Telecommunications: Impact of Sports Programming Costs on Cable
Television Rates (Letter Report, 06/22/1999, GAO/RCED-99-136).

The rates that subscribers pay for cable television in the United States
have risen at several times the rate of inflation during the last few
years. Cable operators attribute these increases to inflation,
programming expenses, system upgrades such as expanding the number of
channels, and other factors. Some cable operators cite the expense of
acquiring sports programming, which has some of the highest ratings on
cable television. This report provides information on (1) the extent to
which sports programming costs are contributing to higher cable
television rates; (2) how prices paid for sports programming differ for
small and large cable operators; (3) the extent to which sports
programmers require cable operators to bundle sports programming with
other cable programming and how this practice affects cable rates; and
(4) whether the salaries of players in major professional sports have
risen during the last four years, and, if so, whether this has
contributed to increases in cable rates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-136
     TITLE:  Telecommunications: Impact of Sports Programming Costs on
	     Cable Television Rates
      DATE:  06/22/1999
   SUBJECT:  Cable television
	     Sports
	     Prices and pricing
	     Cost control
	     Comparative analysis
	     Telecommunication industry

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    United States General Accounting Office GAO                Report
    to the Honorable Byron L. Dorgan, U. S. Senate June 1999
    TELECOMMUNICATIONS Impact of Sports Programming Costs on Cable
    Television Rates GAO/RCED-99-136 GAO    United States General
    Accounting Office Washington, D.C. 20548 Resources, Community, and
    Economic Development Division B-280705 June 22, 1999 The Honorable
    Byron L. Dorgan United States Senate Dear Senator Dorgan: The
    rates that subscribers pay to receive cable television in the
    United States have increased at several times the general rate of
    inflation over the last few years. Cable operators have attributed
    these increases to inflation; programming costs; system upgrades,
    including increases in the number of channels; and other factors.
    However, some cable operators have attributed increases to the
    cost of acquiring sports programming, in particular. In terms of
    viewership, sports programming is among the highest-rated
    programming on cable television. This report responds to your
    request that we provide information on the role that sports
    programming played in recent increases in cable rates.
    Specifically, you asked us to provide information on (1) the
    extent to which sports programming costs are contributing to
    higher cable television rates; (2) how prices paid for sports
    programming differ for small and large cable operators; (3) the
    extent to which sports programmers require cable operators to
    bundle (i.e., combine) sports programming with other cable
    programming and how this practice affects cable rates; and (4)
    whether the salaries of players in major professional sports have
    risen over the last 4 years, and if so, whether this has
    contributed to increases in cable rates. To respond to your
    request, we reviewed recent studies and public documents and
    interviewed representatives from a cross-section of the cable
    television industry, including cable companies, programming
    networks, federal and state regulatory agencies, and industry
    trade groups. Also, we interviewed representatives of major sports
    leagues. We reviewed the Federal Communications Commission's (FCC)
    studies of cable industry prices covering the years 1995 through
    1998 and its 1998 inquiry into cable rate increases. We analyzed
    programming cost information we obtained on 15 cable companies
    from the FCC's and one state regulatory agency's public files and
    convened a panel of experts to discuss issues that you raised. In
    some cases, however, we were unable to provide a more definitive
    response to the research questions because of limitations on the
    availability of information on the costs cable companies incur for
    programming, the terms and conditions of programming contracts,
    and Page 1                  GAO/RCED-99-136 Sports Programming
    Costs and Cable TV Rates B-280705 certain details covering the
    sale of sports rights contracts. For a detailed description of our
    methodology, see appendix I. Results in Brief    The data we
    obtained on 15 cable systems and the results from the FCC's
    nationwide 1999 Report on Cable Industry Prices indicate that
    sports programming has had a limited impact on the rates
    subscribers pay for cable television service. Data on the 15 cable
    systems show that sports programming accounted for about 6.8
    percent of the average monthly amount that the cable systems
    charged subscribers during 1997. Also, the FCC report indicates
    that sports programming accounted for 7.5 percent of the increase
    in a subscriber's average monthly cable bill from July 1, 1997,
    through July 1, 1998. However, some cable industry officials
    believe that the impact of sports programming costs on cable rates
    may increase as the result of recent contractual agreements
    between cable networks and major sports leagues. Because of the
    limitations on the availability of information on prices paid for
    programming and on the terms and conditions of cable programming
    contracts, we cannot provide definitive judgments on the
    differences in what small and large cable operators pay for sports
    programming. According to industry officials, in some cases, small
    cable operators pay more than large cable operators for sports
    programming, such as when programmers offer discounts based on the
    number of subscribers a system has. However, not all cable
    networks that carry only sports or a combination of major sports
    and general entertainment offer such discounts. Furthermore, many
    small cable operators have been able to lower their programming
    costs by participating in the National Cable Television
    Cooperative-an organization that purchases programming on behalf
    of its members, most of which are small cable operators. However,
    officials of the Cooperative believe their organization does not
    always receive discounts comparable to those given to similarly
    sized, large cable companies. Sports networks and networks that
    offer general entertainment and sports events frequently require
    cable operators to bundle their networks with other programming
    networks into service packages that are offered to cable
    subscribers. Opinions on bundling vary among officials in the
    cable industry, with some stating that bundling keeps cable rates
    down by providing an economically efficient means of distributing
    programming because it lowers transaction and equipment costs for
    both cable operators and subscribers. Others, however, believe
    that bundling limits Page 2                   GAO/RCED-99-136
    Sports Programming Costs and Cable TV Rates B-280705 the choices
    of cable customers and can result in higher cable rates for
    customers who are only interested in receiving certain types of
    programming. Over a 4-year period (1994-98), the average player's
    salary in each of four major professional sports leagues-the
    National Football League (NFL), Major League Baseball (MLB), the
    National Basketball Association (NBA), and the National Hockey
    League (NHL)-has increased by a range of 14 to 64 percent,
    depending on the sport. During the same period, the prices cable
    networks pay to carry major professional sports events have also
    increased as have the rates subscribers pay for cable television.
