[Federal Register Volume 59, Number 240 (Thursday, December 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30832]


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[Federal Register: December 15, 1994]


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FEDERAL COMMUNICATIONS COMMISSION

[CS Docket No. 94-48, FCC 94-235]

 

First Annual Report to Congress Assessing the Status of 
Competition in the Market for Cable Television and Other Video 
Programming Services

AGENCY: Federal Communications Commission.

ACTION: First Annual Report to Congress.

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SUMMARY: The Commission is required under the Communications Act to 
report annually to Congress on the status of competition in the market 
for the delivery of video programming. On September 28, 1994, the 
Commission released the first such annual report. In the report, the 
Commission assessed: the definition of the market for the delivery of 
video programming, including cable television services; the performance 
of the cable industry since 1990; the status of existing competitors to 
franchised cable systems and other actual or potential competitors; 
market structure issues affecting competition (specifically, horizontal 
concentration, vertical integration and technical changes in the cable 
industry); and the extent of competition in, and the overall 
performance of, the market. The Commission also made several 
recommendations for promotion competition to cable systems.

FOR FURTHER INFORMATION CONTACT:
James W. Olson, Chief, Competition Division, Office of the General 
Counsel, (202) 416-0856.

SUPPLEMENTARY INFORMATION: 1. Pursuant to Section 628(g) of the 
Communications Act, 47 U.S.C. Sec. 548(g), as amended by Section 19(c) 
of the Cable Television Consumer Protection and Competition Act of 
1992, Pub. L. No. 102-385, 106 Stat. 1460, the Commission is required 
to report annually to Congress on the status of competition in the 
market for the delivery of video programming. On September 28, 1994, 
the Commission released the first such annual report (the ''Report''): 
Implementation of Section 19 of the Cable Television Consumer 
Protection and Competition Act of 1992 (Annual Assessment of the Status 
of Competition in the Market for the Delivery of Video Programming), 
First Report, ______ FCC Rcd ______, FCC 94-235 (CS Docket No. 94-48 
Sep. 28, 1994).
    2. The full text of the Report is available for inspection and 
copying during normal business hours in the FCC Reference Center (Room 
239), 1919 M Street, NW., Washington, DC 20554, and may also be 
purchased from the Commission's copy contractor, International 
Transcription Services, Inc (ITS, Inc.''), 2100 M Street, NW., Suite 
140, Washington, DC 20037, telephone number (202) 857-3805. It will 
also be published in the Federal Communications Commission Record.
    3. In the following paragraphs the Commission summarizes the 
contents of the Report. This summary covers the following discussions 
in the Report: (A) Market Definition (which is located in Section III.A 
of the Report); (B) Cable Industry Performance (which is located in 
Section II); (C) The Status of Existing Competitors to Cable (which is 
located in Section III.B); (D) the Status of Other Actual or Potential 
Competitors to Cable (which is located in Section III.C); (E) 
Horizontal Concentration (which is located in Section IV.A); (F) 
Vertical Integration (which is located in Section IV.B); (G) the Nature 
of Technical Changes affecting Cable Systems (which is located in 
Section IV.C); (H) The Extent of Competition and Assessment of Market 
performance (which is located in Section V.A); and (I) Future 
Considerations and Recommendations for Promoting Competition to Cable 
Systems (which is located in Section V.B).

A. Market Definition

    4. Congress charged the Commission with annually reporting on the 
``status of competition in the market for the delivery of video 
programming.''\1\ In the Commission's view, obtaining a complete 
picture of the status of competition required the Commission to look 
beyond multichannel video programming distributors (``MVPDs'') to other 
technologies that are not explicitly included within the statutory 
definition of an MVPD, but which may have constraining effects on cable 
system practices. Moreover, to fulfill its statutory mandate, the 
Commission believes it should also look beyond the ``effective 
competition'' standard of the 1992 Cable Act, which is a bright-line 
test used to determine when a particular cable system's rates may be 
deregulated.\2\ Accordingly, in the Report, the Commission provided a 
fuller economic analysis of the industry, rather than simply reporting 
on the status of statutorily-defined ``effective competition'' in each 
franchise area in the country.
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    \1\Communications Act Sec. 628(g), 47 U.S.C. 548(g).
    \2\Communications Act (l)(1)(A), 47 U.S.C. 543(l)(1)(A).
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    5. Product Market. For purposes of the Report, the relevant product 
market contemplated in the 1992 Cable Act--multichannel video 
programming service--was the appropriate starting point for assessing 
the status of competition in the market for the delivery of video 
programming. A primary focus of the Report, and a central concern of 
the Act, is the extent to which MVPDs that use alternative technologies 
are emerging as significant competitors to cable operators. In addition 
to cable operators (which include direct competitors known as 
``overbuilders''), The statutory definition of MVPDs specifically 
includes providers that offer television receive-only (``TVRO'') 
satellite services, direct broadcast satellite (``DBS'') services, and 
multichannel multipoint distribution services (MMDS'').\3\ The 
Commission has subsequently determined that satellite master antenna 
television (``SMATV'') systems and video dialtone (``VDT'') service 
providers, which will typically offer their services through facilities 
operated by local exchange carrier telephone companies (``LECs''), 
should also be considered MVPDs.\4\ Consequently, the Report contained 
evaluations of the status of providers utilizing each of these 
technologies.
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    \3\Communications Act Sec. 602(12) 47 U.S.C. Sec. 522(12).
    \4\Implementation of Sections of the 1992 Cable Act (Rate 
Regulation), Report & Order, & Further Notice of Proposed Rulemaking 
21-22, 8 FCC Rcd 5631, 5650-51 (MM Docket No. 92-266 1993), 
summarized in 58 Fed. Reg. 29736 (May 21, 1993).
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    6. In addition, the Commission discussed other video programming 
distribution media as potential substitutes for cable services. While 
the statutory definition of an MVPD expressly excludes current 
broadcast technology (because a broadcast station does not offer 
``multiple'' channels of video programming and is not offered on a 
subscription basis), the Commission nonetheless included a discussion 
of broadcast television in this Report, given broadcasting's potential 
constraining effect on cable industry conduct. Finally, the Commission 
discussed other delivery media that arguably may have a competitive 
impact in the market, including low power television, programming 
distribution by electric utilities, an VCRs.
    7. Geographic Market. The proper definition of the geographic 
market in which cable operators compete has relevance to the assessment 
of cable operators' market power (and to the administration of the 
``effective competition'' standard of the 1992 Cable Act, which will be 
addressed in future reports). The scope of the geographic market is 
defined by the geographic area to which buyers will reasonably turn and 
from which competing suppliers sell their products. Given the current 
state of competitive entry, it seemed reasonable to define, at least 
tentatively, the local franchise area as the geographic market relevant 
to an analysis of the cable industry. However, over time, it is likely 
that consumers will be able to purchase services from MVPDs offering 
service from locations outside their franchise areas. For example, 
wireless cable and SMATV systems may serve entire metropolitan areas. A 
LEC providing VDT service may serve an entire region of the country. 
Finally, DBS service providers appear to contemplate a national market. 
Therefore, as competitive entry increases, the definition of the 
geographic market for purposes of economic analysis may be broadened 
beyond the franchise area to account for the impact of these 
alternative suppliers.

