Telecommunications: Wire-Based Competition Benefited Consumers In
Selected Markets (04-FEB-04, GAO-04-241).
One of the primary purposes of the Telecommunications Act of 1996
was to promote competition in telecommunication markets, but
wire-based competition has not developed as fully as expected.
However, a new kind of entrant, called broadband service
providers (BSP), offers an alternative wire- based option for
local telephone, subscription television, and high- speed
Internet services to consumers in the markets they have chosen to
enter. This report provides information on (1) BSPs' business
strategy, (2) the impact of BSPs' market entry on incumbent
companies' behavior and consumer prices for telecommunications
services, (3) the key factors that BSPs consider when making
decisions about which local markets to enter, and (4) the success
of BSPs in attaining subscribership and any key factors that may
limit their success. We developed a case-study approach to
compare 6 cities where a BSP has been operating for at least 1
year with 6 similar cities that do not have such a competitor.
The 6 markets with a BSP presently account for more than 20
percent of the households nationwide that are in areas where BSPs
currently offer the three-service package, but the results of
these case studies are not generalizable to all markets.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-241
ACCNO: A09191
TITLE: Telecommunications: Wire-Based Competition Benefited
Consumers In Selected Markets
DATE: 02/04/2004
SUBJECT: Cable television
Competition
Rates
Telecommunication industry
Strategic planning
Telephone
Internet service providers
Cost analysis
Broadband services
******************************************************************
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GAO-04-241
United States General Accounting Office
GAO Report to the Subcommittee on Antitrust, Competition Policy and
Consumer
Rights, Committee on the Judiciary, U.S. Senate
February 2004
TELECOMMUNICATIONS
Wire-Based Competition Benefited Consumers in Selected Markets
a
GAO-04-241
Highlights of GAO-04-241, a report to the Subcommittee on Antitrust,
Competition Policy and Consumer Rights, Committee on the Judiciary, U.S.
Senate
One of the primary purposes of the Telecommunications Act of 1996 was to
promote competition in telecommunication markets, but wire-based
competition has not developed as fully as expected. However, a new kind of
entrant, called broadband service providers (BSP), offers an alternative
wirebased option for local telephone, subscription television, and
highspeed Internet services to consumers in the markets they have chosen
to enter. This report provides information on (1) BSPs' business strategy,
(2) the impact of BSPs' market entry on incumbent companies' behavior and
consumer prices for telecommunications services, (3) the key factors that
BSPs consider when making decisions about which local markets to enter,
and (4) the success of BSPs in attaining subscribership and any key
factors that may limit their success.
We developed a case-study approach to compare 6 cities where a BSP has
been operating for at least 1 year with 6 similar cities that do not have
such a competitor. The 6 markets with a BSP presently account for more
than 20 percent of the households nationwide that are in areas where BSPs
currently offer the three-service package, but the results of these case
studies are not generalizable to all markets.
www.gao.gov/cgi-bin/getrpt?GAO-04-241.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Mark Goldstein at (202)
512-2834 or [email protected].
February 2004
TELECOMMUNICATIONS
Wire-Based Competition Benefited Consumers in Selected Markets
BSPs' primary business strategy is to build a fiber-optic network to
provide consumers with a bundle of services, including subscription
television, highspeed Internet access, and local telephone. To entice
consumers to purchase more than one service of the three services they
offer-a key marketing goal-all of the BSPs we reviewed offer substantial
savings to consumers who buy more than one service.
The rates for telecommunications services were generally lower in the 6
markets with BSPs than in the 6 markets without a BSP. For example,
expanded basic cable television rates were 15 to 41 percent lower in 5 of
the 6 markets with a BSP when compared with their matched market.
Comparison of Monthly Cable TV Rates in 6 Matched-Pair Markets
Source: GAO.
The 6 BSPs we interviewed said that demographic factors, such as city
size, income, and computer use were important factors in their decision to
enter a market. For example, most of the BSPs avoided entering large
cities. Location of the markets to key facilities and receptivity of local
government officials were also considered when deciding which markets to
enter.
The 6 BSPs we interviewed have gained significant market shares for the
services they provide, but they have also faced a number of obstacles that
may be hindering their success. For example, the BSPs we spoke with are
experiencing some financial difficulties and are putting off network
expansion. Two of these companies also currently lack the resources
necessary to adequately market their services within their existing
markets.
We provided a draft of this report to the FCC and DOJ. The DOJ did not
provide any comments, and FCC provided technical comments that we
incorporated. We invited the Broadband Service Provider Association, the
National Association of Telecommunications Officers and Administrators,
the National Cable & Telecommunications Association (NCTA), and the United
States Telecom Association to comment on a draft of this report. We
summarize and discuss NCTA's detailed comments in the report.
Contents
Letter
Results in Brief
Background
BSPs' Business Strategy Focuses on Providing Bundled
Telecommunications Services Consumers Enjoy Lower Rates in Markets with
BSPs BSPs Consider Specific Demographic, Geographic, and Local
Government Factors When Deciding Which Markets to Enter BSPs Are Gaining
Market Share, but a Variety of Factors May Hinder
Their Success Conclusions Agency Comments Industry Association Comments
and Our Evaluation
1 4 6
9 12
17
21 28 28 28
Appendixes
Appendix I: Appendix II: Appendix III:
Appendix IV:
Scope and Methodology
Price and Channel Information in Six Market Pairs
Broadband Service Provider Association Member Markets as of February 2003
GAO Contacts and Staff Acknowledgments
GAO Contacts
Staff Acknowledgments
32 35
36
37 37 37
Tables Table 1: Case-Study Cities and Industry and Local Government
Participants 33 Table 2: Price and Channel Information in Six Market Pairs
35
Figures Figure 1:
Figure 2: Figure 3:
Figure 4:
Figure 5:
Case-Study Locations and Telecommunications
Companies Interviewed 3
Telecommunications Service Subscriptions 9
Average BSP A la carte and Bundle Price for Premium
Three-Service Bundle 12
Extent to Which Rates For Telecommunications Services
Were Lowerin the 6 Markets with BSP Competition When
Compared with Each BSP Markets' Matched-Pair 16
Penetration of Subscription Television, High-Speed
Internet, and Telephone Services for BSPs in Case-Study
Markets, June 2003 23
Contents
Abbreviations
BSP broadband service provider
BSPA Broadband Service Provider Association
FCC Federal Communications Commission
NATOA National Association of Telecommunications Officers and
Administrators NCTA National Cable & Telecommunications Association USTA
United States Telecom Association
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
A
United States General Accounting Office Washington, D.C. 20548
February 2, 2004
The Honorable Mike DeWine
Chairman
The Honorable Herb Kohl
Ranking Minority Member
Subcommittee on Antitrust, Competition Policy and Consumer Rights
Committee on the Judiciary United States Senate
One of the primary purposes of the Telecommunications Act of 1996 was to
promote competition in telecommunications markets. In local telephone
markets, companies began to provide competition to local telephone
companies after passage of the act. Much of that competition focused on
service to business customers, and many of these companies have gone out
of business in the past few years. Regarding the subscription television
market-that is, the market for pay television service-there were
expectations that certain provisions of the act, along with some
provisions of the earlier Cable Television Consumer Protection and
Competition Act of 1992, would spur new competition in a market that had
long been dominated by cable television providers. However, entry by
wire-based providers (such as telephone companies) into the subscription
television market has not developed as fully as expected.
In the past few years, a new kind of wire-based provider-typically known
as a broadband service provider (BSP)-has emerged to provide competition
to local incumbent telephone and cable television providers through a
bundled offering of subscription television, local telephone, and
high-speed (or broadband) Internet services. These BSPs could enhance the
competitiveness of these markets, but they also may face certain
challenges that make it difficult for them to become fully viable
competitors.
You asked us to provide information about a variety of issues related to
BSPs' operations and the influence of their entry into selected markets.
