control over system security would be to require MVPDs desiring to retain control over the security equipment to provide it to consumers separated or unbundled from other CPE equipment performing non security functions. To facilitate the connection of the unbundled security equipment to commercially available CPE some form of standard interface or publication of interface specifications would appear to be necessary. 73. If such an unbundling is found to be necessary to assure the commercial availability of equipment, our preferred option for developing the necessary framework to accomplish this would be to adopt only a conduct or performance rule mandating the separation involved, leaving to the industry participants involved the task of developing the necessary interface standards. Thus, MVPD service providers would initially develop the most cost effective means of accomplishing the necessary separation of functions, and, in conjunction with manufacturers of equipment for retail sale, would develop the means of connecting CPE to the security device. 74. An alternative means of addressing this matter, particularly with respect to analog transmission systems and analog systems of security control, would be to extrapolate from any standard that may be developed and approved in connection with ET Docket 93-7. Considerable effort has been devoted by the cable industry and the consumer electronics manufacturing industries in connection with ET Docket 93-7 to the development of a standard interface that would permit cable operators to retain control over security equipment while moving other functions performed by existing set-top boxes into television receivers. The decoder interface connector and associated rules, rather than dividing descramblers and converter boxes into two parts, would reduce the box only to its access control components while shifting the other parts to the television receiver. The decoder interface connector would also eliminate the need for redundant equipment that is common to both converter boxes and television receivers such as power supplies, remote control and tuners. We seek comment on whether the respective industries could voluntarily adopt and we could approve a variant of the decoder interface connector discussed in our proceedings on equipment compatibility as a solution to the security issues raised by Section 629. 75. We recognize that in the current analog environment there may be significant problems with separating security functions from other functions of convertor boxes. Many convertor boxes serve only to perform access control or security functions. Such a solution, however, may be more promising when digital transmission and digital security systems are involved. For digital systems, we believe that MVPD suppliers are able to construct devices such that an MVPD can retain necessary security while at the same time meeting the commercial availability requirements of Section 629. We seek comment on the feasibility of establishing and implementing such a requirement. At the same time we, recognize that any attempt to either standardize delivery techniques or its associated equipment may hinder the advances of digital delivery systems and seek comment on how such adverse consequences may be avoided. G. Multichannel Video Programming Distribution Without Subsidies 76. It is our tentative view that existing equipment rate rules, that are applicable only to noncompetitive cable television systems, properly address the Section 629(a) requirement that MVPDs may offer CPE to consumers "if the system operator's charges to consumers for such devices and equipment are separately stated and not subsidized by charges for any such service." As indicated above, Section 629(f) establishes limits on the extension of Commission authority and Section 623(b)(3) already specifies that Commission rules shall include standards to establish, on the basis of actual cost, the price or rate for: (A) Installation and lease of the equipment used by subscribers to receive the basic service tier, including a converter box and remote control unit and, if requested by the subscriber, such addressable converter box or other equipment as is required to access [basic cable programming]. 77. An alternative, the adoption of which is dependent on the scope of the Commission's authority as discussed above, would be to apply parallel rules to all other MVPDs . H. Developmental Waivers 78. Section 629(c) instructs the Commission to adopt a waiver process to be employed when necessary to assist the development or introduction of a new services, technology, or products. 