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Why Is a Small Town in Kansas Suing Netflix and Hulu?

Declining cable viewership means less revenue for local governments. Fort Scott hopes it can staunch the loss by making the streaming giants pay a franchise fee, something they currently don’t do.

(TNS) — On its surface, the notion that Fort Scott, Kansas, could stand up to Netflix and Hulu seems like a David and Goliath battle of the highest order.

On one hand, you have an 8,000-person town in the state's southeast corner, most famous for its U.S. Army garrison in the 19th century and its role in the Civil War during that timeframe. Facing them are a pair of giants in the media world, with the companies combining for almost $30 billion in profits in 2020.

But the battle royale between the unlikely foes is set to play out, with Fort Scott filing suit against the streaming giants in Bourbon County District Court last month, the latest chess move amid the larger decline in the number of Americans subscribing to cable.

This has left local governments in an awkward spot, as they receive a cut of profits from cable companies — but not firms like Netflix or Hulu. Nationally, this has led to a spate of lawsuits against the companies, as well as their counterparts like Disney+.

And experts note it is a sign of a broader mismatch between state and federal telecommunications laws drafted in the mid-20th century and the modern reality of how Americans consume media.

"It's like, look, the law says what it says ... we're a town, we're strapped for money," said John Bergmayer, legal director for Public Knowledge, a Washington-based public interest group involved in technology issues. "So we're just gonna give it a go and just sort of see if we can use these laws to sort of get revenue to make up for revenue that is being lost based on the large number of cord cutters out there."

To Michael Fleming, an Overland Park attorney representing Fort Scott in the case against Netflix and Hulu, the case comes down to fairness.

In Kansas, statute requires "competitive video service providers" and other utilities to pay up to 5% of their revenues in a given city to the local government in a franchise fee. The logic is simple: Cable companies rely on the public right-of-way to deliver service to customers and thus should compensate governments.

Under a 2006 law, companies also are required to register with the Kansas Corporation Commission and pay a fee to the state as part of that process. Cable providers no longer negotiate individual franchise agreements with each municipality beyond the 5% fee.

In the case of streaming services like Netflix and Hulu, that payment doesn't take place.

"Like the City of Fort Scott, most Kansans expect that companies doing business in this state will pay their fair share," Fleming said. "That is the entire point of this lawsuit."

As streaming services have taken off and residents have "cut the cord," the number of cable subscriptions have dropped, meaning companies are remitting fewer profits to municipalities in franchise fees. An Indiana county, for instance, reported its revenues from cable companies had dropped $30,000 in the past three years.

Erik Sartorious, director of the Kansas League of Municipalities, said that was an anecdotal trend that has been observed statewide as well.

"Many people still have cable connections to power their Wi-Fi, but they're only paying for the connection, not cable TV packages," Sartorious said.

The Fort Scott case is the first such suit against Netflix and Hulu filed in Kansas but similar challenges have cropped up in other states, including Missouri, Texas and Ohio.

The Missouri case was the first in the country to be filed and also is the most advanced. A judge in that state rejected efforts by the streaming providers to toss out the case and also ruled the companies could not use a federal law banning state and local governments from taxing internet access as a shield.

Netflix and Hulu didn't respond for a request for comment and haven't yet been served in the Kansas case.

But in other states, the companies have argued the strategy is a desperate attempt to recoup declining revenues. Moreover, there have been claims that popular shows like Netflix's "The Queen's Gambit" should be considered free speech and that the payment of fees unduly burdens the companies and, by extension, their customers.

"The city is clearly singling out Netflix and Hulu," Jean Pawlow, an attorney for Netflix, told a federal judge in a case brought by New Boston, Texas. "Not just this city but in cities around the United States. It's obvious they are trying to increase revenue because their revenue has declined and therefore they are going after deep pockets."

The streaming providers have attempted to push the cases to federal court, pointing to more specific definitions in federal law that would appear to exclude Netflix and Hulu from being considered a cable company.

But Bergmayer, of Public Knowledge, noted that differences between laws in different states would mean that a favorable ruling in another state wouldn't mean the Kansas case will play out the same way.

"It is kind of hard to say ... a blanket statement as to whether or not these lawsuits will succeed, ultimately," he said.

The franchise fee law in Kansas has seen few changes in recent decades, begging the question of whether this could be an issue legislators take up at some point in the future.

Some in Missouri viewed that as the answer, with a bill introduced in Jefferson City to clarify that Netflix, Hulu and others were required to pay the fee. The bill ultimately floundered, but it had its supporters, including cable providers in the state and a bevy of lawmakers from both parties.

In Kansas, there has been no legislation introduced on the matter and the most likely group of supporters — cable companies — say they have no interest in pursuing the matter presently.

"It has always been of interest and concern for members, the parity issue, because of intense competition," John Federico, a Topeka lobbyist who serves as president of the Kansas Cable Telecommunications Association. "But at this point in time, in Kansas, there are, we feel, more important things to focus on."

Because streaming services would likely pass on any franchise fee costs to consumers, there are worries about raising costs for Kansans looking to binge watch their favorite television show.

And if Missouri is any indication, streaming providers and those opposed to changing the law would likely come out in force against such a move. Dish Network, for instance, registered six lobbyists in Missouri, in part to oppose that state's bill.

But Bergmayer said it will eventually need to be resolved, pointing to the broader issue of state and federal laws not matching how more and more residents consume media.

That debate has played out in Kansas in recent years over another issue: whether to to treat Netflix, Hulu and other streaming or digital services like a physical DVD or CD for taxation purposes, thereby expanding the state's sales tax base.

The idea has been particularly popular with Gov. Laura Kelly and her administration, although Republicans have pushed back, dubbing it the " Baby Yoda tax" after popular "The Mandalorian" character in Disney+. The tax hasn't moved in recent years amid concerns it could unfairly burden middle class households who use streaming services.

And while it is uncertain if modernizing the states' franchise laws will occur in the years to come, experts say it could bear more fruit than relying on the lawsuits to succeed.

"I would hope that these lawsuits don't succeed, not because I don't want the towns to not have money but because I want our laws to make sense," Bergmayer said. "And if you have a law that was passed to, you know, get money from infrastructure providers ... we should update them to make sure they're applying to the infrastructure providers that people are actually using today, not just sort of apply them to random online services."

(c)2021 The Topeka Capital-Journal, Kan. Distributed by Tribune Content Agency, LLC.
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