For a selected set of markets, this report provides information on (1)
BSPs' business strategy; (2) the impact of BSPs' market entry on incumbent
cable and telephone companies' market behavior and on consumer prices of
subscription television, high-speed Internet, and local telephone
services; (3) the key factors that BSPs consider when making decisions
about which local markets to enter; and (4) the success of BSPs in
attaining
subscribership and any key factors that may limit their success. We also
recently issued a report on cable rates that examined several related
issues.1
To address these objectives, we developed a matched-pair case-study
approach to compare cities, or markets, where a BSP is operating with
similar cities that do not have such a competitor. We selected 6 cities in
which a BSP had offered three services-local telephone, subscription
television, and high-speed Internet access-for at least 1 year. We then
chose a match for each of the 6 cities by selecting another city in the
same state, where possible, which was of a similar size and demographic
profile, but that did not have a BSP. See figure 1 for a list of 12 cities
that were chosen. Of the 6 city pairs, 3 were small city pairs, 2 were
medium-sized city pairs, and 1 was a large city pair. In the case of the
large city with a BSP-Boston-we chose a matched city that was not in the
same state because there was no appropriate in-state match for Boston, nor
were there other large cities that had an extensive BSP presence. The 6
casestudy markets with a BSP presently account for more than 20 percent of
the households nationwide that are in areas where BSPs currently offer the
three-service package.2
In each of the cities, we conducted semistructured interviews with
relevant industry representatives as well as state and local regulatory
officials. As depicted in figure 1, we interviewed officials from
o six BSPs in the cities where there was such a provider,
o four incumbent cable companies that operate in our 6 matched-pair
cities,
o four incumbent telephone companies that operate in our 6 matched-pair
cities,
o twelve local franchising authorities, and
o seven state public utility commissions.
1See U.S. General Accounting Office, TELECOMMUNICATIONS: Issues Related to
Competition and Subscriber Rates in the Cable Television Industry,
GAO-04-8 (Washington, D.C.: Oct. 24, 2003).
2The Broadband Service Provider Association (BSPA) has 11 members, 6 of
which provide all three services to more than one market. (See app. III
for a list of BSPs that are members of the BSPA.) For our sample, we
selected 1 city for each of the providers serving multiple markets.
Figure 1: Case-Study Locations and Telecommunications Companies Interviewed
Sources: GAO analysis; Nova Development (clip art).
Although our analysis provides details on the 12 geographic locations we
examined, because we used a case-study method, our results are not
generalizable to all markets. Statistics presented in the Background
section of this report regarding the local telephone, subscription video,
and high-speed Internet markets were obtained from the Federal
Communications Commission (FCC). This information was presented for
background and illustrative purposes only; therefore, we did not assess
the reliability of this information.
We performed our work from May 2003 through December 2003 in accordance
with generally accepted government auditing standards. See appendix I for
a more detailed discussion of our scope and methodology.
Results in Brief BSPs focus on a core business strategy of building a new
fiber-optic network over which they can provide three services to
consumers: local telephone, subscription television, and high-speed
Internet services. The BSPs we interviewed attempt to entice subscribers
to take more than one service, and they have specific targets for the
average revenues that they hope to obtain per subscriber. In order to
encourage subscribers to take more than one of the three services they
offer, these providers offer significant discounts for purchases of
packaged services.
On the basis of 12 markets we examined, it appears that BSPs' entry into a
market benefited consumers in the form of lower prices for subscription
television, high-speed Internet access, and local telephone services.
Incumbent cable operators often responded to BSP entry by lowering prices,
enhancing the services that they provide, and improving customer service.
Incumbent local telephone providers did not appear to have responded as
much to BSP entry as was the case with cable providers; these local
telephone providers told us that certain federal and state laws limit
their ability to respond to new entrants. The combined effect of BSP entry
and incumbent companies' response provides significant benefits for
consumers. The rates for telecommunications services were generally lower
in the 6 markets with BSPs than in the 6 markets without a BSP. For
example, expanded basic cable television rates were 15 to 41 percent lower
in 5 of the 6 markets with a BSP when compared with their matched market.
The prices were also generally lower in markets with BSPs for local
telephone and high-speed Internet services. In some cases, the lowest
price in the BSP market was that offered by the BSP, while, in other cases
the lowest price in that market was that offered by the incumbent
provider.
Some of the rate impacts that we found may be due to factors other than
the BSP entry, such as population density.
BSPs analyze a variety of factors when determining which local markets to
enter. For the 6 BSPs we interviewed, demographic characteristics, such as
the size of the city and the income and level of computer use of its
residents, were important factors that BSPs considered when determining
which markets to enter. For example, these providers generally targeted
small to medium markets because, in their view, it would be difficult to
quickly construct infrastructure in larger markets. Also, the BSPs we
interviewed enter markets that are geographically close to a parent
company or close in proximity to other key facilities, such as the BSP's
headquarters, network, or other needed infrastructure. Finally, 5 of the 6
providers selected specific markets that, in their view, had officials in
city government who were actively interested in having new competition and
who took steps to ease the providers' entry.
Despite making significant progress in attracting customers to purchase
their services, the BSPs we interviewed face some obstacles in the
application of their business strategy. In the 6 markets we reviewed, the
BSPs have attracted, on average, 25 percent of households to their
subscription television service, 29 percent to their local telephone
service, and 17 percent to their high-speed Internet services. The
penetration levels-that is, the percentage of the population in an area
that are subscribing to a BSP's service-vary considerably across the
markets and services, ranging from a low of 6 percent penetration for
high-speed Internet in 1 market to a high of 63 percent penetration in
telephone service in another market. We also found that BSPs' business
strategy can be difficult to implement because of certain factors that may
limit their success. First, BSPs we interviewed noted that certain factors
could hinder their ability to effectively compete in the specific markets
that they have entered. For example, some of these providers said that an
inability to gain access to certain cable networks that subscribers want
to receive, or difficulty being able to provide service to residents of
some apartment and condominium complexes, created barriers to their
success in certain markets. Second, the BSPs we interviewed may be facing
more competition in the markets they have entered than they may have
envisioned when they developed their marketing plans, which is making it
difficult to reach the penetration targets they had set. Lastly, the BSPs
we interviewed have had difficulties securing continued access to adequate
financial resources that are needed to rapidly construct their networks
and market their services. As a result, the BSPs we interviewed are
currently
experiencing varying states of financial problems due to a lack of
capital. None of the 6 companies are actively expanding their networks,
and 2 currently lack the resources that are necessary to adequately market
their services within their existing markets. These financial problems may
be alleviated as the nation's telecommunications sector recovers.
We provided a draft of this report to the FCC and the Antitrust Division
of the Department of Justice for their review and comment. The Department
of Justice did not provide any comments, and the FCC provided technical
comments that we have incorporated.
We also invited representatives from the Broadband Service Provider
Association (BSPA), the National Association of Telecommunications
Officers and Administrators (NATOA), the National Cable &
Telecommunications Association (NCTA), and the United States Telecom
Association (USTA) to review and comment on the draft report. USTA did not
provide any comments. BSPA and NATOA provided technical comments that we
have incorporated as appropriate. NCTA provided detailed comments. In
particular, NCTA stated that because the sample of franchises examined as
part of this case study was so small, no broad conclusions should be
drawn. Moreover, they noted that the observed pricing differences between
cities with and those without a BSP entrant could have occurred for
reasons other than competitive entry. Finally, they noted that GAO did not
evaluate whether the lower prices available in cities with BSPs
represented economically sustainable price levels. GAO's response to these
comments, as well as a more complete summary of NCTA's comments appears at
the end of this report.
Background Today, 95 percent of American households purchase local
telephone service, 85 percent purchase subscription television service
(usually from a cable company or a satellite provider), and about 62
percent purchase some form of access to the Internet. Of those with access
to the Internet, about 39 percent have a high-speed-or
broadband-connection usually through either a cable modem or a digital
subscriber line provided over a telephone connection.