79. Given the goal of this provision to promote technical and service innovation, we seek comment on how to frame the waiver process to accomplish its intended objectives. For example, when should a waiver be required? What kind of information should be filed in conjunction with a waiver request? Should detailed engineering data be require, or would it be adequate to understand the general nature of the service and technology involved? Would it be possible or desirable to use a process whereby waivers not acted on within the prescribed time frame are automatically "deemed approved"? Waivers, according to the statute, "shall be effective for all service providers and products in that category and for all providers of services and products." How should service provider and product categories be defined? While we believe that we can develop policies and standards for such waivers on a case-by-case basis as requests are filed, we seek comment on whether there is a need for us to adopt substantive standards at this time to govern the waiver process. Finally, we seek comment as to whether we need to set guidelines concerning the duration contemplated by the statutory phrase "for a limited time." 80. Assuming an appropriate showing has been made, the Commission is instructed to act within 90 days of the filing of a waiver application. The existing procedures, as reflected in the cable television rules for example, postulate a 20-day period for oppositions or comments to a waiver request after the date of public notice of its filing, followed by a 10-day reply period. This is a total of 30 days from public notice of the filing. The date of public notice is typically several days after filing, so the comment period does not close until more than 30 days from a waiver request's filing. However, the statute requires that waiver requests directed to rules adopted to implement this section be decided within 90 days of the filing of an application for waiver. We seek comment as to what modifications, if any, to our existing waiver procedures are needed. For example, do we need to shorten the filing periods? Should we permit replies as a matter of course? I. Sunset of Regulation 81. Section 629(e) provides that Commission regulation shall end: (1) when the relevant the market for the multichannel video programming distributors is fully competitive; (2) when the market for converter boxes, and interactive communications equipment, used in conjunction with that service is fully competitive; and (3) when elimination of the regulations would promote competition and the public interest. 82. In order to avoid unnecessary regulation, we believe this provision should be read as flexibly as possible. Thus, consistent with the requirement that regulation only be eliminated where to do so would promote competition and the public interest, we would propose to consider relevant submarkets, both geographic and product, in determining the presence of competition and end regulation or decline to commence regulation accordingly. We seek specific comment on what markets, such as for example the DBS market, would qualify for such treatment and what criteria should be employed in evaluating these and other markets for the purpose of sunsetting regulation. IV. CONCLUSION 83. We believe that our responsibilities to implement Section 629 incorporate several interdependent public interest goals. First, maximization of consumer choice and flexibility resulting from the competitive availability of equipment. As previously noted, a prime goal of the 1996 Act is that "consumers are not forced to purchase or lease a specific, proprietary converter box, interactive device, or other equipment from the cable system or network operator." A second goal is the stimulation and promotion of equipment innovation, with the expectation that this will result ultimately in lower costs to be borne by consumers. Third, minimizing governmental intrusion in the equipment design and installation process to the extent feasible. Fourth, assuring adequate protection of operators' networks from harm from any device used by consumers. As stated in the House Report, "telecommunications system operators have a valid interest, which the Commission should continue to protect, in system or signal security and in preventing theft of service." In addition, the Conference Committee Report states that "[t]he conferees intend that the Commission avoid actions which could have the effect of freezing or chilling the development of new technologies and services." In submitting comments in response to this Notice, parties are advised to bear these goals in mind, to explain how their proposals would further these goals. 84. We believe as well that Section 629 is a pro-competitive section of the 1996 Act which furthers the goal of Section 257 of the 1996 Act, which seeks to eliminate "market entry barriers for entrepreneurs and other small businesses in the provision and ownership of telecommunications services and information services, or in the provision of parts or services to providers of telecommunications services and information services." We believe that implementation of Section 629 will have the positive result of opening up to small entities the market to supply navigation devices directly to MVPD subscribers. In addition, small businesses will have the opportunity to become the manufacturers of navigation devices. In submitting comments in response to this Notice, parties are advised to bear the goal of Section 257 in mind, and to explain how their proposals would further this goal. We encourage commenters to suggest ways in which any perceived burden upon small entities could be mitigated. V. ADMINISTRATIVE MATTERS 85. Authority. This Notice of Proposed Rulemaking is issued pursuant to authority contained in 4(i), 4(j), 303(r), and 629 of the Communications Act of 1934, as amended. 