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Earning Income as a PEG Access Facility

Legal Considerations

Wisconsin Community Media - Spring Conference

Milwaukee, WI – April 26-27, 2013

Brian Grogan, Esq.

Question

How do community programming centers make

up revenue lost from decreasing franchise fees

or reduced/eliminated PEG fees?

First – why is this happening now?

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Problem • Cable operator revenue is not growing

– Thus franchise fee revenue is relatively static

• Cities cannot impose franchise fee on:

– Telecommunications – regulated by PUC

– Broadband – regulated by FCC

• Community programming centers depend on

two types of revenue to operate:

1.Franchise fees

– if city dedicates a portion for local programming

2.PEG fees

– except state franchising statutes – Wisconsin

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Why This is Happening Now?

• Some subscribers are disconnecting from cable

– Growth of DBS has been significant

– Over the top cable is having an impact

– Wireless devices

– Economy – high cost

• Millennial generation not dependant on cable

– Few college students subscribe to cable

– All college students have broadband service

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Basic Cable Subscribers

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1975-2011

SOURCE: SNL KAGAN/NCTA

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DBS Subscribers

2002 18,240,000

2003 20,360,000

2004 23,160,000

2005 26,120,000

2006 29,100,000

2007 30,600,000

2008 31,300,000

2009 32,600,000

2010 33,300,000

SOURCE: JULY 2012 FCC REPORT ON COMPETITION

DBS Impact on PEG

• No local or state franchise

• No franchise fees

• No PEG fees

• No local PEG content

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Basic Cable Phone Subs

Year /Subs

1998 .1

1999 .3

2000 1.0

2001 1.5

2002 2.5

2003 3.0

2004 3.8

Year/Subs

2005 5.9

2006 9.5

2007 14.9

2008 19.6

2009 22.2

2010 23.9

2011 25.3

in millions

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High Speed Internet Customers

(IN MILLIONS) 1997 - 2011

SOURCE: SNL KAGAN

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Cable Industry Revenue (,000s) Year Res Video Other Rev Total Rev 1996 $24,136 $2,984 $27,120

1997 $26,270 $3,532 $29,802

1998 $27,626 $6,152 $33,778

1999 $30,050 $7,341 $37,391

2000 $32,541 $9,575 $42,116

2001 $35,734 $9,743 $45,477

2002 $36,738 $11,160 $47,898

2003 $39,338 $15,056 $54,394

2004 $41,813 $18,212 $60,025

2005 $43,832 $21,846 $65,678

2006 $46,518 $25,354 $71,872

2007 $49,105 $29,719 $78,824

2008 $51,811 $34,470 $86,281

2009 $53,040 $36,861 $89,901

2010 $55,470 $38,310 $93,780

2011 $56,938 $40,660 $97,598

SOURCE: SNL KAGAN – NCTA website (in millions)

Finding New Revenue

• PEG organizations

• Seeking new sources of revenues

• Breaking free of years of self-imposed restraint

• PEG channels are not limited to noncommercial

use.

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Cable Act

• No prohibition on commercial speech on PEG

– If a municipality determines advertising is useful

to fund programming on local government at work

or other appropriate PEG programming, I find

nothing in the Cable Act that would prevent a

municipality from doing so.

• Time Warner Cable v. City of New York, 943 F.

Supp. 1357, 1387 (S.D.N.Y. 1996)

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FCC Guidance

• Federal law previously permitted a cable

operator to:

– prohibit the use of a PEG channel for

programming that contains:

• obscene material, sexually explicit conduct,

indecency, nudity, or material soliciting or

promoting unlawful conduct.

• However, the U.S. Supreme Court determined

that this law was unconstitutional.

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FCC Guidance

• Cable operators may not control the content of

programming on public access channels

– Exception:

– Cable operator may refuse to transmit a public

access program which the cable operator

reasonably believes contains obscenity.

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Wisconsin State Law

• Section 66.0420(2)(s):

“PEG channel” means a channel designated for

noncommercial public, educational, or

governmental use.

• Line item veto by Governor in 2007.

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Franchise

• In Wisconsin:

– Since 2007 State issues the franchise

– No more local franchise

• If your city is not in Wisconsin

– Must carefully review local franchise with operator

for possible contractual restriction

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Local Code

• Many cities continue to have antiquated local

code provisions governing cable

• These cable ordinances often date back 20+ yrs

– Well before the 2007 Wisc. state franchising law

• These cable ordinances may contain

noncommercial PEG requirements

– May contain requirements that channel time must

be made available to residents “Free of Charge”

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Traditional Noncommercial Use

• Identification of financial supporters

– similar to PBS sponsorships

• Solicitation of financial support for

– charitable, educational or governmental purposes

• Programming offered by

– accredited, non-profit, educational institutions

– Telecourses

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Sponsorship

• One that finances a project or an event carried out

by another person or group

• Especially a business enterprise that pays for radio

or television programming in return for recognition

• i.e. advertising time

• http://www.pbs.org/insidepbs/guidelines/howto.html

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Qualified Sponsorship

Activities • This is any payment made by a person engaged in a trade or

business for which the person will receive no substantial

benefit other than the use or acknowledgment of the business

name, logo, or product lines in connection with the

organization's activities. “Use or acknowledgment” does not

include advertising the sponsor's products or services.