Local telephone service has been available since the late 1800s, and, by
1950, over 60 percent of households had telephone service. Since the early
20th century, certain aspects of telephone service, such as its price,
have been regulated by state public utility commissions and by the FCC.
With the Telecommunications Act of 1996, the Congress sought to increase
competition in the local telephone market. Today, incumbent local
telephone companies face competition from a variety of types of companies.
However, nearly 87 percent of residential local telephone subscribers
continue to receive service from an incumbent, or traditional, local
telephone company.
Subscription television service has been available since the late 1940s
when cable television providers first emerged, and, by the late 1980s,
cable service was available to nearly 90 percent of households throughout
the United States. Today, according to FCC, about 67 percent of American
households purchase cable service.3 The 1992 Cable Television Competition
and Consumer Protection Act took steps to increase competition to cable
providers. The act prohibited the awarding of exclusive franchises by
local franchising authorities. Also, as required by the act, FCC developed
rules-commonly referred to as program access rules-that require cable
operators that have affiliated cable networks to make those networks (if
they are delivered to the cable operator via satellite) available to
competitors.4 The Telecommunications Act of 1996 also took steps to allow
telephone and electric companies to enter the subscription television
market. In the 1990s, direct broadcast satellite providers (such as
DIRECTV and EchoStar) began offering subscription television service
through satellites. According to FCC, over 17 percent of American homes
currently purchase satellite television service, and these providers have
become the primary competitors to the cable television industry. At this
time, competition in the subscription video market from wire-based
providers exists in only about 2 percent of markets nationwide, according
to FCC information.
3Cable operators obtain a franchise license under agreed-upon terms and
conditions from a franchising authority-referred to as a local franchising
authority-such as a township or county. In some instances, the state
public utility or public service commission regulates cable television
service. These franchise agreements govern many aspects of cable
television service, including access to rights-of-way; the schedule for
the company to build its infrastructure; and the provision of public,
educational, and governmental channels.
4Cable networks typically deliver their programming to cable operators via
satellite. However, if the cable network delivers its programming to the
affiliated cable operator via a different technology (such as a wire),
then the program access obligations do not apply.
High-speed Internet is a relatively new service that provides a
continuous, high-speed, high-capacity connection to the Internet.5
High-speed connections to the Internet became widely available in the late
1990s, and, as of mid-2002, nearly 15 percent of American homes had a
high-speed connection to the Internet. In recent years, local telephone
companies adapted their networks to provide new services, such as digital
subscriber line service, which is a form of high-speed Internet service.
Through their digital subscriber line service, telephone companies serve
approximately 33 percent of subscribers who purchase a broadband
connection. Similar to local telephone companies, many cable television
companies upgraded their networks to provide high-speed Internet service
through cable modem service. Cable modem service is the most widely
subscribed to high-speed service with approximately 57 percent of
subscribers purchasing this service.6
Figure 2 provides information on the extent of competition in the local
telephone, subscription television, and high-speed Internet markets.
5With high-speed Internet service, subscribers can download material
sometimes as much as 50 times faster than a dial-up modem. This additional
capacity allows users to download more material and also makes other
services, such as streaming video, possible.
6In addition to digital subscriber line and cable modem service,
households can acquire high-speed Internet service from other wire-based,
fiber, and wireless technologies. These technologies serve the remaining
10 percent of high-speed Internet customers.
Figure 2: Telecommunications Service Subscriptions
Sources: GAO and Nova Development.
BSPs' Business Strategy Focuses on Providing Bundled Telecommunications
Services
Broadband service providers are a new type of telecommunications provider.
Unlike local telephone and cable television companies, which are adapting
their existing networks to provide additional services, and other entrants
that focus on providing service in one communications market, broadband
service providers focus on a core business strategy of building a new
fiber-optic network over which they can provide local telephone,
subscription television, and high-speed Internet services.
A fiber-optic network requires a long-term commitment to build. According
to the BSPA, companies must first obtain a local franchise that authorizes
them to begin construction. They then must obtain the rights-of
ways to build the network and work with utility companies to make sure
that they do not disrupt other services. Once the BSP begins building its
network, construction usually takes between 2.5 to 4 years if the company
(1) has steady access to capital and has no difficulties in obtaining the
necessary local government accommodations and (2) is able to receive
needed information from utility companies. According to the BSPA, the time
it takes to build a network varies with the size of the market and whether
the BSP can string its cable on poles or if it must bury the cable in the
ground. Because it takes 4 to 5 times longer for a BSP to build a network
if it must bury the cable, some BSPs target communities that allow them to
string their cable on poles according to the BSPA. A BSPA document
indicates that BSPs have spent over $6 billion in capital investments to
build 32,000 miles of fiber network. BSPs' networks currently expand
across areas that would enable them to service up to 4 million homes as of
June 2003; of this possible subscriber base, these companies have gained
over 1 million subscribers.
A representative of the BSPA said that most BSPs have specific targets
regarding the minimum threshold of the potential customers in an area they
need to attract in order to ensure that the large financial investment is
profitable. Additionally, a common goal is to have most of their
subscribers purchase more than one of the three offered services. Finally,
we were told that the target average revenue per subscriber each month is
about $100. In order to be able to achieve these goals, BSPs use several
marketing strategies. First, part of the BSP business strategy is to enter
markets that do not have any wire-based providers other than the incumbent
cable and telephone providers. That is, BSPs look to become the second
major wire
based provider of subscription television and local telephone service in
each of the markets they enter. Second, BSP officials told us that they
attempt to entice customers to stay with their company in the long term by
building the most modern network in the market, thus enabling the BSPs to
upgrade services as new technologies become marketable. Third, and most
central to the BSP business strategy, the 6 BSPs we interviewed offer
pricing discounts to encourage the purchase of multiple services. This
business focus allows the BSPs to capitalize on network efficiencies by
generating more marginal revenue on the second or third service that the
subscriber purchases.
In order to illustrate the savings available to consumers from BSPs'
bundled telecommunications offerings, we compared the packaged price of a
certain bundle of communications services offered by BSPs with the prices
that these companies would charge for the same set of services
individually. While some of the BSPs offered packaged deals on a
relatively low end package of services, we found that to compare a similar
package of services across the 6 BSPs we interviewed, we needed to examine
the price for a higher end package of services that included such items as
digital tiers of video service, premium channels, and higher end speeds of
Internet
access. For the 6 markets with BSPs that we interviewed, figure 3 shows
the average savings a consumer can receive by purchasing this particular
set of telecommunications services in a bundle versus purchasing them
individually. The average monthly BSP `a la carte prices for this bundle
of telecommunications services in the 6 markets is $136.63. If purchased
as a bundle, the subscriber is able to receive a discount that would bring
the cost for this bundle of services down to $117.28. That is, a BSP
customer will save, on average, about $20, or 14 percent, if they select
three services as a bundle package rather than buy them individually from
the BSP. Across the 6 markets with BSPs that we interviewed, the
additional savings a consumer could receive by purchasing this basket of
services as a bundle ranged from $11.66 to $28.74 per month.
Figure 3: Average BSP A la carte and Bundle Price for Premium
Three-Service Bundle
Average monthly rate (in dollars)
140 $136.63
120
100
80
60
40
20
0
BSP `a la carte price for three services
Telecommunications services
Source: GAO analysis of BSP data.
Three-service price with bundle discount
Consumers Enjoy In the 12 markets we reviewed, the entry of a BSP appears
to induce
incumbent cable operators to respond by providing more and betterLower
Rates in services and by reducing rates and offering special deals.
Incumbent Markets with BSPs telephone providers have not shown as much of
a competitive response to
BSP entry. The ultimate result of the BSP operations, along with
incumbents' response, is substantially lower prices for consumers.
