FCC 95-491

Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554

In the Matter of ) ) Annual Assessment of the Status of ) CS Docket No. 95-61 Competition in the Market for the ) Delivery of Video Programming ) .

SECQND ANNUAL BEPORI

Adopted: December 7, 1995 Releuecl: December 11, 1995

By the Commission: Commissioner Barrett issuing a separate statement.

Table of Coateah

Paragraph

I. Introduction ...... 1

A. Scope of this Report ...... 2

B. Summary of Findings ...... 5

11 . Competitors in Markets for the Delivery of Video Programming ...... 11

A. Cable Industry ...... 11

B. Dim:t-to-Home Satellite Services ...... 48

1. Direct Broadcast Satellite Service ...... 49 2. Home Satellite Dishes ...... 61

C. Wireless Cable Systems ...... 68

1. Multichannel Multipoint Distribution Service ...... 68 2. Local Multipoint Distribution Service ...... 84

D. Local Exchange Carriers ...... 86

2060 E. Satellite Master Antenna Television Systems ...... l 04

F. Broadcast Television Service ...... 112 0. Other Actual and Potential Distributors ...... 118

III. Market Structure Conditions Affecting Competition ...... 128

A. Horizontal Issues in Markets for the Delivery of Video Programming . . . 128

B. Vertical Integration in the Cable Industry ...... 148

C. Technical Advances ...... ·· ...... 173.

IV. Status of Competition in Markets for the Delivery of Video Programming ...... 194

v. Administrative Matters ...... 216

Appendices

A. List of Commenters B. Cable Industry Tables C. Status of LEC Entry D. Local Exchange Carrier Proposals E. Status of VDT Technical and Market Trials F. Top 20 Satellite Master Antenna Television Operators G. Horizontal Concentration Tables H. Vertical Integration Tables I. Comments on Program Access Issues

2061 I. INTRODUCI'ION

1. Section 628(g) of the Communications Act of 1934, as amended, directs the Commission to report annually to Congress on the status of competition in the market for the delivery of video programming. 1 This is the Commission's second report issued in compliance with this statutory requirement.2 This second report ("1995 Report") is based on publicly available data, filings in various Commission rulemaking proceedings, and infonnation submitted by commenters in response to a Notice of Inquiry ("NO!') in this docket.3

A. Scope of this Report

2. The purpose of this 1995 Report is to provide data and infonnation that summarizes the status of competition in the market for the delivery of video programming and that updates our Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, First Report ("1994 Report").4 We begin this 1995 Report with an examination of the cable television industry, other existing multichannel video programming distribution technologies, and potential competitors to cable television (Section IT). Among the alternative distribution technologies and providers discussed in this section are direct-to-home ("DTH") satellite services, including direct broadcast satellite ("DBS") services and home satellite dishes ("HSDs"), wireless cable systems using frequencies in the multichannel multipoint distribution service ("MMDSj or lo~ multipoint distribution service ("LMDS"). local exchange telephone carriers ("LECs"), ~tellite master antenna television ("SMATV") systems, and broadcast television service. We also consider several other existing and potential distributors of video programming, such as electric utilities, and other distribution technologies, including video cassette recorders ("VCRs"), interactive video and data services ("IVDS"), and the Internet.

3. Section III of this 1995 Report examines market structure and competition. We evaluate horizontal concentration in the cable television industry in Section liLA. In Section ill.B, we evaluate vertical integration between cable television systems and programming services, and report on issues of access to programming. Finally, we address

1 Communications Act of 1934 ("Communications Act") § 628(g), 47 U.S.C. § 548(g).

2 The Commission released its first report pursuant to this statutory requirement on . September 28, 1994. Implementation of Section 19 of the 1992 Cable Act (Annual Assessment of the Status of Competition in the Marlcet for the Delivery of Video Programming), First Report, CS Docket No. 94-48, 9 FCC Red 7442 (1994).

3 Annual Assessment ofthe Status of Competition in the Market for the Delivery of Video Programming, Notice of Inquiry, CS Docket No. 95-61, 10 FCC Red 7805 ( 1995). A list of these submitted comments and reply comments is set forth in Appendix A.

4 1994 Report, 9 FCC Red at 7558 1 253.

2062 technical advances in Section m.C.

4. Our assessment of the status of competition in the market for the delivery of video programming is presented in Section IV. In this section, we examine the extent of competition and evaluate market performance. We also report on existing and potential impediments to entry and competition, including strategic behavior that could deter entry and regulatory, legal, and other potential impediments.

B. Summary of Findings

5. We conclude that cable television systems remain the primary distributors of multichannel video programming services and continue to enjoy market power in local markets, although some progress bas begun tpward a competitive marketplace for the distribution of video programming. In the last year, DBS systems have attracted many subscribers to newly available services. MMDS and SMATV systems have also continued to increase in subscribership. Several LECs, however, have modified their plans for wire based video service, including video dialtone ("VDT") service, from the scale of entry reported last year. Some LECs are continuing their deployment of wire based facilities in selected markets, either through VDT or traditional cable systems. In other cases, LECs appear to be focusing their efforts on wireless en1ry through investment in MMDS facilities. In sum, while subscribership for distributors using alternative ~hnol~gies has generally increased over the last year, overall subscribership for all distributors usiDg alternative technologies is just 9% of total multichannel video programming distributor ("MVPD") subscribersh.ip, whereas cable systems account for 91% of the total.' Over the long term. it is difficult to predict the extent to which local markets will be cbaracterized by vigorous rivalry among multiple distributors, or the extent to which distributors using alternative ~hnologies may remain essentially "fringe" competitors, with relatively small market shares or offering services largely differentiated from other services, at least from those multichannel packages offered by cable systems. In addition, technological advances, particularly the conversion from analog to digital transmission, may affect the nature and cost of the services provided by cable operators and other MVPDs, and consequently, the extent of rivalry in markets for the delivery of video programming.

6. In this 1995 Report, the Commission makes the following findings:

7. Ctzbk Industry Growth. Since the 1994 Report, subscriber penetration, average system channel capacity, the number of programming services available, revenues, expenditures on programming, and capital investment generally have increased for the cable industry. The number of homes passed by cable grew from approximately 90.6 million at the end of 1993 to approximately 91.6 million at the end of 1994, which is 96% of all television households in the United States.6 The number of subscribers increased from 57.2 million to

s Infra Appendix 0, Table 1.

6 Infra Appendix B, Table 1.

2063 59.7 million between the end of 1993 and the end of 1994. Penetration (i.e., the number of subscribers as a percent of homes passed) rose 3.3% from the end of 1993 to a penetration of 65.2% at the end of 1994.7 Channel capacity grew slightly, with 97% of all subscribers now receiving service from systems that can provide at least 30 channels. Cable systems with the capacity to offer more than 53 channels accounted for the biggest growth during 1994, with a 9.9% increase in the number of systems, and a 10.1% increase in the number of subscribers.' Total cable revenues, as well as revenues from regulated services, remained stable over the year. The industry's cash flow, a measure of earnings before interest, taxes, depreciation, and amortization, was $9.94 billion in 1994, a 1.6% decline from the 1993 industry cash flow of $10.1 billion. 9 Capital expenditures continue to increase, rising 28% to $3.8 billion in 1994 .'0

8. Horizontal Concentration. Since 1994, there has been an increase in the horizontal concentration of cable multiple system operators ("MSOs") nationwide. A number of cable MSO acquisitions and system trades have resulted in increased regional concentration, or "clustering," of cable system ownership. Based on recent repons of additional proposed transactions, it appears that this trend will continue as cable operators consolidate their holdings regionally. Although the cable industry tends to be moderately concentrated nationally, local markets for the distribution of multichannel video programming tend to be highly concentrated as measured by subscribership among all MVPDs. 11

9. Competitive Entry. The percentage of subscribers choosing competitive alternatives to incumbent cable operators has increasecr:since our last report, although cable subscribership continues to dwarf the combined subscnDership of all other MVPDs. In September 1995, cable television systems served 61.7 million households, while all other MVPDs combined (i.e., DBS, HSD, MMDS and SMATV systems) served 5.8 million homes . 1 ~ Although market share is not dispositive evidence of market power, we cannot conclude that a competitive market currently exists for the delivery of video programming. However, some progress towards a competitive marketplace has begun. In particular, we ftnd:

• There continue to be only a few scattered areas of the country where local cable systems face direct competition through "overbuilding" (where two franchised cable television systems compete directly with each other), although

7 Id.

1 Id., Tables 3-4.

9 /d., Table 6.

10 Paul Kagan Assocs., Inc., The Cable TV Financial Databook 92 (1995) ("1995 Cable Financial Databoo/C').

11 Infra sec. III.A.

12 Infra Appendix G, Table 1.

2064 instances of overbuild competition, particularly from LECs, appear to be increasing;

• Direct-to-home satellite services continue to increase their subscribership. DBS services are now available in all states except Hawaii. The nwnber of subscribers to DBS services has more than doubled since the end of 1994, increasing from 602,000 to approximately 1. 7 million subscribers. Prices have declined for some DBS receiving equipment (i.e., satellite dishes and set-top decoders) used by those distributors that require subscribers to buy their own equipment. There are currently 2.3 million subscribers to packaged programming services that distribute satellite programming to HSD users compared with 2.2 million in 1994;

• Wireless cable systems experienced a 33% growth in subscribers since the end of 1994, and now serve approximately 800,000 subscribers. The fll'St wireless cable trial of digital technology, which will increase a system's coverage area and the number of channels that it can offer, has been successfully completed.13 In addition, several LECs have made substantial investments in wireless cable operations. The deployment of wireless video services also has been facilitated by the streamlining of the Commission's application process, adoption of competitive bidding procedures, and ~on of the protected service areas for licensees. The Commission also released a notice of proposed rulemaking seeking comment on its proposal to allocate a portion of the 28 GHz band to LMDS, which can be used for the distribution of video programming; 14

• The VDT framework adopted by the Commission in 1992 allows LECs to construct and operate common carrier platforms that can be used by program packagers to provide programming and other services to subscribers in the LEC' s telephone service areas. Subsequent court decisions and Commission actions permit LECs to offer video programming in their service areas. The first permanent commercial VDT system is expected to begin operation in Dover Township, New Jersey, by the end of 1995. Additional applications for permanent authorizations and trials, including US West Inc.'s ("U S West") plan for Omaha, have been approved. The Commission also streamlined the Sec:tion 214 process for some LECs to construct stand alone cable systems within their local service areas. Since the 1994 Report, some LECs have

13 Infra sec. ll.C.

14 Rulemaking to Amend Parts 1, 2, 21 & 25 of the Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to Reallocate the 29,5-30.0 GHz Frequency Band. to Establish Rules & Policies for Local Multipoint Dist. Serv. & for Fixed Satellite Services, Third Notice of Proposed Rulemaking & Supplemental Tentative Decision, CC Docket No. 92-297, _FCC Red___. FCC 95-287 (July 28, 1995), summarized at 60 Fed. Reg. 43740 (Aug. 23, 1995) ( .. Third 28 GHz NPRM").

2065 modified their plans for entry into video distribution markets and, in addition to pursuing VDT deployment, have announced plans to enter the market using either wired cable or wireless cable facilities. A number of LECs also have announced joint ventures to collaborate on the production and acquisition of· video prograiDIDing;

• SMATV systems ~ve increased their number of subscribers from a combined total of approximately 850,000 to approximately 950,000 since the end of 1994. The industry also appears to be attracting new investment from other sectors, both within and outside the telecommunications industry;

• Regulatory changes and technological advances may, at some jx>int in the future, permit existing and po~tial video technologies -- broadcast television, low power television ("LPTV"), LMDS -- to be used to distribute multichannel video programming. Other potential distributors, such as electric utilities, and other technologies, including VCRs, IVDS, and the Internet, also may, in the future, affect the nature of competition; and

• Technological advances are occurring that will permit MVPDs to increase the quantity of service (i.e., increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). New system architectures are·being developed that combine fiber optic wires and coaxial cables to expand the uses of wired transmission media. Digital compression is currently being deployed, which will enhance the service of both wired and wireless providers by allowing increased channel capacity and the provision of video, voice, and data services that cannot be offered currently. On the basis of the information reported, however, it is unclear which distributors will benefit the most from these technological advances -­ existing cable operators or their existing and potential competitors.

10. Vertical Integration. The number of cable programming services increased from 106 to 129 over the past year. Of these 129 services, 66 are vertically integrated, representing approximately 51% of all national services, which is a slight decline from last year's figure of 53%. The Commission's program access and program carriage rules, and its decisions applying those rules, seem to have been successful in ensuring the availability to competing MVPDs of programming services produced by affiliates of cable MSOs.

2066 D. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING

A. Cable I.Ddustry

11. In this section. we address the performance of finns that own or operate franchised cable systems. The performance section is divided into three categories: (I) output performance - both quantitative measures of the current amount of cable industry services that are being produced (including recent trends in that production) and qualitative measures of the nature of the service, which is related to output since higher quality services are more highly valued and, therefore, can be thought of as increased output; (2) financial perfonnance - the revenues and cash flow that are generated by the industry's output; and (3) capital acquisition and disposition-- the a,mount of funds companies have been able to raise and use to improve their existing physical plant and acquire new systems, •s and how they have chosen to allocate those funds. In addition. this section discusses the status of overbuilding, one of the oldest forms of competition to the cable industry, and the limited evidence of the cable industry's response to existing and potential competition.

12. While we report and analyze statistical information in this section. we do not specifically evaluate the effects of a number of rule changes adopted during the past year that could affect industry performance and competition. In.reviewing these figures, however, we note that the Commission's revised rate regulations instituting the 17% benchmark ("Second Cable Rate Order") became effective July 31, 1994.16 The rules allowing new product tiers and additional programming services ("Going Forward Rules") became effective on January 1. 1995,17 and the amendment of our rules relating to small systems ("Small System Order") has effective since August 21, 1995.11

u The consolidation in the cable industry brought about by these transactions is discussed below. Infra sec. III.A.

16 See, e.g., /mple1Mntalion of Sections of the Cable Television Consumer Protection and Competition Act of 1992 (Rate Regulation}, Second Order on Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed Rulemaking, MM Docket No. 92-266, 9 FCC Red 4119 (1994) (adopted Feb. 2, 1994).

17 See lmple1Mntation ofSections of the Cable Television Consumer Protection and Competition Act of 1992 (Rate Regulation), Sixth Order on Reconsideration, Fifth Repon and Order, and Seventh Notice of Proposed Rulemaking, MM Docket No. 92-266, 10 FCC Red 1226 (1994) (adopted Nov. 10, 1994).

11 See JmplemenJation ofSections of the Cable Television Consumer Protection and Competition Act of 1992 (Rate Regulation}, Sixth Report and Order and Eleventh Order on Reconsideration. MM Docket No. 92-266,. 10 FCC Red 7393 (1995) (adopted May 5, 1995).

2067 1. OlllpuJ PetfontUIIICe

13. Cable Industry Output. Since we released the 1994 Report, the cable industry has continued to expand. The number of homes capable of receiving service from a cable system (commonly referred to as homes passed) grew from approximately 90.6 million at the end of 1993 19 to approximately 91.6 million at the end of 1994, a 1.1% increase.20 Thus. 96% of all television households in the United States have cable service available to them.

14. The year-end figures for the industry's basic service tier subscribership grew from a total of 57.2 million in 1993 to 59.1 million in 1994, a 4.4% increase. This is the largest increase since 1990, and is reflected in the industry's basic cable penetration level. which rose by 3.3% from 63.1% to 65.2% of homes passed.21 This increase in penetration is the largest annual increase since Paul Kagan f\SSOciates, Inc. ("Kagan") began tracking penetration figures in 1977.22

1S . Premium service subscribership showed similar growth trends. The number of homes subscribing to at least one premium channel grew by 6.4% in 1994 from approximately 26.4 million to approximately 28.1 million homes. At the same time, the total number of subscribers to premium channels grew by 8.4% from approximately 41 .5 million to approximately 45 million. 23

16. There is some evidence that the subscrit:iiershi growth reported for 1994 has continued in 1995. A.C. Nielsen Co. estimates that total cable subscribership increased by

19 The figure for homes passed in 1993 that was used in the 1994 Report was 92.9 million. The source for that figure, Paul Kagan Associates, has since revised its numbers. This is the first of several instances where independent analysts have made revisions since the 1994 Report. Wherever possible, this 1995 Report uses the most recently available figures.

20 Infra Appendix B, Table 1 (summarizing information. from, inter alia, Paul Kagan Assocs., Inc., History of Cable and Pay-TV Subscribers and Revenue, Cable TV Investor, June 30, 1995, at 5). Tables 2-11 referred to in this section are included in Appendix B.

21 According to figures released by A.C. Nielsen, Inc., cable penetration grew from 63.0% to 64.00,4 between February 1994 and February 1995. Compare National Cable Television Assoc., Current Estimates, Cable Television Developments, April 1994, at 1 wirh National Cable Television Assoc., Current Estimates, Cable Television Developments, Spring 1995, at 1. Based on data contained in documents ftled by MSOs with the Securities and Exchange Commission, the Commission believes that the estimates made by Kagan reflect more accurately the growth of subscribership in the cable industry in 1994.

22 Infra Appendix B, Table 1.

23 Id Table 2.

2068 4.1% in the first half of 199524 and. according to financial analysts, the industry has maintained subscriber growth of over 4% through the first three quarters of 1995.25

17. Cable Industry Services. During 1994, average channel capacity increased slightly. In 1993, cable systems with the capacity to offer 30 or more channels accounted for over 77% of all cable systems. The equivalent figure for 1994 was 78%. Cable systems with more than 53 channels accounted for the biggest growth in channel capacity during 1994. Of the 141 systems that upgraded to a capacity of 30 or more channels, 129 of them can offer 53 or more channels. At the same time, systems with channel capacities of 12 or fewer channels declined from 7.2% of cable systems in 1993 to 6.7% in 1994.26

18. During 1994, the number of subscribers served by such high capacity systems (53 or more channels) grew by 10.1% to 23 cnillion. Moreover, the number of subscribers receiving service from systems with at least 30 channels rose 2.2% to 53.8 million at the end of the year, which accounted for 96.90/o of all subscribers.27

19. Since the 1994 Report, there has also been growth in the number of cable programming choices. The mamber of basic programming networks grew from 80 at the end of 1993 to 94 at the end of 1994. The number of premium networks increased from 9 to 20 over the same period. Overall, the number of programming networks increased by over 26.7%, from 101 to 128.21 In addition, 18 additional networks have announced plans to launch service by the end of 1995, and 62 more have announced plans to launch after 1995.29

20. Over the past decade, the number of television viewers watching non-premium cable programming networks has grown. Between the 1984-85 and 1993-94 seasons, the combined audience of such cable networks increased from an 11% share to a 26% share of television households.30 During the same period, the combined audience of the network-

14 John M. Higgins & Richard Katz, It's Basic: MSOs Having Strong Year, Multichannel News, July 17, 1995, at 110.

l3 Jessica Reif, JQ Pnvtew, Media & Entertainment, Oct. 6, 1995, at 3.

26 Infra Appeadix B, Table 3.

27 Id Table 4.

28 Id Table S.

29 Infra Appendix H, Tables 3-4.

30 National Cable Television Assoc., Viewing Shares: Broadcast Years 198311984- 199311994, Cable Television Developments. Spring 1995, at 5. The share is the percentage of television households watching the networks. The sum of reported audience shares exceeds 100% due to multiple set viewing.

2069 affiliated, independent, and public broadcast television stations has decreased from an 87% share to a 77% share of television households.31 This growth in the viewership of the cable networks seems to have continued into 1995. The average prime time share of the cable networks for the first fifty-one weeks of the television season increased 12.5% between the 1993-1994 and 1994-1995 seasons, to 29% of television households.32

21 . License fees paid by cable system operators to non-premium cable network programmers increased by 15.8% from $1.9 billion in 1993 to $2.2 billion in 1994Y At the same time, license fees paid by cable system operators to premium cable network programmers increased by 5.6% from $1.8 billion in 1993 to $1.9 billion in 1994.34

22. Consumer Satisfaction. In an effort to improve consumer satisfaction, the cable industry, through the National Cable Television Association (''NCTA") , launched a new on­ time guarantee program on March 1, 1995. Under this program, operators promise that: (1) if an installation appointment is not performed on time, the installation will be done for free, and {2) if a service appointment is not performed on time, the customer will receive a $20 refund.35 This initiative has been adopted by cable systems serving 25 million subscribers, but the effect of the initiative is unclear.36

2. Financilll Petfomumce

23. Cable Industry Revenue. Analysts report that after growing by over 8% in 1993, the industry's revenue remained essentially the same in 1994, growing only from $22)6 billion to $22.79 billion.37 For the purposes of this report, we estimate the annual,

31 ld

32 Jim McCo~ville~ Ratings Records, Broadcasting & Cable, Sept. 18, I 995, at 41 .

33 Paul Kagan Assocs., Inc., Economics of Basic Network Programming (1985-1996), Cable TV Programming, July 31, 1995, at 2.

34 Veronis, Suhler & Associates, The Veron is, Suhler & Associates Communications Industry Forecast 164 {1995).

35 National Cable Television Assoc., Preliminary On-Time Guarantee Statistics, The Future Is On Cable: Establishing Cable as a Telecommunications Leader, Progress Report, Spring I 995, at 3.

36 Jim Forkan, The Cablevision-Chilton Consumer Poll, Cablevision, May 8, 1995. at 22.

37 Infra Appendix B, Table 6.

2070 industry-wide total revenues from 1992 to 1994.31 Based on these estimates, it appears that the industry generated revenue of over $20.35 billion in 1992, $22.45 billion in 1993. and $22.59 billion in 1994.39 The 1994 figme represents an increase of 0.1 % from 1993. which is consistent with reports by industry analysts.

24. Using the figw-es produced by industry analysts, it appears that the cable industry generated $389.50 in annual revenue per subscriber served in 1994. This figure was over $5 lower than the $404.89 generated in 1993. When total cable system revenue is broken down by source, between 1993 and 1994, revenue from regulated tiers (referred to by the Commission as the basic service and cable programming service tiers) remained unchanged. It appears that revenue from premium services declined by 2.2%, continuing a downward trend since reaching its all-time high in 1990. Revenue from advenising, pay-per­ view, and home shopping grew 9.5%, 7.1%, ~d 12.4% respectively.40

25. In Table 8 of Appendix B, we present detailed, quarterly revenue results for sixteen publicly held MSOs, including the eight largest. For each quarter of 1994 and the first two quarters of 1995, total revenue growth over the same quarters of the previous year is calculated for these sixteen MSOs based on their filings with the Securities and Exchange Commission ("SEC"). As of December 31, 1994, these sixteen MSOs served over 35.3 million of the industry's 59.7 million subscribers, which accounts for 59.1% of the industry. Based on the combined revenues of these MSOs, an estimate of the total industry's revenue was made and is also presented in the table.

26. As can be seen in Table 8, after showing slow growth in the first quarter of 1994 (1.1%) and decreasing revenue in the second and third quarters of 1994 (-1.2% and -0.2% respectively), the industry's revenue increased in each of the following three quarters. In the fourth quarter of 1994, the industry's revenue was 2.8% higher than in the founh quarter of 1993. The revenues for the first and second quarters of 1995 were 5.6% and 10.4% higher, respectively, than the revenue produced in the same periods of 1994.

27. Cable Industry Expenditures and Earnings Before Interest, Taxes, Depreciation, and Amortization. Measurements of earnings before interest, taxes, depreciation, and amortization ("EBliDA"), commonly referred to as "cash flow" by the industry, are often used to value the financial position of cable finns. Analysts report that after growing by

31 The Commission arrived at its estimate of industry-wide revenue by analyzing and extrapolating from publicly available information for 25 of the largest cable MSOs. which served a combined 65.3% of the industry's subscribers at the end of 1994. To the extent that there are significant differences between the average financial performance of these large MSOs and that of smaller MSOs, those differences may affect the reliability of industry-wide estimates.

1 ' Infra Appendix B, Table 7.

40 Infra Appendix B, Table 6.

2071 4.1% to $10.1 billion in 1993, industry wide cash flows declined 1.6% in 1994 to $9.94 billion.41 For the purposes of this 1995 Report, the Commission has also produced an estimate of annual, industry-wide cash flows from 1992 to 1994.42 Based on the Commission's estimates, it appears that the industry generated cash flow of $9.35 billion in 1992, $10.27 billion in 1993, and $9.93 billion in 1994.43 The 1994 figure represents a decline of 3.3% from 1993 which, although somewhat larger than the decrease shown by the analysis referred to above, appears to broadly confirm that analysis.

28. Using the figmes produced by industry analysts, it appears that the cable industry generated $169.85 in annual cash flow per subscriber served 'in 1994. This figure was nearly $10 lower than the $179.72 generated in 1993, and almost $9 lower than the $178.64 per subscriber generated in 1992. The ratio of cash flow to revenue ("cash flow margin") declined from 46.1% in 1992 to 44;4% in 1993, and again to 43.6% in 1994.44

29. An analysis of the industry's cash flow for the full year may not provide a complete picture of the trend in the industry's performance during that year. A more informed analysis may be is provided by comparing each quarter of 1994, and the first two qtW'ters of 1995, with the same quarters of the previous year. These quarterly growth rates are shown in Appendix B, Table 9. After exhibiting declining cash flow compared to the same quarter of the previous year for the first three quarters of 1994 (-3.8%, -7.2%, and -8.4%, respectively), the industry' s cash flow improve

3. Capitlll Acquisition and Disposition

30. Historically, the cable industry bas relied on various combinations of private and public financing, with the exact distribution of these combinations varying greatly from year to year. After several years of declines in the issuance of private debt (i.e., debt held by

41 1995 Cable Financial Databook, supra, at 92.

42 As with the Commission's indUstry wide revenue estimate, this cash flow estimate is based on extrapolation from publicly available information for 25 of the largest cable industry MSOs, and is subject to the same caveat about the reliability of industry-wide estimates. See supra note 38.

43 Infra Appendix B, Table 7.

44 /d. Table 6.

45 Reif, supra, at 3.

2072 ~ insurance companies, and institutional investors), banks displayed an interest in lending to cable operators in 1994, especially the larger MSOs. New private debt financing totalled $4.8 billion in 1994, and public debt financing totaled $1.1 billion.~ The remaining industry ftnancing is obtained through a mixture of private equity (i.e., individuals, venture capital firms, investment banks, limited partnerships) and public equity offerings (i.e., stock markets). New private and public equity offerings totalled $409 million and $461 million, respectively, in 1994. Overall, the cable industry obtained $6.7 billion in new fmancing in 1994, which was its highest level since 1989, and an increase of $4.8 billion over the 1993 total.47

31. Cable Industry Financing: Recent Developments. The growth trend exhibited in 1994 has continued into the first six months of 1995. Cable operators are reported to have raised approximately $5 billion in capital during the first half of 1995. Included in this total was a net redemption of $200 million of pri~ely held debt;41 $3.8 billion was raised in the bond market;49 $615 million was raised in the privately ecrn!!Y market;50 -and $800 million was raised in the public equity market 11

32. The growth in total financing during 1994 helped increase the cash available to the cable industry for investment (equal to cash flow from operations plus cash from new financing) to its highest level ever. The $16.7 billion available in 1994 was an increase of 39.2% over the $12 billion that was available in 1993.n With this increase in funds available for investment in 1994, the cable industry's major MSOs were able to increase internal capital expenditure programs and system acquisition efforts.

33. Capital Expenditures. In 1994, the cable industry invested $3.8 billion in construction of new plant and equipment (including maintenance, inventory, system upgrades,

46 Infra Appendix B, Table 10. •, Id

41 Paul Kagan Assocs., Inc., Cable TV Finance, Aug. 31, 1995, at 1.

49 ld

50 Paul Kapn Assoc.s., Inc., Cable TV Financing: Public Debt Market Still Popular, Cable TV Finan«, July 31, 1995, at 8'.

51 This figure was calculated from the $1.7 billion reported in Paul Kagan Assocs., Inc., Cable TY Financing: Public Debt Market Still Popular, Cable TV Finance, July 31, 1995, at 8, and adjusted to accowtt for the $900 million stock swap which was part of Cox Communications, lnc:s ("Cox's") acquisition of Times Mirror's cable systems described in Paul Kagan Assocs., Inc., Cable Financing: All The New Equity lsn 't Just Cash, Cable TV Finance, Mar. 31, 1995, at 5.

n 1995 Financial J?ataboolc, supra, at 92.