B. Cable Industry Performance

1. Performance From 1990 to 1993

    8. Cable Industry Output. Since the Commission last reported on the 
status of competition in 1990,\5\ the cable industry has continued to 
expand. The Commission found that the number of homes that could 
receive cable service (``homes passed'') grew to 92.9 million in 1993 
(up from 86 million in 1990), which was over 96% of all television 
households in the United States. With cable services available to more 
homes than ever before, the total number of households subscribing to 
basic cable services has increased to 57.4 million households, which is 
almost 60% of the television households in the United States (up from 
51.7 million households and 55.8% of television households in 1990). 
The industry's penetration (which measures the percentage of households 
passed by cable that choose to subscribe to basic cable services) 
increased by 2.78% since 1990 so that nearly 62% of all households that 
could receive basic cable in 1993 purchased such services.
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    \5\Rate Deregulation & the Commission's Policies Relating to the 
Provision of Cable Television Serv., Report on Competition, 5 FCC 
Rcd 4962 (1990) (``1990 Cable Report''), summarized in 55 Fed. Reg. 
32631 (Aug. 10, 1990).
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    9. Attributes of Cable Industry Service. Since 1990, average 
channel capacity has noticeably increased in the industry. As a result, 
by the end of 1993, nearly 97% of all subscribers for which information 
is available received service from systems that could provide at least 
thirty channels. Since 1990, there has also been noticeable growth in 
the number of cable programming choices. The number of basic 
programming networks grew by over 18%, from sixty-one at the end of 
1990 to seventy-two at the end of 1993. The number of pay-per-view 
networks nearly doubled, from seven in 1990, to thirteen at the end of 
1993. Overall, the number of programming networks increased by over 
29%, from seventy-seven at the end of 1990, to ninety-nine at the end 
of 1993.
    10. Cable Industry Revenue. The cable industry continued to 
generate increased amounts of revenue between 1990 and 1993. It appears 
that the cable industry generated $22.94 billion in total revenue in 
1993, which was over 28% more than the $17.86 billion it generated in 
1990. Of the 1993 amount, $13.55 billion, or over 59%, came from basic 
service tier programming. Revenue from pay-per-view programming 
increased 102% from $253 million to $512 million over the same time 
period. Advertising revenue has become an increasingly important source 
of revenue for the cable industry.
    11. Cable Industry Expenditures and Earnings Before Interest, 
Taxes, Depreciation, and Amortization. Cable expenditures on 
programming rose by more than 25% between 1990 and 1993. In addition, 
measurements of earnings before interest, taxes, depreciation, and 
amortization (``EBITDA''), which people in the industry commonly refer 
to as ``cash flow,'' are often used to value the economic health of 
industry firms. Based on the Commission's estimates, it appears that 
the industry generated cash flows of over $4.8 billion in 1987, $7.9 
billion in 1990, and $10.5 billion in 1993. It also appears that the 
industry had a cash flow per basic subscriber of $164.29 in 1993, which 
would represent an increase of 19% for the period between 1990 and 
1993. Moreover, it appears that the industry's cash flow represented 
over 46% of its total revenue in 1993, which was a 4.4% increase over 
1990.
    12. Capital Investment. In 1990, the industry invested nearly $3.0 
billion in construction. In 1991 and 1992, however, investment in 
construction dropped off, to approximately $2.2 billion in each of 
those years. The cable industry's construction investment rebounded in 
1993, however, to almost the same level as in 1990, nearly $3.0 
billion.
    13. Cable System Transactions. In 1990, systems with an aggregate 
value of $1.07 billion were sold, compared with the aggregate value of 
$11.21 billion for systems sold in 1987. In 1993, however, the systems 
sold had an aggregate value of over eight billion dollars, even though 
the total number of transactions declined from 1990. The dollar value 
per subscriber of systems sold increased by over five percent during 
the same years, from $2049 in 1990, to $2160 in 1993.