    However, the opinions of sports and cable industry officials
    differ on the extent to which players' salaries have contributed
    to cable rate increases. Some officials believe the increases in
    salaries have caused the increases in the fees associated with the
    rights to televise sports events, which have in turn led to
    increases in cable rates. Others believe that players' salary
    increases are simply a reflection of increased consumer demand for
    sports programming and thus should be viewed as an effect, rather
    than a cause, of cable rate increases. Background    Cable
    television is the major provider of subscription television
    programming in the United States, serving over 65 million
    subscribers as of June 1998. Overall, there are about 11,000 cable
    systems nationwide, most of which are owned by multiple system
    operators (MSO)-companies that own two or more systems. The top 10
    MSOs serve more than 70 percent of the subscription television
    video market and have from about 1.3 million to 13.1 million
    subscribers. In contrast, many individual cable systems are quite
    small. Over 6,000 systems have fewer than 1,000 subscribers. Cable
    television companies compete with other providers of subscription
    television services, such as direct broadcast satellite
    companies.1 Sports is an important part of cable programming.
    Sports programming, such as MLB and NFL games, is referred to as
    "marquee programming" because of its attractiveness to cable
    viewers. Cable television systems carry sports programming aired
    by broadcast stations and by cable networks, including cable
    sports networks. Included among the 40 cable 1Our forthcoming
    report, Telecommunications: The Changing Status of Competition to
    Cable Television (GAO/RCED-99-158), analyzes the status of
    competition in the subscription television market; the extent to
    which ties between cable companies and program suppliers may be
    affecting the development of competition; and the key factors that
    may influence the development of competition in the future. Page 3
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 sports networks are national sports networks, such as ESPN;
    regional sports networks that carry games of local sports
    franchises as well as other sports programming, such as Fox Sports
    Northwest; specialized sports networks, such as the Golf Channel;
    and sports news channels, such as CNN/SI. (App. II provides a list
    of cable sports networks.) In addition, other cable networks, such
    as the TNT and FX networks, offer a mix of major sports
    programming and general entertainment. Cable systems pay for
    programming they obtain through licensing fees that they pay to
    cable networks and through copyright fees that they pay for
    obtaining distant broadcast television signals. Generally, sports
    programming, as well as most other cable programming, is offered
    by cable operators as part of one or more bundled service
    packages, or "tiers," with each tier consisting of additional
    channels provided for an additional cost. The lowest-priced tier
    is called the basic tier and includes the retransmission of local
    broadcast signals; public, educational, and governmental channels;
    and any other channels chosen by the cable operator. Many cable
    companies also offer one or more "enhanced basic" tiers (also
    called cable programming services tiers) that include advertiser-
    supported cable networks (such as ESPN, the USA Network, and MTV)
    and may also include news and special interest services. For an
    additional amount, cable operators also offer premium services,
    such as Home Box Office or Showtime, and pay-per-view services,
    such as professional boxing and movies. From July 1995 through
    July 1998, cable television rates have increased faster than the
    general inflation rate as measured by the Consumer Price Index.2
    For example, according to the Bureau of Labor Statistics, between
    June 1997 and June 1998, cable rates rose by 7.3 percent, while
    the Consumer Price Index increased by 1.7 percent. However,
    because many cable companies increased the number of channels they
    offered during this period, increases in cable rates are lower on
    a per channel basis. For example, according to the FCC's May 1999
    Report on Cable Industry Prices, average monthly rates for cable
    companies not facing effective 2Rates for basic cable service are
    subject to regulation by states or localities. In some cases, the
    state regulates cable television through a state commission or
    advisory board. In other areas, cable is regulated by local
    government entities, such as a city cable commission, city
    counsel, or board of supervisors. The FCC had authority to
    regulate the rates cable companies charged for the cable
    programming services tiers; however, the authority expired on
    March 31, 1999. Page 4                         GAO/RCED-99-136
    Sports Programming Costs and Cable TV Rates B-280705 competition3
    increased by 6.9 percent during the 12 months ending July 1, 1998,
    but by only 1.6 percent when considered on a per channel basis.
    The average monthly cable rate charged by noncompetitive companies
    as of July 1, 1998, was $30.53, of which $27.88 was for
    programming services and $2.65 for equipment rentals.4 The Extent
    of Sports          Available data on 15 cable systems in 1997
    indicate that, in general, sports Programming's Impact programming
    accounted for about 29 percent of the cable system operators'
    programming costs and about 6.8 percent of the monthly on Cable
    Television           amount that the cable systems charged to
    their subscribers.5,6 Rates Was Limited             Furthermore,
    recent FCC studies have found that increases in sports programming
    costs have been a relatively minor contributor to higher cable
    rates.7 However, sports programming costs may have a greater
    impact in the future when the increased costs of recent contract
    agreements with major sports leagues are more fully reflected in
    cable operators' rates. 3The Communications Act of 1934, as
    amended, directs the FCC to annually publish statistical reports
    on the average rate of a number of items, including basic cable
    services, of cable systems that the Commission has found are
    subject to effective competition compared with those that are not.
    Whether effective competition exists is determined using any one
    of four criteria. For example, effective competition is deemed to
    exist where the franchise area is served by at least two
    unaffiliated multichannel video programming distributors, each of
    which offers comparable video programming to at least 50 percent
    of the households, and at least 15 percent of the households
    subscribing to programming services offered by a multichannel
    video programming distributor subscribe to services other than
    those offered by the largest multichannel video programming
    distributor. 47 U.S.C. 543(k),(l). 4The rate for programming
    services includes programming in the basic tier and most popular
    cable programming services tier. Equipment rentals include charges
    for remote control units and converters (electronic devices that
    shift channels transmitted by a cable system to other channels on
    a subscriber's television set). According to the FCC's report,
    rates for competitive cable companies increased by 5.8 percent
    overall during the 12-month period ending July 1, 1998, and by 3.6
    percent when viewed on a per channel basis. The average monthly
    cable rate charged by competitive companies as of July 1, 1998,
    was $28.71, of which $26.12 was for programming services and $2.59
    for equipment rentals. 5 Detailed information on the fees that
    cable system operators pay for cable television programming is
    difficult to obtain because of its proprietary nature. As a
    result, our ability to fully assess the impact of sports
    programming costs on cable television rates was limited. 6 Total
    programming costs accounted for about 23.8 percent of the monthly
    cable bills that the 15 cable systems' subscribers paid. Aside
    from programming costs, subscribers' bills include costs for
    system upgrades, channel additions, new equipment, and inflation.
    7We were unable to determine whether there were any changes in the
    quality of sports programming that may be related to increases in
    the cost of sports programming for the 15 cable systems or for the
    cable systems covered by the FCC's studies. However, according to
    the 1998 FCC report, the average number of channels that
    noncompetitive cable systems devoted to sports programming
    increased from 2.6 to 2.9 (11.5 percent) between 1997 and 1998.