Incumbent Cable Operators Responded to BSP Entry by Lowering Prices and
Improving Services, but Incumbent Telephone Operators Show Less Response
to BSP Entry
In the 6 markets we reviewed that had a BSP providing service, incumbent
cable operators appear to respond competitively to the presence of the
BSP. Although cable operators told us they generally viewed satellite
providers as their primary competitors, they indicated that BSP
competition in individual markets can be a significant factor when they
develop their business strategies for that market. In particular,
incumbent cable providers facing competition from a BSP told us that they
responded to the BSP activity by lowering rates or offering special deals
or packages and, in some cases by providing more local content and
advanced services. For example:
o Almost all of the incumbent cable operators we contacted said they
lowered their cable and high-speed Internet prices in the markets where a
BSP was operating in order to be more competitive. Moreover, we found that
one incumbent cable provider in a BSP market chose to offer discounts to
subscribers who purchased both cable and high-speed Internet service, thus
enabling it to compete directly with the BSP's packaged offerings. In this
market, the incumbent cable operator priced a package combining cable and
high-speed Internet services at a 45 percent discount when compared with
the same package that the cable operator offered in the non-BSP matched
market.
o Two incumbent cable operators also said that exclusive programming
helps them to differentiate themselves from the BSP. For example, one
incumbent cable operator said that they respond to BSP entry in a number
of ways, including providing more local programming and advanced services.
Another cable operator told us that its provision of local high school
sports games, a community-focused talk show, and city council meetings
provides an advantage over the BSP. However, the incumbent cable provider
said that it provided this programming before the BSP's entry into the
market.
o Some incumbent cable providers also responded to BSP competition by
improving their customer service. For example, one cable operator noted
that its company initiated door-to-door visits to customers to ensure good
picture reception and answer customer questions. Similarly, on the basis
of the information we gathered from local franchising authorities, it
appeared that in some cases customer satisfaction with the incumbent cable
providers improved after the BSP entered the market.
The incumbent telephone companies that we interviewed had not generally
taken steps to respond to the BSP presence in their markets. Incumbent
telephone providers told us that their primary competition comes from
providers other than BSPs. The telephone companies varied in terms of
which other providers they viewed as providing the most competition to
their services, but this list of important competitors included a variety
of provider types, such as long-distance telephone providers, wireless
carriers, and Internet-based providers of telephony services.
Incumbent local telephone providers we spoke with told us that they do not
perceive BSPs as a significant source of competition because the BSPs have
a very small presence focused only in scattered markets, and because they
face greater sources of competition, such as wireless and long distance
providers.7 For example, these providers generally did not lower prices or
enhance their services in markets where BSPs provided telephone service.
However, the incumbent telephone providers told us that their ability to
respond to BSP competition was limited by federal and state laws and
regulations that they view as restrictive.8 Regarding the high-speed
Internet market, incumbent telephone providers also noted that they did
not view BSPs as important competitors. Instead, telephone companies told
us that their most important competitors in the high-speed Internet market
are incumbent cable television providers. Moreover, they noted that, in
their opinion, cable operators were likely to remain dominant in the
high-speed Internet market. In fact, one incumbent local phone provider
said that it reduced prices for high-speed Internet service to compete
with cable operators' cable modem service-not because of competition from
BSPs.
7One incumbent telephone company provided data indicating that wireless
lines have increased so much in recent years that they now surpass the
aggregate number of wire
based lines provided by the largest telephone companies by as much as 15
million in 2003. By contrast, the number of telephone lines served by BSPs
number only about 540,000.
8For example, all 4 of the incumbent telephone providers we spoke with
stated that provisions of the 1996 Telecommunications Act force them to
lease critical network elements to competing entities at
government-mandated rates that these providers view as being below cost.
Consumers Benefited from Lower Prices for Telecommunications Services in
the 6 Markets With BSPs That We Reviewed
Rates were generally lower for the subscription television, high-speed
Internet, and local telephone services in the 6 markets we examined with a
BSP present than in the 6 markets that did not have BSP competition.
However, the extent to which prices were lower in a BSP markets compared
to its "matched market" varied considerably across markets and services.
For example, in 1 BSP market, the monthly rate for cable television
service was 41 percent lower compared with the matched market, and in 2
other BSP locations, cable rates were more than 30 percent lower when
compared with their matched markets. On the other hand, in 1 market, the
price for cable television service was 3 percent higher in the BSP market
than it was in the matched market. Also, we found that rates for
high-speed Internet service were at least 20 percent lower in the 3 BSP
markets compared each of their matched markets, but for the other 3
market-pairs, high-speed Internet rates were roughly the same across BSP
markets and their matched markets. The extent to which rates were lower
for one local phone line in BSP markets compared to their matched market
varied considerably: rates were 4 to 33 percent lower in 5 of the 6
markets with a BSP we reviewed, and the rates for local telephone service
were the same in 1 of the matched-pair markets we reviewed. See figure 4
and appendix II for more information on pricing patterns between
market-pairs.
In some cases, the lowest price in the market with a BSP was the BSP
price, however, in other cases, the lowest price was the incumbent's
price. Specifically, in the 6 markets with a BSP, the BSP price was lowest
for cable television in 4 markets, the BSP price was lowest for high-speed
Internet in 2 markets, and the BSP price was lowest for local telephone
service in 5 markets.
Figure 4: Extent to Which Rates For Telecommunications Services Were Lower
in the 6 Markets with BSP Competition When Compared with Each BSP Markets'
Matched-Pair
Source: GAO.
Note: For markets with a BSP, we used the lowest price that could have
been offered by the incumbent provider or by the BSP. In markets without a
BSP, the lowest price is that offered by the incumbent provider.
It is possible that some of the differences in pricing we observed are
caused by factors other than the presence of a BSP in certain markets. For
example, our earlier study on cable pricing included an econometric model
that showed that several factors, such as the number of cable channels,
direct broadcast satellite penetration, and population density, influence
cable prices. We attempted to minimize the influence that other factors
would have on price differences across markets by choosing case-study
markets and matched-pair markets that had certain similarities. Because
the number of channels is known to be an influence on cable rates, we
examined channel line-ups of each of the 12 providers. Our analysis showed
that the provider with the best price in the markets with a BSP also
offered more channels than the provider in their matched market in 4 of
the 6 cases and offered the same number of channels in the other two
matchedpair markets. This indicates that the number of channels is not a
cause of lower prices in markets with BSPs. See appendix I for a
discussion of our methods and appendix II for a more complete listing of
the channel line-up analysis.
BSPs Consider Specific Demographic, Geographic, and Local Government
Factors When Deciding Which Markets to Enter
The BSPs we analyzed considered a variety of factors when determining
which markets to enter. These considerations were directly tied to the
ability to enter a market quickly and to further their business strategy
of selling multiple services to most of their subscribers. The primary
factors considered regarding market selection fell into the following
three categories: demographic factors, geographic factors, and factors
related to the local governments in the communities of interest.
Demographic Factors Were Considered in Market Selection
Three primary demographic factors were considered by the BSPs we
interviewed when deciding which markets to enter and provide service. In
particular, the size of the city, the level of income of residents, and
the level of computer use among residents were primary determinants of
market selection. Despite the commonality in the factors considered, there
was some variation in how BSPs considered each of these demographic
factors.
All 6 of the BSPs we interviewed mentioned the size of the market as a key
factor that they considered in market selection. Only 1 BSP focused its
business development toward larger cities. This company was the first to
take the approach of competing with an incumbent by offering bundled
service packages; thus this BSP believed that in order to attract adequate
venture capital, it was important to focus its operations in major
markets. This BSP also told us that it believed a large-city focus would
have the benefit of enabling the company to rapidly gain subscribers in
high-density corridors where a greater number of customers could be served
with a given amount of infrastructure deployed. This BSP further noted
that a downside of entering large markets was that construction in larger
cities is significantly harder and more costly than in smaller cities,
which made it difficult to meet an aggressive construction schedule. In
fact, this BSP was unable to meet the 4-year construction deadline that
was mandated by its franchise agreement.