2. Recent Developments

    14. Subscriber Growth. The record in the proceeding that led to the 
Report indicated that the publicly-reporting companies have experienced 
continued growth in the number of basic subscribers over the first six 
months of 1994.
    15. Revenues. Information from cable system operators that make 
financial information publicly available through the SEC indicated that 
cable system revenues remained relatively steady through the first six 
months of 1994. According to the most recent annual or quarterly 
reports of fifteen cable system operators, ten reported increased cable 
system revenues and five reported decreases. On the other hand, several 
MSOs reported decreases in revenues during the first six months of 
1994.
    16. Capital Investment. The Commission determined that the cable 
industry appears to be substantially increasing its capital investment 
in infrastructure development.
    17. Cable System Transactions. There has been considerable activity 
in the market for cable system transactions during the first six months 
of 1994. The thirty-eight transactions announced in 1994 that were 
identified by the Commission have a total dollar value of nearly $10.95 
billion which, if the transactions are consummated, would be 
significantly greater than the $8.32 billion that changed hands in 
1993. However, the average price of $2035 per subscriber and cash flow 
multiple of 10.2 times cash flow are somewhat lower this year than the 
1993 levels of $2160 per subscriber and 11.3 times cash flow.

C. The Status of Existing Competitors to Franchise Cable Systems

1. Overbuilders

    18. The term ``overbuild'' describes the situation in which a 
second cable operator enters a local market in direct competition with 
an incumbent cable operator. In those markets, the second operator, or 
``overbuilder,'' lays wires in the same area as the incumbent, 
``overbuilding'' the incumbent's plant, thereby giving consumers a 
choice between cable service providers.
    19. In the Report, the Commission discussed the findings it made in 
connection with its March 30, 1994 Report and Order regarding rate 
regulation, when it examined the competitive differential between 
markets that were overbuilt and those that were not.\6\ Under that 
analysis, the Commission determined that the rates in markets that were 
overbuilt were an average of sixteen percent lower than the rates in 
markets that were not overbuilt.\7\ The Commission then discussed the 
fact that, while most studies suggest that overbuilding produces 
meaningful rate effects, overbuilding seems to have remained quite 
limited, despite the 1992 Cable Act's explicit purpose to encourage the 
emergence of direct competition. The Commission will track the progress 
of existing overbuilds and monitor the emergence of new overbuild 
construction on an on-going basis.
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    \6\Implementation of Sections of the Cable Television Consumer 
Protection & Competition Act of 1992: Rate Regulation, Second Order 
on Reconsideration, Fourth Report & Order, & Fifth Notice of 
Proposed Rulemaking, 9 FCC Rcd 4119 (MM Docket No. 92-266 1994), 
summarized in 59 Fed. Reg. 18064 (Apr. 15, 1994). Appendix C of the 
order contains a detailed and technical discussion of the variables 
and economic assumptions underlying the Commission's calculation. 
The Commission studied 51 overbuilds (including those by municipal 
providers) in connection with the order. Id. 96, 9 FCC Rcd at 4162.
    \7\Id. 97, 9 FCC Rcd at 4162.
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2. Direct-To-Home Satellite Services