    Page 5                          GAO/RCED-99-136 Sports Programming
    Costs and Cable TV Rates B-280705 Sports Programming
    For the 15 individual cable systems we reviewed, fees cable
    operators paid Accounted for 29 Percent                 to obtain
    programming from cable sports networks accounted on average of
    Programming Costs at                  for about 29 percent of
    total programming costs in 1997.8 The costs ranged 15 Cable
    Systems                         from about 18.6 percent to about
    46.2 percent, as shown by figure 1.9 Figure 1: Sports Programming
    Costs as a Percentage of Total Programming Costs for 15 Cable
    Systems, 1997 Source: Programming cost information from 15
    individual cable systems. 8Data on these systems are not
    necessarily representative of all cable systems. 9The fees cable
    system operators pay for sports networks tend to understate the
    impact of sports on cable rates because sports are also carried by
    other networks. However, data were not available to determine the
    degree of the impact of sports on the programming costs of these
    other networks. Page 6                        GAO/RCED-99-136
    Sports Programming Costs and Cable TV Rates B-280705 The monthly
    sports programming costs for operators of the 15 cable systems
    ranged from 74 cents to about $3.00 per subscriber per month. The
    number of sports networks carried ranged from one to four and
    included ESPN, ESPN2, regional sports networks, and the Golf
    Channel. As shown in figure 2, sports programming costs on average
    represented about 6.8 percent of the average monthly amount that
    the 15 cable systems charged to their subscribers for cable
    programming. The percentage ranged from about 3 percent at a
    system that carried only one sports network to over 12 percent at
    a system that carried four sports networks. Other programming
    costs accounted for an additional 17 percent of the monthly amount
    that the 15 cable systems charged subscribers. Figure 2:
    Percentage of the Average Monthly Amount That the 15 Cable Systems
    Charged to Their Subscribers That Was Attributable to Sports and
    Other Programming Costs, 1997 Source: Monthly programming cost
    information on 15 cable systems. Page 7
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 The FCC's Study Found a      In an effort to identify the
    sources of recent cable television cost Similar Impact of Sports
    increases, in 1998 the FCC conducted an inquiry of the top six
    MSOs that Programming on Cable         provide services to
    approximately 67 percent of all cable subscribers. In Rates
    general, the FCC inquiry's results were similar to what we
    determined for the 15 cable systems. The MSOs reported to the FCC
    that sports programming, in general, accounted for 26.7 percent of
    the total programming fees charged to cable system operators,
    compared with about 29 percent for the systems we reviewed. While
    the FCC inquiry's results did not include information on the
    extent to which sports programming costs contributed to a
    subscriber's average monthly cable bill, it did include an
    analysis of the extent to which sports and other programming costs
    contributed to increases in subscribers' cable rates from July 1,
    1995, through July 1, 1996, and from July 1, 1996, through July 1,
    1997.10 Programming Costs Have       Data collected by the FCC
    indicate that total programming cost increases Contributed to
    Cable Rate    have been a substantial contributor to cable rate
    increases. For example, Increases, but the Impact    the 1999
    Report on Cable Industry Prices shows that, on average, for of
    Sports Programming        noncompetitive systems, rate increases
    attributable to programming costs Costs Was More Limited
    were about 33.6 percent from 1997 to 1998 and 24.4 percent from
    1996 to 1997.11 The FCC's 1998 inquiry determined that between
    1996 and 1997, programming costs accounted for 28.2 percent of the
    increase in subscribers' cable rates for four of the MSOs that
    responded.12 Both reports also identified other factors that
    contributed to cable rate increases, such as inflation, upgrades,
    and channel additions. However, compared with the impact of
    programming costs on cable rate increases, the impact of sports
    programming costs has been limited. The 1999 Report on Cable
    Industry Prices shows that for noncompetitive systems, sports
    programming accounted for about 22.4 percent of the increase in
    programming costs, or 7.5 percent of the increase in cable rates,
    between 1997 and 1998. Between 1996 and 1997, sports programming
    accounted for about 19.6 percent of the increase in programming
    costs, or 4.8 percent of the increase in cable rates. Similarly,
    the FCC's 1998 inquiry showed that between 1996 and 1997, sports
    10Annual Assessment of the Status of Competition in Markets for
    the Delivery of Video Programming, Fifth Annual Report, Appendix F
    (1998). 11Most of the respondents to the FCC's 1998 price survey
    were noncompetitive systems. Results were similar for competitive
    systems. 12While the FCC's inquiry included six MSOs, only four
    provided complete information covering the topic. Page 8
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 programming accounted for about 5.3 percent of the total
    increase in rates. Other programming subcategories that both
    reports identified as contributing to cable rate increases
    included news, children's, and other types of programming.13
    Figure 3 shows the reasons cable systems reported for increases in
    subscribers' average monthly rates, according to the 1999 Report
    on Cable Industry Prices. Figure 3: Factors Affecting Cable Rate
    Increases, 1997-98 Note: Other costs include inflation, channel
    additions, system upgrades, and new equipment. Source: 1999 Report
    on Cable Industry Prices, FCC. 13The 1998 inquiry showed that
    news, children's, and other types of programming accounted for 1.2
    percent, 3.2 percent, and 17.6 percent, respectively, of the
    increase in rates from 1996 to 1997. Page 9
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 In comparison, our analysis of programming cost increases
    for 12 cable systems found that sports programming accounted for
    about 32.8 percent of the total increased programming costs
    between 1996 and 1997.14 For 1998, the projected increases for
    sports programming at 14 cable systems15 averaged about 24.1
    percent of total programming cost increases.16 The Impact of
    Sports      While historically sports programming costs have
    generally had a limited Programming Costs on      impact on cable
    television rates, the impact could increase in the future. Cable
    Rates Could         As we describe later in this report, in the
    last 3 years, each of four major Increase in the Future    sports
    leagues has signed contractual agreements that have increased the
    amounts that cable networks pay for the cable rights to the
    leagues' games. According to several MSO officials, the impact on
    costs of these contractual agreements is beginning to be reflected
    in the prices MSOs are being charged by the programmers for the
    sports events. For example, ESPN's Executive Vice President for
    Administration told us that cable operators were notified in April
    1999 that ESPN would increase its programming license fees on
    August 1, 1999. According to the official, the August 1 increase
    is based on several factors, including the value of the network to
    consumers and local advertisers; the increasing costs associated
    with ESPN's obtaining the cable rights to highly valued sports
    programming, such as NFL games; and the relatively high cost of
    producing and televising live sports entertainment. The official
    stated that the net impact of the rate increase on cable operators
    will depend on each operator's contractual agreement with ESPN.