2073 converters, the passing of new homes, and the rebuilding of existing systems). This was a 27% increase over the $3 billion spent on construction in 1993. It also represents the second 3 straight year of increases in capital expenditures by the industry. 5 Moreover, at least one analyst predicts that capital investment will continue to increase in 1995 and the large amount of new capital raised in first half of 1995 also points toward a further increase in capital expenditures for 1995. S4 This increased investment may be attributed to several factors, including preparing for future competition and general maintenance and system extensions. H

34. Cable System TransactionJ. Between 1987 and 1993, the number of cable systems being sold each year declined, while the total number of subscribers served by systems sold each year increased.56 This trend continued through 1994, and appears to be continuing in 1995. In 1994, the number of cable companies and systems that changed hands decreased by 33%,57 while the number of su~scribers to, and homes passed by, systems changing hands increased by 95% and 88%, respectively. In addition, the total dollar value of acquisitions increased 690/o between 1993 and 1994. However, the average dollar value per subscriber of these acquisitions decreased by 13% (from $2,160 to $1,869) and the average cash flow multiple decreased by 90/o (from 11.3 to 10.3). Overall, transactions announced in 1994 involved more subscribers and higher purchase prices than in any year since 1988. sa

35. This year, the average size of cable system acquisitions in terms of subscribers, homes passed, and dollar value has remained appro~tely the same as in 1994. However, the number of acquisitions has increased. For the seven months from January to July of 1995, 63 acquisitions were announced, involving 7.3 million subscribers, 11.4 million homes passed, and purchase prices totaling $13.5 billion dollars, all of which nearly equal the figures reported for all of 1994.S9

53 Id

54 Kagan is projecting 12% growth in capital expenditures by cable MSOs in 1995. Jd.

55 Richard Bilotti & Marc Nabi, Cable Television Industry: The Financial Scorecard - Appreciating Depreciation, M9rgan S~ey Industry Research, Aug. 1, 1995, at 1, 4.

56 1994 Report, 9 FCC Red at 7461 1 36.

51 Infra Appendix B, Table 11 . Transactions announced since 1994 are listed infra Appendix G, Table 5.

" Paul Kagan A.ssocs., Inc., Year-To-Dale Cable System Sale Summary, Cable TV Investor, Jan. 31, 1995, at 8.

59 Infra Appendix B, Table 11.

2074 4. Stlltus of Ovubuilding

36. The term "overbuild" is used in this Report to refer to a situation in which two 60 or more wireline cable television systems directly compete for subscribers in a local market. The 1994 Report surveyed a substantial body of empirical evidence, obtained by the Commission and academic researchers, which indicated that overbuild competition results in lower rates for both basic and pay cable television services.61 One recent empirical analysis of overbuilding also shows a positive correlation between overbuild competition and the availability of an increased number of cable programming services.62 Although the benefits of overbuild competition are apparent and desirable, the 1994 Report concluded that "the extent of overbuilding seems to have remained quite limited. "63

3 7. Several planned overbuilds ~t were reported in the 1 994 Report have yet to be constructed. For example, as of February 1995, plans we noted last year by Cablevision Systems Corp. C'Cablevision") to overbuild several cable systems in New Jersey were reported to be "strictly at the drawing board" stage and had not advanced beyond the initial research point64 The 1994 Report also discussed plans by Fibervision, a firm started by former cable executives, to overbuild systems operated by Tele-Communications, Inc. ("TCI") in Hartford, Connecticut, and the status of litigation brought by TCI that delayed construction of the overbuild.'5 In August 1995, the Connecticut State Supreme Court rejected TCI's appeal of a lower court decision, which dismissed TCI's challenge. to the Connecticut Department of Public Utility Control's grant of a Hartford cable franchise to Fibervision." That appeal bas been reportedly seen as Fibervision •s primary obstacle to obtaining financing and starting

60 1994 Report, 9 FCC Red at 7469 1 54.

61 Id at 7472-73 , 58-60.

62 Jennifer Fearing & Charles Lubinsky, Qualitative Differences in Competitive Cable Markets Prior to Rate Rcregulation 4-5 (Southern Economics Ass'n, 1995 Annual Conference).

63 1994 Report, 9 FCC Red at 7473 1 60.

64 Michael Burgi, Building Blocks; Cable Companies Battle Over Subscribers, Mediaweek, Feb. 6, 1995 at 14.

65 1994 Report, 9 FCC Red at 7473, 60 n.l37.

66 United Cable Television Services Corp. v. Dep 't of Public Utility Control, 663 A.2d 1011 (Conn. Sup. Ct. 1995) (alleged injury to incwnbent cable operator resulting from introduction of direct competition through award of second franchise was not within the zone of interests sought to be protected by state franchising statute. and incumbent therefore lacked standing to challenge award).

2075 construction. 61

38. In its comments, Home Box Office ("HBO") discusses plans by Liberty Cable Company, Inc. ("Liberty Cable") to overbuild Cablevision's Nassau County, New York systems, which serve 387,500 subscribers.61 According to a July 1994 report cited by HBO, Liberty Cable had started negotiations with the Nassau· County Village Officials Association to provide cable service over the network infrastructure of the NYNEX Telephone Company ("NYNEX") and NYNEX planned to spend $150 million to upgrade its network to handle video transport. 69 As of October 21, 1995, those negotiations were reportedly still pending. 70

3 9. Although several of the planned overbuilds mentioned in the ! 994 Report have not yet advanced to the construction phase, new overbuilding activity appears to be occurring. Most notably, Ameritech Operating Com~ ("Ameritech"), several other Regional Bell Operating Companies, and a number of smaller LECs, are pursuing the construction of cable systems in their local telephone service areas.11 In addition, trade press reports indicate that cable operators, either in the midst of or contemplating overbuild situations, are affiliating with non-cable companies such as telephone and power companies in order to build systems capable of offering advanced services.12 There is also anecdotal evidence regarding the activities of existing municipal overbuild ventures involving local utility companies.73

67 Susan Kinsman, Court Gives Cable Firm the Green Light; .Fibervision Can Build Competing Franchise, Hartford Courant, Aug. 22, 1995, at B7. Fibervision has also won the right to provide cable service in six towns in the Bridgeport area that are currently served by Cablevision Systems of Southern Connecticut, and had previously won a franchise in the New Britain area of the state. In addition, an application to provide service in New Haven is pending. Susan Kinsman, Fibervision Wins 15-year Cable Franchise, Hartford Courant, Nov. 10, 1995, at F2.

61 HBO Comments at 19.

69 Comm. Dfl:!.ly, July 1, 1994, at 9.

10 Letter from Jay Newman, CoUDSel for Liberty Cable, to Commission Staff (Oct 21, 1995).

11 Infra sec. UD.

12 Debbie Narrod, Overbuilds '95, Cable World. May 1, 1995 at 49 (reporting, among others: (1) the acquisition of the cable operations of Florida Power and Light Co. by Adelphia Communications Corp., a top-1 0 MSO, and the formation of a Iiniited partnership between the two; and (2) a potential partnership between PacTel and Ultronic~ operator of over~uild systems in Chula Vista and National City, California).

73 ld For example, Paragould City, Light, Water & Cable, which operates a 63 channel (continued ... )

2076 40. As pointed out in the 1994 Report, the limited extent of overbuild competition may be attributable, in part, to local franchi.sipg requirements.,. In order to address one of the potential impediments to overbuild competition imposed by the franchising process, Congress amended Section 62l(aX1) of the Communications Act in the 1992 Cable Act to provide that "a franchising authority may not grant an exclusive franchise and may not unreasonably refuse to award an additional competitive franchise."7s

41. Since the 1994 Report was released. a split has developed among the federal circuit courts of appeal over the application of Section 62l(a) to franchises in existence at the time the 1992 Cable Act was enacted.76 Commenters disagree whether exclusive franchises are an impediment to competition, and whether Section 621(a) should be applied to existing franchises. James Cable Partners ("James"), the plaintiff in a case in the Sixth Circuit. argues that exclusive contracts are not an impedimetU to competition, that there are very few exclusive franchises, and the impact on the industry as a whole is thus de minimis."

42. Other commenters argue that since exclusive franchising is an impediment to the expansion of overbuild competition, Section 621(a) should be applied to prohibit the enforcement of existing exclusive franchises.71 GTE Service Corporation ("GTE") argues that existing exclusive franchises prevent prospective entrants from effectively negotiating with

73 ( ...continued) system in Paragould, Arlamsas. providing 51 channels of basic cable service to 4,250 subscribers for $12.50 per month, plans to offer security services and electricity load management services to its cable subscribers by year-end. In addition, Glasgow Electric, a municipal cable overbuilder in Glasgow, Kentucky, which we discussed in the 1994 Report, bas developed a citywide local azea network and, despite its relatively small size of 2,650 subscribers, is planning to offer advanced, ancillary services, including cable Internet links, in the near future. ld

,. 1994 Report, 9 FCC Red 7472 1 60 n.l36. See also Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), Pub. L. No. 102-285, sec. 2(aX2), 106 Stat. 1460 (1992), codified at 41 U.S.C. § 521, et seq.

" CommUDications Act§ 62l(a),_47 U.S.C. § 54l(a).

,. Compan CO% Coble Communications. Inc. v. United States, 992 F.2d 1178 ( 11th Cir. 1993) (applies to existing exclusive franchises) with James Cable Partners v. City of Jamestown, 43 F.3d 277 (6th Cir. 1995) (applies only to new grants of exclusive franchises}.

n James Comments at 12, 14-15.

71 See. e.g., GTE Reply Comments at 10-11; Ridgebury Township, Pennsylvania, and the Pennsylvania State Association of Township Supervisors ("Ridgebury") Reply Comments at 3-4, 7-8.

2077 local franchising authorities for competitive franchise contracts.79 Likewise, Ridgebury Township, Pennsylvania, and the Pennsylvania State Association of Township Supervisors ("Ridgebwy") argue that exclusive franchises ·"create barriers," and believes that many rural communities, like Ridgebury Township, granted exclusive franchises "at times when few, if any, viable alternatives existed.1110 Ridgebury attributes certain negative experiences with its exclusive franchisee to its inability to award a competitive franchise. Ridgebury believes that its problems are not unique, and are likely to arise in other communities that have entered into exclusive franchise contracts with cable operators."

43. BellSouth Telecommunications, Inc. ("BellSouth") argues that the franchising process itself, even absent exclusivity, is a substantial impediment to competition that imposes significant costs on potential competitors.12 It asserts that the cable industry uses the franchising process as a means to impose on potential competitors expensive and burdensome requirements such as universal service.13

44. As we have previously recognized, we continue to believe that franchising requirements - including the imposition of such requirements as universal service and the enforcement of exclusive franchises - can be an impediment to overbuild entry. 14 Accordingly, we continue to support clarification of Section 621(a) to make clear that it applies to enforcement of all exclusive franchises regardless of when they were adopted.15

19 GTE Reply Comments at 10-11.

10 Ridgebury Reply Comments at 4.

11 Id at 8.

12 BellSouth Reply Comments at 1-4.

13 Jd at 2. In support of its views, BellSouth submitted an analysis, Report on Cable Franchising as a Barrier to Competition, by Dr. Thomas W. Hazlett. Jd, Att. A. Dr. Hazlett attributes limited competitive entry by cable systems to the franchising process, which he argues is inherently anticompetitive because it levies a "large and asymmetric" burden of proof on potential entrants, which skews the process in favor of the incumbent. /d. 1 7. In addition, according to Dr. Hazlett, the incumbent has the incentive and ability to engage in a variety of protectionist activities that far outweigh what typical potential competitors can afford to risk in attempting to obtain a competitive franchise. Jd n 9, 14.

14 1994 Report, 9 FCC Red 7472 n.136; 1990 Cable Report, 5 FCC Red at 5035-37 1111 138-142. See also 1992 Cable Act, sec. 2(a)(2), 106 Stat. at 1460

1$ See 1994 Report, 9 FCC Red at 7557-58, 11 251.

2078 5. Cllble Sysums' Responses to Competition

45. There is anecdotal evidence of'various steps cable operators apparently have taken to retain their share of the MVPD market in response to the increased numbers of consumers choosing to subscribe to the services of competing MVPDs. In Omaha, Nebraska, the incumbent cable operator has modified the pricing of the package of services it provides to its customers, apparently in response to the emergence of competition from a VDT system. According to one report. two days before US West's tariff for its Omaha VDT market trial went into effect, Co>4 one of Omaha's local cable operators, announced that it was offering a "free" 21-channel lifeline service, called Cox Localink16 New subscribers reportedly must pay a $19.95 installation fee, and existing subscribers can switch to the new service for an $8.03 one-time fee.17

46. Jones Intercable, Inc.'s ("Jones") system in Alexandria, Virginia provides another example of a cable operator preparing to compete with aLEC. In September 1995, Jones began connecting subscribers to a new, $35 million hybrid fiber coax (''HFC") network. 11 Initially the network will be used to provide increased channel capacity. 19 However, Jones reportedly plans to expand its services to include telephony and Internet access.90 According to Jones's Presid~ James O'Brien, "This system places us finnly in front of the Bell Atlantic Corporation ("Bell Atlantic") in the ability to offer a complete slate of services to area residents. "91

47. Cable operators are also merging and trading systems to create clusters, which has been attributed to a response to competitors and potential competitors that can operate on a regional basis.92 These regional groupings of cable systems under common ownership could permit operators to offer uniform packages at comparable prices throughout an area and to

16 Cox Of.ftred Free Service Cable Tier To Omaha Customers As US West Looms, Comm. Daily, Aug. 30, 1995, at 1.

17 Id

11 Information Access Co., Advanced Jones Fiber Network Poised To Provide Telephony At No Extra Cost To It, 15 Fiber Optic News No. 38 (1995). The HFC architecture is discussed in more detail below in Section ill.C.

19 Id

90 Information Access Co., US. Cities Turning Into Battle Grounds For Telecom Competition: Northern Virginia, Omaha. Neb., Subs &e Plenty Of Video Choices, 3 Interactive Video News No. 20 (1995).

91 Advanced Jones Fiber Network, supra.

92 Infra Section lll.A.

2079 market their services accordingly. In two recent proposals to resolve rate complaints, cable operators sought provisions that would allow them to offer similar packages at similar prices in contiguous merged systems. 93

B. Direct-To-Home Satellite Services

48. Direct-to-home ("DTH") satellite services use satellites to deliver video programming directly to subscribers. There are two different types of DTH services: direct broadcast satellite (''DBS") services and home satellite dish ("HSD") services. Both offer subscribers many of the same satellite delivered video programming services typically provided by cable systems, in addition to some offerings not typically available from cable systems. DBS operators are like other MVPDs in that they are distributors that (I) downlink programming from many different satellites pursuant to contracts with programmers; (2) package the programming into service offerings; and (3) make the programming available to subscribers over a proprietary facility. However, DBS services use satellites instead of broadband wires or terrestrial microwave stations to transmit their programming to subscribers, who generally use relatively small (18-24 inch) dishes to receive the programming. By contrast, HSD users employ relatively large (4-8 foot) dishes to receive unscrambled programming for free, and scrambled programming in a secondary market from program packagers that are licensed to facilitate subscribers' receipt of programming transmitted from various C-Band satellites, which is al$0 received by cable operators and other MVPDs. HSD users typically purchase HSDs from equipment dealers, and obtain their programming separately from program packagers, some of which ·also sell receiving equipment The program packagers authorize subscn"bers to use the receivers connected to their HSDs to decode and view the programming.

1. Direct Broadcast SateUite Servict!S

49. Subscribership. In the past year, subscribership to DBS services has increased rapidly. Between the end of 1994 and the end of September 1995, subscribership increased from approximately 600,000 to about 1.7 million households.94 Dming the same time period, the availability of DBS service has expanded from 23 states to all 48 contiguous states and Alaska." The monthly gain in new DBS subscribers slowed during the spring and early

93 See Social Contract for Time Warner Cable, Memorandum Opinion & Order,_ FCC Red _, FCC 95-336 (Nov. 30, 1995); Cox Communications, Inc. & Times Mi"or Cable Television. Inc. (Rate Complaints), Order, 10 FCC Red __ , FCC 95.-396 (Sept. IS, 1995) (both of these examples involved migrated product tiers).

94 Infra Appendix G, Table 1.

95 DIRECIV Comments at 1; State of Hawaii Reply Comments at i; Satellite and International, Comm. Daily, Oct. 17, 1995, at 9; DIRECTV Fax, Oct. 20, 1995.

2080 summer of 1995, but began to increase in August." For example, DBS services reported only 100,000 new subscribers in July, after which ~e number of new subscribers increased to 155,000 in August. The increase in August may reflect lower prices and new financing options for receiving equipment, and the availability of new programming packages. whicti we will discuss in the paragraphs below addressing individual DBS suppliers.97

50. DBS service providers and industry observers predict that DBS subscribership growth will continue at a rapid rate. One analyst expects the DBS industry to serve 3 million 9 subscribers by the end of 1996 and 6 minion subscribers by 1999. ' Other estimates of the total number of DBS subscribers at the end of the decade range from a minimwn of 4.66 million to a maximum of over 21 million, with a consensus estimate of 10 million subscribers.99

51. Indtvidut~l DBS Service Providers. Two high power DBS services and one mediwn power DBS service currently provide programming to subscribers.

• DIRECfV offers a high power DBS service to subscribers who have the Digital Satellite-System ("DSS"), which uses an 18-inch receiving dish in all 48 contiguous states.100 Subsaibership to DIRECfV's services increased from a total of approximately 300,000 at the end of 1994101 to 600,000 by Jtme 1995, and to an estimated 900,000 in Septem~ 1995.102 DIRECTV projects that 1.5

96 Numbers Down, Spirits Hi~ SkyREPORT, Sept. 1995, at 10-13.

n The smaller gain in subscribers in July may reflect normal seasonal variations in demand.

91 John Aronsohn, DBS: Here Today . .. BuJ Is It Here to Stay, The Yankee Group (White Paper), Aug. 1995, at 3.

99 Tom Kerver. Between the Lines: DBS Disagreements Emerge, Cablevision, Nov. 14, 1994, at 6. The 4.66 million figure comes from a "coDSCTVative" scenario projected by Paul Kagan Associates, Inc. The 21 million figure comes from an "aggressive" scenario presented by Stanley Hubbml, President of USSB. Id Set also Will DBS Malee Dollars and Sense?, SkyREPORT, Nov. 1994, at 1; Richard Bilotti, Marc E. Nabi &: Eric G. Tak.ada, Cable Television Metamorphosis-T'he A.mval of DBS and RBOC Competition, Morgan Stanley Industry Research, Sept. 15, 1995, at 3;

100 It appears that subscribers in Alaska may have to use larger (i.e., 4' to 8') receiving dishes. See, e.g., Satellite and International, Comm. Daily, Oct, 17, 1995, at 9; and DIRECTV F~ Oct. 20, 1995.

101 C-Band Shipments Continue to Slide, SkyREPORT, Jan. 1995, at 7.

102 DTH Industry Continues Fast Tracie, SkyREPORT, Oct. 1995, at 6.

2081 million households will subscribe to its services by the end of 1995, and I 0 million by the end of 2000. 101 DIRECTV provides approximately I 50 channels of entertainment and informational programming, of which, approximately 50 are pay-per-view movie and sports programming channels. 1oc

• United States Satellite Broadcasting Company, Inc. ("USSB'') offers a high power DBS service to subscribers using the same DSS receiving equipment, and one of the same satellites, as DIRECTV. Because DIRECTV and USSB offer mutually exclusive programming, a customer must subscribe to both services in order to receive all of the most popular cable programming. Nearly all subscribers to one service also subscribe to the other. 105 USSB currently offers twenty channels of movies and other programming. 106

• Primestar Partners, L.P. ("Primestar") offers a medium power DBS service to subscribers using 36.inch or 40-inch dishes. 107 Primestar is a joint venture of five cable MSOs, and OE American Communications, Inc. 101 Using a satellite operating in the Fixed Satellite Service ("FSS"), 109 Primcstar provides 73 channels of video programming similar to that offered by DIREcrv and USSB. The nmnber of subscribers to Primestar's service increased from about 70,000 in June 1994 to approximately 500,000 in June 1995,110 and to 11 approximately n5,ooo in September 1995. '

103 DIRECIV Comments at 1, 5.

•oc DIRECTV Comments at 6; Satellite Broadcasting and Communications Association of America ("SBCA") Comments at 7.

105 DIRECTV Comments at 5; USSB Reply Comments at 2.

106 SBCA CQmments at 7.

107 Rich Brown, DBS Duelers Cross Swords in New York, Broadcasting & Cable, Mar. 21, 1994, at 40; kWta, New York to Be tM Nation 's First Digital Town, PR Newswire, Sept 8, 1994.

101 The MSO par1nerS are Comcast, Continental Cablevision, Cox Enterprises, TCI and Time Warner. Together, these MSOs arc affiliated with cable systems that serve approximately 60% of cable subscribers nationwide. E.g .. infra Appendix G, Table 2.

109 Primestar Comments at 2.

110 Jd

111 DTH Industry Continuu on Fast Track, SkyREPORT, Oct. 1995, at 6.

2082 52. Several firms are planning to initiate new DBS programming services:

• EchoStar and its affiliate, Directsat, plan to offer approximately 126 channels of programming on satellites that they expect to launch in late 1995 and early 1996. lll Philips Consumer Electronics bas announced an agreement to manufacture DBS receivers for EchoStar to be distributed under the Magnavox and Philips labels.m EchoStar expects to price its receiver system at about ssoo. 114

• AJphaStar, a Canadian DBS firm, is reportedly scheduled to offer service to the continental United States with more than 100 channels of digital video and audio programming services. m AlphaStar reportedly plans to lease twenty-four transponders on an AT&T TelStar Ku-band satellite that was launched in the fall of 1995, and to begin offering service to subscribers in early 1996.116 The company currently owns an upli.nking facility in Canada The new service would apparently transmit programming over FSS frequencies to subscribers who purchase or lease AlphaStar's twenty-four inch d.ishes.117

• Tempo Satellite, Inc. (a wholly-owned subsidiary of TCI), is authorized to provide eleven channels of service and is required to be operational by May 1, 1998. 111

12 • Bilotti, Nabi & Takada, supr~ at~; Satellile and International, Comm. Daily, Sept 21, 1995, at 12.

113 Donaldson, Lufkin & Jenrette, Echostar Communications Corporation, Aug. 17, 1995, at 7.

114 /d.

"' Satellite and International, Comm. Daily, Aug. 22, 1995, at 8; Direct-to-Home: Industry at a Glance, SkyTRENDS, Sept 1995, at 9.

116 AlpbaStar Digital Television, A.lphaStar Teams With DMX to Ojfor Digital Satellite TY Subscribcn Up to 120 Channels of Pure Digital Music, PR Newswire (Nov. 30, 1995); AJphaStar Television Network, Tee-Comm Launched A.lphaStar, America's New High­ Powered Digital DTH Service (press release}, Mar. 4, 1995; Linda Haugsted & Kent Gibbons~ Canadian Co. A.lphaStar Joins Crowded DBS Field, Multichannel News, Mar. 20, 1995, at 3; Mary Hillebrand, Tee-Comm Targets Share of U.S. DBS Mar/au, Sat. Bus. News, Mar. 15, 1995. at 1.

117 ld.

111 Tempo Satellite Inc. (Petition for Recon. & Clarification & Assignment of DBS (continued... )

2083 • Continental Satellite Corporation ("CSC") has been assigned eleven DBS channels at both the 61.5° and 166° orbital locations. 119 On November 21, 1995, esc was granted an extension of its conditional construction permit to August 15, 1999, which will allow CSC to construct, launch, and begin operating its DBS system at two orbital locations. 120

• Dominion Video Satellite, Inc. originally held construction permits for DBS frequencies and channel assignments at the 119° orbital position, but those pemrits were cancelled by' the Commission. 121 Dominion was recently assigned eight DBS channels at the 61.5° orbital location, and may be assigned eight additional channels at the 166° orbital location. 122

53. Receiving Equipment. In order to subscribe to services offered by DIRECTV and/or USSB, consumers must purchase DSS receiving equipment Thomson Consumer Electronics ("Thomson"), under the brand name RCA, 123 was the only manufacturer of DSS

111 ( ••• continued) Orbital Positions & Channels), Memorandum Opinio~ & Order, File No. DBS 88-04, 7 FCC Red 6597, 6600, 17 (1992) ("Tempo Assignment").

119 Continental Satellite Corp. (Assignment of DBS Orbital Positions & Channels), Memorandum Opinion & Order, File No. 87-01/4~SAT-TC-95, 10 FCC Red_. DA 95-1733 ,- 44 (Aug. 4, 1995).

120 Continental Satellite Corp. (Applications for Extension of Construction Permit), Memorandum & Order, File No. 130-SAT-EXT-95, _FCC Red_. DA 95-2347,- 4 (Nov. 21, 1995).

121 Dominion Video Satellite Inc. (Application for Extension ofPermit, and Assignment of Orbital Positions & Channels), Memorandum Opinion & Order, File No. DBS 81-08/84-05/ 92-01MP, 8 FCC Red 6680,41 (1993), recon. denied,_ FCC Red_, FCC 95-421 (Oct. 1995). The Commimon assigned the channels to TCI's subsidiary, Tempo. Tempo Assignment, 7 FCC Red at 6600 1 17

122 Dominion Vitko Satellite, Inc. (Assignment of DBS Orbital Positions & Channels}, Memorandum Opinion & Order, File No. DBS 81-08/84-05/92-01MP, _FCC Red_, DA 95-1734,. 13 (Aug. 7, 1995).

123 Starting in June 1994, Thomson/RCA bad an exclusive contract to produce DSS units for the fU'St eighteen months or one million units, whichever occurred first. E.g., 1994 Report 9 FCC Red at 7475 1 65. It appears that Thomson/RCA shipped its one millionth dish in April1995. Mary Hillebrand, Thomson Ships Millionth DBS System, Sat Bus. News, Apr. 26, 1995, at 1.

2084 equipment until June 1995, when Sony shipped its first 18-inch dish systems. 124 The DSS equipment includes the receiving dish, digital receiver and remote control unit. The RCA list 1 price for the basic DSS receiving equipment is $699. lS Subscribers either pay $100 to $200 for professional installation or pmchase the installation equipment for $69.95}26 The basic DSS unit allows a subscribing household to watch one channel at a time. In order to view different channels simultaneously on different television sets, a subscriber must purchase a DSS unit for $899 and then also purchase a $649 decoder for the second television set. 127

54. Starting in May 1995, Soriy was licensed to produce the DSS equipment for the next six months as the sole competitor to Thomson.m Sony made its fust shipments in June 1995;29 pricing its basic model at $749.130 Retailers have been offering Sony•s basic model for $699,131 and RCA's receiving system is now available for $597.132 The price of DSS receiving equipment is expected to drop further as other manufacturers enter the market. 133 Hughes Network Systems plans to begin selling the equipl!lMt in early 1996, Uniden in mid- 1996, and Toshiba in mid-1996.134

55. DIRECTV now offers its customers a financing plan for DSS receiving equipment. The financing plan is available through consumer electronics dealers in both rural

124 DTH Closes in on Folll' Millio~ SkyREPORTf Oct. 1994 at 20; 1M DBS Battleground: Jockeying for Position & Paying tM Piper, SkyREPORT, June 1995 at 8; Paul Farhi, Dishing Up tM Buswss Gets Tougher, Washington Post, S'ept. 6, 1995 at Gl, G3; May C-Band Equipment Sales Rebound; But Questions About Industry's Future Remain, SkyREPORT, Jul. 1995, at 3.

1 1S 1M DBS Battleground. supra. at 10.

126 1994 Report, 9 FCC Red at 7475 , 65.

127 /d.

121 The DBS Battleground. supra. at 8.

129 May C-Band Equipment Sales, supra, at 3.

uo The DBS Battleground. supra, at 8.

Ill Although technical problems with some Sony systems were reported in August 1995, it has also been reported that the company hopes to fix the problems using a code sent through a DSS satellite. A Cure for Red /nlc?, SkyREPORT, Sept. 1995, at 4.

m See, e.g., Washington Post, Nov. 10, 1995, at A2l.

m The DBS Banleground, supra, at 10; DIRECTV Comments at 8.

ll4 DSS: The Price of Things to Come, SkyREPORT, June 1995, at 10.

2085 and urban areas. Under the plan, DIRECTV subscribers make equipment payments of $15 per month for 48 months, in addition to their payments for programming packages. The total monthly charge for receiving equipment and programming ranges from about $27 to $45, • depending on the programming package chosen. m

56. Primestar subscribers can lease receiving equipment through a network of more than 400 local distributors, at a total price for equipment and basic programming of about $1 per day, 136 after payment of a $299 installation charge. 137 Leasing enables subscribers to reduce the large initial expenditure for reCeiving equipment. In addition, Primestar offers to maintain the subscriber' s receiving equipment, and upgrade it to prevent obsolescence as DBS technology advances.

57. Limitations on DBS Services. ·The number of high powered DBS services in the United States is limited because the Ku-band spectrum that is needed to provide these services is limited by international treaty. Only eight orbital positions have been allocated to serve the United States. At each of the eight orbital locations, the spectrum is fully distributed among the 32 available channels.131 Further, it appears that at most four of the eight orbital locations can be used to provide service to all 48 contiguous states, although the Commission recognizes that this number may increase in the future. 139 In addition, DBS dishes are not generally equipped to receive signals from different orbital locations. Therefore, when creating packages of video programming, DBS service providers are effectively limited to the use of those frequencies for Which they hold permits at a given orbital location.