    20. Two distinct types of direct-to-home (``DTH'') satellite 
services now offer video programming for subscription that is 
comparable to the satellite-delivered programming provided by cable 
television services. DBS is one. Technically, DBS service refers to 
satellites that transmit signals ``intended for reception by the 
general public'' and operate pursuant to Part 100 of the Commission's 
Rules in a portion of the Ku-band.\8\ The second type of DTH service is 
offered by the home satellite dish (HSD) industry, and involves the 
home reception of signals transmitted by satellites operating generally 
in the C-band.
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    \8\47 CFR 100.3.
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a. Direct Broadcast Satellite (DBS)
    21. The Commission found in the Report that DBS has advanced since 
1990 as a potential long-term viable competitor to cable. In December 
1993, the first high-power DBS satellite (``DBS-1''), owned by DirecTV 
and operated jointly with USSB, was launched, and on June 17, 1994, 
DirecTV and USSB began providing high-power DBS service via DBS-1. On 
August 3, 1994, DBS-2, also owned by DirecTV, was launched. As of 
September 9, 1994, equipment necessary to receive service from DirecTV, 
and USSB was available in twenty-three states, approximately 40,000 
households were receiving programming through small reception dishes 
that are approximately eighteen inches in diameter. Retailers in the 
first five markets in which that DBS service has been introduced have 
reported that the demand for the dishes has exceeded the supply. In 
addition to that high-power DBS service, Primestar Partners, L.P. 
(``Primestar''), has been operational as a medium-power Ku-band service 
provider since 1991, and its service is available to consumers using 
thirty-six-inch and forty-inch dishes. As of June 4, 1994, Primestar 
served 70,383 subscribers, and it began to use digital technology to 
provide service to its subscribers on July 31, 1994.
    22. The Commission reported that, by its very nature, DBS is a 
national video programming distribution service. However, DBS services 
does not offer local broadcast signals, a fact which may inhibit the 
ability of DBS service to become an effective competitor to cable 
service. On the other hand, DBS service might provide consumers with 
service attributes that are not generally available on cable systems at 
this time.
b. Home Satellite Dishes (HSDs)
    23. The Commission noted in the Report that HSD technology was 
first developed in 1976, and commercialized in 1989. HSDs are 
approximately 7-10 feet in diameter and receive video programming 
transmitted in the C-band of frequencies.\9\ Generally, HSD owners have 
access to the same programming services that are available on cable, 
although the most popular cable programming services are scrambled. In 
order to receive one or more scrambled channels, an HSD owner must 
purchase an integrated receiver-decoder (``IRD'') from an equipment 
dealer and then pay a monthly or annual subscription fee to one of the 
thirty or so national packagers of HSD programming.
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    \9\Because signals in this band are transmitted at lower power 
than signals in other bands used for direct-to-home service, the 
receiving antenna must be larger to receive the signal.
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    24. Today, there are approximately four million HSD users, roughly 
half of whom subscribe to one or more programming services. It has also 
been reported that almost all recent buyers of HSD systems are choosing 
to subscribe to a programming service. It appears that 61% of HSD 
systems were purchased by persons who did not have access to cable at 
the time they purchased HSD. However, 37% of HSD owners with access to 
cable subscribe to cable services, and 18% of HSD owners who subscribe 
to satellite-programming packages also subscribe to cable. Among HSD 
owners who subscribe to both cable and one or more satellite-
programming packages, 41% subscribe to cable for the purpose of 
receiving local television stations. Accordingly, it appears that HSDs 
and cable systems may be either complementary video programming 
distribution services or substitutes for each other, depending on 
viewer preferences and other circumstances.
    25. The HSD industry's primary competitive strength vis-a-vis cable 
is programming variety and flexibility. Although HSD services offer 
more programming options than any other video delivery system, the cost 
of a system entails a large upfront expenditure by the consumer. 
Another drawback for HSD services comes from the fact that many 
localities have enacted zoning ordinances that restrict the deployment 
of HSDs. A third factor that may affect the ability of HSD systems to 
compete with cable systems is presented by claims video programming 
suppliers charge HSD program packagers prices that cannot be justified 
under the Commission's program access rules.

3. Terrestrial ``Wireless'' Cable--Multichannel Multipoint Distribution 
Service (MMDS)

    26. The term ``wireless cable'' refers to the Multipoint 
Distribution Service (``MDS'') and MMDS (Multichannel Multipoint 
Distribution Service), both of which transmit video programming using 
over-the-air microwave radio channels. Subscribers use rooftop antennas 
to receive the programming transmitted from the wireless cable tower. 
The signals received are then sent through electronics equipment to the 
subscriber's television set. There are eleven MMDS (multichannel) 
channels available to wireless cable system operators for full-time 
use, and either two or three MDS (single-channel) channels depending on 
the particular city. In addition, wireless cable system operators have 
access to the twenty channels allocated to Instructional Television 
Fixed Service (``ITFS'')\10\ on a leased, part-time basis. Thus, 
wireless cable operators have access to a maximum of thirty-two or 
thirty-three channels.
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    \10\ITFS channels are used by educational institutions to 
interconnect scattered campus locations.
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    27. In the Report, the Commission noted that the wireless cable 
industry increased its subscribership from 50 systems serving 300,000 
subscribers in 1990, to 143 systems serving 550,000 subscribers by June 
1994. In addition, the Commission discussed projections that the number 
of wireless cable subscribers will grow through the end of the decade, 
and concluded that, although wireless cable has not achieved 
significant penetration nationwide, there are a number of markets in 
which wireless cable has gained a foothold in competition with wired 
cable systems.
    28. In the Report, the Commission wrote that the wireless cable 
industry has a number of strengths vis-a-vis cable. First, wireless 
cable system operators appear to incur lower costs for the initial 
construction of their systems, which allows wireless operators to 
provide comparable service at lower prices than cable. Second, it 
appears wireless operators may be able to upgrade their systems to 
employ digital compression and interactive applications at a lower cost 
per subscriber than cable system operators. Third, in contrast to cable 
system operators, wireless cable operators are not required to obtain 
franchises in order to provide service. However, at least one state now 
regulates various aspects of the customer service provided by wireless 
cable operators and other MVPDs.
    29. The Commission noted, however, that there appear to be several 
remaining obstacles that could hamper the growth of wireless cable. 
First, wireless cable operators have difficulty in gaining access to a 
sufficient number of channels to provide a competitive service. Second, 
wireless cable transmitters must have line-of-sight access to a home in 
order for that home to be capable of receiving wireless cable service. 
Consequently, many homes are unable to receive service from this 
technology because they are blocked by trees or buildings.
    30. Overall, the Commission concluded that it appears that two of 
the wireless cable industry's most significant problems, lack of 
capital and insufficient channel capacity, are being addressed. First, 
the program access provisions of the 1992 Cable Act appear to have 
given wireless operators the credibility to raise money in the public 
debt and equity markets, thereby easing the financial difficulties 
experienced by many wireless systems. Second, the combination of 
improved Commission licensing and the use of digital compression is 
expected to alleviate wireless cable's problem with limited channel 
capacity in the near future. The progress in these two areas has led 
some analysts to forecast continued growth for this industry.