    These agreements include varying discounts and incentives that
    enable cable operators to reduce program licensing fees. In
    addition, to help offset licensing fee increases, ESPN has
    increased the amount of advertising time that it makes available
    to cable operators to sell during ESPN programming. ESPN estimates
    that taking into account discounts, incentives, and the growing
    amount and value of ESPN's local advertising sales inventory, the
    net impact of its wholesale rate adjustments in each of the last 2
    calendar years will average about 10 cents per subscriber per
    month. 14Information for 1996 was available only for 12 of the 15
    cable systems. 15Information for 1998 was available only for 14 of
    the 15 cable systems. 16Information, similar to that in the FCC
    study, on the other factors affecting rates was not available to
    us for the 15 systems. Page 10                        GAO/RCED-99-
    136 Sports Programming Costs and Cable TV Rates B-280705 Small
    Cable Operators Because of the limitations on the availability of
    information on prices paid Sometimes Pay More               for
    programming and on the terms and conditions of cable programming
    contracts, we cannot provide definitive judgments on the
    differences in Than Large Operators             what small and
    large cable operators pay for sports programming. for Sports
    According to interviews with industry officials, small cable
    operators sometimes pay more for sports programming because the
    small number of Programming                      their subscribers
    limits their ability to take advantage of volume discounts or
    opportunities to obtain revenue, such as the sale of time used for
    advertising during cable network programming. Not all networks
    that carry only sports or a combination of sports and general
    entertainment programming offer volume discounts, however. Also,
    many small cable operators have been able to lower their
    programming costs by joining the National Cable Television
    Cooperative (NCTC), which aggregates its members' subscribers to
    collectively purchase programming. Nonetheless, NCTC officials
    believe that NCTC does not always receive discounts that are
    comparable to those given to similarly sized MSOs. Small Cable
    Operators May        According to industry officials, small cable
    operators are likely to pay Pay More If a Programmer         more
    for sports programming than large cable operators if a cable
    Offers Volume Discounts          programming network offers price
    reductions, such as volume discounts, based on the number of a
    system's subscribers.17 According to the American Cable
    Association (ACA),18 such discounts exist because large cable
    operators have more negotiating power than small cable operators.
    Programmers have an incentive to have their programming available
    to the greatest number of subscribers possible because, as the
    number of viewers increases, so do programmers' revenues from
    licensing fees and advertising revenue. Therefore, cable operators
    with a large subscriber base can obtain greater concessions, such
    as volume discounts, from programmers than small cable
    operators.19 17Aside from volume discounts, some sports
    programming networks offer other incentives that can reduce
    programming costs. These include discounts for locating a
    programmer's network on the VHF band (i.e., channels 2 through
    13), locating a network next to another programming network
    offered by the same company, and carrying on the channel lineup
    two or more affiliated networks that are owned by the same
    programming company. 18ACA, formerly the Small Cable Business
    Association, is a nationwide trade association representing
    approximately 300 small cable businesses that collectively serve
    more than 2.3 million subscribers. 19According to comments
    submitted to the FCC by Ameritech New Media, Inc., regarding cable
    television ownership rules, to be economically viable, a
    programming network needs to reach a critical mass of viewers,
    which has been estimated to be approximately 20 million
    subscribers. To reach that level, a programmer must reach
    agreement with one or more of the largest MSOs. As a result, the
    large MSOs possess significant leverage in negotiating price
    reductions. Page 11                       GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates B-280705 Information we
    obtained indicates that the extent to which sports programming
    networks offer volume discounts varies. For example, one prominent
    sports programming network provided eligible cable operators with
    volume discounts ranging from 1 to 6 cents per subscriber. The
    lowest discount was for cable operators with 250,000 to 499,000
    subscribers, and the highest discount was for operators with 1.5
    million or more subscribers. The network's programming must reach
    at least 95 percent of the cable operator's subscribers for the
    operator to be eligible for a discount. Network officials told us
    that the number of subscribers needed to qualify for the discounts
    was recently lowered to assist cable operators in coping with
    programming cost increases. However, another popular sports
    programming network and a few popular networks that offer a
    combination of general entertainment and major sports events20 did
    not offer volume discounts as a way of reducing programming
    service fees. According to an official representing one regional
    cable sports programming network, the per subscriber programming
    costs for small and large cable operators are essentially the same
    because the network bases its licensing fees on the proximity of a
    cable system's subscribers to the sports event and on the
    percentage of a cable operator's subscribers receiving the
    service. Also, some industry officials told us that several
    popular networks that offer a combination of general entertainment
    and major sports events do not offer any volume discounts because
    they are widely distributed and few cable systems could afford not
    to carry them. The officials said that while volume discounting is
    a fairly common practice among cable networks, it tends to be used
    more by newer programming networks and those with limited
    distribution. Small Cable Operators Are    According to industry
    officials, the net cost of sports programming may Likely to Have
    Higher Net    also be higher for small cable operators because
    they take in less in Program Licensing Costs      advertising
    revenue and are less able to take advantage of some of the Than
    Larger Operators        other incentives that offset programming
    costs. Small and large cable companies generally receive a portion
    of the advertising time that is available within cable programming
    offered on their systems. For example, one sports network provides
    cable operators with 2 minutes of local advertising per hour
    during its programming, which represents a 20Programming networks
    that offer a combination of general entertainment and major
    sporting events include TNT, TBS, and FX. Page 12
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 revenue source for cable operators.21 According to network
    officials, 80 percent of cable operators sell advertising during
    each 2-minute period. The officials also stated that to help cable
    operators cope with rising programming costs, the network recently
    increased the number of 30-second advertising units available
    during a 1-hour period. It also lowered the number of subscribers
    that cable operators' systems needed to be able to take advantage
    of volume discounts. However, according to officials representing
    small cable operators, the size of their markets limits their
    ability to sell advertising during the time allotted for local
    advertising. For example, NCTC officials estimate that a cable
    system needs at least 5,000 subscribers to break even with the
