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Waiting for the Third Shoe to Drop

When the FCC issued its Second Report & Order on digital radio in May, we learned that these were not truly and completely "final" rules, but that there will very likely be a Third R&O to follow.

When the FCC issued its Second Report & Order on digital radio in May, we learned that these were not truly and completely “final” rules, but that there will very likely be a Third R&O to follow.

This was obvious from reading the full title of the proceeding (FCC 07-33), which included a Second Further Notice of Proposed Rulemaking.

While the Second R&O mostly moved U.S. digital radio out of the shadows of “interim rules,” there are still some key points that the FCC left unresolved, and which are now considered in the Second FNPRM.

So the disquiet of interim status still lurks at the margins, as the industry remains in doubt over a few IBOC matters.

Perhaps most important among these are possible future rules on IBOC subscription services (audio or data), which the FCC addresses at some length in the Second FNPRM.

The new rules now in effect for IBOC broadcasting allow such service only under experimental authorization, leaving them in interim status and reserving their final disposition until the next R&O — just as multicasting, datacasting and Extended Hybrid operation were under the previous rules.

Most broadcasters probably don’t care much at the moment about the issue of subscription service, but this could change over time.

Consider how not long ago few broadcasters were interested in multicasting, but today many are quite engaged with it. Think back also to the earliest days of IBOC regulation, when the FCC first opened Docket 99-325 in response to USA Digital Radio’s landmark Petition for Rulemaking to allow IBOC broadcasting, filed in October 1998.

Did anyone at the time envision that competing, subscription radio services would have over 10 million subscribers before “final” rules allowing IBOC were approved?

So no matter how well you think you understand the landscape, or how ahead of the curve you think you are, things can change relatively quickly. Thus terrestrial digital subscription radio services may soon evolve to significant importance — again, perhaps even before the FCC creates final rules governing them.

When digital pigs fly

The concept of subscription broadcasting is nothing new.

Even before cable, terrestrial broadcast TV tried it, but the service never caught on. Terrestrial radio has never really worked in this space, although if you ask public radio, they will tell you differently. For them, voluntary subscription radio has been a success — if you call the approximately 10 percent of their listeners that actually contribute a “successful” rate.

It’s all relative, of course. In baseball, for example, a 30 percent success rate for hitters (i.e., a .300 batting average) is considered great.

Some have said that this is why the game is so popular among the American rank and file, but I say it’s about context and degree of difficulty. We’re all graded on a curve, and the slopes of those curves vary with the situations at hand. But I digress.

The point is that even though subscription terrestrial broadcasting is relatively untried, this doesn’t mean it couldn’t become wildly successful in the future under the right circumstances. Look at cable TV and satellite radio, which also flew in the face of the conventional wisdom in their early days.

So what may seem a minor, unresolved detail today could turn into a major new service feature for radio broadcasters, both commercial and non-commercial. (Public radio already has its own interesting ideas for subscription IBOC, by the way, one of which would authorize listeners who have made their contributions to receive a pledge-free multicast channel for the remainder of the fund drive.)

Pay me now or pay me later

The FCC is perhaps rightly concerned that IBOC not become simply a money-grab for broadcasters, but that new and improved radio for the general public result. (The slow start of IBOC acceptance among consumers makes the likelihood of broadcasters’ moving in that direction ever more realistic.)

So the Second FNPRM asks whether limits should be placed on how much of a station’s IBOC digital bandwidth might be applied to subscription services, and/or whether fees should be levied on revenues thereby collected by stations.

The levy idea is not unprecedented, of course. A close parallel already exists under current rules for digital terrestrial television, which require DTV stations to pay 5 percent of what they earn on digital datacasting to the feds. But this authority was granted to the FCC by congressional mandate, and it applied specifically to digital television datacasting. (Remember that, unlike IBOC digital radio, TV stations were all granted new 6 MHz channels for their DTV services, so the context of a “free spectrum giveaway” was an issue that required some political bargaining.)

So the FCC asks in the Second FNPRM whether it has statutory authority to levy similar fees on IBOC digital radio datacasting without express congressional authorization. It further asks that even if it does have adequate jurisdiction, should it levy such fees, and if so, at what rate?

Or should the FCC simply choose an arbitrary percentage of IBOC bandwidth that must be reserved for unencrypted (non-subscription) service(s)? Or should it do this and levy fees on subscription revenues? These are all questions that are being addressed in the current comment period.

More commercials, please

Another point to ponder: To support its desire to ensure that the IBOC transition will broadly impact the general public, the FCC is considering rules that would reserve adequate bandwidth for “free” service.

In reality, however, “free” translates to “commercially supported” service (or equivalent noncommercial underwriting announcements). Is it really in the public interest to effectively mandate that all new multicast radio streams will include commercials?

Perhaps wiser stewardship would provide greater consumer choice via a tiered approach, such that “free” services are maintained (including their new digital equivalents on IBOC’s main program service), and new commercial-free subscription services via IBOC multicasts are also freely allowed.

No coach seats are removed (in fact, they are upgraded by IBOC), but a new first-class service is provided for those who want to pay for it. The marketplace will determine how much of each type of service is viable. That’s the American way, and a smart regulatory approach could enable it.

Further, the unfettered application of subscription IBOC services might allow terrestrial broadcasters to compete in a more agile and direct way with satellite radio, which already offers many channels of commercial-free music to consumers who pay a monthly fee.

Thus allowing subscription service to develop without artificial regulatory constraint could be beneficial to both consumers (providing them greater service variety) and to broadcasters (making them more competitive). This would argue for the FCC to take a light-handed approach here.

Next time we’ll take another look at some of the open questions that remain on digital radio regulation.