58. According to Primestar, DBS service is subject to another limitation. 140 Primestar contends that its inability to transmit of local broadcast network affiliate programming to most of its subscribers inhibits the ability of DBS services to become effective competitors to cable. To offset this disadvantage, DIRECTV provides its subscribers with a remote controlled A-B switch to obtain local broadcast signals over a broadcast

135 Joe Estrella, DIRECTV to Offer New Financing Program for DSS, Multichannel News, Aug. 14, 1995, at 28.

136 Primestar Comments at 3.

137 Primesta:r Partners, News Release, June 1995.

131 See, e.g. , Inquiry into the Development of Regulatory Policy in Regard to Direct Broadcast Satellites. Report & Order, 90 FCC 2d 676 (1982).

139 Revision of Rules and Policies for the DBS Service, Notice of Proposed Rulemaking, IB Docket No. 95-168, _FCC Red ---J FCC 95-443 (Oct. 30, 1995) ("DBS Auction NPRM').

140 Primestar Comments at 6.

2086 television antenna. 141 DIREClV also has proposed that cable operators be required to offer a "closed basic tier" consisting only of local broadcast, public, educational, and governmental channels, which would give consumers the option of buying basic programming from a cable operator and satellite programming from DIREClV. 141 On the other band, DBS systems provide subscribers with service attributes that are not generally available on cable systems at present, such as digital video and sound. 143 DBS systems also offer subscribers programming not available on most cable systems. For example, DIRECTV subscribers can receive nearly all of the games in the schedules of the National Football League, National Basketball 1 Association or National Hockey League for $139 per season. "

59. Proposed Use of DBS Facilities to Provide Programming to MVPDs. TCI has proposed to offer a "headend in the sky" (''HITS") service, which apparently would involve the provision of authorization services and the distribution of Primestar' s programming to MVPDs.145 The subscribing MVPDs could then combine HITS service with local broadcast channels and transmit the programming package over the MVPDs' networks to their 146 subscribers, who would use set top boxes to receive the service. It has been reported that Primestar has signed an $80 million agreement to use HITS. 147 In filings with the Commission, other DBS operators, such as DIREcrv and EchoStar, have suggested that they may also use their DBS facilities to provide service to MVPDs.141

60. PltlltMd Migration to High Power DBS.. Prim~ has been planning to migrate its DBS service from the satellite it is now using to a high power DBS satellite and expand its capacity to 94 video and audio channels. •• For its new service, Primestar was planning to use construction permits that had been held by Advanced Communication Corporation (ACC).

141 DlRECTV Comments at 7.

142 Ted Hearn, FCC Hopes to Get Another Shot At Basic Rates, Multichannel News, Oct 2, 1995, at 32.

143 SBCA Comments at 6.

'" DIREClV Programming Lineup brochure, Aug.l, 1995.

14 ' Tom Kerver, Riding on the Headend in the Sky, Cablevision, Mar. 14, 1994, at 38

146 ld at 40.

147 $80 Million DBS Deal, Electronic Media, Jun. 27, 1994, at 1-2.

141 Echostar Opposition, at 41, Advanced Communications Corp. (Application for Extension of Time), File No. DBS-94-11-E (June 6, 1995); DIREClV Opposition, at 23, Advanced Communications Corp. (Application for Extension of Time), File No. DBS-94-11-E (June 6, 1995).

149 Primestar Adds Viacom Services, ~ultichannel News, Aug. 7, 1995, at 14.

2087 ACC had agreed to sell the permits to Tempo DBS, Inc. ("Tempo"), an affiliate of TCI. 150 In a decision by the International Bureau, whi.ch the Commission has affirmed, ACC's application to extend its pennit was denied because ACC failed to exercise due diligence in constructing its DBS ~ and the application for assignment of the ACC permit to Tempo . consequently was denied as moot. 151 The Commission recently proposed auctioning the channels reclaimed from the former ACC construction permits. 152

2. Home Satellite Dishes

61. HSD owners have access to more than 400 channels of programming placed on C-band satellites by programmers for receipt and distribution by MVPDs, of which 115 are scrambled and approximately 285 are unscrambled. JSJ HSD owners can watch the unscrambled channels without paying a subsCription fee. To receive scrambled channels, however, an HSD owner must purchase an integrated receiver-decoder ("IRD") from an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide, approximately thirty program packagers offer packages of scrambled channels to HSD owners. 154 Like DBS systems, however, HSD program packagers do not provide local broadcast network affiliate channels, which are generally not available on C-Band satellites.

62. It has proven difficult to obtain accurate estimates of the total number of HSD users, which includes: ( 1) viewers who subscribe to a .packaged programming service, (2) viewers who receive satellite programming serviceS illegally without subscribing, and (3) viewers who receive only non-subscription programming. As -of October 1994, the estimates of total HSD users ranged from 2.3 million to 4.5 million. 155 It is estimated that there were approximately 2.2 million subscribers to packaged HSD programming services in 1994.156 Based on this information and reports that almost all recent buyers of HSD systems

150 See, e.g., Advanced Communications Corp. (Application for Extension of Time}, Memorandum Opinion & Order, File No. DBS-94-11-EXT, 10 FCC Red____, DA 95-944 (Apr. 27, 1995), ajf'd, FCC 95-428 (Oct. 18, 1995), appeal dock£ted, Advanced Communications Corp. v. FCC, No. 95-551 (D.C. Cir. Oct. 31, 1995).

lSI [d.

152 DBS Auction NPRM, _FCC Red____, FCC 95-443.

1s3 1994 Report, 9 FCC Red at 7478-79, 71; Crowded Skies? SkyTRENDS DTH Annual Report, Apr. 1995, at 18-19.

154 SCBA Comments at 4.

Iss The 2.3. 3.0, 3.3. 3.9, 4.5 Million Question: How Many DTH Households Are Out There Anyway? SkyREPORT, Oct. 1994, at 1.

6 ts Infra Appendix.G, Table 1.

2088 are choosing to subscribe to a programming service, 157 SBCA estimated that there were between 3.5 million and 4 million HSD users. at that time. asa

63. Minoring the success of DBS service in 1994,1" HSD users increased by more than 640,000, a record number. The number of subscribers to packaged programming services for HSDs increased from about 1.6 million in 1993 to approximately 2.2 million in 1994. 160 The HSD industry's expansion occurred despite severe module shortages, which may have caused sales in September and October 1994 to drop significantly from the all-time high of 90,905 units shipped in August 1994. r61

64. HSD system use has grown more slowly in 1995 than it did in 1994. Only 222,000 HSD systems were shipped through August of this year compared with 436,100 systems shipped during the same period in 1994.162 Similarly, the number of subscribers to HSD packaged programming services grew only from approximately 2.2 million in 1994 to about 2.3 million in 1995.163 Channel Master, a major HSD manufacturer, has predicted that growth in HSD purchases will level off to 15,000 to 20,000 new systems per month, as competition from DBS systems takes subscribers away from HSD.164

65. Several factors may influence the future growth rate of HSD system use. On the one hand, HSD services cunently offer more programming options than any other video delivery system. However, as other video providers such as DIRECTV and Primestar increase channel capacity and improve programming selections; they may begin to provide comparable 1 programming choices. " On the other hand, HSD receiving equipment is more expensive than the receiving equipment for other video distributors. Consumers pay an average of

157 Why Do People Buy?, SkyREPORT, First Quarter 1994, at 10, 11.

lSI Jd

as9 It was widely reported that the launch of DBS service resulted in increased sales of C­ band equipment E.g., Early DSS MariCI!t Ranks #1 inC-Band Growt~ SkyREPORT, Jan. 1995, at 8·9.

160 Infra Appendix G, Table 1.

161 Module Shortages Slash Factory Sales, SkyREPORT, Nov. 1994, at 6-7.

162 DTH Equipmenr & Subs, supra, at 10-11.

163 Infra Appendix G, Table 1.

164 May C-Band Equipmenr Sales Rebound; BuJ Questions About Industry's Future Remain, SkyREPORT, July 1995, at 2-3.

16s See Bilotti, Nabi & TaJcada, supra! at 12.

2089 $2,000 to $2,300 for a complete HSD system, 166 which is significantly greater than the equipment cost of a DBS system. To decrease this cost differential, General Instrument Corporation, Inc. ("GIC"), a major manufacrurer of HSD equipment, recently annoWlced its intention to diSCOWlt the wholesale prices for the HSD system hardware and IRDs. 167 In addition, HSD viewers often experience a delay of several seconds when changing channels if the selected channel is on a different satellite than the prior channel. In order to receive the selected channel, the dish must rotate to face the location of its satellite. Viewers of other MVPD's service do not experience simil~ delays when changing channels

66. The growth rates of both HSD and DBS services also may be affected by zoning ordinances that many localities have enacted, which restrict the deployment of receiving dishes. 161 SBCA cites zoning ordinances and other local restrictions as a significant impediment to the growth of HSD. 169 Although the Commission has preempted zoning ordinances that either discri.m.inate against receiving equipment without "a reasonable and clearly defined health, safety or aesthetic objective," or impose "unreasonable limitations" on the use of satellite dishes, 170 SBCA alleges that local authorities continue to enact ordinances that violate these rules. 171 SBCA has also contended that homeowners' associations use covenants and other restrictions to prohibit HSDs. 172

67. In response to complaints about local restrictions on receiving equipment, we initiated a rulemaking proceeding to modify its zoning.preemption rules.m To clarify its rules, the Commission proposes a rebuttable presumption against local laws and regulations that restrict relatively small receiving dishes. We also propose procedures by which Commission review of zoning disputes occurs after exhaustion of local administrative remedies. 174 This is a change from previous policy which required exhaustion of all legal

166 Direct-to-Home Industry at a Glance, SkyREPORT, Sept. 1995, at 9.

167 Numbers Down, Spirits High, SkyREPORT, Sept. 1995, at 11.

161 See, e.g., Preemption ofLocal Zoning Regulation of Satellite Earth Stations, Notice of Proposed Rulemaking, IB Docket No. 95-59, 10 FCC Red 6982 (1995) ("Local Zoning NPRM").

169 SBCA Comments at 18.

170 47 C.F.R. § 25.104.

111 SBCA Comments at 18.

172 1994 Report, 9 FCC Red at 7481 , 76.

113 Local Zoning NPRM, 10 FCC Red at 6995, 44.

174 See, e.g., Town of Deerfield, New York v. FCC. 992 F.2d 420 (2d Cir. 1992) (where the court invalidated the Commission's stricter exhaustion policy).

2090 remedies before appeal to the Commission. The Commission is reviewing the comments that were filed in response to the proposals and will adopt a final rule in the near future.

C. Wi.releu Cable Systems

1. Multichannel Multipoint Distribution Service

68. MVPDs that use microwave frequencies in the multichannel multipoint distribution service ("MMDS") or multipOint distribution service ("MDS") to transmit video programming to subscribers with rooftop antennas are commonly referred to as wireless cable systems. Wireless cable operators have access to a maximum of thirty-two or thirty-three channels and currently use traditional analog transmission technologies. The thirty-three channels include twenty channels allocated to Instructional Television Fixed Service (''ITFS") that are leased on a part-time basis.

69. Subscribtrship. Between the end of 1993 and the end of 1994, the total number of subscribers to wireless cable systems increased by 51%, from 397,000 to 600,000 subscribers. m During the same time period, the number of homes capable of receiving a wireless cable operator's signal (commonly referred to as homes seen) rose by 10% to over 27 million homes. The growth of subscribership relative to homes seen has pushed the industry's penetration rate from 1.6% at the end of 1993 to 2.2%. at the end of 1994. Apparently, this trend has continued in 1995, as reported by the WireleSs Cable Association International, Inc. ("WCAI"), which claims that in June 1995 the industry was comprised of approximately 190 systems serving about 800,000 subscribers.176

70. Although few wireless cable systems approach the total size of their wired cable counterparts, the industry has 15 systems with at least 12,000 subscribers, including 7 with over 20,000 subscribers. The largest wireless sy~ operated by CAl Wireless Systems, Inc. ("CAl") in Philadelphia, Pennsylvania, has approximately 51,900 subscribersm (3.3% of the approximately 1.5 million homes capable of subscribing to CAl's service). 171 The second largest is Cross Country Wireless, Inc.'s ("Cross Country") system in Riverside,

175 Paul Kagan Assocs., Inc., The 1995 Wireless Cable Databook 23 (1995) (" 1995 Wireless Cablt Databook!').

176 This figure represents 45% growth from WCAI's estimate of 550,000 subscribers being served by the wireless cable industry in June 1994. WCAI Comments at 2.

m James B. Boyle & Andrew W. Marcus, CFA , Alex. Brown & Sons (Media), Wireless Cable Sight-Lines, Aug. 21, 1995, at 5.

171 Gerard Klauer Mattison & Co., When It Comes To '1"M Wirtltss Industry, One Investment Bank Stnds '1"M Right Signals 54 ("Seminal Event In Evolution of W1reless Cable Industry") (July 1995) (Handout distributed at WCAI's WCA '95: Wireless Cable' s Annual Convention & Exposition and available from author) (''1995 GKM Databoolt').

2091 California, which has approximately 42,000 subscribers179 (10.8% of the homes capable of subscribing).110 In general, where a wireless srstem is competing with an incumbent wired cable system, the wired cable system has substantially greater subscribership. There are only 12 systems with penetration rates over 10%, and we are aware of only one system, operated by Heartland Wrreless Communications, Inc. ("Heartland") in Ada, Oklahoma (serving 28.1% of the homes seen) 111 that has more subscribers than its wired competitor.182

71. Analysts expect the wireless industry's recent subscriber growth to continue for the next several years. Paul Kagan AssOciates projects that the industry will grow by over 60% in both 1995 and 1996, and should serve over two million subscribers sometime in 1997,113 which is still only a fraction of the wired cable industry's 59.7 million subscribers at the end of 1994.114 Another observer projects that the industry's average annual subscribership will grow by over 280% be~n 1995 and 1998.115 Commenters have attributed this growth to a combination of price competition, product differentiation, favorable regulatory actions and increased investments by the LECs. 116

72. Consolidation. Several large operators have begun to consolidate systems in major markets across the country. After its acquisition of ACS Enterprises, Inc. C'ACS") and the purchase of systems from Eastern Cable Networks Corporation ("ECN") and American W1reless Systems, Inc. ("A WS"), CAl operates in most of the largest markets in the Northeast, and has line-of-sight coverage of over 11 million homes. Its Northeast holdings cover the following markets: New York City, Philadelphia, Pittsburgh, Washington, D.C.,

179 Wireless Cable Sight-Lines, supra, at 2.

110 Wireless Cable Sight-Lines, supra, at S. As discussed below, significant developments this year in the wireless cable industry included the investment by Bell Atlantic and NYNEX in CAl and the acquisition of Cross Country by the Pacific Telesis Group ("PacBell" which ·refers to both the Pacific Telesis Group and Pacific Bell, a subsidiary of Pacific Telesis Group, unless otherwise noted).

111 Wireless Cable Sight-Lines, supra, at 2.

182 Wireless Cable Sight-Lines, supra, at 1.

113 1995 Wireless Cable Databoolc, supra, at 23.

114 Infra Appendix B, Table 1.

115 James B. Boyle & Andrew W. Marcus, CFA, Alex. Brown & Sons (Media), Wireless Cable Overview, Mar. 23, 1995, at 31.

116 HBO Comments at 4; WCAI Comments at 7, n.l4; NCTA Comments at 14-15.

2092 Baltimore and Boston.117 People's Choice 1V Corporation ("PCJV") has two regional clusters, one in the Midwest and the other in the Southwest With its acquisition of Preferred Entertainment, Inc. ("Preferred") and the purchase of systems from ECN, PC1V's Midwest cluster encompasses systems in Chicago, Detroit, Milwaukee, Indianapolis, Kansas City and St. Louis. PC1V's southwestern cluster includes systems in Houston, Phoenix and Tucson. Between these two clusters, PC1V has a total of almost 8 million line-of-sight homes.'"

73. Digital Trials. According to repons, the Wifeless Cable Digital Alliance ("WCDA")119 completed the first field tri8ls of digital technology in Colorado Springs and Chicago in the spring of 1995, which yielded several important results. First, it has been reponed that wireless operators should be able to fit three190 to nine191 digital channels into one 6 MHz video channel by combining a digital signal with compression algorithms, which is comparable to the results achieved by other MVPDs. Second, it has been reponed that use of a digital signal increased the coverage area of a wireless transmitter, allowing MMDS operators to reach additional homes that were previously unable to receive a clear signal. 192

74. Upon receipt of Commission approval, WCDA's continued development of a digital wireless cable system-will begin this fall when American Telecasting, Inc. ("American Telecasting") will conduct a commercial trial involving 50 homes.191 Operators with systems in urban markets have said that they hope to deploy digital systems by the second half of 1996. 194

117 1995 GKM Databoolc, at 54 ("Seminal Event In Evolution of Wtreless Cable Industry").

111 1995 GKM Databoolc, at 77 ("People's Choice- lV").

119 The WCDA's membership includes: American Telecasting Inc., Andrew Corp., California Amplifier, EMCEE Broadcast Products, Microwave Filter Corp., and Zenith Electronics Corp.

190 Leslie Ellis, Digital Tuts Hearten Wireless Cable Execs, Multichannel News, Mar. 13, 1995, at 6.

191 Test Results Postttw For Digkally Compressed Wirtltss Cable, Comm. Daily, Mar. 7, 1995, at 2.

192 /d

191 Harry A. Jessell, Wireless Cable Is Going Digital ... Or At Least Trying, Broadcasting & Cable, July 24, 1995, at 30.

194 Dow Jones & Co., Wireless Cable Execs/Analysts Mull Industry Futtue, Select Fed. Filings Newswires, July. 20, 1995.

2093 15. Independent of the WCDA's efforts, it has been reported that Decathlon Communications, Inc. ("Decathlon") has developed its own digital wireless cable technology based on MPEG 1+ encoding.'~ Transworld Telecommunications Inc. has announced plans to implement Decathlon's technology in its Tampa/St. Petersburg system.196 American Telecasting has announced plans to install Decathlon's technology in its Fresno, California system by the end of 1995,197 as has Sky Cable of Omaha. 198

76. On July 13, 1995, a coalition of ninety-nine organizations with interests in the wireless cable industry filed a petition requesting a "declaratory ruling on the use of digital modulation by" stations using MDS and ITFS frequencies. On August 23, 1995, the Commission established a pleading cycle for that petition, with comments filed on September 22, 1995 and reply comments filed October 10, 1995.199

77. Financial Performance. The industry's total revenue for 1994 was $203 million, a 48% increase from 1993.200 The industry's cash flow (as defined above in paragraph 27) declined during 1994, dropping from a loss of $10.6 million in 1993 to a loss of $14.2 million.

78. Equity Mark£ts. In the ten months prior to June 1994, the wireless cable industry raised almost $600 million in financing from public markets.201 In the following twelve months, the industry obtained $638 million of additional financing from both public and private sources. There are also $350 million of fiiiancing transactions awaiting

195 Denny Weddle, Compression Breakthrough, Private Cable & Wireless Cable, Oct. 1995, at 27. For a full discussion of digital compression technology, see Section III.C below.

196 Transworld Telecommunications, Inc., Transworld Telecommunications Inc. Announces Deployment of Decathlon Digital Compression System (Business Wire), Aug. 1, 1995.

197 American, Telecasting, Inc., American Telecasting Announces Agreement To Install Decathlon Digital Compression Technology In Fresno This Year (PR Newswire), July 18, 1995.

191 Fred Dawson, Wireless Ops M,ake Move to Digital, Multichannel News, Aug. 28, 1995, at 3.

199 Pleading Cycle Established For Comments On Request For Declaratory Ruling On The Use Of Digital Modulation By Multipoint Distribution Service And Instructional Television Fixed Service Stations, Public Notice, Report No. MM 95-83, DA 95-1854 (Aug. 23, 1995).

200 1995 Wireless Cable Databook, supra, at 23-24.

201 Paul Kagan Assoc., Inc., Wireless Cable Investor, June 30, 1994, at 1.

2094 consummation. Of this combined $988 million (excluding investments made by (ECs), $725 million is in the form of public bond offerings.202

79. LEC ln-Hstmenr. An important development in the wireless cable industry this year has been the decision by three LECs to make major investments in two wireless operators. In March. 1995, Bell Atlantic and NYNEX made a substantial investment in CAl. Their initial investment in CAl was $100 million, and included the issuance of warrants, which would give them the opportunity to purchase 45% equity in CAl for an additional $300 million.203 Helped by this infusion of capital, CAl acquired the systems mentioned above in paragraph 72.204 In April 1995, PacBell acquired Cross Country for $175 million.205

80. Recenr Regulatory Developments. In June 1995, the Commission took several actions to enhance the competitiveness of wireless cable systems and to facilitate the development and rapid deployment of wireless cable services. The Commission adopted streamlined measures to process new applications for MDS spectrum, adopted competitive bidding procedures for the licensing of MMDS spectrum and expanded the protected service area of MDS stations.206

202 Paul Kagan Assoc., Inc., W'ueless Cable Public and Private Funding. June 1994 11uof!gh May 1995, Wireless Cable Investor, May 31, 1995, at 1: Paul Kagan Assoc., Inc., Wireless Cable Public Bond Offerings, WU'Cless Cable Investor, June 30, 1995, at 1.

203 1995 GKM Databook. at 52 ("Seminal Event In Evolution of Wireless Cable Industry").

204 LECs' use of wireless facilities to provide video programming is discussed in more detail infra Section U.D.

w The acquisition was fiMlimf on July 25, 1995, Pacific Telesis Group, Pacific Telesis Becomes Nation's First Telco To Offer Wireless Cable Television (News Release), July 25, 1995.

206 Amendment of Parts 21 &: 24 of the Commission's Rules with Regard to Filing Procedtues in tlte Multipoint Distribution Service and in the Instructional Television Fixed· Service, Report & Order, MM Docket No. 94-131, 10 FCC Red 9569 (1995); Amendmenr of Parts 21, 43, 74, 78, & 94 ofthe Commission's Rules Governing Use of the Frequencies in the 2.1 and 2.5 GHz Bands Affecting: Privare Operational-Fixed Microwave Service, Multipoint Distribution Service, Multichannel Multipoint Distribution Service, Instructional Television Fixed Service, &: Cable Television Relay Service, Second Order on Reconsideratio~ Gen. Docket No. 90-54, 10 FCC Red 7074 (1995). We note that at least one operator complains that the cunent MMDS licensing process is said to be designed in a manner that favors LECs with their larger financial resources over the smaller entrepreneurs. Vermont Wireless Cooperative Comments at 1-2.

2095 81. Factors Affecting Competition. Despite its recent gains, the wireless cable remains industry a relatively small provider of multichannel video services in terms of market share. As of the end of September 1995, only 0.8% of television households subscribed to wireless cable services, compared to 64.3% of television households subscribing to wired • cable systems.

82. Various factors, including technological limitations (e.g., line-of-sight and channel capacity), have been blamed for the relatively low penetration of wireless cable systems. 207 Due to their relatively small size, wireless cable systems potentially face higher programming costs per-subscriber than many of their larger, wired cable system competitors. According to WCAI, several non-vertically integrated programmers engage ip the practice of charging a wireless cable operator more than a similarly situated franchised cable system for programming.201 Wireless cable operators alsO have been dealing with increased competition from DBS services, although some analysts believe that such competition has not had a sUbstantial impact on wireless cable operators' subscribership (less than 0.1% of wireless cable subscribers have switched to DBS serviceV 09 One wireless cable operator alleges that predatory pricing by wired cable operators, including low promotional rates, reduces wireless cable operators' ability to compete.210

83. In addition to the recent progress on the technological front, wireless cable systems may enjoy lower per unit costs than wired cable systems when adding new subscribers. Investment analysts estimate the average investment per subscriber for wireless cable operators is between $330 and $600, compared with $625 to· $1300 for traditional wired cable operators.211 Moreover, WCAI believes that the wireless cable industry's cost of digitization will be lower, on a per subscriber basi~ than the cost of digitization for the wired cable industry.212 At least one analyst agrees with this view, reporting the investment per digital subscriber to be $900 for wireless operators, and $1500 for wired cable operators.213

207 Wireless Cable Overview, supra, at 12.

201 WCAI Comments at 18. A similar concern is raised by the Small Cable Business Association (SCBA), which claims that small wired cable operators must pay substantially higher rates for programming than the large MSOs.

209 Wireless Cable Sight-Lines, supra, at 8.

210 Heartland Comments at 1-3.

211 1995 GKM Databook, at 11 ("Wireless Cable Primer"); Wireless Cable Overview, supra, at 4.

212 WCAI Comments at 15

213 Wireless Cable Overview, supra, at 4. 2096 I 2. Loclll Multipoint Distribution Suvic~

84. LMDS frequencies are microwave channels in the 28 GHz band that may be used to deliver multichannel video programming. As with distribution using MMDS, LMDS distribution requires subscribers to have a special antenna that is located within a "line-of­ sight" to the transmitter. The propagation characteristics of the 28 GHz band are such that an LMDS system must operate in "cells" with radii of three to six miles in order to provide service to a metropolitan area that could be covered by a single wireless cable transminer. With the exception of CeUularVision of New York, L.P.'s ("CellularVision") 5,300-subscriber LMDS system in Brooklyn, New York (which has been managed by Bell Atlantic),214 LMDS frequencies are not currently being used to distribute video programming.m

85. In July 1995, the Commission:issued a Third Notice of Proposed Rulemaking and Supplemental Tentative Decision seeking comment oq;_(1) a plan to allow both LMDS and Fixed Satellite Service ("FSS") systems to operate in the 28 GHz band; (2) a competitive bidding scheme for awarding mutually exclusive LMDS and FSS license applications by Basic Trading Areas ("BTAs"); and (3) flexible use of the 28 GHz spectrum band.216 The Commission also sought comment on the number of LMDS licenses that should be made available in a particular market, and the amount of spectrum that should be allocated. 217 Given the potential for competition between LMDS and cable systems, we also requested comment whether to permit cable operators to acquire LMDS systems in their service areas. At this time, it remains unclear whether, and to what extent, LMDS systems might emerge as significant competitors to wired cable systems.

D. Local Exchange Carrien

86. Local exchange carriers ("LECs") are local telephone companies that operate in local service areas commonly known as local access and transport areas ("LATAs"). In the

214 CellularVision USA, Inc., Form S.J 3, 12 (Oct. 18, 1995). In a registration statement recently filed with the SEC, CellularVision discloses an "electronic manufacturing flaw in its set-top converters which degraded reception quality," and reported an average monthly subscriber cancellation rate of 100/o through August 1995. CellularVision states that it has been installing repaired equipment that remedies the problem and has reduced the rate of cancellations. /d. at 11.

215 1bis operation was authorized by the Commission in 1991 on a waiver basis. Hye Crest Management, Inc. (For Licmse Authorization in the Point-to-Point Microwave Radio Service in 27.5-29.5 GHz Band and R~quest for Waiver of the Rules), Memorandum Opinion and Order, 6 FCC Red 332 (1991). Other applications for LMDS service were subsequently frozen by the Commission.

216 Third 28 GHz NPRM, _FCC Red_, FCC 95-287.

217 /d, 79.

2097 1994 Report, the Commission noted an increase in LEC video related activity since the Commission's 1990 Cable Report, spurred by. the adoption of the video dialtone ("VDT") framework and technological advances.211 In the year since the 1994 Report, LEC plans for entry into the video marketplace have evolved considerably. At present, however, it is difficult to predict the level of future LEC entry into markets for the delivery of video progranuning over the long run, or the form that entry will take.

1. Commission and Judicial Actions

87. Shortly after release of the 1994 Report, the Commission resolved the pending petitions for reconsideration of the 1992 VDT Order.219 In the VDT Reconsideration Order, the Commission affirmed its decision to enforce the statutory cable-telco cross-owner-ship prohibition, and generally affirmed the regulatory framework for VDT services.220 However,

211 1994 Report, 9 FCC Red at 7495-505 ~ 103-20. VDT is a regulatory framework that permits LECs to offer, on a nondiscriminatory basis, a basic common carrier video delivery platform that must accommodate multiple video programmers. First adopted by the Commission in 1992, this regulatory framework provides for LEC participation in the MVPD marketplace consistent with the statutory cable television company-local telephone company ("cable-telco") cross-ownership ban. This ban or restri;tion was enacted by the 1984 Cable Act, and prohibits a common carrier from providing vi.deo programming directly to subscribers in its telephone service area, either directly or indirectly through an affiliate owned by, operated by, controlled by, or under common control with the common carrier. See Telephone Company-Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Second Report & Order, Recommendation to Congress~ and Second Further Notice of Proposed Rulemaking, CC Docket No. 87-266, 7 FCC Red 5781 (1992), ("1992 VDT Order"), aff'd in part and modified in part, Memorandum Opinion & Order on Reconsideration and Third Further Notice of Proposed Rulemaldng, 10 FCC Red 244 (1994), (" VDT Reconsideration Order" and "VDT Third Further Notice"), appeal pending sub nom. Mankato Citizens Tel. Co. v. FCC, No. 92-1404 (D.C. Cir. filed Sept. 9, 1992).