4. Satellite Master Antenna Television (SMATV) Systems

    31. SMATV system operators (also known as ``private cable 
systems'') are MVPDs that serve residential, multiple-dwelling units 
(``MDUs''), and various other buildings and complexes. A SMATV system 
offers, in general, the same type of programming as a cable system, and 
the operation of a SMATV system, in large part, resembles that of a 
cable system--a satellite dish receives the programming signals, 
equipment processes the signals, and wires distribute the programming 
to individual dwelling units. The primary difference between the two is 
that SMATV systems typically are unfranchised, stand-alone systems that 
serve a single building or complex, or a small number of buildings or 
complexes in relatively close proximity to each other. However, SMATV 
operators are increasingly using microwave facilities to interconnect 
properties spread over a metropolitan area.
    32. The Commission noted in the Report that one industry source 
estimates that there are currently approximately 3000 to 4000 SMATV 
systems operating nationwide serving approximately one million 
subscribers. SMATV operators may have the ability to offer lower prices 
than can wired cable operators for substantially the same services. On 
the other hand, the Commission noted that regulatory barriers, 
including the circumstances under which SMATV systems may be required 
to obtain franchises, may artificially raise the cost of operating 
SMATV systems. Moreover, SMATV operators contended in the proceeding 
that the Commission's cable home wiring rules permit cable operators to 
engage in conduct that has a chilling effect on competition. Those 
rules, require, inter alia, that cable operators provide subscribers 
with the opportunity to acquire cable home wiring before the cable 
operator removes it from the premises after termination of service.\11\ 
The Commission concluded by stating that it will address home wiring 
issues when it rules on the petitions for reconsideration that are now 
pending.
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    \11\47 C.F.R. Sec. 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 utilize the wires 
with competing MVPDs, thereby facilitating competition from these 
entities. Implementation of the 1992 Cable Act, Cable Home Wiring, 
Report & Order, 8 FCC Rcd 1435 (1993), summarized in 58 Fed. Reg. 
11970 (Mar. 2, 1993), recon. pending., MM Docket No. 92-260. The 
Commission currently has before it a petition to initiate a 
rulemaking to determine how cable subscribers may have access to 
existing cable home wiring for the delivery of competing and 
complementary services. Joint Petition for Rulemaking on Cable 
Television Wiring, Public Notice, 8 FCC Rcd 8184 (1993).
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5. Broadcast Television Service

    33. Broadcast television stations are, and always have been, 
significant suppliers in the market for delivered video programming. In 
the Report the Commission noted that during the 1993-94 season, ABC, 
CBS, NBC and Fox maintained a combined 72% share of prime-time viewers. 
Even among those households subscribing to cable, retransmitted 
broadcast channels had a 46% prime time viewing share in the 1992-93 
season, while retransmitted independent broadcast and public television 
stations maintained 17% and 3% shares respectively. Therefore, two-
thirds of all cable households watching television delivered by cable 
in the 1992-93 season were watching a retransmitted broadcast channel. 
Moreover, more than one-third of all households that could subscribe to 
cable service elected not to do so. Accordingly, the Commission wrote 
that it would appear that for at least some viewers, broadcast 
television service satisfies their demand for video programming.
    34. The Commission found, however, that cable systems offer a 
``steadily-expanding complement of specialized program services,'' 
which can increasingly meet consumer demand for more video programming 
choices.\12\ Accordingly, the Commission determined that the menu of 
available broadcast signals is insufficient to constrain cable market 
power.
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    \12\1990 Cable Report  69, 5 FCC Rcd at 4971-72.
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D. The Status of Other Actual or Potential Competitors

1. Local Exchange Carrier (LEC) Entry

    35. Since 1990, the Commission has adopted orders easing the 
regulatory restrictions that had essentially prevented LECs from 
participating in the multichannel video marketplace. The Commission 
discussed in the Report the ``video dialtone'' (``VDT'') framework that 
it created for LEC participation in the multichannel video distribution 
marketplace consistent with the statutory prohibition against LECs' 
provisions of video programming directly to subscribers within their 
service areas.\13\ That VDT framework, along with technological 
advances, has spurred increased video-related activity by LECs, 
including several market and technical trails and twenty-four 
applications for permanent authority covering over 8.5 million homes. 
Those applications, taken together, constitute a promising source of 
competition to cable operators for the multichannel distribution of 
video programming.
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    \13\Communications Act Sec. 613(b), 47 U.S.C. Sec. 533(b), See 
also 47 C.F.R. Secs. 63.54, 63.58 (1990); United States v. AT&T 552 
F. Supp. 131 (D.C.C. 1982), aff'd sub nom. Maryland v. United States 
460 U.S. 1001 (1983).
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    36. In the Report, the Commission discussed how the VDT regulatory 
framework adopted by the Commission in 1992 permits a LEC to make 
available, on a non-discriminatory common carrier basis, a platform 
capable of providing non-discriminatory access to multiple video 
programmers and of delivery video programming and other services to end 
users within its local telephone service area. The LEC may also provide 
additional enhanced and non-common carrier services to customers of the 
common carrier platform. Neither a LEC offering VDT service, nor its 
programmer-customers, is required to obtain a local cable television 
franchise.\14\ Authorization pursuant to Section 214 of the 
Communications Act\15\ (``Section 214 authorization'') is required for 
LEC provision of VDT service, and the Commission has established 
safeguards to prevent discrimination and cross-subsidization.
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    \14\The Commission's decision that neither LECs nor their 
programmer-customers are required to obtain a local franchise in 
order to provide video programming to end-users was recently 
affirmed by the D.C. Circuit. National Cable Television Assoc. v. 
FCC, 33 F.3d 66, (D.C. Cir. 1994).
    \15\47 U.S.C. Sec. 214.
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    37. In addition to regulatory and legal constraints, the Commission 
wrote that technology has also played a role in restraining the entry 
of LECs into the multichannel video programming distribution 
marketplace. While an infrastructure owned by telephone companies 
currently exists for delivery of narrowband voice communications to 
most homes and businesses in the nation, that infrastructure is unable 
to transport and deliver multichannel video programming to multiple end 
users. Various techniques, technologies and architectures for 
delivering broadband video signals are currently being tested.
    38. Finally, the Commission discussed the fact that a number of 
issues remain unresolved with respect to the participation of LECs in 
the delivery of video programming. At the time of the release of the 
Report, the regulatory framework for permitting LECs to construct and 
operate a common carrier VDT platform for the transmission of video 
programming and other services to end-users was under review by the 
Commission.\16\ Moreover, the VDT industry is in its planning and 
construction phases. In future reports, the Commission will further 
review the development of LEC provision of video programming and its 
status as a competitive alternative to cable.
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    \16\The Commission has subsequently released an order on 
reconsideration, in which it affirmed the VDT regulatory framework 
in most respects, and issued a further notice of proposed rulemaking 
on certain issues. Telephone Company-Cable Television Cross-
Ownership Rules, Sections 63.54-63.58, FCC 94-269 (CC Docket No. 87-
266 Nov. 7, 1994).
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2. Local Multipoint Distribution Service (LMDS)