• For example, if, in return for receiving a sponsorship payment,

an organization promises to use the sponsor's name or logo

in acknowledging the sponsor's support for an educational or

fundraising event, the payment is a qualified sponsorship

payment and is not subject to the unrelated business income

tax.

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Advertising

• Generally refers to the sale or exchange of a

good or service or

– the solicitation of donations, remuneration or

barter

• Is a pastor asking for donations advertising?

• A political candidate asking for contributions?

• A plea for Save the Starving Children?

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Advertising • A payment is not a qualified sponsorship payment if, in

return, the organization advertises the sponsor's products or

services.

• Advertising includes:

– Messages containing qualitative or comparative language, price

information, or other indications of savings or value;

– Endorsements; and

– Inducements to purchase, sell, or use the products or services.

• The use of promotional logos or slogans that are an established

part of the sponsor's identity is not, by itself, advertising. In

addition, mere distribution or display of a sponsor's product by

the organization to the public at a sponsored event, whether for

free or for remuneration, is considered use or acknowledgment

of the product rather than advertising.

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New PEG Revenue Options

• Sponsorships

• Advertising

• Memberships

• Charging for channel time

• Resale of programming

• Studio/editing leasing

• Production services

• Other?

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Goldberg v. Cablevision Systems

• New York has a noncommercial state requirement

• PEG producer sought to sell:

– $39 duplicate tape or $5 transcript of program

• 2nd Circuit held

– Message would not render program “commercial”

– Primary role was to disseminate message

– Not to produce financial gain

A cable operator may refuse to cablecast on a public

access channel any programming that does not meet

the legal criteria for dissemination in that forum.

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Policies

• Written policy setting forth acceptable advertising

– Avoid viewpoint discrimination

• Should a government access channel accept

sponsorship/advertising funding from an entity:

– That bids on City contracts?

– Provides services to the City?

– Is currently lobbying controversial legislation under

the purview of the City?

– Is a candidate for City office?

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Nonprofit Fears

• Detract from the mission of the nonprofit

• Undermine the organization by introducing

“market forces”

• Be too difficult or complex to manage

• Put the nonprofit status at risk

• Impose “Unrelated Business Income Tax”

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Unrelated Business Income Tax

Unrelated business income is the income from

a trade or business regularly carried on by an

exempt organization and not substantially

related to the performance by the organization

of its exempt purpose or function.

Additional UBIT Info:

http://www.irs.gov/pub/irs-pdf/p598.pdf

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UBIT Analysis

1. Ascertain organization’s exempt purpose

– Articles of Organization

– Limited by 501(c)(3)

2. Is business activity substantially related to the

accomplishment of exempt purpose?

If not, then UBIT

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Consequences of UBIT

• The business income is taxable; and

• If the unrelated activity is a substantial part of

the organization’s activities, potential for loss

of exemption.

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How Can You Develop

Alternative Sources of Revenue

• Analyze services you can provide/sell

• Determine what might be saleable

• Conduct market research to understand the

profit potential

• Balance the promise of profit with the mission of

the organization

• Develop products or services

• Create a business plan

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Business Plan Details

• Business model and how it operates

• Competitive landscape and how the nonprofit can

compete effectively to sell goods/services

• Structure, roles and responsibilities of staffing for the

business

– Stay true to mission statement – discuss with city

• Pricing, promotion, packaging, and distribution of

the products/services

• Financial plan

• Day-to-day operational plan for the business

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Questions to Think About • Are we in a fairly stable financial situation?

• Do we have core assets/personnel that could be

transformed into saleable products or services?

• Is there a potential market with a willingness and ability to

pay for these products/services?

• Would the sale of these products/services be a

complement to, not a distraction from, our mission?

• Is our staff, board, council, elected officials

– for the most part, open to risk and experimentation?

• Do we have access to funders who could potentially

provide some startup capital for an earned income

venture?

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Processes to Undertake

1. Analyzing assets to determine potential

products/services to sell

2. Conducting market research to determine

competitors and consumers

3. Pilot testing a product/service

4. Creating a business plan including marketing,

staffing, financial model, risks and mitigations

5. Launching the business

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Thank You

Brian T. Grogan, Esq.

Moss & Barnett, A Professional Association 4800 Wells Fargo Center, 90 South Seventh Street

Minneapolis, MN 55402-4129

(612) 877-5340 phone / (612) 877-5999 facsimile

E-mail: GroganB@moss-barnett.com

Website: www.moss-barnett.com