    costs incurred to develop an advertising sales and production
    department. They noted that most of their members' cable systems
    have fewer than 5,000 subscribers. Net licensing fees for small
    cable operators may also be higher because small cable operators
    have difficulty taking advantage of, or negotiating for, some of
    the other incentives available to both small and large companies,
    such as marketing support-that is, funding to advertise
    programming networks-and cash or other incentives. However, the
    magnitude of these incentives is unclear. Representatives for
    small cable operators we spoke with stated that it is difficult
    for small companies to utilize marketing support money because
    they have limited markets and few media outlets on which to spend
    promotion funding. An industry official we spoke with also said
    that it is common practice in the cable television industry for
    programming networks, including sports programmers, to provide
    cash or other incentives to cable operators in return for airing
    promotional advertising in the local market. The official said
    that many small cable operators are unable to take advantage of
    these incentives because they do not have a sufficient number of
    subscribers to justify the investment necessary to sell, produce,
    and insert promotional advertising into cable programming. 21Total
    cable advertising revenues in 1998 were about $9.079 billion,
    including $2.214 billion for local and spot cable advertising,
    $305 million for advertising on regional sports networks, and
    $6.560 billion for advertising on network cable. For the six MSOs
    responding to the FCC's 1998 inquiry, the average local
    advertising revenues represented 7.9 percent of the average
    revenues of regulated cable systems. Page 13
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 Small Companies Can Now     Many small cable operators now
    purchase sports and other types of Purchase Programming
    programming collectively through NCTC, which negotiates master
    contracts Through the National        with programming networks on
    behalf of its members. Currently, NCTC, Cable Television
    which has about 925 cable operator members representing 6,300
    cable Cooperative                 systems, has contracts covering
    85 programming networks. The combined amount of NCTC members'
    subscribers (10.5 million) would make it the third largest MSO. By
    purchasing programming through NCTC, small cable operators are
    capable of obtaining volume discounts comparable to those acquired
    by large MSOs. But, according to NCTC officials, NCTC does not
    always receive the discounts that a comparably sized MSO would
    receive. Industry officials told us that NCTC is still limited in
    its ability to negotiate the best possible terms with programming
    networks because large MSOs can promise delivery of a certain
    number of subscribers while NCTC can only promise to present
    offers to its members. In addition, according to ACA, while buying
    groups such as NCTC have had some success obtaining cost savings
    for national programming, they have not been successful in
    obtaining cost savings for local or regional programming, such as
    regional sports networks. Moreover, ACA has indicated that neither
    it nor NCTC has any assurance that current programmers will renew
    their existing NCTC contracts when they expire. Furthermore, some
    industry officials believe that because many small cable operators
    continue to have fewer opportunities for mitigating cost
    increases, in the near future, small cable operators will pay more
    than large operators as the higher costs of recently signed sports
    rights agreements are passed on to cable operators. Cable Networks
    Our discussions with cable industry officials and our analysis of
    Generally Require           information provided by cable
    operators indicate that sports networks and networks that offer a
    combination of general entertainment and sports Bundling, but
    Views         events generally require the bundling of their
    programming with other on Its Effect on Rates      cable networks
    on the basic or enhanced tiers of service. However, opinions on
    the effect that bundling has on cable rates were mixed. Vary
    Limited Information         Information obtained from discussions
    with cable operators, cable Indicates That Sports
    programming networks, and other cable industry representatives
    indicates Networks Frequently         that sports networks and
    networks that offer general entertainment and Require Program
    Bundling    sports events frequently require their networks to be
    bundled with other programming networks in specific tiers. For
    example, an official with a large MSO stated that most of the
    cable programming networks, including sports programming networks,
    require that their networks be located on the basic or enhanced
    basic tier of service. An official of a large MSO and Page 14
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 major distributor of cable programming stated that sports
    programming networks pressure cable operators to bundle their
    networks with other programming networks because it increases the
    potential for viewers and, thus, can increase the network's
    advertising revenue. Information we obtained indicates that the
    specific bundling arrangements required by networks vary. For
    example, one sports network required that its programming be
    provided either on the operator's basic tier or on an enhanced
    basic tier that contained no fewer than 10 other first-quality
    cable programming networks. Another sports network required that
    its programming be distributed as part of basic service, enhanced
    basic service, or a third-tier service. If the programming was
    offered on the third tier, the network required that the tier be
    received by at least 30 percent of the operator's subscribers and
    that it contain at least four other cable programming networks.
    However, the network also allowed the cable operator to distribute
    the network on an a la carte basis22 so long as the system also
    offered the network as part of a third tier in which each other
    programming network was also offered on an a la carte basis. Yet
    another network that offers general entertainment and major
    sporting events required that its programming be received by an
    aggregate of at least 90 percent of the total subscribers
    throughout all the MSO's systems and that it not be offered solely
    as an a la carte service on any system.23 In addition to having
    specific bundling requirements, sports networks and networks that
    offer general entertainment and major sporting events also
    frequently employ fee structures whereby the amount cable
    operators pay for programming decreases as the percentage of
    subscribers who receive the service increases, according to
    information we received. For example, one network's fees were
    broken into three price levels. The lowest fee was charged to a
    cable operator that provided the network's programming as part of
    its service to 95 percent or more of the operator's subscribers.
    The level increased by about 11 percent per subscriber if more
    than 85 percent but less than 95 percent of subscribers received
    the network and by an additional 18 percent if less than 85
    percent of the operator's subscribers received the network.
    Another network provided a discount if the total 22Programming
    offered on an a la carte basis allows cable subscribers to
    purchase channels individually. 23Information we obtained from
    cable operators also indicates that some sports networks that
    previously were available on an a la carte basis have tried to
    convince operators to move the networks to the enhanced basic
    tier. A 1998 study conducted by Economists Incorporated also found
    that there has been a migration of regional sports networks from a
    la carte programming to cable operators' enhanced service tiers.