86. Ex parte Rules -- Non-Restricted Proceeding. This is a non-restricted notice and comment rulemaking proceeding. Ex parte presentations are permitted, except during the Sunshine Agenda period, provided that they are disclosed as provided in the Commission's rules. See generally 47 C.F.R. 1.1202, 1.1203, and 1.1206(a). 87. Comment Information. Pursuant to applicable procedures set forth in 1.415 and 1.419 of the Commission's Rules, 47 C.F.R. 1.415, 1.419, interested parties may file comments on or before May 16, 1997 and reply comments on or before June 16, 1997. All relevant and timely comments will be considered by the Commission before final action is taken in this proceeding. To file formally in this proceeding, parties must file an original and four copies of all comments, reply comments, and supporting comments. Parties are also asked to submit, if possible, draft rules that reflect their positions. If you want each Commissioner to receive a personal copy of your comments, you must file an original and eleven copies. Comments and reply comments should be sent to the Office of the Secretary, Federal Communications Commission, 1919 M Street, N.W., Washington, D.C. 20554, with a copy to Barrett L. Brick of the Cable Services Bureau, 2033 M Street N.W., Room 703B, Washington, D.C. 20554. Parties should also file one copy of any documents filed in this docket with the Commission's copy contractor, International Transcription Services, Inc., 2100 M Street N.W., Suite 140, Washington, D.C. 20037. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center (Room 239) of the Federal Communications Commission, 1919 M Street, N.W., Washington, D.C. 20554. 88. Parties are also asked to submit comments and reply comments on diskette, where possible. Such diskette submissions would be in addition to and not a substitute for the formal filing requirements addressed above. Parties submitting diskettes should submit them to Barrett L. Brick of the Cable Services Bureau, 2033 M Street N.W., Room 703B, Washington, D.C. 20554. Such a submission should be on a 3.5 inch diskette formatted in an IBM compatible form using MS DOS 5.0 and WordPerfect 5.1 software. The diskette should be submitted in "read only" mode. The diskette should be clearly labelled with the party's name, proceeding, type of pleading (comments or reply comments), and date of submission. The diskette should be accompanied by a cover letter. 89. Regulatory Flexibility Act. As required by 603 of the Regulatory Flexibility Act, the FCC has prepared an Initial Regulatory Flexibility Analysis [IRFA] of the expected impact of 629 on small entities. The IRFA is set forth in Appendix A. Written public comments are requested on the IRFA. These comments must be filed in accordance with the same filing deadlines as comments on the rest of the Notice, but they must have a separate and distinct heading designating them as responses to the regulatory flexibility analysis. The Secretary shall cause a copy of the Notice, including the IRFA, to be sent to the Chief Counsel for Advocacy of the Small Business Administration in accordance with 603(a) of the Regulatory Flexibility Act. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A INITIAL REGULATORY FLEXIBILITY ANALYSIS As required by Section 603 of the Regulatory Flexibility Act ("RFA"), the Commission has prepared the following Initial Regulatory Flexibility Analysis ("IRFA") of the expected significant economic impact on small entities by the policies and rules proposed in this Notice of Proposed Rulemaking. Written public comments are requested on the IRFA. These comments must be filed in accordance with the same filing deadlines as comments on the rest of the Notice but they must be have a separate and distinct heading designating them as responses to the IRFA. The Secretary shall send a copy of this Notice to be sent to the Chief Counsel for Advocacy of the Small Business Administration ("SBA") in accordance with 5 U.S.C.  603(a). Need for and Objectives of the Proposed Rules: The 1996 Act requires the Commission to promulgate rules designed to promote the commercial availability of navigation devices. The Commission is issuing this Notice to seek comment on the proposed rules intended to implement this provision of the 1996 Act, and to provide a record for a Commission decision on issues discussed in the Notice. Legal Basis: Authority for this proposed rulemaking is contained in Sections 4(i), 4(j), 303(r), and 629 of the Communications Act of 1934 as amended, 47 U.S.C.  154(i), 154(j), 303(r), and 304 and 549 of the Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 56 (1996). Description and Estimate of Small Entities to Which the Proposed Rules Will Apply:Implementation of Section 304 will have the positive result of opening up to small entities the market to supply navigation devices directly