219 See VDT Reconsideration Order, 10 FCC Red at 247, 1. In the VDT Reconsideration Order, the Commission also clarified and modified certain policies adopted in the 1992 VDT Order, including policies pertaining to ownership and non-ownership affiliations, and to cross-subsidization and pricing issues.

220 The Commission interpreted the statutory cable-telco cross-ownership ban as restricting LEC participation in the selection, pricing, or packaging of video programming for distribution to subscribers within its telephone service area. VDT Reconsideration Order, l 0 FCC Red at 280-81 Td 73-74. As noted below, this restriction was subsequently eased in response to court orders enjoining the Commission from enforcing the cable-telco cross­ ownership ban. In the VDT Reconsideration Order, the Commission clarified that, under the VDT framework, a LEC is precluded from acquiring a cable system that operates within its telephone service area, and a LEC cannot engage in joint ventures with in-region cable (continued... )

2098 shortly thereafter two federal circuit courts of appeal held that the statutory cable-telco cross­ ownership restriction was an unconstitutional infringement of telephone companies• First Amendment rights, and upheld lower court orders enjoining the Commission from enforcing the statutory restriction against parties to those cases.221

88. In response to those decisions and a number of similarly decided federal district coun ca.ses, 222 the Commission took a number of actions to clarify funher the manner in which LEC entt)' into the MVPD and rel.ated markets would be regulated. In January 1995, the Coaunission issued another notice of proposed rulemaking seeking comment on, among other things, whether Title II or Title VI of the Communications Act, or some combination thereof, should apply to a LEC that, directly or indirectly through an affiliate, provides video programming over a VDT platform to subscribers within its local telephone service areas. 223

89. In April 1995, the Commission clarified that it will not enforce the cable-telco cross-ownership restriction against: (1) any telephone company that is a party to any of the cases in which the Commission has been enjoined from enforcing the statutory cross­ ownership ban; or (2) any telephone company operations that are within the geographic

220 ( •••continued) operators for purposes of providing video programmina to subscribers within its telephone service area. ld at 266, 48, 286-87, 89. In the VDT Third Further Notice, adopted concurrently with the VDT Reconsideration Order, the Commission sought comment on the viability of multiple wire based competitors in the MVPD marketplace, and on criteria for modifying the restrictions imposed on LEC acquisitions of, and joint ventures with, cable operators. VDT Third Further Notice, 10 FCC·Rcd at 372-73, 276-79. The Commission also sought comment on: (1) capacity issues; (2) preferential access; and (3) pole attachment and conduit rights. This rulemaking remains pending before the Commission. ld at 368-75 '111 268-285.

221 Chesapeake & Potomac Tel. Co. v. United States, 830 F. Supp. 909 (E.D. Va. 1993), aff'd, 42 F.3d 181 (4th Cir. 1994), cert. granted, 115 S. Ct. 2608 (Jun. 26, 1995); US West, Inc. v. United States, 855 F. Supp. 1184 (W.O. Wash. 1994), affd, 48 F.3d 1092 (9th Cir. 1995). Set also Pacific Telesis Group v. United Stales, 48 F.3d 1106 (9th Cir. 1994).

m See Bel/South Corp. v. United States, 868 F. Supp 1335 (N.D. Ala. 1994), appeal pending No. 94-7036 (11th Cir. filed Oct. 28, 1994); Ameritech Corp. v. United States, 86J F. Supp 721 (N.D.lli. 1994), appeal pending No. 94-7036 (11 th Cir.); NYNEX Corp v. United States, No. 93-323PC, 1994 WL 779761 (D. Me. Dec. 8, 1994), appeal pending No. 95-1183 (1st Cir).; Southern New England Tel. Co. v. United Stales, 886 F. Supp. 211 (D. Conn. 1995); GTE South, Inc. v. U.S.• No. 94-1588-A (E.D., Jan. 13, 1995); United States Tel. Ass 'n v. United States, No. 1:94CV01961 (D.D.C. Feb. 14, 1995); Southwestern Bell Corp v. United States, Civ. A. No. 3:94-V-0193-D, 1995 WL 444414 (N.D. Tex. Mar. 27. 1995).

m Telephone Co.-Cable Television Cross-Ownership Rules, §§ 63.54-63.58, Fourth Further Notice of Proposed Rulemaking, c;c Docket No. 87-266, 10 FCC Red 4617 (1995).

2099 boundaries of the Fourth or Ninth Circuits, where the ban has been held unconstitutional. n• In May 1995, the Commission detennined ~ it has legal authority to grant waivers of the cable-telco cross-ownership ban to allow telephone companies to provide video programming on VDT networks in their telephone service areas.225 In August 1995, the Commission streamlined the Section 214 process for LECs to construct stand alone cable systems within their local service areas. 226 Finally, over the course of the year, the Commission has established many of the reporting and accounting requirements applicable to the provision of VDT service.227

2. LEC Entry into MVPD and Program Supply Markets

90. In this section of the 1995 Report, we examine the status of LEC entry into various video markets. First, we report on the status of LEC entry into what may be thought of as the video transport segment of the market for the delivery of video programming -- the provision by LECs of common carrier video transport services over VDT facilities to customer-programmers that distribute programming packages to end user subscribers. Second,

224 Commission Announces Enforcemenl Policy Regarding Tel. Co. Ownership ofCable Television Sys., Public Notice, DA 95-722 (Apr. 3, 1995) (correcting Public Notice, DA 95-520 (Mar. 17, 1995)).

225 Telephone Co.-Cable Television Cross-Ownership Rules, §§ 63.54-63.58, Third Report & Order, CC Docket No. 87-266, 10 FCC Red 7887 (1995).

226 Telephone Co.-Cable Television Cross-Ownership Rules, §§ 63.54-63.58, Fourth Report & Order, CC Docket No. 87-266, _FCC Red_ , FCC 95-357 (Aug. 14, 1995}, summarized at 60 Fed. Reg. 44280 (Aug. 25, 1995}, petition for review pending, Ameritech Corp. v. FCC, No. 95-1423 (D.C. Cir. filed Aug. 18, 1995) and No. 95-1441 (DC Cir. filed Aug. 25, 1995); GTE Serv. Corp. v. FCC, No. 95-1488 (DC Cir. filed Sept. 22, 1995). The streamlined Section 214 procedures apply only to telephone companies that have obtained injunctions barring the Commission from enforcing the cable-telco cross-ownership ban. Telephone companies already had blanket Section 214 authority to operate cable systems outside their telephone service areas.

227 See, e.g., RAO Letter 25. DA 95-703, Mar. 31. 1995 (accounting order providing specific guidance on the requirements for accounting classifications, subsidiary records and. amendment of cost allocation manuals for LECs that provide VDT service); Price Cap Performance Review for Local Exchange Carriers; Treatmenl of Video Dialtone Services Under Price Cap Regulation, Second Report & Order and Third Further Notice of Proposed Rulemaking, CC Docket No. 94-1, _FCC Red_, FCC 95-394 (Sept 21, 1995) (specific price cap regulations for VDT offerings); Reporting Requiremenls on Video Dialtone Costs & Jurisdictional Separations for Local Exchange Carriers Offering Video Dialtone Services, Memorandum Opinion & Order, AAD No. 95-59, _FCC Red __ , D.A 95-2026 (Sept. 29, 1995}, summarized at 60 Fed. Reg. 53544 (Oct 16, 1995) (specifying the content and format of the VDT reports LECs must file when offering VDT service).

2100 we address LEC entry into these markets through constrUction of, or investment in. traditional stand alone cable systems, wireless cable systems, and other integrated proprietary facilities that bundle video transport services with the provision of programming services to • subscribers. Finally, we note instances of LEC entry into the video programming supply and packaging market

91. Status of VDT Technical and Market Trials. At the time of the 1994 Report, five applications for VDT technical and ~t trials had been granted, three applications for initial trials were pending, and two applications for expansion of existing trials were also pending. Since the 1994 Report, no additional applications for VDT technical or market trials have been filed with the Commission. The three applications for new trials that were pending at the time of the 1994 Report have all been granted.221 In addition, three applications for expanded or extended trials have been granted. 229 lnfonnation pertaining to the VDT trial participants, the status of the trials, and results of market and technical tests are summarized in Appendix E.230

92. Status of VDT Permmumt Commercial Applications. At the time of the 1994 Report, twenty-three applications for permanent commercial VDT authorizations were pending before the Commission and one application to provide permanent commercial VDT service had been gran1ed- to Bell Atlantic for service to approximately 38,000 households in Dover

221 &e Puuto Rico Tel. Co. (P.R. VDT TrUJJ), Order & Authorization, File No. WPC 6949, 10 FCC Red 156 (1994); BellSouth Telecommunications, Inc. (Chamblee & De.Kalb Cos., Ga. VDT Trial), Order & Authorization, File No. WPC 69n, - FCC Red - - , DA 95-181, 1995 WL 51206 (Feb. 2, 1995, CCB); Carolina Tel. & Tel. Co. (Wake Forest. N. C. VDT Trial), Order & Authorization, File No. WPC 6999, 10 FCC Red 1583 (1995). See also infra Appendix E.

219 These expansions or extensions are for Bell Atlantic's Northern Virginia trial, Southern New England Telephone Co.'s ("SNET") Connecticut trial, and US West's Omaha, Nebraska trial. See Chuapellh &: Poto111/lc TeL Co. (No. Va. VDT Trial Expansion), Order & Authorization, 10 FCC Red 2975 (1995); Southern New Eng. Tel. Co. (W. Hartford VDT TrUJJ), Order & Authorization, 9 FCC Red 1019 (1993); Southern New Eng. Tel. Co. {E.xJxultkd VDT Trial), Order and Authorization, 9 FCC Red nt5 (1994); Southern New Eng. Tel. Co. (W. Hanford & Expantkd VDT Trial Synchronization); Order, 10 FCC Red 4558 (1995); US West Communications, Inc. (Omaha, Neb. VDT Trial), Order & Authorization, 9 FCC Red 184 (1993); US West Communications, Inc. (/'rial Modification), Order & Authorization, File No. WPC 6868, FCC 94-350 (Jan. 6, 1995), on recon .• FCC 95-141 1995 WL 220632 (April 12, 1995).

230 See also the discussion below for more information on architectures and technologies. Infra sec. III.C.

2101 Township, New Jersey ("Dover").231 Those applications represented a potential market for 232 VDT services of over 8.5 million homes. .

93. Since release of the 1994 Report, fifteen of the twenty-three applications for permanent commercial VDT authority have been granted (two to NYNEX, four to PacBell, four to GTE, and five to Ameritech); two applications were withdrawn (by Bell Atlantic); the processing of five applications has been suspended (at the request of U S West); and one application remains pending (by Bell Atl.antic).233 In addition, five new applications to provide commercial VDT service have been filed with the Commission since the 1994 Report. Of these five applications, four (filed by US West) were dismissed by the Commission for insufficient data234 The fifth new application (filed by Southern New England Telephone Company ("SNET")) remains pending.23.s

94. Consequently, a total of sixteen applications for commercial"VDT service have been approved, and two applications for commercial VDT service remain pending before the Commission. The status of the approved applications for permanent commercial VDT authorization is as follows:236

231 See New Jersey Bell Tel. Co. (Application for Authority to Offer VDT Service in Dover Township, N.J.), Order & Authorization, File No. WPC 6849, 9 FCC Red 3677 (1994). See also infra Appendices D, E.

232 1994 Report, 9 FCC Red at 7496 1 104.

233 The pending Bell Atlantic application is for authority to offer permanent commercial service to 11,700 homes. New Jersey Tel. Co. (Florham Parle. New Jersey VDT App. for Permanent Service), File No. WPC 6838 (filed Nov. 16, 1992).

234 US West, Communications, Inc. (App. to Offor VDT Service in Cedar Rapids, Iowa), File No. WPC 7024 (filed Nov. 16, 1994) (passing 63,000 homes); US West Communications, Jnc. (App. to Offer VDT Service in Colo. Springs, Colo.), File No. WPC 7025 (filed Nov. 16, 1994) (passing 161,000 homes); US West Communications, Inc. (App. to Offer VDT Service in Des Moines, Iowa), File No. WPC 7026 (filed Nov. 16, 1994) (passing 120,000 homes); US West Communications, Inc. (App. to Offor VDT Service in Albuquerque, N.M.), File No. WPC 7Q27 (filed Nov. 16, 1994) (passing 214,000 homes). On December 23, 1994, the Commission dismissed these applications for lack of information. · See Letter from Kathleen M.H. Wallman, Chief, Common Carrier Bureau, FCC to Lawrence E. Sarjeant, US West Communications, Inc. (Dec. 23, 1994).

23.s Southern New Eng. Tel. Co. (Connecticut VDT Application for Permanent Service), File No. WPC 7074 (filed Apr. 28, 1995).

236 A chart is provided in the appendices summarizing the current status of all of the VDT applications for commercial service that have been filed with the Commission (omitting (continued ...)

2102 • Bell Atlantic's July 1994 authorization for a VDT system in Dover Township, New Jersey, that will pass 38,000 homes.237 The tariff for this system was permitted to become effective following a one-day suspension, subject to investigation.23 1 This VDT system is scheduled to begin service in 1995, and is expected to become the first permanent commercial VDT system in operation. 139

• NYNEX' s March 1995 authorization for two VDT systems, one in Rhode Island that will pas$ 63,000 homes and one in eastern Massachusetts that will pass 334,000 homes. NYNEX's applications, filed in July of 1994, proposed completion of construction in 2010.240 According to some trade press accounts, NYNEX is proceeding on target with a "cautiously aggressive" strategy with its VDT systems in eastern Massachusetts and Rhode Island. 241 Jarlier reports suggested, however, that while still pursuing VDT entry, NYNEX had scaled back its deployment plans and may utilize wireless cable in the near term to reach subscribers while constructing its VDT systems.242

• PacBell's August 1995 authorization for four VDT systems in California, which will pass 490,000 homes in San Francisco; 360,000 homes in Los Angeles; 259,000 homes in San Diego; and 210,000 homes in Orange County, California. PacBell's applications, originally

236 ( ••• continued) the four U S West applications that were filed and dismissed since the 1994 Report). Infra Appendix C-1.

237 New Jersey Bell Tel. Co., 9 FCC Red 3677. See also infra Appendix E.

231 The Bell At!. Tel. Cos. (Waiver of Part 69 to Offer VDT service In Dover Township, N.J.), Order, DA 95·1282 (June 9, 1995). See also Bell Atlantic Tel. Cos., Tariff F. C. C. No. 10, Transminal Nos. 741, 786, Order Designating Issues for Investigation, CC Docket No. 95-145, _FCC Red_, DA 95-1928 (Sept 8, 1995) (ra~ terms and requirements for VDT service in Dover Township).

239 See Launch Delayed. Comm. Daily, Aug. 16, 1995, at 5.

240 New Eng. TeL & Tel. Co. (VDT Serv. Auth. to Communities in R.L & Mass.), Order & Authorization, File No. WPC 6982, 10 FCC Red 5346, 5349, 5 (1995).

241 NYNEX lnlrigued. buJ Wary, of VDT Opportunity, Washington Telecom News, Sept 25, 1995, at 5; NYNEX Plans a Common Carriage Model for VDT, Washington Telecom News, June 19, 1995, at 14.

242 1995 GKM Darsbook., supra, at 3~ - 34 .

2103 filed in December 1993, proposed an advanced, wire based video and telephone network that would be consnucted sometime in 1996 at an expense of approximately $16 billion.243 It appears that PacBell currently plans to pass only 500,000 homes with this advanced network in 1996, increasing to one million homes in 1997.244 These reports suggest, however, that PacBell is accelerating constrUCtion of the VDT network in the San Francisco Bay Area. scaling back its VDT deployment plans in its other authorized areas, and deploying wireless facilities in those areas in ·the near term while building out the VDT 24 systems. '

• GTE's May 1995 authorization for four VDT systems that will pass 476,000 homes in Pinellas and Pasco, Florida; 334,000 in Honolulu, Hawaii; 122,000 in Ventura, California; and 109,000 in Manassas, Virginia. 246 Reportedly, GTE is aggressively moving ahead with its VDT plans. By the end of 1996, GTE reportedly plans to pass a total of 500,000 homes in three markets: Ventura, California; Pasco and Pinellas counties, Florida; and Honolulu, Hawaii. By 1997, GTE reportedly plans to enter the Manassas, Virginia market, increasing its total homes passed to 900,000 homes in all four markets.247 GTE states that its goal is to pass seven million homes with VDT in 66 top markets within the next ten years.141

• The remaining five applications for permanent commercial VDT

243 Pacific Bell Co. (VDT Serv. A.uth. for Communities in Orange Co., S.F Bay Area, LA. Area & S.D. Area in CaL), Order & Authorization, File Nos. WPC 6913 et al., _FCC Red_, FCC 95-302 (Aug. 15, 1995).

244 See Pacific Telesis, Pacific Telesis Refines Network & Video Strategy (News Release}, Sept. 27, 1995; Leslie Cauley, PacTel Puts Off Interactive-Video Plans, Concentrating Instead on Wireless Cable, Wall St J., Sept 28, 1995, at A3; John M. Higgins, PacTel Finds Video Plans Too Ambitious, Multichannel News, Oct 2, 1995, at 1, 52.

24 ' 1995 GKM Databook, supra, at 33-34.

246 Conte/ of Va., Inc. (VDT Serv. Auth for CommuniJies in Va. , Fla., Ca. & Haw.), Order & Authorization, File Nos. WPC 6955 eta/.,_ FCC Red_, DA 95-1012 (May 5, 1995, CCB).

247 GTE to Have Video Dialtone Nets in 3 Markets by Year End. Computergram Int'l, May.lO, 1995; Mark Bemiker, GTE's Video Dialtone Gets FCC Green Light, Telemedia Week, May 8, 1995, at 76.

m Bemiker, supra, at 76.

2104 authority were granted to Ameritech in January 1995 for five systems that proposed to pass 23~000 homes in Detroit, Michigan; 501 ,000 homes in Chicago, Illinois; 115,000 homes in Indianapolis, Indiana; 262,000 in homes in Cleveland and Columbus, Ohio; and 146,000 homes in Milwaukee, WISCOnsin. 249 After obtaining these authorizations, Ameritech decided to pursue entry into the MVPD marketplace through stand alone cable systems, rather than VDT systems. 250

95. As noted above, seven of the Section 214 applications for permanent commercial VDT authority that were pending at the time of the 1994 Report have been withdrawn or suspended by the applicant. These seven applications represented a potential market of over 4.3 million homes passed by VDT. The disposition of these applications includes the following:

• On May 24, 1995, Bell Atlantic withdrew two applications for permanent commercial VDT systems that proposed to pass 1.2 million homes in the 9:£. LATA and 2 million homes in the mid-Atlantic area. lSI Bell Atlantic announced that it was considering new technologies and would submit amended applications at a later date, after further evaluating the technologies_m Press reports suggest that in the D.C. and mid-Atlantic regio~ Bell Atlantic plans to use wireless technology pending further development of switched digital video ("SDV") architecture.253 Notwithstanding its withdrawal of two significant VDT proposals, Bell Atlantic is going forward with VDT in other areas, including the construction of a permanent commercial VDT operation in Dover.

• On May 31, 1995, US West requested suspension of further Commission consideration of the five applications it filed in January and

249 Ameritech ~rating Cos. (VDT Serv. Auth. for Communities in fll., Ind. Mich., Ohio & Wis.), Order & Authorization. File No. WPC 6926, 10 FCC Red 4104 (1995).

250 &e infra Appeodix C-2.

lSI E.g., Bell Atlantic Co., Bell Atlantic Moves to DqJloy Full Service Network with Latest Digital Technology (News Release), May 24, 1995; Bell A.tlanlic Aslc.s FCC to Suspend 2 VDT Reviews, Comm. Daily, Apr. 26, 1995, at 1; Bell Atlantic Drops VDT Applications, Comm. Daily, May 25, 1995, at 2.

m Bell Atlanlic Moves to Deploy Full Service Networlc, supra.

253 /d.; Bell Atlantic Piclc.s Wireless Cable Video Solution, Comm. Daily, May 18, 1995, at 4. See the discussion below for more ~ormation on SDV. Infra sec. III.C.

2105 March 1994, which proposed permanent commercial VDT service to 1.1 million homes, including 90,000 homes in Boise, Idaho; 357,000 homes in Denver, Colorado; 357,000 homes in Minneapolis, Minnesota; 162,000 homes in Portland, Oregon; and 160,000 homes in Salt Lake City, Utah.lS4 US West stated that it wanted time to review results of its Omaha, Nebraska market trial and to study new technologies. :m

96. Thus, in addition to Bell Atlantic's Dover VDT system, the available data indicates that four LECs, Bell Atlantic, PacBell, GTE, and NYNEX, are entering or planning to enter the MVPD marketplace as VDT operators in a total of eleven markets that range in size from 63,000 to 490,000 homes passed. These eleven pennanent VDT systems represent potential VDT service to approximately 2.5 million homes passed.

97. LEC Entry Into the MVPD Marlcetplace Through Cable and Wireless Facilities. Several LECs have indicated an interest in providing cable service in their telephone service areas. For example, as noted above, Am.eritech is pursuing entry through construction of cable systems, and has sought and obtained from local cable franchising authorities and the Commission authority to construct cable systems in Plymouth, Canton and Northville Townships in Michigan (near Detroit);l$6 in Columbus, Ohio; and in Glendale Heights, Illinois

lS4 See Application of US West Communications, Inc. (Application for Permanent Commercial VDT Serv. in Denver, Colo.), File No. WPC 6919 (filed Jan. 10, 1994); Applications of US West Communications, Inc. (Application for Permanent Commercial V.DT Serv. in Portland, Or. & Minneapolis, Minn.),File Nos. WPC 6921, WPC 6922 (filed Jan. 19, 1994); Applications of US West CommunicatWns, Inc. (Application for Permanent Commercial VDT Serv. in Boise, Idaho & Salt La/ce City, Utah), File Nos. WPC 6944, WPC 6945 (filed Mar. 16, 1994).

255 See US West Asks FCC to Suspend Action on VDT Applications Pending Test Results, Comm. Daily, June 1, 1995, at 1.

256 On August 14, 1995, the FCC proposed fining Ameritech $200,000 for beginning construction of the Plymouth Township system without prior Section 214 authority. Ameritech Corp., Notice of Apparent Liability for Forfeiture and Order to Show Cause, File No. ENF 95-13, _FCC Red_, FCC 95-356 (Aug. 14, 1995). On August 16, 1995, in compliance with the Notice of Apparent Liability for Forfeiture and Order to Show Cause, . Ameritech sought temporary and permanent Section 214 authorizations to construct, operate, own and maintain cable facilities within Plymouth Township, Michigan. The Common Carrier Bureau granted Ameritech's request for Section 214 temporary authority that same day. Ameritech New Media Enters. (STA to Operate Cable Facilities in Plymouth Twshp., Mich.), Order & Authorization, File No. WPC 7099, _ FCC Red _ , DA 95-1819 {Aug: 16, 1995, CCB). Shortly thereafter, Ameritech appealed, on First Amendment grounds, the Commission's Fourth Report and Order in CC Docket No. 87-266 streamlining the Section 214 procedural requirements for a telephone company seeking authority to construct a (continued... )

2106 (near Chicago).m Ameritech plans to begin offering stand alone cable services in 1996 and to complete its cable systems by early 1997 . ~1 SBC has received Commission approval for a temporary market trial of cable service in Richardson, Texas.ll9 BeliSouth has applied to provide cable service in Daniel Island, South Carolina.* In addition, four smaller LECs - MebCom Telephone Company, Hargray Telephone Company, Inc., Bluffton Telephone Company, and Kingsgate Telephone, Inc. -have obtained authority to provide stand alone cable service, pursuant to the Commission's streamlined Section 214 review.261

ll6( ... continued) cable television system within its service area. See Ameritech Corp. v. FCC, No. 95-1423 (D.C. Cir. filed Aug. 18, 1995); Ameritech Gorp. v. FCC, No. 95-1441 (D.C. Cir. filed Aug. 25, 1995). See also United States Tel. Ass'n v. FCC, No. 95-533-A (E.D. Va. flied July 31, 1995) (also challenging the Section 214 requirement on First Amendment grounds).

157 Ameritech bas received Commission approval of streamlined Section 214 applications to provide stand alone cable service in each of these five areas. See Amtritech New Media Enterps., Order & AuthoriDtion, File No. WPC 7099, _FCC Red_ , DA 95-1819 (Aug. 16, 1995, CCB); Ammtech New Media Enters. (Col11111bu.s, Ohio), Order, File No. WPC 7106, _FCC Red_, DA 95-2067, 1995 WL 574393 (Sept. 28, 1995, CCB); Amerittch New Media Enters. (Plymouth Twshp, CantOn, Plymouth & Northville, Mich. , and Glendale Heights, OL), File Nos. WPC 7099, WPC 7103, WPC 1104, WPC 7105 & WPC 7107, deemed approved, in Federal Communications Commission, Commission Acrion on Common Carrier Bureau Domestic Facilities Applicotions, Report No. D-819-A, Public Notice No. 55918 (Sept. 27, 1995).

lSI See Plymouth Twp., Mich., Becomes First to GranJ Cable Franchise to Ameritech, Comm. Daily, June 29, 1995 at 2; Amtritech 's Coble Plans Hit a Snag in Illinois, Cable World, Sept. 30, 1995, at 1, 76; Ted Hearn, Amerittch Takes Cable Plunge, Multichannel News, Nov. 6, 1995, at 3.

159 Southwestern Bell Video Servs. (Application to Temporarily Provide Cable Service to Richardson, Tex.), File No. WPC 7088, deemed approved, Federal Communications Commission, Commission Action on Common Carrier Bureau Domestic Facilities Applicalions, Report No. 0.812-A, Public Notice No. 55205 {Aug. 9, 1995).

* Bel/South OJ. (Applicationfo~ Authority Pursuant to 47 C.F.R. § 63.01 to Offer Cable Service in Daniel Island, S.C), File No. WPC 7093 (filed July 19, 1995).

261 Set MebCom, Inc. (Application for§ 63.16 Approval for Cable Facilities to Serve Mebane, Alamance and Orange Co., NC), File No. WPC 7068, deemed approved. Federal Communicaions Commision, Commission Action on Common Carrier Bureau Domestic Facilities Applications, Report No. 0.819-A, Public Notice No. 55978 (Sep. 27, 1995); Hargray Ttl. Co. (Application for § 63.16 Approval for Cable Facilities to Serve Portions of Beaufort Co. & Jasper Co., S.C.), File No. WPC 7059, deemed approved, Federal (continued... )

2107 98. Other LECs are pursuing entry into markets for the delivery of video programming through investments in. and acquisitions of. wireless providers. CAl, in which, as noted above, Bell Atlantic and NYNEX have invested. has wireless systems located in both Bell Atlantic's and NYNEX's local telephone service areas.262 Cross Country, which, as noted above, was recently acquired by PacBell, has wireless systems in PacBell's local telephone service area. 263 The extent to which these LEC's plans are intended to be a transitional means of entering the MVPD market pending development of a wireline distribution system, or are intended to be complementary to or a su~stitute for such entry, remains unclear.

99. LEC Entry into Video Programming. In addition to offering video transport services, LECs have also entered into a number of joint ventures to produce and package video programming. As noted in the 1994 Report, several LECs had already entered into 264 ventures with programmers. •

261 ( •••continued) Communications Commission, Common Carrier Network Services Divuion, Public Notice No. 60214 (Oct. 16, 1995); Bluffton Tel. Co. (Application for § 63.16 Approval for Cable Facilities to Serve Portions of Beaufort Co., S.C.), File No. WPC 7058, deemed approved Federal Communications Commission, Common Carrier Bureau Network Services Division, Public Notice No. 60214 (Oct. 16, 1995); Kingsgate fil. Co. (Appficationfor § 63.16 Approval for Cable Facilities to Serve Harris Co., TeX.), File No. WPC 7118, deemed approved, Federal Communications Commission, Common Carrier Bureau Network Services Divuion, Public Notice No. 60287 (Oct. 20, 1995).

262 CAl's wireless systems located in Bell Atlantic's local telephone service area include Philadelphia. Washington, D.C., Pittsburgh, Baltimore and Norfolk/Virginia Beach. Bell Atlantic would be able to pass four million households in those markets through CAl's wireless systems. CAl's wireless systems located in NYNEX' s local telephone service area include New York, Boston, Long Island, Buffalo, Providence, Albany and Syracuse. In addition, CAl has wireless systems in Cleveland, Hartford, Rochester, Stockton/Modesto and Bakersfield. See CAI W'treless Sy~ Inc., Prospectus 5 (Sept. 21, 1995). For more detail on the CAI-NYNEX/Bell Atlantic transaction, see the discussion above. Supra sec. ll.C.1.