    How Bundling Cable Networks Benefits Consumers (Washington, D.C.:
    Economists Incorporated, Feb. 28, 1998), p. 6. Page 15
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 number of cable system subscribers receiving the network
    was above 80 percent. The discount increased for each percentage
    point that the number of subscribers exceeded the 80-percent
    level. Differing Views Exist on    Views on the effect of bundling
    vary. According to many cable industry the Effect That the
    officials, the bundling of cable television programming is
    economically Bundling of Cable           efficient. For example,
    an official representing a large MSO commented that Programming
    Networks        the bundling of cable networks is the most
    efficient means of providing Has on Cable Rates          cable
    programming for cable customers. Having numerous tiers of service
    or a la carte programming would increase costs and, therefore,
    increase cable rates, the official stated. A 1998 industry-
    sponsored study by Economists Incorporated reported that without
    bundling, all subscribers would have to pay the additional costs
    of adding and deleting channels since the cable operator would
    likely have to add additional customer support and technical staff
    to deal with the increased number of calls. The study also
    reported that many cable subscribers would have to purchase or
    rent additional pieces of equipment, like converter boxes, since
    cable operators would probably scramble unbundled channels to
    prevent unauthorized subscribers from viewing them. The study
    cited a National Cable Television Association estimate that the
    rental rate of a converter box is about $3.20 per month. A panel
    of experts we commissioned agreed that the bundling of cable
    programming, to at least some extent, results in economic
    efficiencies and thereby helps in minimizing cable rate
    increases.24 The Economists Incorporated study, as well as some
    industry officials we contacted, stated that unbundling cable
    programming would not be in the best interest of cable
    subscribers. For example, one sports network official indicated
    that unbundling would lead to fewer subscribers receiving the
    network, which would result in decreased advertising sales because
    a smaller audience share would be viewing the programming. The
    loss in advertising sales could then lead to cable operators'
    raising cable rates to make up the loss in revenue from
    advertising. An official of a major broadcast network also
    indicated his concern by stating, "If forced in an a la carte
    direction, the cost to the consumer of each individual channel
    will necessarily go up, and the number of people subscribing to
    various services will accordingly shrink." Other officials believe
    that bundling limits the choices of cable customers and that cable
    operators should seriously consider a la carte programming. 24For
    a list of the expert panel members, see app. III. Page 16
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 For example, one of the experts on the panel we
    commissioned commented that even if economic modeling indicates
    that bundling is more efficient for cable operators and consumers,
    consumers do not feel they are benefiting. The panelist commented
    that, after complaints about rates, the lack of choice in the
    number and types of networks they receive is consumers' second
    most frequent complaint about cable television. An official of one
    large MSO indicated that the cable industry should take a serious
    look at offering a la carte programming because "choice" is a good
    marketing banner. Another official representing a large MSO
    commented that his company would like to offer sports networks on
    an a la carte basis because it could provide a more economical
    package of other kinds of programming to non-sports fans. The
    official continued by saying that the MSO might be able to add
    more subscribers if it could better package its programming.
    Differing Views Are Held     Some cable industry officials we
    talked with indicated that the on the Future of Bundling
    implementation of new technologies, such as digital cable, and the
    increasing number of programming networks that a cable operator
    can carry will lead to more tiers of service but not necessarily
    to a transition to a la carte programming whereby subscribers can
    choose each channel they want. For example, an official
    representing a large MSO commented that as cable moves to a
    digital format, programming provided on smaller tiers or a la
    carte will be easier for cable operators to offer because of the
    new technology. However, another MSO official pointed out that
    even if a la carte programming eventually becomes a reality, there
    would still be a need for a basic tier of service; placing new
    programming networks on a basic tier gives them an opportunity to
    attract an audience. According to the panel of experts we
    commissioned, there is at least a moderate likelihood that system
    upgrades and new technology will result in cable operators'
    offering programming on an increased number of tiers within the
    next few years. But even if additional tiering occurs because of
    digital technology, it may not necessarily mean that existing
    networks, including sports networks, will move into the new tiers-
    only that new programming networks will be added to the additional
    service tiers. Page 17                GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates B-280705 Players' Salaries
    Have                 Players' salaries in four major sports
    leagues-the NFL, MLB, NBA, and Increased, but Views
    NHL-have increased during the last 4 years as have the amounts
    that cable system operators have paid to acquire the rights to air
    the leagues' games. Differ on the Extent                   Cable
    subscribers' rates have also increased during this period.
    However, to Which Salary                        views differ on
    the extent to which players' salary increases have contributed to
    rises in cable rates. Increases Have Contributed to Rises in Cable
    Rates Players' Salaries and Team             Data we obtained from
    the sports leagues indicate that average player Payrolls Have
    Increased                salaries in each league increased between
    the 1994-95 and the 1997-98 During the Last 4 Years
    seasons. However, as shown in table 1, the percentage of these
    increases varied widely from league to league. While average
    salaries for NHL players increased by 64 percent, average salaries
    for MLB players increased by only 14 percent. Table 1: Average
    Player Salaries in Four Major Professional Sports
    National                  Major          National
    National Leagues
    Football              League           Basketball
    Hockey Season                         Leaguea            Baseballa
    Association                 League 1994-95
    $588,000        $1.154 million         $1.8 million
    $733,000 1997-98                       $720,000        $1.314
    million         $2.6 million         $1.2 million Percentage
    increase                              22%                  14%
    44%                 64% Note: Average player salaries are in
    nominal dollars. aThe average salaries shown for the NFL and MLB
    are for the 1994 and 1997 seasons, which, with the exception of
    the NFL playoffs, extend through a single calendar year. The NHL
    and NBA seasons begin in the fall of one year and end during the
    late spring of the following year. As shown in table 2, average
    team payrolls for the three leagues for which information was
    available also increased during the same period. The increases
    ranged from 19 percent for NFL teams to 47 percent for NBA teams.
    We were not able to obtain team payroll information from the NHL.
    Page 18                       GAO/RCED-99-136 Sports Programming
    Costs and Cable TV Rates B-280705 Table 2: Average Team Payrolls
    of Major Professional Sports Leagues
    National                Major               National Football
    League             Basketball Season
    Leaguea           Baseballa,b           Association 1994-95
    $34.1 million       $31.377 million            $22.7 million 1997-
    98                                   $40.7 million       $38.775
    million            $33.3 million Percentage increase
    19%                     24%                    47% Note: Average
    team payrolls are in nominal dollars. Payroll figures for the NFL
    include salaries, bonuses, and some standard league benefits.
    Figures for MLB and the NBA include salaries and bonuses only.
    aThe average payrolls shown for the NFL and MLB are for the 1994
    and 1997 seasons, which, with the exception of the NFL playoffs,
    extend through a single calendar year. The NBA season begins in
    the fall of one year and ends during the late spring of the
    following year. bIn 1997, there were 826 players on MLB's active
    roster, compared with 761 players on the active roster in 1994.