to cable and other subscribers. In addition, small businesses will have the opportunity to become the manufacturers of navigation devices. While any policies or rules developed in this proceeding could have an impact on small businesses that manufacture, distribute, or use converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, this proceeding seeks comment on how this burden, if any, could be mitigated for small entities. The Regulatory Flexibility Act defines the term "small entity" as having the same meaning as the terms "small business," "small organization," and "small business concern" under Section 3 of the Small Business Act. A small 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 SBA. Small MVPDs: SBA has developed a definition of small entity for cable and other pay television services, which includes all such companies generating less than $11 million in revenue annually. This definition includes cable systems operators, closed circuit television services, direct broadcast satellite services, multipoint distribution systems, satellite master antenna systems and subscription television services. According to the Census Bureau, there were 1,323 such cable and other pay television services generating less than $11 million in revenue that were in operation for at least one year at the end of 1992. Cable Systems: The Commission has developed its own definition of a small cable system operator for the purposes of rate regulation. Under the Commission's rules, a "small cable company," is one serving fewer than 400,000 subscribers nationwide. Based on our most recent information, we estimate that there were 1,439 cable operators that qualified as small cable system operators at the end of 1995. Since then, some of those companies may have grown to serve over 400,000 subscribers, and others may have been involved in transactions that caused them to be combined with other cable operators. Consequently, we estimate that there are fewer than 1,439 small entity cable system operators that may be affected by the decisions and rules proposed in this Notice. The Communications Act also contains a definition of a small cable system operator, which is "a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1% 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 there are 61,700,000 subscribers in the United States. Therefore, we found that an operator serving fewer than 617,000 subscribers shall be deemed a small operator, if its annual revenues, when combined with the total annual revenues of all of its affiliates, do not exceed $250 million in the aggregate. Based on available data, we find that the number of cable operators serving 617,000 subscribers or less totals 1,450. Although it seems certain that some of these cable system operators are affiliated with entities whose gross annual revenues exceed $250,000,000, we are unable at this time to estimate with greater precision the number of cable system operators that would qualify as small cable operators under the definition in the Communications Act. MMDS: The Commission refined the definition of "small entity" for the auction of MMDS as an entity that together with its affiliates has average gross annual revenues that are not more than $40 million for the preceding three calendar years. This definition of a small entity in the context of the Commission's Report and Order concerning MMDS auctions that has been approved by the SBA. The Commission completed its MMDS auction in March 1996 for authorizations in 493 basic trading areas ("BTAs"). Of 67 winning bidders, 61 qualified as small entities. Five bidders indicated that they were minority-owned and four winners indicated that they were women-owned businesses. MMDS is an especially competitive service, with approximately 1573 previously authorized and proposed MMDS facilities. Information available to us indicates that no MDS facility generates revenue in excess of $11 million annually. We tentatively conclude that for purposes of this IRFA, there are approximately 1634 small MMDS providers as defined by the SBA and the Commission's auction rules. ITFS: There are presently 2032 ITFS licensees. All but one hundred of these licenses are held by educational institutions. Educational institutions are included in the definition of a small business. However, we do not collect annual revenue data for ITFS licensees and are not able to ascertain how many of the 100 non-educational licensees would be categorized as small under the SBA definition. Thus, we tentatively conclude that at least 1932 licensees are small businesses. DBS: As of December 1996, there were eight DBS licensees. However, the Commission does not collect annual revenue data for DBS and, therefore, is unable to ascertain the number of small DBS licensees that could be impacted by these proposed rules. Although DBS service requires a great investment of capital for operation, we acknowledge that there are several new entrants in this field that may not yet have generated $11 million in annual receipts, and therefore may be categorized as a small business, if independently owned and