263 See Pacific Telesis Group, Pacific Telesu Becomes Nation's First Telco to Offer Wireless Cable Television (News Release). July 25, 1995. See also supra sec. ll.C.1; John M. Higgins, PacTel Finds Video Plans Tao Ambitious, Multichannel News, Oct. 2, 1995, at 1, · 52. PacBell reportedly expects to reach five million homes with wireless cable by 1997. Leslie Cauley, PacTel Puts Off Interactive-Video Plans, Concentrating Instead on Wireless Cable, Wall St. J., Sept. 28, 1995, at A3.

264 1994 Report. 9 FCC Red at 7498, 107 n.305. In September 1993, US West inv~d $2.5 billion in Time Warner Entertainment Company L.P. According to US West, the alliance is to provide information services, telephone, and entertainm~nt over Time Warner' s cable systems in 29 markets outside of U S West's telephone service area. US (continued... )

2108 100. In October 1994, Bell Atlantic, NYNE~ and PacTel announced the formation of a joint venture, since named Tete-TV, to provide interactive video networks. One part of the venture will produce content for the LEC's distribution facilities and the other will develop technical systems.265 In April 1995, Ameritech, BeUSouth, and SBC announced an alliance with Disney Corporation to develop and package video programming and interactive services.266 On August 10, 1995, GTE joined this group.267

3. Conclusions

101 . When the 1994 Repon was released, there bad been no actual entry by LECs, beyond VDT trials, into multichannel video programming distribution markets in their local telephone service areas. However, large scale wire-based entry by LECs in the near tenn, primarily through the construction of VDT s)'stems, was widely anticipated. As noted in the 1994 Report, if granted and constructed, the VDT applications pending at that time would have allowed service to approximately 8.5 million houses, which is nearly ten percent of the nation's television households. 261

102. Since the 1994 Report, some LECs appear to be reassessing their options for entry into the MVPD marketplace within their local telephone service areas. While some LECs intend to pursue construction and operation of permanent VDT systems, other LECs are also considering wireless technology and stand alone cable systems. It appears that, in the aggregate, currently authorized VDT facilities of foW' LECs (Bell Atlantic,~ GTE, and PacBeU) would allow service to approximately 2.5 million homes in eleven markets. However, considering all modes of entry into MVPD markets, LEC plans may have not declined in terms of markets entered and the number of homes passed. At least three LECs (PacBell, NYNEX and Bell Atlantic) appear to have increased their respective overall number of homes passed by adding wireless technologies to their entry plans. Other LECs (including US West, SBC, Bell South, Ameritech and several smaller LECs) have entered, or are

264 ( ... continued) West 1994 Annual Report, 10 (1994). In late 1993, NYNEX invested $1.2 billion in Viacom with the aim of jointly developing video on demand and interactive services. Jennifer L. Schenker, NYNEX Raised Profile, CMP, Mar. 20, 1995, at 26--28.

w Bell Atlmtic, Bell Atlantic, NYNEX. and Pacific Telesis Parmer to Create Next Generation of HoWN Enlertai111Mnt and Information Services; Creative Artists Agency Allied with Telephorw Companies (News Release) Oct. 31, 1994.

266 SBC Communications Inc., Disney. Ameritech. Bel/South and SBC Launch Home Entert~nt Ptli'IMrship (News Release) April 18, 1995.

267 Ameritech Corp., GTE To Join Disney, A.meritech. Bel/South and SBC in Home Entertainment Ptl1'1Mrship (News Release) Aug. 10, 1995.

261 1994 Report, 9 FCC Red at 7496 ~ 104.

2109 entering, MVPD markets as cable operators.

103. Thus, an examination of LEC activity since the 1994 Report makes it clear that the state of LEC entry into the MVPD marketplace is continuing to evolve, both in terms of the mode and timing of entry. The pace of technological change may affect the speed of LEC entry into the MVPD marketplace, irrespective of which mode of entry the LEC chooses. Both U S West and Bell Atlantic cited the need to further evaluate new technologies as a reason for asking the Commission to suspend review of certain Section 214 applications. 269 GTE and Bell Atlantic acknowledge in their comments a reluctance to commit to a technology that may become obsolete in the near future.270 Moreover, as was the case in 1994, unresolved issues remain that affect the ability of LECs to offer delivered video programming:271 (1) the Commission's regulatory framework for VDT is still developing; telecommunications reform legislation is still: pending before Congress;272 and (2) the Supreme Court is expected to decide the constitutionality of the statutory cable-telco cross-ownership ban sometime next year.273

E. Satellite Master Antenna Television Systems

104. SMATV systems are MVPDs that serve residential, multiple dwelling units ("MDUs"), and various other buildings and complexes. A SMATV system generally offers the same type of programming as a cable system, and the operation of a SMATV system largely resembles that of a cable system - one or more satellite dishes and antennas receive the programming signals; equipment combines, amplifies and processes the signals; and wires distribute the programming to individual dwelling units. By statute, however, a SMATV system is defined by way of an exception to the definition of a cable system. 274 A system is a cable system if "closed transmission paths" (i.e., wires) are used: (1) to serve buildings that are not commonly owned, controlled, or managed, or (2) to cross a public right-of-way. To qualify as a SMATV system, and not be subject to cable system regulatio~ neither of the two statutorily defined operational elements for a cable system may exist within the system.27 s

269 See supra· notes 240, 249.

270 GTE Comments at 9-10; Bell Atlantic Comments at 13·14.

271 1994 Report, 9 FCC Red at 7504-05 1 120.

272 See H.R. 1555, 104th Cong., 1st Sess. § 201 (1995); S. 652, 104th Cong., 1st Sess. § 202 (1995).

273 United States v. Chesapeake & Potomac Tel. Co., No. 94-1893 (filed Jun. 26, 1995).

274 Communications Act§ 602(7), 47 U.S.C. § 522(7).

275 See Implementation of Sections 11 & 1J of the 1992 Cable Act (Horizontal & Vertical (continued ... )

2110 105. A typical SMATV system is an unfranchised, stand alone system that serves a single building or complex, or a small nmnber of buildings or complexes in relatively close proximity to each other. For this reason, SMATV systems are sometimes referred to as • "private cable systemS." Recently, SMATV operators have begun using 18 GHz microwave facilities to link MD Us that are separately owned or separated by public rights-of. way. 276 By using microwave equipment instead of coaxial cable to link their facilities, SMA TV operators avoid being regulated as cable operators. This permits them to realize efficiencies associated with using some of the same headend ~pment to serve more subscribers.

106. Relying upon industry sources, the 1994 Report concluded that there were approximately 3000 to 4000 SMATV systems operating nationwide, and approximately one million SMA TV subscribers as of August 15, 1994.277 Recently, however, some industry sources have reassessed estimates of SMATV subscribership over the past few years and concluded that the estimates should be revised downward. Thus, rather than the estimated one million subscribers in 1994, and 1.09 million this year,271 the current estimates are 850,000 SMATV subscribers in 1994, and 950,000 in 1995.m Both sets of estimates, however, indicate continued SMATV subscriber growth.

107 . One analyst representing the industry suggests that particular markets, such as those in Dallas, Texas, Phoenix, Arizona and Florida, are experiencing SMATV system growth, and that this growth bas spurred interest by firms such as General Electric Capital, Videotron, and MCI in investing in the SMATV markCt210 SMA1V system growth may also be due in part to the fact that SMATV operators may be able to deliver video programming

27 '(•• • continued) Ownership Limits, Cross·Ownership LimitaJions and Anti· Trafficking Provisions), Memorandum Opinion & Order on Reconsideration of the First Report & Order, MM Docket No. 92·264, 10 FCC Red 4654, 4659, 12 (1995) ("SMATV·Cable Cross·Ownership Recon.").

276 See Amendnrent of Pan 94 ofthe Commission's Rules to Permit Private Video Distribution Systems ofYIMo Entertainment Access to the 18 GHz Band, Report & Order, PR Docket No. 90-S, 6 FCC Red 1270 (1991).

277 1994 Report, 9 FCC Red at 7488-89, 92.

271 Paul Kagan Associates, Inc., Mar/cering New Media, Cable World, Feb. 20, 1995. See also MPAA Comments at ~7 (quoting Paul Kagan article); HBO Reply Comments at 2.

279 Telephone conversation on October 19, 1995 between Commission staff and John Mansell. Senior Research Analyst with Paul Kagan Associates, Inc. See also infra Appendix G, Table 1.

210 David Dea, The Race is On!, Priv~ Cable & Wireless Cable. Aug. 1995. at 15-17.

2111 for less cost than cable operators. 211 Liberty Cable, for example, states that its video services are attractive to subscribers because it does not charge for additional outlets and its services are offered at half the price charged by the incumbent cable operator. 212

108. A few current examples of SMATV systems follow. Interactive Cable Systems, Inc. provides SMATV service to 700 properties, passes 230,000 households and serves 80,000 retail subscribers.213 OpTel, Inc. ("OpTel") provides SMATV service to more than 350 properties, passes more than 110,000 households, and serves more than 50,000 subscribers in Los Angeles, San Diego, Houston, Phoenix and the Dallas-Ft. Worth metropolitan areas.214 Liberty Cable serves approximately 28,000 subscribers at approximately 2 150 sites in the New York metropolitan area. " Cable Plus bas approximately 140 SMA TV systems in the western United States, passing about 45,500 homes and serving about 18,000 retail subscribers. 216

109. The Motion Picture Association of America, Inc. ("MPAA") states that the Commission's decision this year to permit cable operators to acquire SMATV systems within their existing service territories removed a significant banier to entry into the SMATV business.217 Commenters in that proceeding claimed that potential SMATV operators were hesitant to enter the SMATV business because they did not have the ability to recoup sunk costs by selling their SMATV systems to locally-franchised cable operators when that operator was the only potential buyer.211 In eliminating the prohibition against cable operators buying SMATV systems operating in their existing franchise ~ the Commission noted that one of the benefits of this decision might be to provide an exit strategy for SMATV operators;

211 See Dea, supra, at 15-17.

212 Liberty Cable Comments at 4-5.

213 Paul Kagan Assoc~ Inc., Leading SMA TV Operators, Private Cable Investor, Dec. 31, 1994, at 5. See also infra Appendix F.

214 /d.

w Liberty Cable Comments at 2. Liberty Cable also states that it "provides service to a handful ofMDUs located in Northern.New Jersey." Liberty Cable Comments at 4 n.9. See also Liberty Cable Co., Inc. v. City of New York, 60 F.3d 961 (2nd Cir. 1995). Kagan estimated that Liberty Cable served approximately 175 properties and passed approximately 30,000 units in December 1994. Infra Appendix F.

216 Paul Kagan Associates, Inc., Leading SMA TV Operators, Private Cable Investor, Dec. 31, 1994, at 5. See also infra Appendix F.

217 MPAA Comments at 6--7.

211 /d. (footnote omitted).

2112 however, the economic data supporting this contention was inconclusive.219

110. SMATV operators raise concerns about cable operators' use of exclusive contracts and certain zoning restrictions. Liberty Cable and OpTel argue that cable operators are abusing their market power by coercing MDU owners into perpetual exclusive contracts that foreclose competition from new market entrants.290 WCAI argues that cable operators have begun to pre-wire residential units for cable service at no charge to the developer in exchange for deed covenants and other restrictions forever barring the homeowner from installing rooftop antennas.291 These commenters urge Congress or the Commission to take action to curb these alleged abuses.

111. As for the future, SMATV operators, like other MVPDs, are looking to increase their channel capacity though digital tecbnology.292 At the same time, SMA TV operators are trying to keep costs down by connecting systems through 18 GHz microwave facilities. 293 SMATV operators are also penetrating new markets such as colleges and universities. 294 In addition, SMA TV operators are trying to differentiate themselves from cable operators by offering security services and intra-MDU communications (or private 29 telephone) services together with multichannel video programming services. '

F. Broadcast Television Semce

112. In asseuing the competitive position of broadcast television, it is important to distinguish between broadcast television as a source of programming that is an input to cable service and broadcast television as a transmission medium. As a source of programming,

219 SMA.TV-Cable Cross-Ownership Recon.. 10 FCC Red at 46661 31 .

290 Liberty Cable Comments at 22; OpTel Comments at 3; see also Bell Atlantic Comments at 11-12.

291 WCAI Comments at 27-28.

292 NCfA Comments at 20-21. See also C. Thomas Veilleux, Home Furnishings Newspaper (HFN), Mar. 20, 1995, at 2 (reporting that Thomson Consumer Electronics has announced that it is testing a version of the DSS system for use in MDUs).

293 Paul Kagan Associates, Resurgence to 18 Ghz Microwave Technology, Private Cable Investor, Sept. 30, 1995, at 3-4.

294 Paul Kagan Assoc~ Inc~ Private Cable Graduates To A New Campus. Private Cable Investor, June 30, 1995, at 4.

m Telephone conversation on January 10, 1994 between Commission staff and Deborah Costlow, Esq., Winston&. Strawn, who represents several SMATV and MMDS system operators.

2113 broadcast television continues to be the most watched source of video programming. Between 1984 and 1994, the number of broadcast signals available to the public increased by 32%. 296 In the last year, the number of operating commercial and noncommercial television stations increased from 1,5 18 to 1,542. 297 In addition, two new networks, United Paramount's UPN and Warner Brothers' WB, commenced program distribution in the 1994-95 television season.

113. In the 1994-95 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 66% share of prime time viewing among all television households; UPN and WB achieved a combined 9% share of prime time viewing. 298 The most recent data available for households subscribing to cable service indicates that, even in cable homes, programming originated on local broadcast television stations accounted for a combined 64% share of all day viewing in the 1993-94 television season, while non-premium cable networks and pay cable services achieved a combined 45% share of all day viewing. 299 It appears that broadcast television service continues to satisfy the demand for video programming for a significant number of viewers. Indeed, the importance of broadcast television as a source of programming is reflected in the fact that the inability of certain distribution technologies (e.g., DBS) to carry local stations may affect their competitiveness.

114. Moreover, broadcasting continues to be a profitable business, as total advertising revenues reached $13.5 billion in the half of 1995.300 Advertising revenues for the four major networks alone reached $6.2 billion in the first half of 1995, an increase of 3% over the first half of 1994.301 In 1994, advertising revenues for the- four major networks

296 R.R Bowker, A Reed Ref. Pub. Co., Broadcasting & Cable Yearbook 1994, C-218. In 1984, there were 1,180 commercial and noncommercial television stations, and in 1994, there were 1,520. Federal Communications Commission, Broadcast Station Totals as of September, 1984, FCC News Release (Oct 12, 1984). Federal Communications Commission, Broadcast Stations Totals as ofSeptember 30, 1994, FCC News Release (Oct. 12, 1994).

297 Federal Comm.. Comm'n, Broadcast Station Totals as ofAugust, 1995, FCC News Release (Sept 8, J995) .

291 People's Choice, Broadcasting & Cable, Sept 25, 1995, at 34. These figures are provided by Nielsen Media Research.

299 National Cable Television AssOciation, Viewing Shares Broadcast Years 1983184- 1993/94, Cable Television Developments, Spring 1995, at 5 (citing A.C. Nielsen Co. statistics). Reported audience shares exceed 1000/o due to multiple set viewing.

300 Steve McClellan, Broadcast TV Ads Top $13.5 Billion in Jst Half, Broadcasting & Cable, Sept 4, 1995, at 12. The Television Bureau of Advertising supplied this data, which is based on information gathered from the Competitive Media Reporting's MediaWatch Service.

301 Id This figure ~ts sales for ABC, CBS, Fox, and NBC.

2114 reached approximately $10.9 billion, while cable programming networks received an estimated $2.3 billion in advertising revenues.JOl

115. On the other hand, as 96% of the nation's television households are currently passed by cable and basic cable subscnDership continues to escalate,303 the use of the broadcast spectrum as a transmission medium for direct video program delivery has clearly declined. Approximately two thirds of the nation's 95.9 million television households watch local broadcast channels through the facilities of an MVPD, and only one third of the households rely on over-the-air transmissions.~ Accordingly, we continue to believe, as in the 1994 Report, that broadcast television as a transmission medium is insufficient to constrain 30 cable market power. "

116. Several recent developments and technological innovations have the potential to affect the constraining effect of broadcast television as a gansmission medium on cable operator conduct. First, the Commission has undertaken a series of proceedings aimed at removing existing regulations that may restrain more efficient and effective use of broadcasting as a video programming and transmission medium, which may prevent a rational, more efficient organization of the broadcast industry.306 Secon~ advances in broadcast technology, such as digital compression and advanced television, could pennit multiple programs to be broadcast over a single channel, thereby expanding the number of broadcast

302 See Trends in Advertising Volume, A TVB Research Report (Television Bmeau of Advenising), May 1995, at "U.S. Advertising Volume" (citing McCann-Erickson, Inc. statistics). McCann-Erickson's worldwide United States advertising figures represent all expenditures by advertisers- national, local, private individuals, etc., advertising in the United States.

303 Of the 91.6 million homes cUITently passed by cable, 59.7 million subscribed to basic cable services. Supra sec. II.A.

304 Infra Appendix 0, Table 1.

305 1994 Report, 9 FCC Red at 7494, 101.

306 E.g., Review of the Prime Time Access Rule, Report & Order, MM Docket No. 94-123, _FCC Red__, FCC 95-314 (July 31, 1995), summarized a1 60 Fed. Reg. 44773 (Aug. 29, 1995); Review ofthe Syndication & Financial Interest Rules, Report & Order, MM Docket No. 95-39, _ FCC Red __, FCC 95-382 (Sep. 6, 1995), summarized a1 60 Fed. Reg. 48907 (Sep. 21, 1995); Amendment of Part 73 of the Commission's Rules Concerning the Filing of Television Network Affiliation Contracts, Notice of Proposed Rulemaking, MM Docket No. 95-40, 10 FCC~ 5611 (1995); Review of the Commission's Regulations Governing Broadcast Television Advertising, Notice of Proposed Rulemaking, MM Docket No. 95-90, _FCC Red__, FCC 95-226 (June 14, 1995), summarized at 60 Fed. Reg. 34959 (July 5, 1995); Review of the Commission's Regulations Governing Television Broadcasting, Further Notice of Proposed Rulemalcing, ~Docket 91-221, 10 FCC Red 3524 (1995).

2115 video signals available in a particular market and strengthening broadcast television as a competitor to cable. Advanced television could also provide a higher quality signal and improve reception in those areas where broadcast television is otherwise unavailable. Depending upon Commission regulatory approval, digital technology could allow each broadcast licensee to send several streams of video programming simultaneously, as well as a mixture of video and non-video services.307 This technology could also enable the broadcaster to send a mixture of subscription and non-subscription services.301 The spectrum needed for the transition to digital television could be obtained from the spectrum currently allocated to broadcasting. 309 In order to facilitate this transition, the Commission is considering the appropriate regulatory framework. 310 However, because advanced television is in its initial planning phase, it is premature to determine its competitive effect in the cable industry.

117. Low Power Television. In the:1994 Report, the Commission noted that low power television ("LPTV") stations could offer multichannel video programming services on a subscription basis.311 At that time, the Commission was aware of at least one LPTV station providing multichannel service in an uncabled rural area of Minnesota.312 Construction permits were also issued to a single applicant for another possible LPTV site in Selma, Alabama.313 On the other hand, the allocation of spectrum use for new LPTV stations was frozen for service within 100 miles of the thirty-six largest United States markets in order to preserve spectrum availability for the implementation of advanced television systems. 314 At

307 See Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, Fourth Further Notice of Proposed Rulemaking and Third Notice of Inquiry, MM Docket No. 87-268, _FCC Red_, FCC 95-315 (Aug. 9, 1995), summarized at 60 Fed. Reg. 42130 (Aug. 15, 1995) ("Fourth Advanced Television NPRM").

301 ld

309 See Advanced Television Systems & Their Impact Upon the Existing Television Broadcast Service~ Tentative Decision & Further Notice of Inquiry, MM Docket No. 87-268, 3 FCC Red 6520 (1988).

31° FDUTth Advanced Television NPRM, _FCC Red_, FCC 95-315.

311 1994 Report, 9 FCC Red at 7507, 127. See also 47 C.F.R. § 73.642(a)(2).

312 1994 Report, 9 FCC Red at 7508 '( 129.

313 ld

314 Notice of Limited Low Power Televisionil'elevision Translator Filing Window from April], 1994 through Apri/15, 1995, Public Notice (MMB Mar. 3, 1994). We note that the application freeze placed on new LP'IV stations within 100 miles of the thirty-six largest United States cities remains in effect

2116 present, we are unaware of any new LPTV stations providing multichannel services,315 and thus, they do not seem to have a significant competitive impact on the market

G. Other Actual and Potential Distributon

118. In this section, we address several other actual or potential distributors of video programming and distribution technologies that may affect competition.

1. Ekctrk UtilitUs

119. Electric utility companies may be a potential source for the delivery of video programming.316 The entry of electric utilities into the video programming market is currently limited by law.317 However, if Section 205 df S. 652, the telecommunications bill passed by the Senate this year, is enacted as part of a new telecommunications law, the number of 311 electric utilities permitted to provide video service could increase substantially. That provision would permit registered public utility holding companies to diversify into telecommunications and other industries.

120. An electric utility could either provide video service either directly to consumers or serve as a "pipeline" by offering its facilities to video program providers. Such companies already have incurred substantial costs to deploy a network that reaches nearly every household in the co~ 19 ~according to one commenter; they have the financial resources and existing rights-of-way (e.g., pole attaduncnts) needed to enter the video marketplace. m Most major utilities already have fiber optic lines for controlling power distribution, and need only additional coaxial cable or tiber to the home to offer competitive wideband telecommunications services.32 1 Electric utilities have been experimenting with advanced communications technologies, including demand-side management programs that use

31s We note that Segue Services, a low power television engineering and consulting firm, is currently installing and testing equipment for a 17 channel LPTV system. which will provide subscription type service in Nebraska. See Segue Installs LPTV System In Nebraska, Private Cable & Wireless Cable, Aug. 1995, at 54.

316 Electric utilities are defined as investor-owned utiliti~ municipal utility systems, and exempt public utility holding companies. See 15 U.S.C. § 79c.

317 15 u.s.c. § 79i.

311 S. 652, 104th Cong., 1st Sess. § 205 (1995).

319 NO/, 10 FCC Red at 7817 , 62; MPAA Comments at 8.

320 Next Level Communications Reply Comments at 10.

311 Utilities Eye Home Mia., Electronic Buyers News, Feb. 27, 1995, at 20.

2117 two-way communications with customers and fiber optic cable that can carry video programming.322 As discussed above, some municipal electric utility companies are actively engaged in or contemplating overbuilding,323 and have formed joint ventures with cable and telephone companies to provide video service.324 Over the Jast year, additional plans have been announced by a few electric companies intending to enter the market for communications services.325 As stated previously, there is some interest by electric utilities in the provision of video service, although there is no evidence of the extent of their potential entry at this time.

2. Vuleo Cassette Recorders

121 . Video cassette recorders ("VCRs") pennit viewers to watch television programs at times other than their scheduled times, and allow viewers to view pre-recorded tapes. Approximately 85% of all homes own at least one VCR, about the same share of households as a year ago.326 VCRs are used primarily for viewing pre-recorded video cassettes.327 Although VCRs are not MVPDs, the Commission has recognized that VCRs have at least some effect on cable operator conduct. Previously, the Commission determined that VCRs are best considered competitors to premium and pay-per-view services provided by cable operators because both offer movies without commercial interruptions.321 The price charged by video stores for movie rentals appears to have a constraining effect on the charge for pay-

322 MPAA Comments at 8-9. For example, Detroit Edison reportedly is planning to add telephone service and interactive video over the same equipment it intends to use for interactive control and monitoring of electricity in the home. Utilities Eye Home Mkt.• supra, at 20. .

323 See supra sec. ll.A See also 1994 Report, 9 FCC Red at 7508-09 11 131-33.

324 See, e.g., Industry Giants Push Into Energy Management Market, Comm. Daily, Feb. 28, 1995, at 8.

325 Utilities EYe HorM Mb., supra, at 20; Daniel J. Murphy, The Roadblocks to Competition, Deregulating Power Monopolies a Slow Process, Investor's Bus. Daily, May 11, 1995, at 1.

326 1994 Report, 9 FCC Red at 75.10 1 135; HBO Comments at 20. It is reported that there were approximately 115 million VCRs in use in 1994, an indication that many households have multiple VCRs. Warren Publishing, Inc., Television & Cable Factbook I-3 (1995).

327 HBO Comments at 20.

321 See Florence Setzer & Jonathan Levy, Broadcast Television in a Multichannel Marketplace 108 (Federal Communications Commission. Office of Plans ·and Policy, OPP Working Paper 26, June. 1991).

2118 per-view movies from cable operators.329 According to industry analysts, consumers are willing to pay a premium for the convenience_ of pay-per-view service, but the differential between home video rental and pay-per-view prices cannot be too large.llO The average pay­ per-view movie cost $4.25 in 1994, somewhat higher than the average cost of renting a movie from a video stOre.m Currently, the average rental fee for all movies is $2.47 and the average for new movies, most comparable to the offerings of the pay-per-view services, is S2.70.m

122. Digital video discs ("DVDs") and digital VCRs are expected to be available by 1996. DVDs feature sharper digital pictur~ a vast capacity for audio and data storage, and greater convenience and durability than videotape, although they cannot be used for home recording. Digital VCR tapes are expected to have more than two times the recording capacity of normal tapes. It is predicted that: the availability of this technology will enhance competition as consumers will have access to programming not available over-the-air or through traditional cable service.333 However, as with the introduction of conventional VCRs, these new home video technologies may not materially penetrate the market until their prices 3 drop from the expected initial level of $1,000 to approximately $500. ,. On this basis, we expect that VCRs will continue to have some constraining effect for some consumers on the pay-per-view and premium movie services offered by cable systems, even though VCRs cannot provide the full range of services offered by cable systems generally.

123. The interactive video and data service ("'VDSj is a point-to-multipoint, multipoint-to-point, short distance communications service in which licensees may provide information, or services to individual subscribers at fixed locations within a service area, and subscribers may provide responses.335 This radio based interactive service is available for a variety of public uses that may be delivered by, and coordinated with. broadcast television,

329 Veronis, Suhler & Assocs., supra, at 166-67.

330 ld. at 166.

Jll ld at 167.

m Video Software Dealers Association.

m HBO Comments at 21.

l :W Veronis, Suhler & Assocs., supra, at 181; Lawrence B. Johnson, Videotapes's Best Years May Lie in the Ft1111Te, New York Times, Aug. 20, 1995, Section 2, at 21.

335 47 C.F.R. § 95.803(a).

2119 cable televisio~ MMDS, DBS, or any other future television delivery technology. 336 By itself, however, the service is not capable of delivering voice or full-motion video. Among the types of services that IVDS licensees may offer, in conjunction with video or data delivery systems, are polls, educational classes, home banking, and home shopping. 337 The Commission is also considering a proposal to allow IVDS licensees to provide ancillary mobile service to subscribers within their service area. 331

124. The Commission awarded 18 IVDS licenses by a lottery held September 15, 1993. Pursuant to new radio spectrum auction authority, the Commission· auctioned an additional 594 licenses on July 28 and 29, 1994.339 Each license permits service within a specified service area, which is equivalent to a cellular radio service area. Under the rules, an IVDS licensee must make service available within one year to at least ten percent of the population or area that it is licensed to serve.: This condition has been waived for 17 of the 18 finns awarded licenses through the lottery process, and the Commission is currently considering a request by a number of auction winners that the requirement be eliminated. l

4. lntemet

125. The Internet is a world-wide network of computer netWorks operated by governmental, educational, and commercial entities, including entertainment £inns. The interconnected computer networks use a common communications protocol, TCPIIP (Transmission Control Protocol/Internet Protocol), which is essentially a common language for interoperation of computer networks that might usc a variety of local protocols.l

336 AmendmenJ ofPart 0, 1, 2, & 95 of the Commission 's Rules to Provide /nJeractive Video & Data Services, Report & Order, GEN Docket No. 91-2, 7 FCC Red 1630 (1992).

337 47 C.F.R § 95.805.

331 Amendment of Part 95 of the Commission's Rules to Allow /nJeractive Video & Data Service Licensees to Provide Service to Subscribers, Notice of Proposed Rule Making, WT Docket No. 95-47, _FCC Red_, F<;:C 95-158 (May 5, 1995), summarized at 60 Fed. Reg. 25193 (May 11, 1995).

339 47 u.s.c. § 309Q). 340 Amendment of Part 95 of the Commission 's Rules to Modify Construction RequiremenJs for /nJeractive Video and Data (IVDS) Licenses, Notice of Proposed Rule MakiJtg, WT Docket No. 95-131, 10 FCC Red 8700 (1995).

341 Jeffrey K. MacKic-Mason & Hal R. Varian, Economic FAQs About the Internet, Internet Address: http: //gopher . econ.tsa.~ch . edu/FAQsiFAQs . html (June 1995).

