OTT Fees Possibly a Growing Trend for Local Franchise Authorities

With one Missouri community attempting to levy fees on Netflix and Hulu like it does cable TV, other states and localities are likely to try to head down the same road, experts told us. “I don't know that anybody is jumping on the bandwagon per se but I think [other communities] are interested in seeing how [the city's litigation] plays out," said Creve Coeur, Missouri, Mayor Barry Glantz.

NATOA General Counsel Nancy Werner doesn't know any cities that plan to pursue this approach. While it gets framed as a money grab by localities, cities are trying to manage their rights of way effectively and maintain a level playing field for providers of similar services, she said. As more services move to over-the-top, that balance becomes harder where every provider uses facilities in the rights of way (ROWs) to reach its customers but only some providers pay for that use, she said.

It's likely other communities or states will consider following the Creve Coeur approach, said a lawyer with localities experience. The attorney said OTT services like Hulu and Netflix don’t own the distribution facilities they are using, and that historically has been the regulatory distinction, but that distinction breaks down as more services move to OTT. If cities start implementing policies saying provision of service over facilities in public ROWs makes those services subject to local regulation, those providers may respond with litigation or seek FCC pre-emption, the lawyer said.

More localities may test this approach, as local franchise authorities are smarting from cord cutters, said a streaming-expert lawyer. Similar issues are at play when ISPs split their systems so customers are in affiliates that don't fall under public utility commissions, the lawyer said. Minnesota asked the 8th U.S. Court of Appeals to review of a panel's affirmation of a lower court decision freeing interconnected VoIP service from state regulation (see 1809240021).

States and political subdivisions "will always look for opportunities to tax services and businesses if given the opportunity to do so," said Markham Erickson of Steptoe & Johnson. He represents Dish Network in Creve Coeur litigation.

The St. Louis suburb suing Netflix and Hulu for not paying video service provider fees (see 1809100020) last week also filed a motion (in Pacer) in U.S. District Court in St. Louis to consolidate its Netflix-Hulu litigation with litigation it has against direct broadcast satellite operators for similarly not paying fees as required by the 2007 Video Services Providers Act.

The cable industry's ongoing customer losses are affecting localities' income from franchise fees, Glantz said. OTT services are delivered over the same ROWs as cable, but haven't been paying to use it, he said. "We're not trying to penalize anybody," Glantz said. "Anybody who is using our right of way [should be] on a level playing field and paying the same franchise fees we feel we're owed.” Whether video service delivery is via a cable operator, another MVPD or a streaming service, "the city is entitled to our rightful franchise fee," he said.

Erickson said state and locality attempts to regulate and charge fees of non-cable services aren't likely to fly far. He said the tax Creve Coeur is trying to apply stems from a law meant to apply to companies like cable operators that are regulated by local political subdivisions and is connected to those companies using public ROWs to install cable, so there's a rational connection between the tax and the company imposing infrastructure costs on the locality. That public ROW rationale doesn't apply to DBS or OTT service, since the ISP providing connectivity might be subject to PUC regulation but the content providers aren't. The Telecom Act also precludes local jurisdictions from taxing DBS services, he said.