operated. HSD: The market for HSD service is difficult to quantify. Indeed, the service itself bears little resemblance to other MVPDs. HSD owners have access to more than 265 channels of programming placed on C-band satellites by programmers for receipt and distribution by MVPDs, of which 115 channels are scrambled and approximately 150 are unscrambled. HSD owners can watch unscrambled channels without paying a subscription fee. To receive scrambled channels, however, an HSD owner must purchase an integrated receiver-decoder from an equipment dealer and pay a subscription fee to an HSD programming packager. Thus, HSD users include: (1) viewers who subscribe to a packaged programming service, which affords them access to most of the same programming provided to subscribers of other MVPDs; (2) viewers who receive only non- subscription programming; and (3) viewers who receive satellite programming services illegally without subscribing. Because scrambled packages of programming are most specifically intended for retail consumers, these are the services most relevant to this discussion. According to the most recently available information, there are approximately 30 program packagers nationwide offering packages of scrambled programming to retail consumers. These program packagers provide subscriptions to approximately 2,314,900 subscribers nationwide. This is an average of about 77,163 subscribers per program packager. This is substantially smaller than the 400,000 subscribers used in the Commission's definition of a small MSO. Furthermore, because this an average, it is likely that some program packagers may be substantially smaller. We seek comment on these tentative conclusions. SMATVs: Industry sources estimate that approximately 5200 SMATV operators were providing service as of December 1995. Other estimates indicate that SMATV operators serve approximately 1.05 million residential subscribers as of September 1996 The ten largest SMATV operators together pass 815,740 units. If we assume that these SMATV operators serve 50% of the units passed, the ten largest SMATV operators serve approximately 40% of the total number of SMATV subscribers. Because these operators are not rate regulated, they are not required to file financial data with the Commission. Furthermore, we are not aware of any privately published financial information regarding these operators. Based on the estimated number of operators and the estimated number of units served by the largest ten SMATVs, we tentatively conclude that a substantial number of SMATV operators qualify as small entities. LMDS: Unlike the above pay television services, LMDS technology and spectrum allocation will allow licensees to provide wireless telephony, data, and/or video services. A LMDS provider is not limited in the number of potential applications that will be available for this service. Therefore, the definition of a small LMDS entity may be applicable to both cable and other pay television (SIC 4841) and/or radiotelephone communications companies (SIC 4812). A small radiotelephone entity is one with 1500 employees or less. However, for the purposes of this Noticeon closed captioning, we include only an estimate of LMDS video service providers. LMDS is a service that is expected to be auctioned by the FCC in 1997. The vast majority of LMDS entities providing video distribution could be small businesses under the SBA's definition of cable and pay television (SIC 4841). However, in the Third NPRM, we proposed to define a small LMDS provider as an entity that, together with affiliates and attributable investors, has average gross revenues for the three preceding calendar years of less than $40 million. We have not yet received approval by the SBA for this definition. There is only one company, CellularVision, that is currently providing LMDS video services. Although the Commission does not collect data on annual receipts, we assume that CellularVision is a small business under both the SBA definition and our proposed auction rules. We tentatively conclude that a majority of the potential LMDS licensees will be small entities, as that term is defined by the SBA and the Commission's proposed definition. OVS: The Commission has certified four open video system (OVS) operators. Because these services have been introduced so recently, financial information regarding them is not available. Two of the four OVS licensees, Bell Atlantic and Metropolitan Fiber Systems, however, have sufficient revenues so that they do not qualify as small business entities. Accordingly, we tentatively conclude that at most two OVS licensees qualify as small business concerns. Small Manufacturers: The SBA has developed definitions of small entity for manufacturers of household audio and video equipment (SIC 3651) and for radio and television broadcasting and communications equipment (SIC 3663). In each case, the definition includes all such companies employing 750 or fewer employees. Electronic Equipment Manufacturers: The Commission has not developed a definition of small entities applicable to manufacturers of electronic equipment. Therefore, we