2120 126. The portion of the Internet in the United States generally has three levels - local area netWOrks, regional (mid-level) networks, and backbones. Until recently, NSFnet was the primary backbone for this portion of the Internet, but on April 30, 1995, NSFnet ceased operation and traffic in the United States is now carried on several privately operated backbones. These backbones generally use fiber optic facilities and, by the swnmer of 1995, 2 there were at least fourteen national and super-regional high-speed TCP/IP networks. )4 MCI. which assisted in operating the original NSFnet, is one of the largest carriers of Internet traffic in this country. but the market includes firms such as Sprint, Altemet, PSlnet and UUNet l-4l

127. Currently, the main categories of Internet activities are: (1) electronic mail; (2) interactive "chats"; (3) infonnation retrieval; (4) remote program execution; and (5) user groups. 344 As bandwidth increases, these networks may increasingly distribute more complex data types, such as voice and video, as well as more traditi.f>nal data. The functionalities of these networks can be expected to become increasingly varied and to include home shopping and banking, video-on-demand, and video conferencing.345 Currently, Internet users generally rely upon existing communications facilities to access and use the network, such as standard telephone lines, private lines, integrated services digital network ("ISDN") lines, wireless facilities, or coaxial cable. As a result, the Internet is not a separate local distribution network except for extremely high volume users who access the network via private lines. Cable access to the Internet currently is being tested,346 and tllrough the Digital Audio-Visual Council ("DAVIC" ) the cable industry is working to develop a standard for cable modem and Internet access technology.347 Server software that will enable the delivery of live, real-time audio, and video over the Internet is becoming available.l4l Consumer and business demand for the commercial, academic, govemmen~ and entertainment offerings is likely to grow as

342 /d.

).4) ld

344 See, e.g., John R. Levine & Carol Baroudi, Internet for Dummies 7-11 (1993); Mark Gibbs & Richard Smith, NavigaJing the Internet 1-5, 13-14 (1993).

3-4s Price Waterhouse, Technology Forecasr: Entertainment, Media, and Communications 235, 248 (1995).

346 See, e.g., Mark Bemiker, Microsoft Sees 'Broadcast PC' Evolving Soon, Broadcasting & Cable, Sept. 8, 1995, at 60; Mark Berniker, TCI's @Home Teams with Netscape for Internet Access, Broadcasting &: Cable, Oct 2, 1995, at 56.

341 Set, t .g., lnttroperability, Planning for Next Year Domi1Ulles DA VIC Meetings in L.A., Comm. Daily, Sept. 1995, at 2; Toby Scot, DA VIC Releases First Standards, Broadcasting & Cable, Oct. 2, at 53-54.

341 Richard Karpinski, Coming: Web TV, Interactive Age, July 31, 1995, at 1.

2121 the networks connected to the Internet and their capabilities increase. 349 Being an open networ~ the Internet has the potential to aff~ the video marketplace, perhaps significantly. However, it appears too early to assess its impact m. MARKET STRUCTURE CONDmONS AFFECI'ING COMPETITION

A. Horizontal Issues in Markets for the Delivery of Video Programming

128. In this section of the 1995' Report, we examine several issues concerning rivalry in markets for the delivery of video programming. First, we discuss the market definition that we used in the 1994 Report, and have used again this year. We also consider the extent of concentration among MVPDs in local markets, and the nature of competition among MVPDs. Finally, we document increasing consolidation nationally and regionally among cable MSOs (and other MVPDs) over the past year, and the potential effects of such increased consolidation on rivalry in local markets for the delivery of video programming.

1. Market DqiniliiJn

129. To analyze rivalry among providers of video programming services, it is necessary to define the relevant product and geographic markets. In the NO/, we invited comment on our use last year of the 1992 Cable Act's. definition of "multichannel video programming service" as a starting point for the definition of the relevant product. 350 Although few commenters directly addressed this issue, most commenters generally relied on the same definition of the relevant product market. m Examples of comments concerning the appropriate product definition include DIRECTV' s approval of the Commission's inclusion of all MVPDs in the relevant product market,352 and HBO's assertion that subscribers can create their own service comparable to cable by combining over-the.air broadcast service with service from a non-cable MVPD and "premium" programming obtained from a non-cable MVPD or a VCR353 Accordingly, we reaffirm here our determination to use definition of an MVPD in the 1992 Cable Act as a starting point, and have considered all reasonable substitutes for the video programming services generally offered by cable systems and other MVPDs.

130. We also sought comment in the NO/ on the relevant geographic market-- the area in which buyers can obtain alternative sources of supply, or in which there are sellers

349 Price Waterhouse, supra, at 235.

l$0 1994 Report. 9 FCC Red at 7468 1 49.

351 NCTA Comments at 5; Time Warner Comments at 5; HBO Comments at 1-2.

352 DIRECTV Reply Comments at 5.

m HBO Comments at 21-22.

2122 who act to restrain the prices charged to those buyers.354 A buyer of multichannel video service may select only from among the firms. distributing multichannel video programming in a panicular area- the subscn"ber cannot turn to other providers whose services are not available in an area. Accordingly, commenters generally agree that the relevant geographic market is the local franchise area. 355 and we continue to believe that the relevant geographic market in which MVPDs compete is essentially local in nature.

2. ConcentTation in LoCDI Markds

131 . A firm with market power can maintain prices above the level that would prevail if the market were competitive, and the exercise of market power tends to produce a wealth transfer from buyers to sellers.356 Sellers with market power can lessen competition in such areas as product quality, innovation and;service. Market power among buyers of a product, referred to as monopsony power, can depress the price of the product below competitive levels, thereby reducing output below the optimal level. When potential entrants are unlikely to be able to respond quickly to an exercise of market power, the degree of concentration among competitors, which is referred to as horizontal concentration. can have a significant effect on rivalry aacl-market performance. Market concentration reflects the nwnbcr of firms a market and their respective market shares, and is particularly relevant where, as here, a market is characterized by substantial barriers that delay competitive entry.351 In general, as markets become increasingly~ firms have increased opportunities to coordinate their conduct tacitly or overtly, limit competition. and increase their rates of return. lSI

132. Last year, we found that local markets for providing multichannel video programming were highly concentrated, and that most consumers could not choose the services of an MVPD other than the local cable operator.359 Although providers of DBS and MMDS services have increased their subscribcrship since last year, as shown in Table 1 of

354 United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 359 (1963); Common Carrier Services, 95 F.C.G. 2d 554, 573 (1983), rev 'd on other grounds, AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992), cert. denied, 113 S. Ct. 3020 (1993).

m See, e.g., Time Warner Comments at 13-15.

356 United States Depattment of Justice & Federal Trade Commission. Merger Guidelines, 1.41, 4 Trade Reg. Rep. (CCH), 13,104, at 20,569-3 (1992) ("Merger Guidelines").

m E.g. infra. sec. IV.A.3; 1994 Report, 9 FCC Red at 7623 App. H.

351 E.g., Merger Guidelines 12, 4 Trade Reg. Rep. (CCH) 13,104, at 20,573-6 to 20,573-8; Revision of Rules and Policies for the Direct Broadcast Satellite Service, IB Docket No. 95-168, _ FCC Red ~ FCC 95-443 (Oct. 30, 1995).

359 1994 Report, 9 FCC Red at 7541 , 201.

2123 Appendix G, the combined national market share of non-cable MVPDs at the end of September 1995 was slightly less than nine ~cent. Thus, on average, we expect that most local markets as measured by current subscribership continue to remain highly concentrated. If we used total number of subscribers as a measure of market share, we could calculate the Herfmdahl-Hirscbman Index ("HHI") for the market, which is a standard measure of horizontal concentration in an industry that is calculated by summing the squares of the ftrms' percentage shares of the market.360 The United States Department of Justice and the Federal Trade Commission generally regard a market with an HHI below 1000 as "unconcentrated," a market between 1000-1800 as "moderately concentrated." and a market above 1800 as "highly concentrated. "361 Using total numbers of subscribers as a measure of market share, the average HHI in local markets for video programming would be over 8650, or more than four times as high as the threshold at which a market may be considered "highly concentrated."

133. An alternative way to view MVPD concentration may be to assign equal market shares to competing MVPDs with similar capacities for serving subscribers. Such an approach is consistent with the approach taken by the United States Department of Justice and Federal Trade Commission.362 Assigning equal market shares to firms that have similar abilities to serve new customers may be appropriate because, to the extent competing MVPDs have similar levels of capacity deployed in a market, they may have an equal ability to serve customers. Under such an approach, a local market served by five video distributors of roughly comparable capacity would have an HHI abov~ 2000, and thus would be considered highly concentrated. 363 Only when a sixth MVPD is ptoviding service in a panicular local market would the HHI for that market fall below the highly concentrated level, to an HHI of 1673.364 Because less concentrated markets are generally less susceptible to impaired market performance and are, therefore, more likely to benefit consumers, the Commission will continue its efforts to eliminate barriers that delay entry by competitive firms, although issues associated with such conentration are likely to remain a concern for at least several years.

3. Nalrln of Competition in L«lll Markets

134. The extent to which concentration in local markets for the delivery of video programming affects consumer welfare is affected by the degree to which the services of other MPVDs are interchangeable with the services of cable systems. While we continue to believe

360 See, e.g., Merger Guidelines, , 1.5, 4 Trade Reg. Rep. (CCH), 13,104, at 20,573-5.

361 /d. 1 1.51, 4 Trade Reg Rep. (CCH) 1 13,104, at 20,573-5 to 20,573-6.

362 Id 't1 1.41, 4 Trade Reg. Rep. (CCH) 1 13,104, at 20,573-4 to 20,573-5.

363 With five equal sized firms, each would have a market share of 200/o, which when squared equals 400. The HHI would therefore equal 5 x 400, or 2000.

364 With six comparable fmns, each would have a market share of 16.6%, which when squared equals 277.7. The HHI would therefore equal 6 x 277.7, or 1666.

2124 that the distribution of multichannel video programming is the relevant market in which cable operators compete, we r=>gnizc that MVP~ use different distribution technologies that can each be described by a unique set of attributes, which can be similar to, or significantly different from, the attributes of a typical cable system. For example, products within this market can differ from each other in terms of the number of channels and types of programming offered. Demand for the services of different MVPDs is a function of consumer preferences for the different attributes of the distribution systems.

135. The extent to which other· firms within the multichannel video market provide pricing discipline for cable television, therefore, is dependent on the extent to which the offerings of these other firms differ from the services of cable systems. Cable systems are less able to raise prices above competitive levels, all other things being equal, if consumers arc able and willing to choose instead the services offered by other firms. We believe current cable subscribers are more likely to switch to the services of other MVPDs in response to a price increase if those other MVPDs offer bundles of attributes comparable to the attributes offered by the cable operator.l6S

136. Concerns about concentration are also informed by an analysis of the incentives for other MVPDs to engage in product differentiation strategies, which can also affect the competitive interactions among firms within a given market All other things being equal, firms that offer products with dissimilar attributes are less likely to compete with each other on the basis of price. To a certain extent, MVPDs c:aD choose the attributes of the services they offer. Choosing dissimilar attributes may allow firms to decrease the amount of price competition in the industry.* This is especially true to the extent that the firms can commit to their choice of attributes, since this credibly signals their willingness to pursue this sttategy.367 For example, one MVPD may decide to specialize in the offering of spons programming. Such a strategy could differentiate its services from those offered by most cable systems, which typically provide a variety of programming, including some spons. By differentiating its services, the MVPD might reduce the extent of competition between its services and those offered by cable systems generally. To the extent that this firm signs long­ term contracts with sports programmers, it can commit itself to pursue this differentiation strategy for a given period of time.

13 7. On the other hand, once firms have expended the fixed costs necessary to enter

36 ' See, e.g.. Jerry A. Hansman, Gregory Leonard & J. Douglas Zona, A Proposed Method for Analyzing Competilion Among Dijforentiated Products, 60 Antitrust L.J. 889-900 (1992).

* See, e.g., Avner Shaked & John Sutton, Relaxing Price Competition through Product Differentiation, 49 Rev. Econ. Stud. 1. 3-13 (1982) .

• , For a discussion of bow actions by firms can be used to signal whether they are Likely to compete aggressively or not, see Drew Fudenberg & Jean Tirole, The Fat Cat Effect, the Puppy Dog Ploy and the Lean and Hungry Look, 14 Am. Econ. Rev. 361 (1984).

2125 the video distribution market, they might have an incentive to expand output in order to lower unit costs and to help recoup their fixed inv~ent. 361 One way to do this might be to position their services as closer substitutes for those of cable systems and compete more strongly with those systems on price terms. To date, some firms, such as cable overbuildeis and MMDS firms, appear to have pursued a strategy based on a certain degree of price competition with incumbent cable systems. 369 They appear to generally provide programming choices that are very similar to the ones provided by incumbent cable systems and try to draw customers away by offering lower prices. In contrast, it currently appears that DBS operators have tended to pursue more of a product' differentiation strategy, with DBS operators focusing on their ability to offer digital programming that includes programming and operational features currently tmavailable from most cable systems. 370

138. We continue to believe that efforts to encourage competitive entry and reduce concentration will increase opportunities for rivalry and improve market peifonnance. However, it is difficult to predict the extent to which local markets will be characterized over the long term by vigorous rivalry among multiple distributors, or whether additional MVPDs may remain essentially fringe competitors, with either relatively small market shares or services largely differentiated from those of cable systems.

4. Conc~ntrlltion of Cable Systems NaJionally

139. In addition to our ongoing concern with1·concentration in local markets, the 1992 Cable Act was concerned with and places limits on the nationwide concentration of cable systems, given the potential effect of this increased national concentration on competition in the provision of multichannel video programming.371 In the 1994 Report, we

361 For a discussion of behavior by firms in the industries with fixed costs, see Jean Tirole, The Theory of Industrial Organization 305--60 (1988).

369 E.g., supra sees. ll.A.4, ll.C.l.

370 The different technological characteristics of, and constraints on, the delivery systems employed by various MVPDs may also affect the extent to which concentration in local markets affects consumer welfare. E.g. supra. sees. ll.B.l (DBS systems), II.B.2 (HSD packagers}, ll.C.l (MMDS systems), ll.D (LEC entry), ll.E (SMATV systems).

371 1992 Cable Act, § 11(c), amending, Communications Act, § 613, 47 U.S.C. § 613. The 1994 Report discusses the potential adverse and pro-competitive effects of increased national concentration in the cable industry. See 1994 Report, 9 FCC Red at 7518-21 W 150-56. Pursuant to Section 11 (c) of the 1992 Cable Act, the Commission promulgated horizontal ownership rules, which prohibit any entity from having an "attributable interest" in cable systems that reach more than thirty percent of all homes passed nationwide by cable, or thirty-five percent if the additional systems are "minority-controlled." See Implementation of Sections 11 & 13 of the 1992 Cable Act (Horizontal & Vertical Ownership Limits), Second (continued ...)

2126 found that the four largest cable MSOs accounted for service to 47% of all cable subscribers, with TCI (24.75%), Time Warner (12.53%), Continental (5.08%), and Comcast (4.82%} comprising the fom largest cable operators. m · We also calculated an HH1 of 898 for cable systems nationally based on transaCtions colJSUilliilated at the time of the 1994 Report, which means that a national market would have been considered "unconcentrated. "373

140. One year later, we find that the four largest MSOs accounted for service to 55% of cable subscribers, with TCI (25.87%} Time Warner (16.21%), Continental (6.85%), and Comcast (5.66%) remaining the fow·largest MSOs.374 Greater concentration among the largest MSOs contributed to an increase in an HHI to 1098,m which means that a national cable market would now be considered moderately concentrated.

371 ( •••continued) Report & Order, 8 FCC Red 8565 (1993) ("Second Ownership Report & Order"); 47 C.F.R. § 76.503. After a federal district court ruled that Section ll(c) of the 1992 Cable Act is unconstitutional, Daniel Cabltvision, Inc. v. United States, 835 F. Supp. 1, 10 (D.D.C.), appeal dDck.tted and pending, Civ. Act. No. 93-5290 (D.C. Cir. 1993), the Commission stayed enforcement of its horizontal ownership rules pending appellate review. In addition, the horizontal ownership rules currently are under reconsideration by the Commission. Consumer Fed'n. ofAm. (Petilionfor Reconsideration ·ofSecond OwMrslrip Report & Order), MM Docket No. 92-264 (filed Dec. 15, 1993) ("Consumer Fed'n Petition for Recon. ");Bell Atl. Co. (Petition for Ltd. Reconsideration of Second Ownership Report & Order), MM Docket No. 92-264 (filed Dec. 15, 1993) ("Bell Atl. Petition for Recon. ") .

312 1994 Report, 9 FCC Red at 7589 App. G, Tbl. 2. Those figures were generated using March 31, 1994 subscriber totals, Paul Kagan Assocs., Top I 00 Cable System OperaJors as of March 31, 1994, Cable TV Investor, Jun. 30, 1994 (Insert), with the MSOs subscriber counts being revised pursuant to the Commiwon's attribution rules, e.g., 41 C.F.R. § 76.501, to account for common interest, including all transactions that had been consummated as of August 31, 1994. As a result, the figures differ from those that would be obtained from generally distributed measurements of subscriber totals.

313 1994 Report, 9 FCC Red at 7589 App. G, Tbl. 2.

374 Infra Appeudix G, Table 2. Like the 1994 figures, these figures were generated us~g subscriber totals from March 31 of the year, Paul Kagan Assocs., Top 100 Cable System OperaJors as of March 31, 1995, Cable TV Investor, Jun. 30, 1995 (Insert), with the MSOs subscriber counts being revised pursuant to the Commission's attribution rules, e.g., 41 C.F.R. § 76.501, to account for common interest, including all transactions that had been consummated as of August 31 this year. As a result, the figures differ from those that would be obtained from generally distributed measurements of subscriber totals.

m Infra Appendix G, Table 2. This calculation is based on subscriber totals including transactions consummated before November 20, 1995.

2127 141. A number of transactions have been announced since our report last year, including acquisitions by the two largest MSOs. 376 If all of those transactions are consummated, the top four companies' share of subscribers would increase to 61.3%, and the percentage of subscribers served by the ten largest MSOs would increase from 73.42% to 79.89%.317 The announced transactions include: (1) TCI's pending purchase of cable systems from Viacom, which would add 1.16 million subscribers to its subscriber base;371 (2) Time Warner's pending acquisition of Cablevision Industries Corporation ("CVI"), which serves 1.4 million subscribers;379 (3) Comcast's announced transaction with Scripps Howard, which has attributable interests in systems serving over 750,000 subscribers;310 and ( 4) a nwnber of smaller announced transactions. If all of those transactions are consummated, an HHI calculated for cable systems nationally would increase from 1098 currently to 1355, which is well into the range in which a market would be considered moderately concentrated.

5. Regional Concentration of Ctzbk Systems - "Clustering"

142. Overall, it appears that the desire of cable MSOs to develop local "clusters," is a major factor underlying many of the cable industry transactions, including sales of systems and system-for-system exchanges between MSOs.311 In its 1994 annual report to shareholders, Time Warner describes the clustering of its cable systems as the basis both for anticipated revenue growth from cable service and for entering the market for local telephone service.312 One analyst estimates that twenty percent of the nation's cable subscribers will have changed handS in 1995, and that nearly all of these transactions; are driven by MSOs' interest in clustering systems.313

376 Infra Appendix G, Table 5.

371 Infra Appendix G, Table 3.

371 Eben Shapiro, Viacom Agrees to Spin Off, Then Sell Its Cable Systems, Wall St. J., July 26, 1995, at ~·

379 Time Warner Crests Cable Deal-Making Wave, Bilying Cablevision Industries, Comm. Daily, Feb. 8, 1995, at 1.

310 Comcast Corp., Comcast Acquires 800,000 Cable Subscribers from E. W. Scripps (News Release), Oct 29, 1995.

311 The system-for-system exchanges identified in this section include transactions in which one party also contributes cash as part of the transaction.

312 Time Warner, Inc., 1994 Annual Report 45 (1995).

313 Paul Kagan Assocs., Inc., MSOs Swapping Their Way To AD! Dominance, Cable TV Investor, Sep. 18, 1995,at 4.

2128 143. The number of clusters of systems serving at least 100,000 subscribers increased from 88 at year-end 1993 to 97 by· year-end 1994.314 These 97 clusters accounted for 34% of all cable subscribers. Time Warner had 33 of these clusters, TCI had 12, and Continental had 6. In addition to creating clusters from previously unaffiliated systems, the largest MSOs are increasing the size of their existing clusters. At the end of 1993, there were 6 clusters of systems serving a combined total of over 300,000 subscribers. By the end of 1994, however, the number of such clusters of over 300,000 subscribers had increased to 13, and over 6 million of the nation's subsqibers were receiving service from one of those "mega" clusters.

144. In addition to a number of the smaller transactions,us two of the largest system sales announced since the 1994 Report were apparently motivated, at least in part, by the desire to cluster systems:

• TCI's pending purchase of cable systems from Viacom and Chronicle Publishing would result in TCI controlling 1.3 of the 1.45 million cable subscribers in the San Francisco Bay area, and 900,000 of the 1 million subscribers in Seattle.316

• Time Warner's pending acquisition of Cablevision Industries and its acquisition of KBLCOM would result in T!Dle W,mer having clusters of over 1 million subscribers in New York City, 638,000 in central Florida, 512,000 in Tampa Bay, Florida and 249,000 subscribers in Houston.m

145. Cable MSOs have also sought to create clusters by trading systems. The largest system-for-system exchange since the 1994 Report occWTed on September 11, 1995, when TCI and Cox announced that they had agreed to exchange cable properties involving 600,000 subscribers.m Other significant system-for-system exchanges announced in the past year include Time Warner and Centmy trading systems that involved a total of 200,000 subscribers;319 Time Warner and Jones Intercable exchanging a total of 182,000 subscribers on

314 /d. at 38-39.

w Infra Appendix G, Table 5.

316 John M. Hig~ New TCI Deal Worth A Bit Less To Viacom, Multichannel News, July 31, 1995, at 3.

311 1995 Cable Financial Darabook, supra, at 38-39.

311 Mass Media, Comm. Daily, Sep. 12, 1995, at 8.

319 Century Completes Time Warner .Swap, Multichannel News, Aug. 7, 1995, at 45.

2129 one occasion,390 and 141,000 in another instance;391 TCI and Intermedia Partners exchanging systems that served a total of 155,000 subscri!>ers; 392 TCI and Post-Newsweek Cable exchanging 102,500 subscribers;393 and TCA and Time Warner swapping systems involving 58,000 subscribers. 394

146. As we recognized last year, increased regional concentration could have both procompetitive and anticompetitive effects.m In its comments this year~ Time Warner notes that the economies associated with clustering were an important factor in its decision to make multimillion dollar investments in facilities that will provide the next generation of telecommunications services. 396 Time Warner also disagrees with a nUmber of concerns associated with clustering. that we discussed last year. In particular, it argues that clustering does not tend to remove any competitive pressure that unaffiliated, adjacent cable systems exert on each other through threats of overbuilding because, according to Time Warner, adjacent cable systems do not exert competitive pressure on each other because adjacent systems cannot compete for each other's subscribers.397 Similarly, Time Warner argues that clustering does not send entry-deterring signals to potential rivals, and notes that entry by DBS and LECs into local markets has taken place concurrently with its own substantial 391 investment in its systems. ·

390 Mass Media, Comm. Daily, Aug. 15, 1995, at '6.

3~ 1 Jim McConville, Coble's Summer ofMajor Le4gue Clustering, Broadcasting & Cable, Oct 2, 1995, at 46.

392 Paul Kagan Associates, Inc., Coble System Sales: Breakthroughs to Come, Cable TV Investor, Mar. 24, 1995, at 5.

393 Mass Media, Comm. Daily, Aug. 14, 1995, at 7.

394 Mass Media, Comm. Daily, Aug. 30, 1995, at 10.

395 1994 Rep(Jrt, 9 FCC Red at 7518-21 TV 150-56. We also note that Section 202 the telecommunications bill passed by the United States House of Representatives would enjoin the Commission from preventing the transfer of cable systems solely on the basis of geographic location. See H.R. 1555, 104th Cong., 1st Sess. § 202 (1995). The committee report accompanying the bill explains that the scale and scope economies associated with system clustering may improve existing cable service and enhance the cable industry's ability to provide local telephone service. See H.R Rep. No. 204, 104th Cong., 1st Sess., pt. 1, at 107 (1995).

396 Time Warner Comments at 11-12.

391 !d. at 14.

391 !d. at 15-16.

2130 147. Fi.nally, as mentioned above in the sections addressing competition to cable systems by MVPDs using various distribution technologies, there has been a significant increase in actual and proposed consolidation ·among non-cable MVPDs since last year. 399 In particular, the largest MMDS system operators have acquired a number of previously unaffiliated MMDS systems, and two of the largest MMDS systems have themselves become partly or wholly owned by LECs providing telephone services in the region.400 The likely overall effect on market performance of these transactions among non-cable MVPDs is cwrently unclear. Such consolidation may make the non-cable MVPDs more effective competito~ in particular by combining LEC resources with the operations of other MVPDs. On the other hand, increased consolidation among non-cable MVPDs may tend to reduce the number of firms that ultimately offer multichannel video programming in most local markets which, as discussed above, may reduce the potential for sustained and vigorous price competition.

B. Vertical Integration in the Cable Industry

148. In this section of the 1995 Report, we review the status of vertical integration in the cable industry, and update information provided in the 1994 Report.401 We also provide information on the CommiS!ion's enforcement and rulemaking activities relating to provisions of the 1992 Cable Act designed to address the potential anticompetitive effects of vertical integration and to foster competitive entry in the video programming supply and distribution markets - the program access, program carriage and c:bannel occupancy rules.402

1. StiiiiU of Vnticlllllflqriltion ilr 1995

149. In the 1994 Report, the Commimon found that the percentage of programming services that were affiliated with a cable operator had grown from approximately 500/o to 53% since 1990. 40l In addition, we found that most of the programming services that had been

399 Supra sees. ll.B.l (DBS), ll.C. t (MMDS), U.D (LECs).

400 Supra sec. ll.C.l.

401 Vertical integration occurs where a cable system (a video programming service distributor) has an ownership interest in a video programming service supplier or vice versa.

402 Those provisions of the 1992 Cable Act are codified at: Communications Act § 628(b)-(c), 47 U.S.C. §§ 548(b)-(c) (program access); Communications Act§ 613(f)(l)(B), 47 U.S.C. § 533(f)(1)(B) (channel occupancy); and Communications Act§ 616, 47 U.S.C. § 536 (program carriage). See also 41 C.F.R §§ 548(b)-(c), 533(f)(l)(B), 536.

403 1994 Report, 9 FCC Red at 7522 1 161.

2131 launched since 1990 were owned in part by one or more cable operators.404 We further determined that vertically integrated programming services continued to be among the most 405 widely viewed national services. ·

150. Since the 1994 Report, the total number of national programming services has increased from 106 to approximately 129.406 Of those 129 services, 66, or approximately 51% of all national services existing today, are vertically integrated.407 This represents a slight decrease in the level of vertical integration in the industry from last year's figure of 53%. 401

151. Based on its analysis of recent data, NCTA states that little has changed with regard to cable MSO ownership or affiliation with programming networks since the 1994 Report. 409 As NCTA points out, a number of cable networks that were launched in the past year have no affiliation with a cable MS0." 1 ~ Five of the twelve national programming services that were launched since September 1994, or approximately 42%, are affiliated with a cable operator.••• In addition, cable operators have thus far invested in only 18 of the 80 national programming services that have been announced but not launched since the 1994 Report, or approximately 23% of such announced services.412

152. The ten largest MSOs in terms of subscribersbip have a stake in 65 of the 66 vertically-integrated services, or in 990.4 of all such services."13 TCI, the largest MSO, holds

404 1994 Report, 9 FCC Red at 7524 4f 166. However, less tban half of all newly announced programming services were owned in whole or in part by cable operators. ld., n.450.

405 1994 Report, 9 FCC Red at 7522, 162.

406 ld at 7522, 161, n.434; infra Appendix a Tables 1-2. 407 Infra Appendix a Tables 1·2.

401 The 1994 Report indicated that the overall number of national programming services had grown from 70 national services in 1990 to 106 national services in 1994. 1994 Report, 9 FCC Red at 7522, 161 n.434. The growth in national programming services from 1990 to 1994 was accompanied by a slightly greater increase in cable company investment in programming RI'Yices. Id

409 NCTA Comments at 32.

410 ld. at 33.

411 Infra Appendix H, Tables 1-2.

412 Jd, Tables 3-4.

413 ld, TableS.

2132 ownership interests in 38 national programming services, which amounts to approximately 30% of the available national programming services.414 This represents an increase in TCI's level of vertical integration since last year, when we reported that TCI held interests in 22% of all available national programming services.•u Time Warner, the nation's second largest MSO, holds interests in 18 national programming services, or approximately 14% of those available.416 This represents a 1% decline from 1994.4 17

153. Since the 1994 RqJOrt, the number of national programming services in which an MSO holds a SO% or greater interest bas increased. Currently, 36 vertically-integrated national programming services are owned, in part, by an MSO holding a SO% or greater ownership interest.411 Viacom holds a 500/o or greater interest in 12 of those 36 services, but, as discussed above, has agreed to sell its cable systems to TCI. 419 This would significantly reduce the degree of such ownership interest$ by cable operators, as well as the overall level of vertical integration in the cable industry.420 TCI/Liberty Media and Tim~ Warner hold such interests in 10 and S of those 36 servi~ respectively.