Five BSPs built new infrastructure in medium and smaller cities. They told
us that they took this approach, in part, because they recognized how
difficult it would be to meet construction requirements in a large city.
These BSPs also said that a benefit of entering a smaller city is that
incumbent cable operators are less likely to vigorously compete with them
as would likely, in their view, be the case if they entered a major city.
Representatives from 3 BSPs also told us that they enter smaller markets
because they may be able to leverage customers' dissatisfaction with the
incumbent-which they believe tend to be more of an issue in smaller
markets. Similarly, 3 of the BSPs told us that small and medium markets
tend to have old networks, and this provided an opportunity for the
entrant with an upgraded system to successfully compete for subscribers.9
Representatives from the 5 BSPs also noted that entering smaller sized
cities allows them to better target markets with favorable demographics,
rather than have to serve the wide array of residents that would live in a
larger market.
Four of the 6 BSPs we spoke with stated that the average household income
in a market was a key criterion in their decisions about what markets to
enter. However, BSPs took various approaches regarding what income levels
they were targeting. For example, 2 BSPs told us that they choose to enter
markets with high-income level populations because these subscribers are
more likely to take two or more telecommunications
9Three BSPs we interviewed stated that incumbent providers focus more
attention on their largest markets. As such, the quality of infrastructure
as well as customer service may, in their view, be lower in smaller
cities.
services. On the other hand, the other 2 BSPs look more for markets with a
balance of varied income levels. Representatives of these companies told
us that a mix of income levels among subscribers helps to ensure that each
of the communications services offered by the company has a target
audience. In fact, 1 BSP stated that higher level income subscribers may
be most likely to subscribe to broadband service, but middle income
subscribers may be most likely to subscribe to subscription television
service.
Two of the 6 BSPs noted that high levels of computer use and Internet
connections among residents of a community are factors they consider when
determining what markets to enter because high-speed Internet service has
a high profit margin. In particular, these BSPs told us that they selected
markets with a high number of college students because the academic
environment has a large amount of computer ownership and Internet use.
Geographic Factors Were Considered in Market Selection
We found that BSPs consider certain geographic factors when deciding which
markets to enter and provide services. In particular, BSPs looked for
markets that were in close proximity to other markets that were served by
a parent company or in proximity to other key facilities, such as the BSP
headquarters or network, or other needed infrastructure.
Officials of 2 BSPs that are subsidiaries of energy companies told us that
a key factor considered in market selection was proximity to the parent
company's service area, which they said helps to leverage the parent
company's name brand, infrastructure, and human capital. For example, a
BSP representative told us that his BSP chose to enter one of the markets
we studied because it was close to its parent company, and the BSP was
thus able to benefit from the parent company's good reputation within the
community as a power provider. The local franchising official in that
market agreed that the community's positive relationship with the parent
power company gave citizens confidence in the BSP's proposal and to trust
that it would fulfill its infrastructure construction requirements. In
addition to name recognition, another BSP official said that entering
cities where the parent company has a presence allows the BSP to take
advantage of the parent company's workforce to assist with the
construction of the new infrastructure.
Two BSP representatives said that their BSP chose to enter markets on the
basis of close proximity to their BSPs' headquarters or physical network.
For example, 1 BSP that we interviewed chose markets that were close to
the BSP headquarters. Another BSP told us that choosing cities in close
proximity to its existing physical network was important in order to
minimize the cost of fiber connecting any new market to the company's
network. In fact, some markets that this BSP chose not to enter were too
far from existing infrastructure and would have been very costly to
connect.
Characteristics of Local Government Were Considered in Market Selection
We found that when deciding which markets to enter, BSPs considered the
receptivity of local government officials to new entrants. Moreover, the
degree to which government officials took steps to reduce administrative
requirements-which BSPs told us could be considerable-was a key factor for
some BSPs when considering market entry.
Representatives from 5 BSPs indicated that specific markets were selected
because the city government officials had a positive attitude toward
competition, were easy to work with, or invited the BSP to provide
services in their market. Similarly, one BSP told us that they avoided
entering markets that had local franchising officials who showed limited
interest in their services.
During our interviews, BSPs mentioned that they needed to overcome a
variety of administrative issues before market entry. Gaining access to
rights-of-way, fulfilling costly franchise requirements,10 and obtaining
access to apartment buildings that have exclusive contracts with the
incumbent cable operators were a few of the varied administrative issues
that were mentioned by the BSPs. Representatives from 2 BSPs told us that
when government officials are welcoming to the new entrants, the officials
often take steps to mitigate administrative costs and requirements. For
example, one local franchising authority, which was eager to have a BSP
offer services in its market, presented a franchise agreement with
reduced-fee payments for rights-of-way access and construction permits.
Also, 2 different BSPs told us that the timeliness for gaining approvals
for various required applications often were directly influenced by the
receptivity of the regulators. We were told that two enthusiastic local
10Franchise requirements are agreed-upon terms and conditions between the
local government officials and cable operators, which can include
provisions such as fees, Public Education and Government channels,
construction schedules, and customer service requirements.
franchising authorities took only 120 days to approve a BSP's application
for a franchise. In contrast, another BSP told us that it was unable to
obtain a franchise after 2 and 1/2 years of working with a local
franchising authority that was not receptive to competition, and the BSP
did not succeed in entering that market.
Five of the 6 case study markets that do not have a BSP competitor had
companies express interest in entering their cities, but, according to
local government officials, these companies decided not to enter for
several reasons. For example, one local official told us that the
level-playing-field law in his state-which are laws that require any new
cable franchiser to agree to the same terms and conditions that the
incumbent cable provider must meet-was a factor in an interested
competitive cable company's (not 1 of the 6 companies we studied)
retracting a franchise application.11 Another factor that may cause BSPs
to choose not to enter a market is the local government's lack of
administrative resources. Specifically, one local official said that the
lack of administrative resources to process applications quickly caused
some BSPs to withdraw their applications and seek more receptive markets.
BSPs Are Gaining Market Share, but a Variety of Factors May Hinder Their
Success
BSPs are gaining market share in the service markets they have entered,
with varying success. BSPs we interviewed said that certain factors, such
as difficulty in gaining access to certain programming, can create
obstacles to their ability to compete effectively. Moreover, BSPs may be
finding that these telecommunications markets are more competitive than
they had expected when they first developed their business strategy.
Currently, all of the BSPs we interviewed are having problems with access
to capital and, thus are struggling to continue expanding their market
presence.
BSPs Are Having Varied On the basis of statistics provided by the 6 BSPs
we interviewed, these Success in Gaining companies appear to be having
varied success in gaining subscribers for Subscribers their television,
local telephone, and high-speed Internet services. The 6
BSPs have made significant inroads in gaining market share in the three
service markets. In particular, for the 6 cities with BSPs we interviewed,
the average BSP market penetration for subscription television service was
25 percent, the average penetration of subscribers for local telephone
11According to a recent article, at least 12 states have
level-playing-field laws.
service was 29 percent, and the average subscriber penetration for
highspeed Internet service was 17 percent.12 As figure 5 shows, there was
substantial variation across the companies in the penetration rates for
each service-ranging from a low of 6 percent penetration for high-speed
Internet in 1 market to a high of 63 percent penetration in telephone
service in another market. We found that entering smaller markets may be
associated with an ability to gain greater market penetration. For
example, we found that in the 3 smaller markets we examined, the BSPs were
able to attract a larger share of the potential subscribers-that is, to
achieve a higher level of penetration-than was the case for BSPs that
entered the medium and the larger markets included in our case study.