    39. LMDS is a new technology, similar to MMDS, in which multiple 
channels of video programming are transmitted using high-frequency 
microwave channels in the 28 GHz band. Like MMDS, LMDS subscribers must 
have a special antenna that is located with a line of sight to the 
transmitter. Because of the propagation characteristics in this 
frequency band, LMDS requires multiple transmitters in ``cells'' with 
radii of three to six miles in order to cover a metropolitan area that 
could be covered by a single wireless cable transmitter.
    40. Because the Commission has not yet determined whether the 28 
GHz band will be designated for use by LMDS operators, the Commission 
determined that it was premature to draw any conclusions in the Report 
regarding the feasibility of LMDS. If the Commission ultimately 
concludes that LMDS is to be licensed in the 28 GHz band, LMDS will be 
included in future reports to Congress.

3. Low Power Television (LPTV)

    41. Low power television (``LPTV'') refers to use of the VHF and 
UHF spectra pursuant to the regulatory scheme that was established by 
the Commission in 1982 as a means of increasing diversity in television 
programming and station ownership.\17\ Although this service has been 
highly successful in meeting that objective, there is now interest in 
using LPTV channels to provide multichannel video service.
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    \17\An inquiry into the Future Role of Low Power Television 
Broadcasting & Television Translators in the Nat'l 
Telecommunications Sys., 51 RR2d 476 (1982).
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    42. The Commission wrote in the Report that, while multichannel 
LPTV services may eventually become available in many areas, an 
application freeze on new LPTV stations within 100 miles of the thirty-
six largest United States cities, which was entered to preserve 
spectrum availability for the implementation of advanced television 
systems, suggests that multichannel LPTV entry will likely be limited 
to smaller and mid-sized markets. In addition, it is unclear whether 
multichannel LPTV will enter the market as a competitor to cable, or as 
a substitute to cable service in largely uncabled areas.

4. Electric Utilities

    43. The Commission also discussed the fact that electric utility 
companies may provide another potential source for the delivery of 
video programming. Some municipal electric utility companies are 
actively engaged in overbuilding privately-owned cable systems, or are 
presently contemplating such overbuilding. As is the case with LEC 
provision of VDT services, the need for appropriate safeguards to avoid 
cross-subsidization between regulated and video distribution businesses 
in an issue associated with entry by electric utility companies.

5. Video Cassette Recorders (VCRs)

    44. VCRs (video cassette recorders) are not ``multichannel video 
programming distributors.'' However, widespread ownership of VCRs 
allows many viewers to see over-the-air programs at times other than 
when they are broadcast, and also permits those viewers to choose pre-
recorded tapes on a variety of subjects, giving them more control over 
both the programming they watch and the time they watch it.
    45. In the Report, the Commission found that VCRs have become more 
prevalent since the 1990 Cable Report was released. It appears that by 
the end of 1993, there were approximately 80.5 million households with 
VCRs, which compares to approximately 57 million cable households in 
1990. Although those 80.5 million households with VCRs would account 
for nearly 84% of all television households in the United States, the 
Commission noted that a study conducted by the Commission following its 
release of the 1990 Cable Report found that VCRs are more properly 
categorized as competitors of premium or pay-per-view cable 
programming, rather than of cable services generally.\18\
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    \18\See Florence Setzer & Jonathan Levy, Broadcast Television in 
a Multichannel Marketplace 108 (Federal Communications Commission, 
Office of Plans and Policy, OPP Working Paper Series, June 1991).
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E. Horizontal Concentration in the Cable Industry