will utilize the SBA definition of manufacturers of Radio and Television Broadcasting and Communications Equipment. According to the SBA's regulations, a TV equipment manufacturer must have 750 or fewer employees in order to qualify as a small business concern. Census Bureau data indicates that there are 858 U.S. firms that manufacture radio and television broadcasting and communications equipment, and that 778 of these firms have fewer than 750 employees and would be classified as small entities. The Census Bureau category is very broad, and specific figures are not available as to how many of these firms are exclusive manufacturers of television equipment or how many are independently owned and operated. We conclude that there are approximately 778 small manufacturers of radio and television equipment. Electronic Household/Consumer Equipment: The Commission has not developed a definition of small entities applicable to manufacturers of electronic equipment used by consumers, as compared to industrial use by television licensees and related businesses. Therefore, we will utilize the SBA definition applicable to manufacturers of Household Audio and Visual Equipment. According to the SBA's regulations, a household audio and visual equipment manufacturer must have 750 or fewer employees in order to qualify as a small business concern. Census Bureau data indicates that there are 410 U.S. firms that manufacture radio and television broadcasting and communications equipment, and that 386 of these firms have fewer than 500 employees and would be classified as small entities. The remaining 24 firms have 500 or more employees; however, we are unable to determine how many of those have fewer than 750 employees and therefore, also qualify as small entities under the SBA definition. Furthermore, the Census Bureau category is very broad, and specific figures are not available as to how many of these firms are exclusive manufacturers of television equipment for consumers or how many are independently owned and operated. We conclude that there are approximately 386 small manufacturers of television equipment for consumer/household use. Computer Manufacturers: The Commission has not developed a definition of small entities applicable to computer manufacturers. Therefore, we will utilize the SBA definition of Electronic Computers. According to SBA regulations, a computer manufacturer must have 1,000 or fewer employees in order to qualify as a small entity. Census Bureau data indicates that there are 716 firms that manufacture electronic computers and of those, 659 have fewer than 500 employees and qualify as small entities. The remaining 57 firms have 500 or more employees; however, we are unable to determine how many of those have fewer than 1,000 employees and therefore also qualify as small entities under the SBA definition. We conclude that there are approximately 659 small computer manufacturers. Small Retailers: The Commission has not developed a definition of small entities applicable to navigation retail devices. Therefore, we will utilize the SBA definition. The 1992 Bureau of the Census data indicates: there were 9,663 U.S. firms classified as Radio, TV & electronic stores (SIC 5731), and that 9,385 of these firms had $4.999 million or less in annual receipts and 9,473 of these firms had $7.499 million or less in annual receipts. Consequently, we tentatively conclude that there are approximately 9,663 small entities that produce and distribute radio, television, and electronic stores that may be affected by the decisions and rules proposed in this Notice. Reporting, Recordkeeping, and Other Compliance Requirements: The proposed actions may require MVPDs to obtain security modules for sale to subscribers. They may also prohibit MVPDs from providing CPE which is not commercially available. In addition, the proposed actions may require MVPDs to make available to consumers basic technical information concerning the network to which a navigation device is to be attached (paragraph 56). This latter proposal, if adopted, would not necessitate any additional professional, engineering, or customer service skills beyond those already utilized in the ordinary course of business by MVPDs. Any costs to the MVPD would be justified by the competitive benefits; MVPDs and consumers will benefit from an increased, more innovative, and more competitive market for navigation devices. We seek comment on this. Any Significant Alternatives Minimizing the Impact On Small Entities Consistent With the Stated Objectives: We believe that our proposals will have the positive result of opening up to small entities the market to supply navigation devices directly to cable and other subscribers (see discussion at paragraph 84). In addition, small businesses will have the opportunity to become the manufacturers of navigation devices. (see discussion at paragraph 84) While small businesses would experience costs associated with maintaining for sale navigation devices, should we adopt rules that would require such, we believe such businesses are capable of doing so. Should commenters disagree with this conclusion, we welcome comments suggesting ways in which any perceived burden upon small entities could be mitigated. Federal Rules Which Overlap, Duplicate or Conflict with Proposed Rules: None. APPENDIX B SEC. 629. COMPETITIVE AVAILABILITY OF NAVIGATION DEVICES. (a) Commercial Consumer Availability of Equipment Used To Access Services Provided by Multichannel Video Programming Distributors.