12In its comments on a draft of this report, the BSPA noted that an
additional benefit of BSP entry into markets is greater penetration of
high-speed Internet access. In particular, BSPA noted that it believes
that the total high-speed Internet access penetration rate in markets with
BSPs is at least double that of the national average high-speed
penetration rate.
Figure 5: Penetration of Subscription Television, High-Speed Internet, and
Telephone Services for BSPs in Case-Study Markets, June 2003
Percentage of households that subscribe to BSP services in the 6
case-study markets
100 90
80
70
60
50 29% 40 25% 30
20 17% 10 0
Cable television Residential telephone service
High-speed Internet
Range Average
Source: GAO analysis of BSP data as of June 2003.
Certain Factors in Local All of the BSPs we interviewed noted that various
barriers arise that can Markets Can Hinder BSPs' hinder their ability to
effectively compete in the markets that they have Ability to Compete
entered. Although a host of issues were mentioned during our interviews,
the greatest concern surrounded issues related to an inability to gain
access to certain cable networks, an inability to serve certain apartment
and condominium complexes, and restrictive local regulatory requirements.
Program Access Concerns In 4 markets, BSP officials said they have
experienced problems obtaining certain cable networks-such as regional
sports, weather, and local informational channels-that the incumbent cable
provider of that market
owns or holds exclusive rights to within that market. Of the 4 BSPs that
expressed concern with program access, 2 specifically told us that they
were unable to gain access to regional sports networks because the
incumbent cable provider, which owned that network, provided the network
to its own facilities terrestrially-that is, not via a satellite.13
Similarly, the third BSP stated that it could not obtain access to a
popular local news network because the incumbent cable provider partially
owned it. The incumbent, however, explained that FCC ruled that program
exclusivity in this case was in the public interest and therefore FCC
granted it an exemption to the program access rules. The last BSP stated
that even though the incumbent cable provider had not produced a local
sports network, it still could not obtain access because the incumbent had
secured an exclusive deal with the producers of that network. The BSP was
able to gain access to that cable network only after the network was sold
from one owner to another.
While 4 of the BSPs said they had a problem with program access, only two
cable operators we spoke with said that they were aware of program access
issues in the markets we reviewed. Moreover, one incumbent cable provider
told us that producing or having access to exclusive content can be a good
marketing strategy for it and that without the ability to develop
exclusive content, the incentive to produce innovative programming is
minimized. Regarding the market where an incumbent cable provider had
exclusive rights to certain programming, the incumbent's view was that it
created the concept for the programming package and the BSP was unwilling
to make such a commitment on an unproven product.
Multiple Dwelling Units Three of the BSPs we interviewed expressed
concern about being prevented from providing service to large segments of
the population that live in apartments or condominiums, which are
generally referred to as "multiple dwelling units." We were told that
owners of multiple dwelling units often enter into exclusive contracts
with one cable provider, thereby limiting a competitor's access to that
building. Also, even when BSPs have gained access into a building, we were
told that the building owners may not allow them to lay additional wires
because of the associated costs and disruptions. In fact, 1 BSP we spoke
with estimated that it could not provide service to 20 percent of
subscribers in 1 of our case-study markets
13As required by the Cable Television Consumer Protection and Competition
Act of 1992, FCC developed rules designed, in part, to ensure that
vertically integrated cable operators generally make their
satellite-delivered programming available to competitors.
because of problems gaining access to multiple dwelling units. The
incumbent cable operators we interviewed said that in some cases they had
exclusive contracts to serve multiple dwelling units. However, in 3 of the
markets, these providers noted that the BSPs also had exclusive contracts
with some multiple dwelling units.
Recently, FCC reviewed issues related to access by telecommunications
companies to multiple dwelling units. In a January 2003 order, FCC did not
establish federal access requirements or preempt state regulation of these
matters.14 Likewise, FCC continued to permit exclusive or perpetual
contracts for subscription television service in multiple dwelling units
because, according to FCC, it found that it was not clear that there are
anticompetitive effects from exclusive and perpetual contracts, and, as
such, FCC could not support government intervention in privately
negotiated contracts.
Burdensome Franchise Some of the BSPs also told us that certain franchise
requirements can be
Requirements burdensome. As we previously noted, BSPs told us that the
administrative requirements of local jurisdictions can influence the
markets they enter, but we were also told that these requirements could
affect how quickly they can begin providing service in markets they have
chosen to enter. For example, we were told that required construction time
frames often burden new entrants, even though these rules are generally
designed to create a "level playing field" by ensuring that new providers
must meet all of the same requirements that incumbent providers have had
to meet. These construction rules can require extensive capital,
reprioritization of the business plan, or the provision of service in
areas that are not economic to serve. In some cases, BSPs have changed
their legal status in order to avoid costly and labor-intensive
construction requirements.15 One BSP noted that the incumbents effectively
receive a longer build-out schedule because they were able to grow with
the communities they serve.
14See In the Matter of Telecommunications Inside Wiring, 18 F.C.C.R. 1342
(FCC 1st order on recon., 2003)
15A company that wants to provide subscription television service in a
community can elect to operate under the "open video system" (OVS)
provisions of the 1996 Telecommunications Act. An OVS provider may not
always need to obtain a franchise and as such may not generally face
specific construction requirements. However, companies with OVS status
must open portions of their network to competing entities.
BSPs May Have Underestimated the Level of Competition in
Telecommunications Markets
One of the most significant factors that may hinder the BSP's marketing
success is that the communications markets BSPs seek to serve may be more
competitive today than these providers envisioned when they first
developed their plans. We found that BSPs avoid markets where another new
wire-based operator had entered the market, but this avoidance does not
ensure that there are not other new competitors providing service in the
three service markets.16 For example:
o Regarding subscription television service, direct broadcast satellite
service (such as DIRECTV or EchoStar) service is available nationwide and,
thus, represents a second and third formidable competitor in every market
that a BSP may choose to enter. As the number of direct broadcast
satellite subscribers continues to grow, it will be even harder for the
BSPs to achieve the penetration rates that are necessary for
profitability.17
o Competition in the market for local telephone service has been
emerging. Incumbent local telephone companies noted that consumers are
increasingly turning to mobile telephones as their sole telephone line in
lieu of a wire line connection. If more consumers replace their wire line
telephone service with wireless service (which is not traditionally
provided by BSPs), such action will also have the effect of decreasing the
number of potential subscribers to which BSPs can market their services.
Also, incumbent local telephone providers view the large established cable
operators as their primary competitive threat in the future. In fact, some
established cable operators are increasingly providing telephone service
in markets around the country.
o In the high-speed Internet market, BSPs already compete against cable
and local telephone providers. In addition, new platforms for the
16Interestingly, none of the incumbent cable operators we interviewed
chose to enter other markets to compete against an existing incumbent
cable company despite the fact that incumbent cable providers have
extensive know-how, reasonably reliable access to capital, and lucrative
contracts for programming. These companies' lack of interest in competing
in new markets may indicate a view that such entry poses a difficult
business challenge.
17However, some BSPs and incumbent cable operators we spoke with noted
that DBS subscribership is low in some of the markets with BSPs. For
example, in 4 of the 6 markets with a BSP present, the incumbent cable
provider or the BSP had data indicating that DBS penetration was well
below the national average, and as low as 2 percent in 1 market.
Representatives of the incumbent cable operator said that the low rate was
due to the greater competition and lower prices in that market.
provision of Internet service may erode the market for all wire-based
companies. For example, one incumbent local telephone company noted that
the presence of a large university that provides free highspeed Internet
service to its students and faculty reduces its potential high-speed
Internet market. Other new means of Internet access, such as through
wireless modes, are also becoming more widely available.