    Additional players were also on the disabled list in 1997. Much of
    the attention that has been given to increases in players'
    salaries may, however, stem from the increases in salaries
    received by the leagues' star players. The salaries for such
    players have, in some cases, increased at a much higher rate than
    average player salaries. For example, available data indicate that
    the average salaries received by the five highest-paid NBA and MLB
    players have more than doubled since 1994. According to one of the
    expert panelists, unlike in most markets, there are a limited
    number of top sports stars, which gives them an increased ability
    to raise the prices paid for their services. Prices Paid by Cable
    Since 1996, each of the four major sports leagues has signed new
    Networks to Carry the                agreements with cable and
    broadcast networks for the rights to its games. Major Sports
    Leagues'                It is difficult to compare precisely the
    amounts cable networks paid under Games Have Increased
    the new and old agreements because the specific terms of the
    agreements are proprietary and the rights acquired may vary.
    However, the available information indicates that the amounts that
    cable networks paid under the new agreements are substantially
    higher than what they paid under the previous contracts.25 In
    August 1998, the NHL approved Disney's 5-year $600 million offer
    for the television rights to air NHL games on ABC and ESPN. It is
    expected that ESPN will pay approximately $70 million per season
    for this package. Under the prior agreement, ESPN is reported to
    have paid $100 million for seven seasons (about $14 million per
    season). According to an NHL 25Teams also obtain revenues from
    cable networks and broadcast stations under other agreements for
    the local and regional rights to their games. Page 19
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 representative, under the new agreement, ABC and ESPN have
    exclusive rights to televise twice as many games as ESPN did under
    the previous agreement. In January 1998, ABC and ESPN, CBS, and
    Fox signed 8-year broadcast and cable rights agreements totaling
    about $18.3 billion to air NFL games. ABC and ESPN made a combined
    bid of $9.4 billion to air games from 1998 to 2005. Of this
    figure, $4.8 billion ($600 million per season) is allocated to
    ESPN for the Sunday Night Football cable package, the NFL Prime
    Time highlights show, and other related programming. Under the
    prior agreement, which covered the 1994 through 1997 seasons, the
    rights to televise NFL programming on broadcast and cable
    television sold for about $4.4 billion. In November 1997, the NBA
    entered into a 4-year broadcast rights agreement with NBC Sports,
    Inc., and a 4-year cable rights agreement with Turner Broadcasting
    System (TBS), Inc. Combined, these contracts totaled $2.6 billion.
    This includes the cost paid by TBS-$890 million-an increase of
    about 153 percent over the company's previous 4-year contract of
    $352 million, which expired after the 1997-98 season. In 1996, MLB
    signed 5-year agreements totaling about $1.7 billion with Fox,
    NBC, and ESPN for the broadcast and cable rights to MLB games. Fox
    and NBC collectively paid about $1.1 billion for the broadcast
    rights, and Fox and ESPN collectively paid about $600 million for
    the cable rights. The information needed to compare these amounts
    with the amounts that TBS and ESPN paid for rights under the
    previous agreements with MLB was not available. Views Differ on
    the Effect    The views of the cable industry and sports league
    officials we talked with of Players' Salaries on       differed on
    whether increases in players' salaries have contributed to rises
    Cable Rates                   in cable rates. Some cable industry
    officials said they believed that the salary increases have
    contributed to higher cable rates. While most stated that they
    were not experts in this area, their observations of the sports
    and cable television industries led them to believe that salaries
    have driven up fees charged to televise sports, which in turn have
    driven up cable rates. For example, one representative of a major
    MSO and programmer noted that while sports stars' rising salaries
    were not the only cause of cable rate increases, they were surely
    one of the causes. Page 20                GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates B-280705 On the other hand,
    most members of our expert panel, as well as some cable industry
    officials, said that players' salaries should not be viewed as a
    cause of increases in cable rates. More specifically, five of the
    seven panel members believed that increases in players' salaries
    had caused increases in cable rates to little or no extent, while
    one panelist believed that they had caused increases to a moderate
    extent. In addition, according to the NFL, players' salaries do
    not cause the NFL to charge higher fees for televising
    professional football games because, under the league's "salary
    cap" system, what teams spend on players is a direct function of
    leaguewide revenues.26 For example, if television revenues
    increase in any year, the salary cap increases and teams are able
    to spend more on players' salaries. If television revenues remain
    constant, however, the teams' spending on players is unchanged.
    Several panelists pointed to the increases in broadcast and cable
    rights fees and players' salaries as a reflection of increased
    consumer demand for major professional sports. In this regard, one
    of our experts stated that cable operators and programmers
    recognize the demand and try to satisfy it, thereby bidding up the
    prices in the market, including players' salaries. Another
    panelist agreed that increases were related to demand but said
    that additional factors also come into play. For example, he said
    that while movies and other types of programming are available on
    more outlets, the major sports leagues have one product that can
    be broadcast one time, thus giving them market power. In addition,
    he noted that with the plethora of new cable channels, it has
    become more important for individual networks to form distinct
    identities, such as being identified as the carrier of a major
    sports league like the NFL. This, he believed, had fueled
    competition among networks for the leagues' rights and had led to
    the high prices paid. Thus, increases in players' salaries may be
    viewed as an effect rather than a cause of cable rate increases.
    Agency Comments    We provided the FCC with a draft of this report
    for its review and comment. The FCC stated that our report was not
    inconsistent with the FCC's own research on the subject. The FCC
    also provided some technical comments, which we incorporated into
    the report as appropriate. The FCC's comments appear in appendix
    IV. 26The NFL receives leaguewide revenues from a variety of
    sources, including the sale of broadcast and cable rights for
    league games. These revenues are divided among the teams in the
    league. According to the NFL, each year, each NFL team knows the
    amount of the salary cap available to it before it begins to sign
    free agents or to draft players. Page 21
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates B-
    280705 We performed our work from July 1998 through June 1999 in
    accordance with generally accepted government auditing standards.