    46. The Commission determined that there has been a moderate 
increase in the horizontal concentration of the cable industry on the 
national level since the issuance of the 1990 Cable Report, as measured 
by the Herfindahl-Hirschman Index (``HHI''), which is a standard 
measure of horizontal concentration.\19\ At the end of the first 
quarter of this year, the HHI for the industry is 898, which is a 
number that is typically associated with an ``unconcentrated'' market, 
although it does represent a modest increase in concentration since 
1990. However, the Commission then discussed the fact that, by the 
middle of September 1994, four transactions had been announced that 
would significantly alter the shares of the market attributable to the 
top ten companies. The Commission determined that, if those four 
transactions are consummated, the HHI will rise to approximately 1051. 
Standard antitrust analysis considers a market with an HHI between 1000 
and 1800 to be ``moderately concentrated.''\20\
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    \19\The HHI is calculated by summing the squares of the firms' 
percentage shares of the market. United States Dep't of Justice & 
Federal Trade Comm'n, 1992 Horizontal Merger Guidelines 
(``Horizontal Merger Guidelines'') 1.5, 57 Fed. Reg. 41552, 41557.
    \20\Id. 1.51, 57 Fed. Reg. at 41558.
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    47. The Commission discussed the fact that the persistence of high 
concentration at the local level (i.e., one cable system per community) 
tends to impair market performance. In addition, Congress and the 
Commission have noted that greater national concentration may have both 
adverse and pro-competitive effects. Concentration in regional, or 
locally clustered, marketing areas may also be pro-competitive or anti-
competitive. Such clustering may result in significant efficiencies, or 
it may reflect the desire of cable operators to enter the telephone 
business or position themselves to compete against LECs that are 
themselves regionally clustered and poised to enter the market for the 
distribution of multichannel video programming. On the other hand, the 
Commission found that there are competitive risks associated with 
increased regional clustering of commonly-owned cable systems. The 
creation of large, contiguous clusters of commonly-owned systems may 
result in the removal of cable systems that are not affiliated with 
large MSOs from significant regions of the country, and thereby, 
increase the market power of clustered systems by decreasing the 
likelihood of entry by overbuilders.

F. Vertical Integration in the Cable Industry

    48. The Commission found in the Report that, while the number of 
vertically-integrated national programming services has grown 
substantially since 1990, so too has the overall number of programming 
services available for distribution. Consequently, approximately 53% of 
programming services are integrated with cable system operators today, 
compared with 50% in 1990.
    49. The Commission noted that vertically-integrated national 
programming services dominate the group of services that are most 
widely viewed. Twelve of the top fifteen most-watched services, 
according to prime-time rankings, are vertically integrated, an 
increase from ten in 1990. Moreover, cable operators have interests in 
fifteen of the top twenty-five services, an increase from thirteen in 
1990. The Commission wrote, however, that it is too early to determine, 
whether vertically-integrated services that have been introduced since 
1990 will be more successful than their non-integrated counterparts.
    50. Currently, there are fifty-six vertically-integrated 
programming services. They are owned, in whole or in part, by only 
twenty MSOs. Nine of the ten largest MSOs have attributable ownership 
interests under the program access rules in one or more of these fifty-
six programming services. The four largest MSOs have partial ownership 
interests in seven of the fifteen most popular services and in nine of 
the top twenty-five.
    51. In contrast to the ``substantial evidence of specific problems 
concerning program access'' that were noted in the 1990 Cable 
Report,\21\ the Commission noted that the commenters in this proceeding 
have not complained about widespread unavailability of programming to 
distributors competing with cable operators. From November 1993, when 
the program access and carriage agreement regulations took effect, 
through June 30, 1994, only twelve program access cases were filed; 
eleven have since been resolved.\22\ Accordingly, the Commission 
determined that its enforcement of the program access provisions 
appears to be meeting one of the goals of Section 19 of the 1992 Cable 
Act--ensuring access by competing MVPDs to satellite cable programming 
from vertically-integrated programming services.
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    \21\1990 Cable Report 113, 5 FCC Rcd at 5021.
    \22\A brief description of the resolved cases appears in 
Appendix F of the Report.
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    52. The Commission also noted that it has not received any 
complaints alleging violations of its channel occupancy rules or 
petitions requesting that the restrictions be waived. That silence, ten 
months after the rules took effect, is a strong indication that there 
are no significant violations of the rules and that the rules are not 
unduly restricting the ability of vertically-integrated MSOs to deliver 
programming to their customers. However, the Commission did not have a 
sufficient record to determine whether cable systems exclude affiliated 
programming services because of the rules. Nor was there a sufficient 
record to address whether the channel occupancy limits have influenced 
investment of cable MSOs in programming, or whether unaffiliated 
programming vendors have benefitted from the limits.

G. The Nature of Technical Changes Affecting Cable Systems

    53. The Commission noted in the Report that telecommunications 
technologies, including those used in the distribution of video 
programming, are evolving rapidly. For example, technologies used to 
transmit voice, video and data are crossing the boundaries that have 
traditionally separated information distributors. Moreover, the cable 
industry and competing information distributors are in the midst of 
deploying new and improved transmission systems; and they are 
projecting the near-term introduction of new and innovative services 
that are presently unavailable to consumers, or are only available on 
an experimental basis. The Commission determined that those changes 
have the potential to exert a major influence on industry structure, 
and will affect the sustainability of competition with incumbent cable 
systems from MVPDs that use technologies other than cable.
    54. The Commission found, however, that it was too soon to draw any 
conclusions regarding the ongoing dynamics of technological change that 
permeate the telecommunications industry today. Nevertheless, 
significant issues that may have a dramatic effect on how competition 
develops in the delivered multichannel video programming industry are 
coming into focus. The Commission's ongoing review of such issues will 
be essential to the formulation of public policies for video 
distribution markets that will provide consumers with early access to 
the remarkable advantages that such technologies seem to promise.