BSPs Serving the Markets We Reviewed Are Now Struggling to Obtain Adequate
Access to Capital
The BSPs we spoke with gained financial capital to construct their
infrastructure and operate their business in a variety of ways. Two BSPs
that are providing services in the markets we reviewed were wholly owned
subsidiaries of large power companies and were able to receive all of
their investment capital from their parent company. Two other BSPs
providing service in the markets we reviewed are, or had been, part of
larger telecommunications companies and received their startup financing
from these parent companies. The remaining BSPs serving markets we
reviewed were funded through venture capital or a mixture of venture
capital and money obtained through a partnership with an energy company.
Despite these sources of capital in the early stages of their business,
the 6 BSPs we interviewed are currently experiencing some level of
financial problems. In particular, they told us that their difficulty in
obtaining access to necessary capital is threatening their ability to
construct their networks and market their services. None of the 6 BSPs we
studied are aggressively expanding their operations. Two of the BSPs are
still completing construction within their current markets in order to
comply with their agreed-upon schedule, but another BSP was currently
unable to complete construction. Beyond their current markets, all of the
BSPs we reviewed have had to put expansion plans on hold until the market
conditions improve. Additionally, 2 BSPs told us that they do not have
enough capital to advertise their service offerings to their current base
of potential subscribers, and 1 BSP reorganized through a Chapter 11
bankruptcy proceeding.18 BSPs told us that, to a large extent, these
financial problems are the result of the economic problems that have
affected the entire telecommunications sector.
18The BSPA told us in their comments that the bankruptcy proceeding was a
prepackaged conversion of debt to equity, through which no creditors lost
money.
Conclusions Although our study indicates that there are measurable
consumer benefits in markets with BSPs compared with markets without such
competition, the degree to which the BSP model is replicable throughout a
broader set of markets remains unclear. For example, the majority of BSPs
we spoke with stated that they avoid entering large metropolitan cities
because they believe serving such markets might prove difficult. Moreover,
even in the markets that they have successfully entered, the companies are
struggling to achieve their key business targets. As a result, nationwide,
BSPs serve only about 1 percent of the subscription television market and
even less of the local telephone market, although BSPs do serve about 2
percent of all high-speed Internet subscribers. Nevertheless, at this
time, with the telecommunications sector struggling to recover from
diminished capital investments, it is difficult to determine the long-term
prospects for success of BSPs as new telecommunications providers. The
problems BSPs face may be mitigated as the current economic downturn of
the telecommunications sector subsides, but the long-term viability of
these providers is not clear.
Agency Comments We provided a draft of this report to the Federal
Communications Commission and the Antitrust Division of the Department of
Justice for their review and comment. The Department of Justice did not
provide comments on this report. The FCC provided technical comments that
we incorporated.
Industry Association Comments and Our Evaluation
We also invited representatives from the Broadband Service Provider
Association (BSPA), the National Association of Telecommunications
Officers and Advisors (NATOA), the National Cable & Telecommunications
Association (NCTA), and the United States Telecom Association (USTA) to
review and comment on a draft of this report. The USTA did not provide any
comments. The BSPA and NATOA provided some comments that we incorporated
as appropriate.
NCTA officials provided extensive comments on the draft. These officials
expressed concern with certain summary statistics on price differences in
BSP markets compared with markets without BSPs that appeared in the draft
of this report that they reviewed. We modified the presentation of the
data on these price differences. In particular, rather than providing
summary statistics on price differences across the markets with BSPs
compared to the markets without BSPs, we provide information on the
price difference between each BSP market and its match. Additionally, NCTA
made the following points:
o NCTA officials note that a case study of 6 markets with and 6 markets
without a BSP competitor is a very small sample of the roughly 10,000
cable systems in operation in the United States. They view the study as
thus having no statistical significance. In particular, NCTA official
express concern that our draft "implies vastly broader conclusions
regarding the effect of BSPs on cable pricing than are warranted by the
limited case studies." They also note that, as we reported, the larger
pricing differences were found for the 3 smaller city-pair case studies,
while smaller price differences were found in the medium and larger city
pairs. The officials stated that, as such, for the larger percentage of
subscribers covered by the study, the differences were much smaller.
GAO response: We agree that our approach in this report-a case study
analysis-is not generalizable to the universe of cable systems. We have
stated this several times in the report, and have added more discussion of
this in response to NCTA's comments. However, as stated in the report, our
BSP sample represents more than 20 percent of the households nationwide
that are in areas where BSPs currently offer the three-service package.
Given the caveats we place on our own work, we do not believe that our
conclusions imply a broader interpretation than is warranted.
o NCTA officials note their concern that just 4 months after we released
a report on cable pricing that was based on an econometric analysis, we
would provide new information on cable pricing in competitive and
noncompetitive markets that are based on a different methodology.
GAO response: We do not believe there is a problem in conducting a second
study on cable rates and competition that analyzes the issue using an
alternative methodology. The two studies used different data and different
methods to examine an overlapping issue. The fundamental findings of both
studies were similar, but the specifics were different-as would be
expected given the different methods used. While our October 2003 study
examined the issue of cable rates broadly, the current study focuses on 12
markets and compares rates in the 6 with a BSP to the 6 without such a
competitor. The findings from this study relate to those 12 markets.
o NCTA officials note that the reported pricing differences between
markets with BSPs and those without BSPs could be misinterpreted as
implying that BSP entry engenders a substantial price response by
incumbent providers, when in fact, for cable pricing, the BSP (not the
incumbent) offered the lower price in the BSP market in 4 out of the 6
case-study markets. Moreover, NCTA officials note that to the extent that
incumbents are responding to competition, this response may be to
competition from DBS providers, rather than competition from BSPs.
GAO response: We agree with NCTA that price differences in cable rates
across the BSP markets compared to those without a BSP do not necessarily
mean that the incumbent providers lowered their prices entirely in
response to BSP entry. We added some discussion in the report to clarify
this point. Also, we note in the report that incumbent cable providers
told us that their most important competitors are the two DBS providers.
However, almost all of the incumbent cable providers also told us that
when faced with wire-based competitors in particular local markets, they
tend to lower their prices.
o NCTA officials also note that any observed price difference between
markets with and without BSPs could be related to other factors not
controlled for by the case-study analysis. For example, they noted that
the number of channels in a cable system's line up is a key factor that
may drive pricing differences across locations and providers.
GAO response: We agree with NCTA's point that some of the differences in
cable rates across our case study locations with a BSP as compared to
those without such a provider could be caused by factors other than the
presence of the BSP. We have added language to that effect in the report.
However, after receiving NCTA's comments, we also examined the number of
channels provided in the case study markets-which NCTA specifically cited
as a possible cause of rate differences-and found a similar number of
channels available in the markets with a BSP when compared to its matched
market. Moreover, when we asked incumbent cable operators why their prices
differed across the markets in our sample, they usually cited the presence
of the BSP as the primary cause.
o NCTA officials note that the draft report did not adequately address
the possibility that in markets with BSPs, prices are uneconomically low
and are unsustainable. That is, they noted that the low prices available
in markets with BSPs may be of a transitory nature only. The officials
noted that this seems particularly possible in light of the fact that we
found that all BSPs interviewed in the course of the study were facing
various degrees of financial difficulty. NCTA officials also said that we
did not fully describe the extent of financial problems currently
experienced by the BSPs.
GAO response: We did not evaluate the long-term sustainability of the BSPs
in the markets we reviewed. However, to address this to some extent, we
only selected markets where the BSP had been in operation for at least a
year.
o NCTA officials note that they believe that BSPs have overstated claims
that certain local conditions (e.g., related to program access concerns,
multiple dwelling unit access, and local franchising conditions) may
hinder BSPs' ability to compete.
GAO response: We did not evaluate BSPs' concerns about the effect of local
market conditions on their entry and success. Similarly, we did not
evaluate the veracity of incumbent providers' statements on these issues.
In this section of the report, we are simply reporting the views of these
providers.