154. Since 1994, there has been a decrease in the number of programming services in which multiple MSOs hold combined interests of greater than 500/o. Currently, there are nine programming services that are each owned, in part. by several MSOs whose ownership interests, if combined, would comprise an interest of 500/o or greater in that programmer.411 There are eight programming services that are each partially owned by several MSOs whose ownership interests, if agrepted, would constitute a minority interest in that programmer.422 In addition, there are approximately teD vertically-integrated progr,inming services in which a

414 ld

415 1994 Report, 9 FCC Red at 7526 , 168.

416 Infra Appendix H, Table S.

4 17 See 1994 Report, 9 FCC Red at 7526 1 168.

411 Infra Appeudix H, Table 1. In the 1994 Report, it was reported that 24 of the 56 vertically integrated services existing at that time were owned, in part, by a single MSO holding a SO% or pester ownership interest 1994 Report, 9 FCC Red at 7527 1 169.

419 See supra sec. W.A.4.

420 NCTA Comments at 33.

411 Infra Appendix H, Table 1. Last year, it was reported that there were 19 national programming services that wa-e each owned, in part, by several MSOs whose combined ownership interests comprixd a 50% or greater interest in that programmer. 1994 Report, 9 FCC Red at 7527 , 170.

422 Infra Appendix H, Table 1.

2133 4 single MSO holds a minority ownership interest. D

155. Programming services affiliated with an MSO continue to be among the most popular programming services in the country. One exception is the non-vertically integrated ESPN, which remains the top service by subscribership,•lA and is the fifth most popular service based on prime time rating.425 Of the top 25 programming services in terms of subscribership, 15 are owned in whole or in part by an MSO, and 10 by one of the four largest MSOs. 426 Two of those top 25 services, C-SPAN and C-SPAN II, while not owned in the usual sense by cable operators, were creations of the cable industry.427 Of the top 15 services by prime time rating. 11 are vertically integrated, and 9 are owned, in part. by one or more of the four largest MSOs. 421

156. In the last year, there has bee~ little change in the relative rank of vertically­ integrated programming services. Only two of last year's !Qp_ 25 programming services by subscribership no longer appear on that list429 While one of those services, Comedy Central, is vertically integrated, the other service, EWlN: The Catholic Network, is not. However, the two services that replaced th~ Home Shopping Network and The Learning Channel, are vertically integrated.430 Only two services that previously were in the top 15 by prime time rating, MTV and Nickelodeon/Nick at Nite~ no longer rank among the 15 highest rated networks in terms of prime time audience.431 Both MIV and Nickelodeon/Nick at Nite are vertically integrated. 432 In addition, both The Learning Channel and E! Entertainment

423 ld

424 ld, Table 6.

425 ld, Table 7.

426 ld, Table 6.

427 ld C-SPAN and C-SPAN ll, non-profit cable networks, receive funding through system operators ~d other MVPDs that provide support on a per-subscriber basis. 1994 Report, 9 FCC Red at 7528 1 171. See also id at 7599, Appendix G, Table 7 n.l.

421 Infra Appendix H, Table 7.

429 Compan 1994 Report, 9 FCC' Red at 7599, Appendix 0, Table 7 with infra Appendix H, Table 6.

430 Compt11'e 1994 Report, 9 FCC Red at 7599, Appendix G, Table 7 with infra Appendix H, Table l.

431 Compare 1994 Report, 9 FCC Red at 7600, Appendix G, Table 8 with infra Appendix H, Table 7.

432 Infra Appendix H, Table 1.

2134 Television, which, unlike last year, are now among the top 15 services by prime time rating, are vertically integrated. 433

2. Acca:s to Prognunming

157. As part of the 1992 Cable Act, Congress sought to promote entry into local distribution markets through interim limits on strategic vertical restraints between vertically­ integrated cable operators and programmers. This Congressional policy is embodied in Section 628 of the Communications Act -and the Commission's program access rules.434 These provisions place limitations on the conduct of vertically integrated finns distributing satellite programming and MVPDs, so as to foster competitive entry by competing distribution technologies. In general, the rules prohibit unfair methods of competition and limit discriminatory conduct, including the use of exclusive contracts. o.s In addition, under the program carriage provision of the Act,436 competing distributors have standing to challenge exclusive arrangements that are the result of coercive activity.07

158. Although vertical relationships can often have pro-competitive effects, under certain market conditions, strategic vertical restraints (achieved by vertical integration, exclusive distribution contracts, or monopsony pressure) can also deter entry into the distribution market for delivered multichannel video programming. Accordingly, the Commimon's program access policies balance the likely competitive harm to consumers created by a particular vertical arrangement against its: likely effic~cy benefits. By targeting those vertical restraints that can impede entry into the distributio~ market, the program access policy attempts to contribute to the long-term market performance of both the distribution ma.rkCt and the progmnming market

159. We note that several parties have set forth general arguments both in favor of,m and critical of,09 the program access regime. In general, we continue to believe that the program access rules, as enforced by the Commiuion, successfully promote competition from existing and potential competitors in the video programming distribution market, and do not

433 Jd

434 47 U.S.C. § S48; 47 C.F.R. §§ 76.1000..76.1003.

415 CommUDications Act § 628, 47 U.S.C. § 548.

436 Communications Act§ 616(aX2), 47 U.S.C. § 536(aX2).

437 47 C.F.R. §§ 76.1300-76.1302.

431 SCBA Reply Comments at 4-6; WCAI Comments at 16; DIREC1V Reply Comments at 3.

4 9 ) Time Warner Comments at 19-27; TCI Reply Comments at 2-3.

2135 unreasonably inhibit efficient integration or restrict the development and distribution of new programming.

a. Commission Activities

160. The Commission' s enforcement of the program access provisions appears to be meeting one of the goals of the 1992 Cable Act - ensuring access by competing MVPDs to satellite cable programming from vertically-integrated programming services.440 Commenters generally agree that the program access tules have resulted in decisions that help emerging competitors to cable obtain access to programming,441 although some -commenters, including the National Rural Telecommunications Cooperative ("NRTC"), still allege that they do not 442 have access to programming, or have access to it at discriminatory rates. ·

161. Enforcement Activities. Of the four program access cases that have been resolved since the 1994 Report, two involved petitions for exclusivity and two involved complaints by competing MVPDs. In an exclusivity petition decided in 1995, Cablevision Industries Corp., ("CVIj, a cable MSO, and USA Networks ("USA"), a cable programming vendor (the "Petitioners"), asked the Commission to authorize them to enforce an exclusive distribution agreement with the Sci-Fi Channel programming service ("Sci-Fi").443 In denying the petition. the Cable Services Bureau concluded that limiting access to the Sci-Fi channel would impede the development of competition in 1~ markets by denying a popular programming service to actual or potential competitorS in seventy-eight communities nationwide. 444 The Bureau concluded that the exclusive contract was not in the public interest because the harmful effects of exclusivity on the development of competition in local distribution markets, and on competition from competing distributors, outweighed any efficiency-enhancing or pro-competitive effects of the requested exclusivity."'45

162. In another exclusivity petition resolved in the last year, NewsChannel, a Division of Lenfest Programming Services, Inc. ("NewsCbannel"), which is a regional and local news network that is 500/o owned by TCI, asked the Commission to authorize it to enter

440 See 1994 Report, 9 FCC Red at 7521-23, 157-60.

441 See, e.g., NCTC Comments at. 3.

442 See, e.g., NRTC Comments at 6-8; Liberty Cable Comments at 4-5, 11-12.

443 Cablevision Indus. Corp. & Sci-Fi Channel (Petition for Public Interest Determination Relating to the Exclusive Dist. ofthe Sci-Fi Channel), Memorandum Opinion & Order, 10 FCC Red 9786 (1995) ("SciFi Exclusivity Order").

444 Id at 9790 , 22.

44S Id

2136 into exclusive program distribution agreements with its cable affiliates."' The Bureau found that NewsChalmel bad demonstrated that the limited exclusivity would not have a significant limiting effect on competition, and granted the petition based upon consideration of the public interest factors involved set forth in Section 628(c)(4XA)-{E).447

163. One of the two discrimination cases resolved in 1995 involved a complaint by CellularVision against Prime SponsCbannel Network alleging discrimination in the sale of satellite cable programming in violation of Section 628(c)(2)(B) of the Communications Act and Section 76.1002(b) of the Commission's rules. 441 CellularVision , the nation's sole LMDS licensee, which operates a single system in Brooklyn, New York, alleged that SponsCbannel Associates, a programming vendor vertically integrated with Cablevision, refused to provide its SportsChannel New York programming to CellularVision. SportsCbannel New York contended that it had not received satisfactory assurances from CellularVision concerning the way the latter would secure the programming services it distributes. The Bureau found SportsChannel's security concerns unpersuasive and held that SponsCbannel's refusal to sell its programming to CellularVision constituted an unreasonable refusal to sell.449

164. In another discrimination complaint, NRTC filed a price discrimination complaint against EMI Communications Corporation, a fixed service satellite carrier that distributes the signals of satellite broadcast stations WWOR-TV and WSBK-TV to cable operators and HSD users through program packagers such as NRTC. The parties, assisted by Commiuion staff, settled the matter and the case bas been djgni~. 4SO

165. Rulemalcing Activities. In November 1994, the Commission released an order on reconsideration addressing a number of program access issues that remained after the

446 NewsChanne/, a Dtv. of Lenfost Programming Servs. (Petition for Public Interest Determination Under 47 C.F.R. § 76.1002(c)(4) Relating to Exclusive Dist. of NewsChannel), Memorandum Opinion & Order, 10 FCC Red 691 (1994) ("Newschannel Exclusivity Order").

447 47 U.S.C. §§ 548(c)(4XA)-(E); Newschannel Exclusivity Orr.kr, 10 FCC Red at 696 , 36.

.._ CellularJ'i.rton v. SportsChannel Assocs., File No. CSR-4478-P, 10 FCC Red 9273 , 11 (1995).

449 Id On September 20, 1995, SportsCbannel Associates filed a Request For Stay Pending Reconsideration and a Petition For Reconsideration. On October 6, 1995, the Cable Services Bureau released an order denying SportsCbannel' s Request for Stay. Cellular V'JSion v. SportsCIJanMI Assocs., Order, File No. CSR-4478-P, DA 95-2134 (Oct. 6, 1995).

450 National Rural Telecommunications Coop. v. EM1 Communications Corp.. 10 FCC Red 9785 (1995). A third price discriminatien complaint is pending. Set American Programming Serv., Inc. v. United V'uleo Satellite Group, Inc., File No. CSR-4299-P (filed July 28, 1994).

2137 Commission's first report and order concerning program access issues ("Program Access Report and Order").s1 In that order on reconsideration, 452 the Commission generally affirmed its initial determinations that: (1) a showing of harm is not required for actions brought under Section 628(c); (2) differences in costs at the MVPD level cannot justify pricing differences by a satellite broadcast programming vendor in the sale or delivery of satellite cable programming or satellite broadcast programming among or between cable operators. or other MVPDs; (3) the Commission's rules apply to contracts that were in existence before the effective date of the rules; (4) a 5% attribution standard should be used to assess the existence of vertical integration; and (5) a remedy -allowing recovery for injuries from violations of program access rules is not necessary at this time. 453

166. In December 1994, the Commission released another order on reconsideration of the Program Access Report and Order, in. which it denied a petition by NRTC to include exclusive contracts between DBS operators and vertically-integrated MVPDs within the per se prohibition of Section 628(c)(2)(C) and Section 76.1002(c) of the Commission's rules.4sc On the basis of the findings and the legislative history of the 1m Cable Act, which was focused on concerns over exclusive anangements of cable operators, as well as the language of the

4s1 Implementation ofSections 12 & 19 ofthe 1 9f2 Cable Act. (Dev. of Competition & Diversity in Video Programming Dist. & Carriage), First Report&: Order, MM Docket No. 92-265, 8 FCC Red 3359 (1993) ("Program Access Report & Order").

4 2 $ Implementation of Sections 12 & 19 ofthe 1992 Cable Act (Dev. of Competition & Dwersily in Video Programming Dist. & Carriage}, Memorandum Opinion&: Order on Reconsideration of the First Report &: Order, MM Docket No. 92-265, 10 FCC Red 1902 (1994).

453 In its comments, NRTC argues that the program access rules should include recovery for damages, at least in the amount of demonstrated overpayments. NRTC Comments at 1. See also NRTC Reply Comments at 1-2. But see Time Wamer Comments at 27 (stating that "the Commission was flatly wrong to conclude .. . that it can award damages in a program access dispute (even if the Commission has held, for the time being, that it will not do so)").

4 . sc Implemenllllion of Sections 12. & 19 of the 1992 Cable Act (Dev. of Competition & Dwersity in V"uko Programming Dist & Carriage}, Memorandwn Opinion and Order on Reconsideration of the First Report & Order, MM Docket No. 92-265, 10 FCC Red 3105 (1994) ("Second Program Access Reconsideration Order"). In its comments, NRTC asserts that the vertically-integrated cable industry "continues to stifle competition .. . by denying access to DBS programming and by discriminating in price against C-hand satellite distributors," NRTC Comments at 12, and argues that "there will not be full competition in the market for . . . video programming until the Commission prohibits exclusive arrangements between vertically integrated programmers and non-cable operator distributors in areas unserved by cable." ~TC Reply Comments at 1.

2138 provision, the Commission denied NRTC's petition.455 The Commission, however, noted that in declining to broaden its rules, it did not preclude the petitioner or any other aggrieved party from seeking relief from such contracts through other provisions of the program access 4 rules. S6

167. Issues of Concern to CommenJers in 1995. In the NO/, we invited comment on additional information we should consider with respect to vertical integration. m This year, panies focused their comments on three principal areas: ( 1) the extension of the program access rules to non-vertically integrated programmers;•sa (2) the extension of the program access rules to non-satellite delivered prog:ramming;459 and (3) the application of the program access rules to customers of LEC VDT platforms and to programming services affiliated with LECs.460 Parties' comments are summarized in Appendix I.

168. In general, commenters raise essentially the same arguments that were raised last year with respect to application of the program access regime to progranuning services of 461 non-vertically integrated vendors and to non-satellite delivered programming services. As

m Second Program Access Reconsideration Order, IO FCC Red at 3106 1 6, 3121 , 33, 3127,42.

4 $6 /d. at 3126-27 , 40.

457 NO/, 10 FCC Red at 7821 1 88.

m See, e.g., Satellite Receivers, Ltd., ("SRL") Comments at 1-2, S; WCAI Comments at 17-18; WCAI Reply Comments at 3-6; PrimeTime 24 Comments at S-6; NCTA Comments at 33-36, 38; NCTA Reply Comments at 11-12; National Cable Television Cooperative, Inc. (''NCTC") Comments at 3-4; SCBA Reply Comments at 6-8; Lifetime Television ("Lifetime") Comments at 1, 6-8; Viacom Comments at 1-6; Viacom Reply Comments at 4-5, 7-12; ESPN Comments at 1-8; ESPN Reply Comments at 5-8; Group W Satellite Communications ("GWSC") Comments at 2-S; CNBC, America's Talking and Canal de Noticias ('*CNBC") Comments at 3-7; Lifetime Reply Comments at 2-3; HBO Comments at 23-24; HBO Reply Comments at 5-6.

459 See, e.g., Liberty Cable Comments at 11-12; Liberty Reply Comments at 9-11; WCAI Comments at 18-19; TWC Reply Comments at 14-18; NCTA Reply Comments at 12-13.

460 See, e.g., Liberty Cable Comments at 11-12; Bell Atlantic Comments at 14-16; GTE Reply Comments at 4-6; NYNEX Comments at 10-11; Viacom Comments at 5; Comcast Reply Comments at 6-13.

461 Compare 1994 Report, 9 FCC Red 7530-34, 179-186 with infra Appendix I at 1-3. We note, however, that in support of its comments this year to extend the program access rules to non-vertically integrated programming providers, WCAI includes a 1995 article by (continued... )

2139 we noted last ye:ar,4112 the Commission's program carriage rules provide standing to MVPDs to file complaints alleging that cable operators have coerced programmers, whether vertically integrated or not, into granting them exclusive distribution rights.463 In addition, apart from the general assertion that non-vertically integrated programmers charge non-cable MVPDs higher rates than cable operators,464 as was the case last year, commenters have not presented any specific evidence regarding anticompetitive behavior that would require further action by the Commission at this time.

169. Regarding commenters' claims about the applicability of the program access regime to VDT platforms, a number of commenters correctly point out that these issues are either already subject to Commission proceedings, or may be affected by pending legislation. 46S We also note that application:<;>f the Commission's program access rules to customer-programmers of VDT platforms is the subject of a pending program access complaint. 466 Therefore, we do not address these issues in this Report.

b. Additional Competitive Issues Relating to Vertical Integration

170. Channel Occupancy and Program O:vriDge Comments. In the NO/, we sought comments on the channel occupancy and program carriage rules. Time Warner argues that the Commission's channel occupancy and program aqoriage rules generally constrain the ability of cable operators to produce programming by'diminishina .economic incentives to do so.461 Time Warner also submits that cable operators are less likely to risk scarce channel capacity on an unproven network if they cannot offer that DetWork on an exclusive basis because of the program caniqe rules. 461 Time Warner contends that cable operators are less

461 ( ...continued) David Waterman, VertiCDl /ntegrlllion and Progrll11f Access in tM Cable Television Industry, 47 Fed. Comm. LJ. 511, 514-15 (1994), which concludes that the program access rules should apply to all program suppliers, whether or not they are vertically integrated.

4112 /994 RepOrt. 9 FCC Red 7531 , 180.

463 47 C.F.R. §§ 76.1300-76.1302.

464 See, e.g.. WCAI CoDUlleDts at·18 ; NCTC Comments at 6.

465 See, e.g., Bell Atlantic Comments at 14-16; NYNEX Comments at 10-11; GTE Comments at 4-5.

466 CAl Wireless Systems Inc. & ConnecticuJ Choice Television, Inc. v. Cablevision Sys. Inc.\ File No. CSR 4479-P (filed Feb. 28, 1995).

467 Time Warner Comments at 25.

461 /d

2140 likely to produce programming if they are not able to deliver it on their own systems because of the channel occupanc:y rules. • HBO submits that the channel occupancy rules are of little use in ensuring diversity in programming and."may in fact impede the use of technologies that will benefit consumers. '"70 Pay-Per-View Network, Inc. d/b/a Viewer•s Choice ("Viewer's Choice") agrees, arguing that the channel occupancy rules are contrary to the public interest because they limit cable subscribers• access to programming they would prefer to receive.471 TCI sees little evidence that the channel occupancy limits are necessary to ensure access for non-vertically integrated programmers.412

171 . The channel occupancy limits have been the subject of a reconsideration order. In April. the Commission denied petitions for reconsideration filed by the Center for Media Education/Consumer Federation of America .("CME") and Bell Atlantic. We declined: ( I) to reduce the number of channels that a cable Operator could devote to affiliated programming from 40% to 200.4 of activated channels;473 (2) to reverse the decision to include over-the-air broadcast. public, educational and government, and leased access channels when calculating total channel capacity;474 (3) to reverse the decision to exempt local and regional networks from channel occupancy limits;415 (4) to reverse the decision not to apply channel occupancy limits beyond a system's first 75 channels;416 and (5) to reverse the decision to grandfather all vertically integrated programming services being carried as of December 4, 1992. the effective date of the 1992 Cable Act. 417 In addition. the Commission declined to reconsider its decision to apply channel occupancy limits to cable sxstemS that face ICtUa1 head-to-bead competition.m Bell Atlmtic ad Tune Wamcr have .ppealed the ~hannel occupancy decision

46t ld

470 Home Box Office Comments at 25; see also Tune Warner Comments at 19-27.

471 Pay-Per·View Network Comments at 5-6.

412 TCI Reply Commentaat 2.

473 lmpii1M1tliltio1t ofSection 11 (c) oftiN Ctzble Ttlevisiorr Co11S11Jf111' P1'ot~ction & CollfP'ttlion Act of 1992 (YmlcGJ Ownuship Limits), Memorandum Opinion & Order on Reoonsideratioo of the Secoad Report & Order, MM Docket No. 92-264, 10 FCC Red 7364, 7369 , 14 (1995).

474 ld at 7372 , 24.

47S ld at 7374 , 30. .,. Id at 7375 1 34. m Id at 7364-65 1 2.

411 ld at 7376 , 46.

2141 to the United States Court of Appeals for the District of Columbia Circuit 419 In general. we find little indication that cable channel occupancy limits have had a significant impact on the video marketplace during the last year.

172. Leased Access. Another means of addressing concerns relating to media diversity is found in the statutory leased access requirements. 480 One commenter, VaJueVision International ("ValueVision"), believes that commercial leased access could address many of the problems of programmer access to ~le systems. However, Value Vision claims "the 'implicit fee' provisions of the Commission's .initial leased access rules ... have been relied upon by larger cable operators to effectively eliminate leased access as the kind of tool Congress contemplated to promote such competition...... Petitions for reconsideration of these rules are under review.412 Although the leased access rules provide a means of allowing editorial voices other than those selected by the system operator to be heard, a variety of difficult issues remain to be resolved.

C. Technical Advances

173. Technological"*velopments are likely to have particularly significant effects on competition in communications industries, where technologies, including those used in the distribution of video programming, are evolving rapidly. For example, the simultaneous transmission of two.way voice, video, and data has hUttorically requimi a separate transport architecture for each type of infonnation. Today, digital technology has evolved to the point where it appears that it may become economically feasible for voice, video, and data to be transported simultaneously over the same network. Digital technology has also paved the way for the development of compression technologies aimed at conserving bandwidth. which among other thin~ may permit MVPDs to expand offerings. Moreover, many different communications companies are in the midst of deploying new and improved system architectures to increase the bandwidth and efficiency of their distribution facilities. Such upgrades will allow for tbe introduction of new services that are currently unavailable to

419 Bell Atlantic v. FCC, Case No. 95-1335 (D.C. Cir. filed June 30, 1995); Time Warner v. FCC, Case No. 95-1337 (D.C. Cir. filed July 7, 1995). On August 22, 1995, the Court entered an order consolidating the cases and holding them in abeyance, pending resolution of certain attribution issues applicable to channel occupancy pending before the Commission.

410 Communications Act § 61~ 47 U.S.C. § 532.

411 ValueVision Reply Comments at 2-3.

412 Imp/emenJation ofSections of the 1992 Cable Act (Rate Regulation, Leased Commercial Access), 8 FCC Red 5631 (1993), recon. pending, Dlct No. 92-266. Vahie Vision urges the Commission to act on the pending reconsideration petitions (Value Vision Comments at 2), and has filed a petition for a writ of mandamus in the D.C. Circuit, In re Value Vision /nJ., Inc. , Petition for Writ of Mandmnus, No. 95-1564 (D.C. Cir. filed Nov. 6, 1995).

2142 consumers.

174. Advances in digital technology- and the deployment of advanced system architectures have the potential to exert a major influence on the structure of the market for the delivery of video programming, but the overall effect of these developments on future industry structure and competition with incumbent cable systems remains unclear. Whether these new technologies result in increased competition largely depends on how competing MVPDs are able to employ them to con;serve bandwidth and to develop interactive services.

1. BackgroUIId

175. Because the delivery of full motion video requires a large amount of bandwidth relative to other types of communication, the. limited supply of bandwidth has always been a barrier to the expansion of video services. For example, a telephone company can use as little as 3 kHz of spectrum to transmit a voice signal, whereas 2,000 times as much spectrwn (a minimum of 6 MHz) bas historically been needed to transmit a single broadcast channel of analoa video."' Thus, networks transmitting analog video channels can reach their maximum capacity very quickly. The point at which MVPDs encounter this banier, however, differs depending upon the disttibution media and technologies they employ.

176. Cable systems' use of coaxial aDd fiber. optic cable gives them the most baDdwidth of all of tbe cu:m:Dtly deployed MVPDs. the electrical charaeteristics of coaxial cable make it suitable for very high bandwidth transmission, up tO ·one GHz of bandwidth."" Roughly 15% of total cable plant miles are in systems with 400 MHz to 1 GHz capacity, with offerings rangina from 52 channels to 150 channels..., Another 75% are in systems with capacities ranging from 330 MHz to 400 MHz. with offerings of between 40 and 52 channels. 416 Capacity continues to increase as operators integrate fiber optic cable into their systems.

177. LECs, like cable systems, use spectrum enclosed in wires for the distribution

.., Dr. Walter Ciciora, Cable Television Labs, Inc., An Overview of Cable Television in the United Statu 4 (1995). Bandwidth is one measure of capacity for communications networks and is mcasun:d in cycles per second, or "hertz," typically gigahertz (billions of cycles per seccmd., •oHz"), megahenz (millions of cycles per second, "MHzj, or kilohertz (thousands of cycles per secoDd, "kHz"). The bandwidth of different networks varies depending upon tbe tranvnission media employed. Harry Newton, Newton 's Technical Dictionary 126 (1994).

"" Price Waterhouse,~ at 110.

"' Most cable systems are operating at capacities from 400 MHz to SSO MHz, with a sin&}e system operating at 1 GHz, and several operating at 750 MHz capacity. /d.

'* Ciciora, supra, at 22.

2143 portion of their networks. The difference is that the majority of LEC local loop plant (the portion of the network between the local central office telephone switch and the customer) cUITently consists of twisted copper wire pairS, d~signed for the transmission of narrowband signals, but not as well suited for transmission of broadband signals. ' 11 Thus, despite the sophisticated switching capability and ubiquitous deployment of their networks, the local portion of the LEC plant is generally limited in terms of bandwidth when compared with that deployed by other MVPDs. These constraints are not likely to apply to video dialtone architectures, which are generally designed with broadband distribution plant.

178. Many current and potential competitors to cable operators use or plan to use wireless technologies to distribute video programming to subscribers. These' competitors include systems using MMDS, LMDS, and DBS distribution technologies. The principal advantage of these wireless technologies is ~ they can be deployed without the installation and maintenance of a wireline system. 411 A potential disadvantage is that they have been allocated only a comparitively s:na11 amount of spectrum.

179. In anticipation of emerging competition in markets for the delivery of video services, many MVPDs are apparently planning enhance their standard services and expand their offerings to include new services such as Internet access, video on demand, and other interactive services.419 Such efforts require increased bandwidth and two-way network capabilities. Two of the primary strategies MVPDs ~ employing to increase bandwidth are upgrading system architecture and deploying digital compression.~ Cable operators and LECs are pursuing both strategies while MVPDs using wireless distribution methods are focusiJlg primarily on digital compieSSi.on.

180. A major limitation on cable system capacity is the inability of coaxial cable to carry signals over long distances without the use of amplifiers. On the other hand, fiber optic cable can transmit signals over much longer distances without the use of amplifiers. Fiber optic cable can be deployed in the tnmk and distribution portions of cable networks, or extended all the way to the node (tbe point at which a cluster of individual households connect to the network). From the node, information is transmitted to subscribers' houses over coaxial cable. This combination of fiber optic cable and coaxial cable is referred to as a

417 Price Waterhouse, supra, at 113; Gerard Klauer & Co., Wireless Cable Primer, April 20, 1995, at 16.

411 Bilotti, Nabi & Takada, supra, at 75.

419 Dwight L. Allen, Jr~ H. William Ebeling, Jr. & Lawrence W. Scott, Deloitte & Touche, Speeding TowQI'd tM lnreractive Multimedia Age 1, 14-17 (1994).

490 Gail Bronson. Bandwidrh: 1995 's Hot Buzzword, Interactive Age, Jan. 30, 1995, at 40.

2144 181 . During the past three y~ the cable industry's deployment of fiber optic cable bas grown by over 100% annually.' 92 Current estimates indicate that over 33% of all cable subscribers are served by cable systems employing an HFC architecture. ''1 and some estimate that the nwnber of subscribers served in this manner will increase dramatically over the next 4 five years. 9-4

182. LECs are also integrating fiber optic cable into their networks. During 1994, LECs upgraded over 21,000 route miles of their networks to fiber optic cable.495 Nonetheless, only 6% ofLECs' networks, which total n~ly 3.7 million route miles of cable, consist of fiber optic cable. ' 96 Furthermore, roughly 60% of this fiber is contained in the interoffice portion of the network (the part of the network that connects local telephone office switches to one another).497 Thus, the local loops, which comprise 89% of the LECs' networks, are almost entirely comprised of low capacity twisted copper wire pairs.491 LECs are considering two principal architectures to replace their current architectures dominated by copper wires - switched digital video ("SDV") and HFC.

183. In its most advanced foun, the SDV architecture require3 tbc deployment of fiber optic cable to an optical oetwork unit ("ONU") ~ a small number of homes. 499 The remainder of the distmce from tbc ONU to a sub;crlber' s home would be traversed by a combination of twisted copper wire pairs aDd coaxial cable. usUig ·this architecture, LECs could provide switched telephony and compressed digital video services without replacing all

491 Ciciora, supra, at 48.

4 P2 Joan Finamore, CorniJl& Inc., Opto-Elec:tronics Group, Guidelines 6 (Summer 1995).

'" Price Waterhouse. .nqwa, at 111-12.