--The Commission shall, in consultation with appropriate industry standard-setting organizations, adopt regulations to assure the commercial availability, to consumers of multichannel video programming and other services offered over multichannel video programming systems, of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor. Such regulations shall not prohibit any multichannel video programming distributor from also offering converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, to consumers, if the system operator's charges to consumers for such devices and equipment are separately stated and not subsidized by charges for any such service. (b) Protection of System Security.--The Commission shall not prescribe regulations under subsection (a) which would jeopardize security of multichannel video programming and other services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service. (c) Waiver.--The Commission shall waive a regulation adopted under subsection (a) for a limited time on an appropriate showing by a provider of multichannel video programming and other services offered over multichannel video programming systems, or an equipment provider, that such waiver is necessary to assist the development or introduction of a new or improved multichannel video programming or other service offered over multichannel video programming systems, technology, or products. Upon an appropriate showing, the Commission shall grant any such waiver request within 90 days of any application filed under this subsection, and such waiver shall be effective for all service providers and products in that category and for all providers of services and products. (d) Avoidance of Redundant Regulations.-- (1) Commercial availability determinations.--Determinations made or regulations prescribed by the Commission with respect to commercial availability to consumers of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, before the date of enactment of the Telecommunications Act of 1996 shall fulfill the requirements of this section. (2) Regulations.--Nothing in this section affects section 64.702(e) of the Commission's regulations (47 C.F.R. 64.702(e)) or other Commission regulations governing interconnection and competitive provision of customer premises equipment used in connection with basic common carrier communications services. (e) Sunset.--The regulations adopted under this section shall cease to apply when the Commission determines that-- (1) the market for the multichannel video programming distributors is fully competitive; (2) the market for converter boxes, and interactive communications equipment, used in conjunction with that service is fully competitive; and (3) elimination of the regulations would promote competition and the public interest. (f) Commission's Authority.--Nothing in this section shall be construed as expanding or limiting any authority that the Commission may have under law in effect before the date of enactment of the Telecommunications Act of 1996. SEC. 633. UNAUTHORIZED RECEPTION OF CABLE SERVICE. (a)(1) No person shall intercept or receive or assist in intercepting or receiving any communications service offered over a cable system, unless specifically authorized to do so by a cable operator or as may otherwise be specifically authorized by law. (2) For the purpose of this section, the term "assist in intercepting or receiving" shall include the manufacture or distribution of equipment intended by the manufacturer or distributor (as the case may be) for unauthorized reception of any communications service offered over a cable system in violation of subparagraph (1). * * * * * SEC. 705. UNAUTHORIZED PUBLICATION OF COMMUNICATIONS. (a) * * * * * No person not being entitled thereto shall receive or assist in receiving any interstate or foreign communication by radio and use such communication (or any information therein contained) for his own benefit or for the benefit of another not entitled thereto. * * * * * (e) * * * * * (4) Any person who manufactures, assembles, modifies, imports, exports, sells or distributes any electronic, mechanical, or other device or equipment, knowing or having reason to know that the device or equipment is primarily of assistance in the unauthorized decryption of satellite cable programming, or is intended for any other activity prohibited by subsection (a) of this section, shall be fined not more than $500,000 for each violation, or imprisoned for not more than 5 years for each violation, or both. For purposes of all penalties and remedies established for violations of this paragraph, the prohibited activity established herein as it applies to each such device shall be deemed a separate violation. * * * * *