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Federal Communications Commission Washington, D.C Federal Communications Commission Washington, D.C. CHAIRMAN November 18,2004 The Honorable Joe Barton Chairman Committee on Energy and Commerce U.S. House of Representatives 21 25 Rayburn House Office Building Washington, D.C. 205 15 Dear Chairman Barton: In response to your May 18,2004 request, I am pleased to provide the Committee on Energy and Commerce the enclosed Report concerning the packaging and sale of video programming services by cable and satellite television providers. The Report was prepared by the Commission’s Media Bureau. To assist in the preparation of the Report, the Bureau issued a Public Notice seeking public comment and information on the technical, economic and legal issues identified in your request. The Bureau also conducted a symposium last summer to explore first-hand the advantages and disadvantages of an a la carte marketing scheme, including its potential implications for the prevalent economic model in the pay television industry, as well as its possible effects on retail prices and new entrants in the video programming market. The specific questions outlined in your letter are addressed in Appendix F to the Report. If you or other Committee members have any questions concerning the Media Bureau’s Report, please do not hesitate to contact me. Sincerely, *&Michael K. Powell Enclosure THEREPORT < > Report On the Packaging and Sale of Video Programming Services To the Public November 18,2004 THEREPORT 2 TABLE OF CONTENTS Page I. INTRODUCTION AND SUMMARY .......................................................................................... 3 IT . THE RETAIL MARKET FOR VIDEO PROGRAMMING .................................................... 8 A. Background .............................................................................................................................. 8 B . Historical Overview ................................................................................................................. 8 C . Current Cable Services and Program Options................................................................... 12 D. Current Requirements and Obligations .............................................................................. 15 1. Tier Placement Requirements ........................................................................................ 15 2 . Tier Buy Through Requirements ................................................................................... 18 3. Commercial Availability of Navigation Devices and Equipment Compatibility ....... 19 E . Analysis of Current Packaging Practices at the Retail Level ............................................ 20 1. Benefits and Harms of Bundling at the Retail Level .................................................... 20 F . Feasibility of A La Carte and Themed Tiers....................................................................... 26 1. Alleged Harms and Benefits ........................................................................................... 26 2. Implementation ................................................................................................................ 27 3. Consequences ................................................................................................................... 38 4. Experiences With A La Carte ........................................................................................ 56 G . New Models ........................................................................................................................... 59 H . Recommendations for the Retail Market ............................................................................ 62 111 .THE WHOLESALE MARKET FOR VIDEO PROGRAMMING ....................................... 66 A. Industry Overview ................................................................................................................ 66 B. Requirements and Remedies ................................................................................................ 66 1. Broadcast Signal Carriage Requirements ..................................................................... 66 2 . Retransmission Consent .................................................................................................. 68 3. Network Nonduplication and Syndicated Exclusivity .................................................. 70 4 . Antitrust ........................................................................................................................... 71 C . Historical Practices and Outcomes ...................................................................................... 72 D . Current Broadcast Signal Carriage Arrangements ........................................................... 74 1 . Benefits of Retransmission Consent............................................................................... 74 2 . Harms of Retransmission Consent and Other Requirements ..................................... 75 E . Affiliation Agreements and Contractual Terms of Program Networks ........................... 77 F. Recommendations for the Wholesale Market ..................................................................... 80 Economic Appendix I. The Economics of Bundling in the MWD and Video Programming Markets IT . Analysis of Booz Allen Hamilton Economic Study General Appendices Appendix A: Letters From Congress Appendix B: Media Bureau Public Notices Appendix C: List of Leading Commenters and Reply Commenters Appendix D: List of Economic Analyses Appendix E: A La Carte in Canada Appendix F: Summary of Responses to Congressional Inquiry THEREPORT 3 \ , I. INTRODUCTION AND SUMMARY Earlier this year, several members of the U.S House of Representatives’ Committee on Energy and Commerce wrote to Federal Communications Commission Chairman Michael Powell asking for Commission insight on the “efficacy of providing a la carte and themed-tier services to cable and satellite subscribers.”’ Separately, Senator John McCain, Chairman of the United States Senate, Committee on Commerce, Science, and Transportation, asked Chairman Powell to “explore all available options . to promote a la carte and satellite offerings as soon as possible where such offerings would benefit consumers.’72 At the heart of these Congressional requests for the Commission to study a la carte and themed- tier services for cable and satellite subscribers is our nation’s long-standing public policy goal of making available communications and media technologies to all Americans at affordable rates. Although it is undeniable that the last decade has brought the public a wealth of new benefits and value stemming both from the introduction and continued growth of direct broadcast satellite systems (“DBS” or “satellite carriers”) as strong, nationwide competitors to cable in the multichannel video programming distributor (“MVPD”) marketplace, and the cable industry’s collective $85 billion investment to upgrade its distribution platform and product offerings, it is equally undeniable that many Americans are frustrated with year over year increases in their pay-television bills. In a desire to empower consumers and to bring them more choice, and in hopes of stemming the tide of rising MVPD retail rates, some have turned to a la carte and themed-tier services as a potential solution. Others believe that a la carte and themed-tier services may serve as an effective means for the public to address another issue of concern to millions of Americans-the growing coarseness of programming on television. As the explosion of channel capacity and new program networks have brought some of history’s best television to living rooms across the country-from educational and children’s programming to news, public affairs and sports programming-it also has provided a significant amount of coarse programming. Many view a la carte and/or themed-tier services (such as a packaged tier of family programming) as a way to give adults, especially parents of young children, an ability to prevent objectionable programming from entering their homes or to more easily find family- friendly programming. A third, albeit less pronounced, catalyst behind the interest in exploring the feasibility and impact on the public of a la carte or themed-tier services is the impact of the tying of cablekatellite program networks to the carriage of large broadcast network affiliates through retransmission consent. Some argue that the use of retransmission consent by some of our nation’s largest broadcast networks has hindered the development of independent program networks, threatening diversity, and view a la carte and theme-tier services as a potential vehicle to limit these perceived effects of retransmission consent. These core communications policy goals--consumer choice, universal and affordable access to communications and media technologies, diversity and parental control over the media that enter their I The House members asked the Commission to address questions in seven general areas and submit a Report to the Committee by November 18,2004. Letter from the Hons. Joe Barton, John D. Dingell, Fred Upton, Edward Markey, and Nathan Deal, U.S. House of Representatives, to the Hon. Michael K. Powell, Chairman, Federal Communications Commission, May 18, 2004. (“House Letter”) The letter is attached as part of Appendix A. A concise issue-response summary to the House Letter is found in Appendix F. 2 Letter from the Hon. John McCain, Chairman, United States Senate, Committee on Commerce, Science, and Transportation, to the Hon.
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