494 Id

*' Jonathan M. Krausbar, Federal Communications Commission, Fiber Deployment Update End ofYetl/"1994 21 (July 1995).

496 Federal Communications Commi~on, Statistics of Communications Common Carriers 157 (1993/1994 ed.).

.,., Kraushaar, supra at 28-29. ..,. Jd

499 Ismini Scouras, New JCs Provide .SDV Solwion, Electronic Buyers News, Oct. 9, 1995, at 16.

2145 of the twisted copper wire pairs connecting homes to their networks. 500 The transmission of analog video signals, however, may still require a separate coaxial cable connecting 501 subscribers' homes to the ONU. •

184. As described above, the HFC architecture, which connects homes to a shared node using coaxial cable, would allow LECs to deliver analog and digital video signals to subscriber homes both as a broadcast service (i.e., a basic package of channels delivered simultaneously to all homes) and as a "qear video on demand" or "video on demand" service, where individual subscribers can receive .specific programming. S02 Voice and data services could also be offered over the existing twisted copper wire pair or potentially over the coaxial cable. 503

185. Proponents of SDV architecnir:e stress its higher capacity, its efficient handling of both voice and video digital signals, the low maintenance costs associated with fiber, and the efficiency of using existing twisted copper wire pairs to connect homes to the network. 504 Advocates of HFC architecture, on the other hand, emphasize the cost of the HFC solution relative to that of installing tiber-to-the-curb in an SDV architecture. Currently, the cost of deploying SDV is estimated to be about $400 higher per household than HFC,sos although AT&T Microelectronics reportedly bas introduced low-priced SDV chip sets.506

J. Digitlll eo,rasio,.

186. Digital compression is the process by which analog Signals are digitized (converted to streams of "l"s and "'"s) and then compressed, using an encoding process that extracts only the information n~ for the decompression of the signal at its destination. By transporting only essential information, the amount of bandwidth the signal occupies is

500 Richard Karp~ Up Qose: US Wut's New V"u:leo Strategy, Interactive Age, Nov. 14, 1994, at 53.

501 Id New~ teclmoloaies allow twisted copper wire pairs to carry much increased bandwidth over a ·short distmce, and thus replacement of the twisted pairs may not be required all the way to tbe bome.

502 Price Wm:rbouse, supra, at 1.10-11.

503 ld

504 AT&T Microelectronics, Inc., New Chip Platform for Interactive Services Over Copper Wire (News Release), Oct. 2, 199S.

sos Nicholas Negropontc, 2020: The Fiber-Coax Legacy, Wired, Oct. 1995, at 220.

506 Leslie Ellis, Set-Top Verulors Weigh New Switched Digital Chip. Set, Multichannel News, Oct. 9, 1995, at·6S.

2146 dramatically reduced. Various encoding techniques have been developed to implement this technology with resulting compression ratios as high as lO:l .m

187. Industry representatives are working to develop uniform standards for digital transmission, compression and possibly security. This effort is being undertaken by the Digital Audjo Visual Council ("DAVIC" ), Moving Pictures Expert Group ("MPEG"), and the Video and Electronics Standards Association ("VESA "). soa In a step toward interoperability, a standard developed by MPEG bas emerged as the most likely industry standard for digital compression. S09 The group has developed several compression standards for different media applications. The standard for digital television is called MPEG-2, and consists of video, audio, and systems components for compressing television signals.510 Numerous vendors are in the process of employing MPEG-2 in the ·development of digital encoders and decoders for use by MVPOs and subscribers. ·

188. OBS providers, including OIREClV, USSB, and Primestar, are the fu-st MVPOs to implement diiital compression technology on a wide scale. Currently, OIRECTV and USSB are broadcuting programming using the MPEG-1 + encodina format for audio and video and, according to iDdustty anal~ are in the process of upgrading the video component to MPEG-2.m The set-top boxes curremly in subscribers' homes are reportedly compatible with the MPEG·2 format, and subscribers tW1 DOt have to upgrade their equipmenLm Primestar cum:utly uses GcDc:rallnsuualent's Di~Cipher set·top boxes, which employ a compression scheme different from MPEG·2. Primestai has announced plans to

m Cable Television Labs., IDe., MPEG IPR &ckgroiii'IMr, Int.emet Address: http:// www.cablelabs.com/PRIIPR_S.CkgroUDder.html (199S).

501 In addition, the cable aDd consumer electronics industries are developing a decoder interface standard to resolve issues relating to the incompatibility between cable systems that use scrambling and consumer electronics equipment (e.g., TVs, VCRs, PCs), which can render inoperable featwa such u picture-in·picturc, time recordings, and the ability to view one channel while recordina IDOtber. Jmpleme1fllltion of~ction 17 oftlw 1992 Cable Act. (Compatibility &twcm Cab/~ Sys. & Consumer Elec. Equip.), First Report & Order, 9 FCC Red 1981 (lm), NCOII. pendbtg, ET Docket No. 93-7. In this context the Commission expressed an interest in exmrinjng compatibility issues "relating to digital video tec:hnologi~ and services" in tbe fumrc. /d. at 2005 1 144.

• HBO Comments at 228.

10 ' MPEG·2 FAQ, Internet Address: http://www.cres4.it/-luigi/MPEG/mpeg2.html.

m Price Waterhouse. svpra, at 173.

m Halhed Enterprises, l.Dc., V"u:leo Compression for Broadcasting Including Direct Broatkast Sal~llite, Internet Address: http://www.hei.ca/hei/mpeal.html, at "A Period of Transition," (1995).

2147 upgrade its set·top boxes sometime in 1996 to DigiCipher Il, which includes an MPEG-2 decoding option.m Digital compression teclmology, such as MPEG and DigiCipher, allows packagers of DBS programming to deliver foar to eight channels of video programming with compact disc quality sound using the same amount of bandwidth required to deliver a single channel of analog programming on satellite systems. 51 4 Similarly, as discussed above, MMDS operators are considering digital compression technology to increase the capacity of their systems.sas

189. According to industry sources, cable operators plan to introduce digital services into their major markets in 1996 or 1997.516 It has been reported that plans to deploy digital technology earlier had been delayed in part by the industry's indecision over an encoding standard. m The video portion of this stan~ appears to have been found in MPEG-2. m However, there is some question whether is~es relating to the implementation of this standard519 may further delay the deployment of digital services by cable operators.

190. The cost of digital set·top boxes is another significant factor delaying the implementation of digital technology. As with other new products based on semiconductors, the initial cost of digital set-top boxes has been relatively high. Even at high volumes of production, cwm1t prototypeS of digital set·top boxes to be deployed by cable systems are estimated to cost over $500.S20 According to industry sources, however, MSOs are seeking set-top box prices in the $300 to $400 price range. nJ :The cost of encoding equipment is also an issue. Such equipment must be installed at the headend so that' incoming analog programming can be digitized before it is transmitted to the subsCriber. Although, the price of MPEG-1 encoders has dropped significantly over time, a state of the art MPEG-2 encoder

m Richard Doherty, Look to the Skiu, OEM Magazine, June 1, 1995, at 46.

514 Bilotti, Nabi & Takada, supra, at 75.

m Supra see. D.C.

16 ' Bilotti, Nabi &: Tabda, supra., at 9.

m Mark Bcmibr, &t-Top Chaos: Delays Persist, Standanis Remain Elusive, Broadcasting & Cable, Sept. 25, 1995, at 58.; Carl Weinschenk, Sizing Up the FUlllre: AT&T, SietMns and Othu Giants are Primed for Baltle, Cable World. Dec. 19, 1994, at 22.

511 HBO Comments at 228.

"' MPEG-1 FAQ, supra, at 3.

no GIC Comments at 14, n.22.

n• Paul Kagan & Assocs., Inc., Marketing New Media, Feb. 20, 1995, at 1.

2148 is currently priced at about S 100,000 per channel of video.m Even as these prices decline over time, systemS serving small suburban and rural markets may be unable to afford such. equipment and, consequently, unable to take advantage of digital technology to expand their capacity.slJ TCI's proposed distribution of Primcstar's programming to cable operators and other MVPDs, which it calls "Headend in the Sky" service, may provide such systems with access to digital programming, although the extent to which programmers will make their services available is unclear.n•

191 . LEC Plans for Using Digital Compression in ADSL Networks. Given the preponderance of narrowband copper wiring in the local loops of LECs • networks. digital compression that uses that plant is being exp,lored. The panicular implementation of compression technology that has been under' consideration by LECs is called Asymmetric Digital Subscriber Line ("ADSL"). Using ADSL, LECs will be able to offer services such as VHS-quality interactive television and video conferencing over their existing copper network. ns Some consider ADSL to be an interim strategy to &ive LECs a foothold in the video distribution market while they upgrade their networks to SDV or HFC architectures. su On the other hand, ADSL technology also may be used as an adjunct to other distribution teclmologies. m

192. Currently, deployment of ADSL teclmotogy costs $2,000 to $3,000 per line~ although some vendors are promising to decrease tbe cost to under. $600 by the end of 1996.m Another limitation of ADSL is tbe limited distaDce ovei Which high speed transmissions can be maiDtaiDed on tbe copper portion of tbe network. Currently, ADSL servi~ can transmit data over a single copper pair to subscriber's home at a rate of 6 megabits per second ("mbps") with a 640 kilobi1S per second ("kbps") return path over a

m Price Walerhouse, supra, at 169.

m FCC Hollb up Helllknd in The Sky License, Independent Cable N~ June 1995, atll.

»• ~e SllpNl JOe. D.B. ~~also Karen JP Howes, Tel's Digital Sale/lite Heathnd. Via Satellite, Sept. 199S, at sa, 62.

slS Price Waterhouse, supra, at 113.

516 Teny Sweeney, ADSL EnJu:znced in Bid for Local Loop, Comm. Wk. lnt'l, Mar. 20, l99S, at 6.

m Infra para. 193. mId

2149 distance of about 9,000 feet. 529 On averag~. the distance between homes and LEC central offices is about 13,517 feet.SJO Thus, the implementation of ADSL would require LECs to install fiber optic cable in local loops, but not as much as would be required by a fiber to the curb SDV architecture. Industry vendors are ~ing both of these limitations. m

193. According to industry sources, after expressing an initial interest in ADSL technology, many LECs shifted the focus of their upgrade strategies to fiber and HFC architecture. m Recent advances in ADSL technology have at least partially reversed this trend. 533 NYNEX and Bell Atlantic are reported to be interested in usjng ADSL technology in concert with their recent investment in MMDS. 534 MMDS would be used to provide one­ way broadcasts of multiple cable channels, while ADSL would be employed to provide interactive services such as video on demand. and Internet access. U S West is also reponed to be considering the deployment of ADSL technology in its netWorks. m

IV. STATUS OF COMPETITION IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING

Extent of Competition and Assessment of Market Performance

J. Overview

194. The Commission finds in this 1995 Repilrt that cable television systems remain the primary disttibutors of video programming. Although competitive pressures from alternative video disttibutors arc increasing, the Commission concludes that markets for the distribution of video programming are not yet competitive. Most video distribution markets continue to be highly concentrated, and incumbent cable operators face direct competition from overbuilders in only a few markets. During the past year, DBS systems have entered

529 Carol Wilson, TelephoM Companies Re-Evaluating Two-Way Technology on Copper Lines, Inter@ctive Wk., at Internet Address: http://www.zdnet.com/-intweek/print/newsl 950727a.html (July 27, 1995). ·..

S30 Krausbar, supra, at 29.

s31 See, e.g., AT&T Paradyne, Inc., AT&T Paradyne Unveils Modern Modem Technology (Press Release), Sept. 21, 1995.

s32 Loring Wirbel, Digital Standards Promise Expansion, EE Times Interactive, Oct. 2. 1995, at 43. mId

Sl4 Wilson, supra.

m Wirbel, supra, at 43.

2150 most markets, making service become available to consumers throughout the continental United States, and achieving rapid increases in subscribersbip. Wtreless cable systems have also increased subscribership at a rapid rate. However, the number of subscribers to alternative video distributors remains extremely low relative to the number of subscribers to cable systems.

195. The Commission's experience with the "effective competition" provisions of the 1992 Cable Act offers some evidence ol.the limited extent of competition in the video programming distribution market. Under the 1992 Cable Act,"• a cable system is subject to effective competition if it meets any one of the following three tests:

(1) fewer than 30% of the houseJ19ld.s in the cable system's franchise area subscribe to its service (the "low penetration" test);

(2) the franchise area is (a) served by at least two unaffiliated MVPDs, each offerina comparable video programming to at Least 500h of the households in the franchise area, and (b) the number of houteholds subscribing to propmming services offered by MVPDs other than the larsest MVPD exceeds 15% of the households in the franchise area (the "competing provider" test); or

(3) an MVPD opeiated by the franc:hising ~for the fnnc.hise area offers video progmnming to at least SO% of the boulebo14s in the franchise area (the •fnmcbise authority provider" test).

196. Information about cable systemS subject to effective competition comes primarily from two sources: (1) the Commission's survey of cable systems to establish the bencbm.arlc rate replation scheme under the 1992 Cable Act and (2) orders of the Cable Services Bureau in cues to ~ whether to certify a local franchise authority to regulate basic service rates. Of the 496 cable systems surveyed, 244 systems met one of the three tests for effective competition, but only 45 (less than 10% of the systems surveyed) satisfied the competing provider test. m Of the 137 effective competition cases the Bureau has resolved, 130 involved the ·low penetlation test, and the Bureau determined that effective competition existed in 77 of these cues. In the 12 cases involving the competing -provider test, the Bureau determined that the system faced effective competition in 4 cases, of which, 3 involved a competing cable system and 1 involved a ~less cable system. The Commission believes that these four cases provide the most convincing evidence of competitive forces ~ work, because at least 15% of the consumers in these franchise areas actually chose service

SM 47 U.S.C § 543(1)(1).

m Stt Jmpltmtntation of&ctions ofthe 1992 Cablt Act (Ratt Rtplation), Second Order on Reconsideration. Fourth Report & Order, and Fifth Notice of Proposed Rulemaking. MM Docket No. 92-266, 9 FCC Red 4119, 4281-82 (1994).

2151 from a provider other than the largest MVPD. m The fact that consumers made this choice in only 4 of 137 cases-- together with the small percentage of systems surveyed that met the competing provider test -· suggests that effective competitio~ as defined by the 1992 Cable Act, remains limited in markets for the distribution of video programming.s 19

197. In a recent order, the Commission proposes to waive, on a temporary and trial basis, certain rules regulating rates charged for cable programming services in Dover Township, New Jersey, upon the initiation there of the fJISt permanent commercial VDT service by Bell Atlantic.S40 The proposed waiver would be effective ·for a two-year trial period begirming when Bell Atlantic initiates service within the incumbent cable operators' franchise areas.s•t The Commission believes that, although the statutory definition of effective competition will not yet be met, the be~g of VDT service will ensure that the incumbent cable operators' rates for cable programming services will not be unreasonable. The Commission also believes that the waiver may reduce re8'!!!tory burdens on the cable operatOrs.

198. In the 1994 Report the Commimon assessed the extent to which the existing level of competition favorably influenced market performance - i.e., how well a given market satisfies conswner demand in the least costly manner ·~ using several standard market performance indicators. Specifically, the Commission emphasize

199. We see no need in this 1995 Report to replicate or update the formal empirical analysis of marke:t performance indicators provided in the 1994 Report. F~ given the concentrated structure of most video programming distribution markets and the persistence of

m No cases have been filed under the franchise authority provider test

539 We note, however, that this analysis does not take into account "effective competition" systems that franchising authorities have not sought to regulate.

S40 See Waiver of the Commission's Rules Regulating Rates for Cable Services (As Applied to Cable Sys. in Dover Twnshp., NJ.). Order Requesting Comments, CUID No. NJ0213, _FCC Red_, FCC 95-455 (Nov. 6, 1995).

s.t Records indicate that at least two cable operators otTer cable service within Dover Township. ld, 8.

2152 impediments to entry and competition,S42 it is unlikely that the entry and growth of new £inns over the past year is extensive enough to change market conduct and, hence, market performance appreciably since last year. By contrast, the 1994 Report updated the empirical market performance indicators last reponed in the 1990 Cable Report, a time period of sufficient length that some change in market structure and performance might be reasonably expected. Even then, the 1994 Report still found that the q ratios ". . . suggest the presence of substantial market power,"S43 although one q ratio estimate was consistent with some reduction in market power in the cable industry.S44

200. Second, the data employed by the Commission in the 1994 Report to derive the market performance indicators preceded for the most part the imposition of price regulation on the cable industry. Given that the conceptual basis of all three of the market performance indicators relies on the assumption that firms are unconstrained in their attempt to maximize profit, the exact meaning of these indicators is unclear in the presence of cable rate regulation. Th~ it may be misleading to compute empirical market performance indicators that could be uncritically compared with earlier estimates that do not reflect the effects of cable rate regulation.

201. Although formal empirical indicators of market performanc::e are, therefore, not provided in this 1995 Report, it is possible to descri~ measures of market performance that reflect changes in the economic welfare of cable subsaibers since .the 1994 Report. Recent data suggest that consumer welfare may be improving· in some ways, although not as fast or as much compared to what might be reali2ed if incumbent cable systems faced the ongoing and persistent pressure of fully-developed competition. For example, since the 1994 Report, video distributors have continued to expand their capacity to deliver programming to consumers. The cable industry bas expanded in terms of the number of homes passed, the number of subscribers, and the number of systems.

202. Distributors using alternative technologies have also expanded their capacity to supply delivered video programming to consumers, as evidenced by the growth in the number of subscribers to DBS, HSD, MMDS, and SMA1V services reported above. Continued expansion by such alternative d.istnoutors is likely. In addition, LECs plan to enter markets and offer service to millions of households using several distribution methods (MMDS, VDT, and cable).

203. The J'ID&e of programming choices offered to consumers has expanded, and continued expmsi011 is likely. Since the /994 Report, cable operators have increased the number of cable DetWorb that they offer, while vertical integration has decreased slightly. Alternative distributors have also increased the number of choices available to consumers.

S4l Infra sec. 3.

S4) 1994 Report, 9 FCC Red at 7545-6 n.541 .

,.... ld at 1545 , 212, t.bl. S.2.

2153 Furthermore, several LECs have entered into- ventures relating to the supply and packaging of video programming.

204. Conclusion. Growth in cable network capacity, the number of cable programmers, and the range of consumer choice resulting from new entrants, such as DBS operators, generally have improved the economic welfare of consumers of multichannel video programming. However, the lack of intense competition in most video distribution markets means that further improvements in consumer welfare remain unrealized. While the Commission's cable rate regulation has attenuated the exercise of market power to some degree and provided some improvement in market performance and consumer welfare, further dramatic improvements in market performaqce will depend on the eventual emergence of intense competitive rivalry between and am6ng multiple suppliers in local video programming· distribution markets. Thus, market performance in local markets today remains only mixed, reflecting economic growth that bas benefitted consumers, but not reflecting the level of market performance that more intense competitive rivalry may be expected to produce. A particular concern, moreover, is that impediments to entry and competition may delay or prevent future improvements in performance.

J. E:Jdstlng tmd PoulllitlllmpdlmDits to Entry 111111 Compnition

205. There may be existing and potential impediments tliat deter entry and prevent increased competition in video programming delivery markets. S'oine impediments result from the strategic behavior of incumbent firms, and others from legal and regulalory restrictions. These impediments may block potential entrants from entering the market, or increase the entrant's cost, or decrease the attractiveness of the entrant's service, compared with that of the incumbent firms.

a. Ctlble System Behavior to Deter EnJry and Elimintlle Competition

206. Much of tbe cost of constructing a cable distribution network is a sunk cost, i.e., an operator~s cable system probably cannot be put to another equally profitable use if 54 video distribution became Ullpl'Ofitable. ' The existence of sunk costs creates strong incentives for iDcumbent cable operators to engage in strategic behavior designed to protect their investmt4•a. Altemati.ve distributors must also incm sunk costs to enter the video distribution IJUIIket md compete with incwnbent cable operators. As we discuss below, strategic behavior by cable operatots to disadvantage their rivals can create a credible threat that entry will be unprofitable. In that case, because the costs of entering video distribution are sunk, entrants will be unable to shift their systems to some other profitable use. Thus, entrants' need to incur sunk costs may enable incwnbent cable operators to deter entry by engaging in strategic behavior.

545 A discussion of sunk costs and related economic concepts is presented in 1994 Report, 9 FCC Red at 7604 App. H.

2154 207. Ail incumbent may attempt to disadvantage its rivals by raising their costs or decreasing their access to a needed production input. S46 For example, cable operatOrs may attempt to decrease access to programming by competing video distributors. The Commission's enforcement of the program access provisions of the 1992 Cable Act appears to be ensuring competing video distributors' access to satellite programming from venically integrated programming services.

208. An incumbent may also attempt to disadvantage its rivals by strategic non- uniform pricing. In this regard. the Commission has observed that cable systems often offer bulk discounts to subscribers in MDUs, and has expressed a desire that bulk discounts not be used as a means of displacing competition from alternative MVPDs, such as SMA TV operators.~' The Commission•s desire is thus consistent with the underlying purpose of Section 623( d) of the Communications Act.~· Accordingly, the Commission's regulations require that all similarly sized MDUs in a frimchise area receive "the same bulk discount rate structure," and that the cable operator be able to demonstrate that it receives some economic benefit from offering the discount.549

209. In response to the NO/, commenters complain that cable operators are offering potential MDU customers discounted and no~uniform rates that are not available to other MDU customers, and arc thereby violating the uniform rate structure of the 1992 Cable Act. SJO The Commission believes that its cunent uniform rata rule strikes .an appropriate balance between limiting the potential for anticompetitive ~c conduct, and avoiding micromaMgement of cable operator marketing decisions. To thC eXtent a competing distributor believes that it has been the target of prohibited non-uniform rates, it may file a uniform rate complaint under the Commission's rules.m We recognize, however, that the

S46 &e Tom Krattenmaker ct Steve Salop, A.nttcompetitlw Exclusion: Raising Rivals ' Costs to Achieve Power Over Price, 96 Yale L. J. 209, 223-224 (1986).

547 1993 Rate Report & Ordlr, 8 FCC Red S898 1424.

s.a 47 U.S.C; § S43(a). Section 623(d), which generally requires that a cable operator have a uniform rate structure throughout its franchise area. embodies Congress's concern that a cable operator could injure competition by temporarily offering discounts in part of its franchise area to UDdcrcut a competitor. S. Rep. No. 102-92, 102d Cong. 1st Sess. 76 (1991).

549 /d. &e also lmplemenuztion ofthe 1992 Cable Act {Rate Regulation & Buy-Through Prohibition), Third Order on Reconsideratio~ MM Docket No. 92-262, 9 FCC Red 4316 (1994).

5 "' Heanland Comments at 1-3; Liberty Cable Comments at 9-10; OpTel Comments at 4-S; WCAI Comments at 19-22.

m Indeed, there are three cases pending before the Commission in which overbuilders (continued ... )

2155 decision of the United States Court of Appeals for the District of Columbia Circuit in Time Warner bas narrowed the protection of the uniform rate provision to markets where the cable operator is not subject to effective competition.m

b. Legal, Regulatory and Other Potential Impediments

210. In the past year, the Commission and courts eliminated or reduced several impediments to entry identified in the 19.94 Report. Two federal circuit court decisions have overturned the cable-telco cross-ownership ban, and the Commission staff clarified that it would not enforce this ban against LECs subject to the court decision. The Commission streamlined its rules on LEC entry through 9verbuilding. In addition, the Commission recently granted several Section 214 applications to Ameritech to build cable systems. The Commission recently decided to permit Cable operators to acquire SMATV systems within their service areas. In the past year, the Commission also has taken actions to promote entry and more rapid expansion of wireless cable, including the adoption of measures to process new applications for MDS spectrum and expanding the protected service area of MDS stations.

211 . Despite these actions by the Commission and courts, however, several impediments to entry aDd competition may remain. P..or example, a number of actual and potential competitors to incumbent cable operators contend tbat cable operator conduct under the Commission's home wiring rules has a chiJJing effect on competition. The Commission's home wiring rules require, inter alia, that cable operators provide subscribers with the opportunity to acquire cable home wiring within thirty days after termination of service before the cable operator removes the wiring from the premises. 553 Actual and potential competitors

m(. ..continued) allege violations of the uniform rate provision and one case pending in which a wireless cable operator alleges violations of the uniform rate provision. American Cable Co. v. TeleCable, Inc., CSR-4198, .CSR-4206, Crou Country Cable, Inc .• v. C-Tec Cable Systems of Michigan. Inc., CSR-4414-P •. CSR-4449, Beach Cable v. Jones lnterCDble In.. CSR-4500-R, People 's Choice TY Corp. v. Jona lntocable Inc. , CSR-4578.

sn See T~~~te Wili'MI' Entertainment Co., L.P. v. FCC, No. 93-1723 (D.C. Cir. 1995). Some commenters are conccmcd because this decision narrows the scope of the uniform rate provision. See, e.g. . WCAI Comments at 19-22.

m 47 C.F.R. § 76.802. The purpose of the cable home wiring rules is to avoid the disruption from having the wire removed after service is terminated and to allow subscribers to utili.a the wires with competing MVPDs, thereby facilitating competition from these entities. lmplemenratton oftiN 1992 Cable Act, Cable Home Wiring, Report ct Order, 8 FCC Red 1435 (1993), recon. pending, MM Docket No. 92-260. The Commission currently has before it a petition to initiate a rulmaking to determine whether and how cable subscribers may have.access to existing cable home wiring for the delivery of competing and (continued. ..)

2156 to incumbent cable operators argue that the Commission's defmition of home wiring for MDUs does not permit potential competitors to connect subscribers to their systems without damaging the subscriber's premises, since the wiring in many MDUs is embedded in the walls. Several commenters state that this is a significant disincentive for subscribers to switch providers. 'S4 Cable operators argue, however, that the Commission's home wiring rules merely pennit a cable operator to remove its own propeny from MDUs, or to terminate its own lines."' These issues are the subject of pending petitions for reconsideration.

212. Commcnters also identify local franchise regulation as an impediment to entry by overbuilding. In the 1994 Report, the Commission discussed Section 62l(a) of the Communications Act, which prohibits the wu-easonablc denial of a competitive franchise. We continue to support clarification of Section ~l(a) to make clear that it applies to all exclusive franchises regardless of when they were adopted. ·

213. Some local laws and regulations may also impede entry. For example, despite limited ~ption by the Commission, local zoning regulations may inhibit competition from direct-to-home propmming distributors by preventing home users from installing receiving dishes. As noted above, the Commission has an oqoing rulemaking proceeding to modify its zoning ~ption rules."'

214. While 1epl ad regulatory obstacles may delay the Spread of competition, the speed of deployment of new competitive tccJmolog:ies also is affected by the business decisions of potential eutlaats. Decisions regarding tbc choice of technologies, investment strategies and assessment of risk strongly influc:uce tbc speed at which competition emerges. Finally, there remains a possibility that new potential entrants may be evaluating the costs and political climates of buildina an entirely new infrastructure or trying to acquire existing systems.

.....1\ snc ...con~, ..... complementary services. &t Joil'll Petition for Rulemoking on Cablt Television Wiring. Public Notice, RM No. 8380, 8 FCC Red 8184 (1993).

54 ' Liberty Cable Comments at 17-18; Bell Atlantic Comments at 11; OpTel Comments at S-6; WCAI Comments at23; Liberty Cable Reply Comments at 7-8.

"' Time Warner Reply Comments at 25-29; Cablevision Reply Comments at 7-9.

sS6 Supra sec. 11.8.

2157 4. Outlook for Competition in V"uleo Programming Distribution Markets

215. In most local markets, a single cable system remains the primary distributor of multichannel video programming services. Despite the growth of DBS and wireless cable subscribership in the past year, competitive rivalry in most local video programming distribution markets is insufficient to constrain the market power of incumbent cable systems. The continued growth of DBS and the entry of additional competitors may exert a significant, favorable long-run effect on market conduct and performance in video programming distribution. In addition, LECs are planning to enter video distribution markets by several means, including VDT, wireless cable and;stand alone cable systems. In SUID, the market for the distribution of video programming is not yet competitive, although we are cautiously optimistic about the outlook for increased competition. Nevertheless, we believe that it will take some time for entry to have a significant effect on the market power of cable operators.

V. ADMINISTRATIVE MATIERS

216. This Report is issued pursuant to authority contained in Sections 4(i), 4(j), 403 and 628(g) of the Communications Act of 1934, as amended, 47 U.S.C. § 154(i), 154(j), 403 and 548(g). ·

217. It is ORDERED that the Secretary shall send copies of this 1995 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate.

FEDERAL COMMUNICATIONS COMMISSION

William F. Caton Acting Secretary

2158