As agreed with your offices, unless you publicly release its contents
earlier,
we plan no further distribution of this report until 30 days after the
date of
this letter. At that time, we will provide copies to interested
congressional
committees; the Chairman, FCC; and other interested parties. We will also
make copies available to others upon request. In addition, this report
will
be available at no charge on the GAO Web site at http://www.gao.gov. If
you have any questions about this report, please contact me at (202) 512
2834 or [email protected]. Key contacts and major contributors to this
report are listed in appendix IV.
Mark L. Goldstein
Director, Physical Infrastructure Issues
Appendix I
Scope and Methodology
We employed a case-study approach in gathering information in responding
to our four objectives. In particular, this report provides information on
(1) BSPs' business strategy; (2) the impact of BSPs' market entry on
incumbent cable and telephone companies' market behavior and consumer
prices of subscription television, high-speed Internet, and local
telephone services; (3) the key factors BSPs consider when making
decisions about which local markets to enter; and (4) the success of BSPs
in attaining subscribership and any key factors that may limit their
success. The case study consisted of 6 matched pairs of cities (12 total)
that shared certain key traits except that 1 city in each pair has a BSP
providing service and the other does not.
In selecting the cities with BSPs, we considered several factors. We
selected cities in various parts of the country with BSPs that met some
basic criteria. To be considered for selection in our case study, a BSP
had to provide subscription television, local telephone, and high-speed
Internet services in the city for more than 1 year; had to have
constructed its own network (rather than having purchased an existing
network); and had to have a network that was nearly completed. We also
analyzed population data to ensure that our case study included markets of
varying sizes. We selected 3 small cities (with populations under
100,000), 2 medium-sized cities (with populations of 100,000 to 200,000)
and 1 large city (with a population over 200,000). The 6 cities chosen for
the case studies represented more than 20 percent of the households to
which BSPs currently offer the three-service package. See appendix III for
a detailed listing of the BSPs and areas of service.
To choose cities without BSPs for our analysis, we matched the 6 BSP
cities with cities that were similar in terms of size and demographics.
Where possible, we matched each BSP city with a city that did not have a
BSP in the same state to avoid any possible differences caused by state
laws or regulations and to help ensure reasonably similar demographic
characteristics across the city-pairs. However, in the case of the only
large city in our sample of BSP cities we selected a city in another
state- Seattle-to match with Boston because there was no city in
Massachusetts with similar size and demographics, and no other large
cities had extensive BSP presence.1 Each city-pair also has the same
incumbent local telephone
1Although Boston had the largest presence of a BSP for any large city, the
BSP operating in Boston has not fully constructed a system.
Appendix I
Scope and Methodology
and cable television providers, although in one case two incumbent
telephone companies served different parts of a city.
We conducted semistructured interviews with a variety of industry and
local government participants for each of the selected markets. Our
interviews included questions about telecommunications competition in each
city, the price of telecommunications services, and the factors that favor
or discourage competition in each city. We interviewed the BSPs (in the 6
cities where they existed), the incumbent cable companies, the incumbent
telephone companies, the local franchising authorities, and the public
utility commissions. Table 1 provides the details of the cities we chose
and the primary companies and local representatives we interviewed. In
addition, we interviewed officials from the BSPA and the Mid-American
Regional Council (a support organization for local governments).
Table 1: Case-Study Cities and Industry and Local Government Participants
Type of Local State
market
Incumbent Incumbent franchising telecommunications
With BSP
State Without BSP telephone cable authority regulator
BSP
Lenexa Time
Kansas Prairie Everest SBC Warner Lenexa
Village Kansas Corporation
Prairie Commission
Village
Texas Waco Grande SBC Time Waco
Beaumont Warner Public Utility
Beaumont Commission of
Texas
Minnesota St. Cloud Astound Charter St. Cloud Minnesota Public
Rochester Qwest
Rochester Utilities
Commission
South Yankton Prairie Mediacom Yankton South Dakota
Dakota Vermillion Wave Qwest Public
Vermillion Utilities
Commission
Augusta BellSouth Comcast Georgia Public
Georgia Savannah Knology Augusta Service
Savannah Commission
Massachusetts Boston Seattle RCN Verizon Comcast Boston Massachusetts
& Washington Qwest Seattle Department of
Telecommunications
and Energy,
Washington
Utilities
and Transportation
Commission
Source: GAO.
Our analysis provides details on the competitive status of markets with
BSPs. However, because we used a case-study method, our results are not
generalizable to all markets with such providers. We performed our work
Appendix I
Scope and Methodology
between May 2003 and December 2003 in accordance with generally accepted
government auditing standards.
Appendix II
Price and Channel Information in Six Market Pairs
The following table provides additional data on the price patterns between
the matched pair markets. The percentage price difference between each
matched market pair was calculated by subtracting the lowest price in the
BSP market from the incumbent's price in the non-BSP market, and then
dividing that difference by the incumbent's non-BSP market price.
Table 2: Price and Channel Information in Six Market Pairs
Expanded basic cable High-Speed Internet One local
television telephone
service: Percentage line: Percentage
Case study Percentage monthly rate monthly rate is monthly rate is
Number of additional lower in lower in
market pair is lower in BSP market BSP market BSP market
channels in BSP market
Market pair 31% No difference 29% 7%
Market pair 32% No difference 20% 33%
Market pair 41% 3 38% No difference
Market pair 17% 7 2% 11%
Market pair 15% 5 No difference 4%
Market pair -3% 1 No difference 28%
Source: GAO.
Note: The difference in numbers of channels was based on the comparison of
the channels offered by the provider with the lowest price in the market
with a BSP and the channels offered by the sole wirebased provider in the
comparison market.
Appendix III
Broadband Service Provider Association Member Markets as of February 2003
Broadband Total Percentage of
service households network
provider Markets under franchise under franchise constructeda
Altrio California: Arcadia 19,970 Low
Astound Minnesota: St. Cloud
California: Concord, Contra Costa
County,
and Walnut Creek 119,471 Moderate
Everest Kansas: Lenexa, Overland Park,
Shawnee,
and Merriam
Missouri: Kansas City and Kearney 321,000 Low
Grande Texas: Austin, San Marcos, Corpus
Christi,
Midland, Odessa, San Antonio, and 1,355,419 Low
Waco
Hiawatha Minnesota: Winona 12,893 Substantial
Knology Alabama: Huntsville and Montgomery Florida: Panama City Georgia:
Augusta and Columbus South Carolina: Charleston Tennessee: Knoxville
628,392 Substantial
Prairie Wave Iowa: Lakeside and Storm Lake Minnesota: Luverne, Marshall,
Pipestone, Slayton, Tracy, and Worthington South Dakota: Canton, Coleman,
Flandreau, Madison, North Sioux City, Watertown, and Yankton 43,667
Substantial
RCN California: Gardena and San Francisco Illinois: Chicago New York: New
York Massachusetts: Boston Pennsylvania: Philadelphia 4,575,362 Low
Starpower Washington, D.C. 650,000 Low
Utilicom Networks Indiana: Evansville 77,000 Substantial
WideOpenWest Colorado: Lakewood 12,000 Substantial
Source: BSPA.
Notes: The markets noted in bold were those included in our case study.
The table only includes markets in which these companies currently offer
subscription television, local telephone, and highspeed Internet services.
Several changes in the membership of BSPA have taken place since we
selected our case-study markets in early 2003.
aLow is less than 25%; Moderate is from 25% to 75%; and Substantial is
more than 75%.
Appendix IV
GAO Contacts and Staff Acknowledgments
GAO Contacts Amy Abramowitz (202) 512-2834 Keith Cunningham (202) 512-2834
Staff In addition to those named above, Julie Chao, Michael Clements,
Andy Clinton, David Dornisch, Etana Finkler, Bert Japikse, Sally Moino,
and
Acknowledgments Carrie Wilks made key contributions to this report.
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