H. The Extent of Competition and Assessment of Market Performance

    55. The Commission found in the Report that cable television 
remains the dominant medium for providing consumers with multichannel 
video programming. Most local markets for the distribution of 
multichannel video programming are highly concentrated, and for most 
consumers, cable television is the only provider of multichannel video 
programming. There are presently only a few scattered areas of the 
country where the local cable operator faces direct competition from an 
overbuilder. Moreover, providers using alternative technologies have 
not yet reached the subscribership levels necessary for the Commission 
to find the existence of vigorous rivalry in the market for 
multichannel video distribution.
    56. Overall, the Commission reported that the current market 
performance in the multichannel video programming distribution 
industry, when assessed in terms of several indicators of economic 
efficiency, is mixed. While the industry is responsive to growth in 
consumer demand, the output is supplied to consumers at prices that 
often imply substantial losses in economic efficiency. The industry 
continues to invest in the deployment of improved video distribution 
facilities, which should offer the consumer expanded video programming 
options. The industry also invests in research and development, which 
should improve the capabilities and performance of local cable networks 
and services in the future. The willingness of new entrants to invest 
substantial resources in competition with the incumbent cable systems 
suggests, however, that there exist further opportunities for improved 
market performance.
    57. The Commission also reported that, in the longer term, 
increased rivalry in the market for delivered multichannel video 
programming should result in lower prices relative to present cable 
rates, and in a substantially broadened array of programming options 
for increasingly specialized audiences. In addition, consumers should 
receive more pricing options. Such rivalry may also be expected to 
provide a stimulus to more rapid development of new technologies and 
product innovation. At present, however, the Commission found that 
market performance in local cable markets does not yet reflect the 
benefits of this competitive rivalry. Therefore, lowering barriers to 
entry is likely to lead to significant gains in consumer welfare.
    58. The commission noted that the cost of constructing a cable 
distribution network may be viewed as a sunk cost, i.e., an operator's 
investment in its cable plant cannot typically be physically redeployed 
to some other profitable use of operation of the system were to become 
unprofitable.\23\ The existence of those sunk costs creates strong 
incentives for the incumbent cable operator to engage in strategic 
behavior designed to protect that investment. While such behavior may 
take the form of vigorous competition, which enhances consumer welfare, 
cable operators also have the incentive to engage in strategic behavior 
designed to deter entry by potential rivals.
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    \23\The concept and economic significance of sunk costs are 
discussed in Appendix H of the Report.
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    59. The record in the proceeding also contained evidence that 
federal statutory schemes prevent competitive entry altogether, or may 
prevent the most efficient form of entry. Various state laws were also 
identified as possible impediments to competitive entry. For example, a 
recently enacted California statute allows municipalities to require 
video programming distributors to undertake various actions in cities 
in which they offer video programming. Similarly, despite limited 
preemption by the Commission, local zoning regulations may inhibit 
competition from direct-to-home programming distributors by preventing 
home users from installing HSDs and smaller DBS dishes.
    60. The creation of technological bottlenecks in the 
telecommunications industry has long been of great concern to the 
Commission. The record in the proceeding reflected a variety of 
potential bottlenecks, some as old as the industry itself, and others 
related to emerging technological developments. In particular, the 
Commission noted that concerns have recently reemerged with respect to 
utility poles as a potential bottleneck where cable operators 
themselves might be suffering competitive harm.\24\ The Commission 
determined that pole attachment is an area that could affect the status 
of competition in the delivered video programming market and may merit 
Commission attention in the future.\25\
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    \24\See, e.g., Selkirk Communications, Inc. v. Florida Power & 
Light Co., 8 FCC Rcd 387 (1993); Heritage Cablevision Assocs. v. 
Texas Elec. Co., 8 FCC Rcd 373, appeal denied sub nom., Tex. Elec. 
Co. v. FCC, 997 F.2d 925 (D.C. Cir. 1993).
    \25\The Commission did not seek or receive public comment on the 
issue of pole attachments in this proceeding. Accordingly, the 
Report did not contain any conclusions concerning the status of this 
issue or the need for Commission or congressional action.
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    61. The Commission noted that MSOs are currently investing in 
digital compression and encryption technologies, which could impact the 
manner in which ``raw'' video programming is distributed via satellite 
nationally, and possibly create a technological bottleneck to competing 
distribution media. Finally, the Commission wrote that, as the cable 
industry converts to digital technology and two-way communications, 
issues concerning network architecture, standardization, and access may 
become important competitive issues as they have in the telephone 
industry. While the Report provided no analysis of the potential 
significance of such issues at this time, it is likely that such issues 
will require attention in future reports.

H. Future Considerations and Recommendations for Promoting Competition 
to Cable Systems

    62. While the Commission believes that several specific reforms 
mentioned in the Report might improve market performance, most of the 
competitive issues raised in the Report will require ongoing monitoring 
as a more dynamic and competitive environment develops in this market. 
In the coming year, Commission staff will endeavor to find a mechanism 
to collect, interpret and monitor the growth of alternative 
distribution media so future reports will be able to provide a more 
complete picture of the status of competition at both the local and 
national levels. Because this market is dynamic and evolving, the 
Commission anticipates that, to a certain extent, this series of 
reports will be a work in progress in which certain parts are 
continually updated and revised.
    63. Consistent with the requirement that the Commission annually 
report to Congress on the status of competition, future reports will be 
submitted to Congress by November 15 of each subsequent year.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 94-30832 Filed 12-14-94; 8:45 am]
BILLING CODE 6712-01-M