    As arranged with your office, unless you publicly release its
    contents earlier, we plan no further distribution of this report
    until 14 days after the date of this letter. At that time, we will
    provide copies to William E. Kennard, Chairman, Federal
    Communications Commission, and other interested parties. We will
    also make copies available to others on request. Please call me at
    (202) 512-7631 if you or your staff have any questions. Major
    contributors to this report are listed in appendix VI. Sincerely
    yours, Judy A. England-Joseph Director, Telecommunications Issues
    Page 22                GAO/RCED-99-136 Sports Programming Costs
    and Cable TV Rates Page 23      GAO/RCED-99-136 Sports Programming
    Costs and Cable TV Rates Contents Letter
    1 Appendix I
    26 Scope and Methodology Appendix II
    30 Cable Sports Programming Services Appendix III
    31 Expert Panel Participants Appendix IV
    32 Comments From the Federal Communications Commission Appendix V
    33 Sampling Error of Estimates From FCC's May 1999 Report on Cable
    Industry Prices Appendix VI
    34 GAO Contacts and Staff Acknowledgements Tables
    Table 1: Average Player Salaries in Four Major Professional
    18 Sports Leagues Page 24              GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates Contents Table 2: Average
    Team Payrolls of Major Professional Sports                     19
    Leagues Figures    Figure 1: Sports Programming Costs as a
    Percentage of Total                      6 Programming Costs for
    15 Cable Systems, 1997 Figure 2: Percentage of the Average Monthly
    Amount That the 15                   7 Cable Systems Charged to
    Their Subscribers That Was Attributable to Sports and Other
    Programming Costs, 1997 Figure 3: Factors Affecting Cable Rate
    Increases, 1997-98                        9 Abbreviations ACA
    American Cable Association FCC           Federal Communications
    Commission GAO           General Accounting Office MLB
    Major League Baseball MSO           multiple system operator NBA
    National Basketball Association NCTC          National Cable
    Television Cooperative NFL           National Football League NHL
    National Hockey League TBS           Turner Broadcasting System
    Page 25                 GAO/RCED-99-136 Sports Programming Costs
    and Cable TV Rates Appendix I Scope and Methodology To determine
    the extent to which sports programming costs are contributing to
    higher cable television rates, we reviewed reports from the
    Federal Communications Commission (FCC) on cable industry prices
    covering the years 1995 through 1998, reviewed its 1998 inquiry
    into cable rate increases for six multiple system operators (MSO),
    and analyzed information we obtained on 15 cable systems. The
    FCC's Report on Cable Industry Prices collects data from a
    statistical sample of cable operators on a variety of fees and
    revenues associated with the provision of cable television
    programming services. While the FCC has issued the report since
    1993, the 1999 report is the first one in which the Commission
    included questions about the cost of cable programming and
    associated advertising revenues by type (i.e., sports, news,
    children's, general entertainment). The FCC included questions
    about the cost of programming by type because of concerns about
    the impact of sports programming, in particular, on increases in
    cable rates. The 1999 Report on Cable Industry Prices covers the
    periods July 1, 1996, to July 1, 1997, and July 1, 1997, to July
    1, 1998. The 1997 report covers the periods July 1, 1995, to July
    1, 1996, and July 1, 1996, to July 1, 1997. Because the FCC's
    reports on cable industry prices are based on a sample of cable
    operators, rather than all operators, statistics in the report are
    subject to sampling error. The sampling errors for the statistics
    we used from the FCC's reports are provided in appendix V. We did
    not independently verify the FCC's estimates. The FCC's 1998
    inquiry into cable rate increases provided information on recent
    cost increases for cable television programming that the FCC
    collected from the nation's six largest MSOs. Collectively, the
    MSOs serve about 67 percent of all cable subscribers. With the
    inquiry, the FCC sought to build on information that was gathered
    in the 1997 Report on Cable Industry Prices. While all six MSOs
    responded, not all respondents provided complete information on
    every question. The participants provided several reasons for not
    responding fully, including the unavailability of the requested
    data, the inability of the MSOs to compile the data in the
    requested format, and the MSOs' unwillingness to share the
    requested data because of their proprietary or competitively
    sensitive nature. However, at least four respondents provided
    consistent information for most of the questions. The results of
    the inquiry, therefore, are largely based on four responses. From
    FCC public files and from public files at the state regulatory
    office in Massachusetts, we obtained data on the licensing fees
    that 15 cable Page 26                GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates Appendix I Scope and
    Methodology systems incurred for cable programming. The cable
    systems were part of three large MSOs and one medium-sized MSO,
    which, combined, represented about 28 percent of cable subscribers
    nationwide. The systems served subscribers in six states.
    According to available data, the number of subscribers for the 15
    systems ranged from about 400 to over 90,000. The information we
    obtained primarily covered the programming costs for the basic
    tier and the cable programming service tier. The data reflect the
    cable operators' programming costs for each of their channels on a
    per subscriber, per month basis. To determine the percentage of
    programming costs that were attributable to sports programming for
    the 15 cable systems, we compared the systems' monthly cost (on a
    per subscriber basis) for carrying the sports networks included in
    their basic or enhanced basic tiers to the systems' total cost of
    programming included in their basic and enhanced basic tiers. The
    total programming costs that we used included both costs for cable
    networks and for copyright fees. To compare sports programming
    costs to subscribers' monthly bills, we compared the monthly cost
    (on a per subscriber basis) that the cable systems incurred for
    carrying sports networks included in their basic or enhanced basic
    tiers to the monthly amount that the systems charged customers for
    subscribing to basic and enhanced basic service. We used data from
    January 1997 for these analyses. We obtained information on the
    rates paid by subscribers from the FCC's public files, from one
    state regulatory agency's public files, and directly from cable
    operators and MSOs. As discussed in the report, we recognize that
    this analysis tends to understate the impact of sports programming
    on programming costs and cable rates because sports are also
    carried on other cable channels. To calculate the increases in
    programming costs that are attributable to sports programming, we
    compared the increases in the costs that cable systems incurred
    for carrying sports networks to the total increases in costs for
    programming that they included in their basic and enhanced tiers.
    We used data from 1997 and 1998 for this analysis. To provide
    information on differences in what sports programmers charge small
    and large cable operators for programming, we interviewed
    representatives of large and small cable companies, cable
    programming networks, state and federal regulatory agencies, cable
    trade associations, and a cable program buying cooperative and
    reviewed information they provided. We also obtained information
    from a panel of seven experts we convened on subscription
    television issues and analyzed data from the Page 27
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
    Appendix I Scope and Methodology 1999 Report on Cable Industry
    Prices on the impact of sports programming costs on small, medium,
    and large cable operators. To determine the extent to which sports
    programmers require cable operators to bundle sports programming
    with other cable programming and the effects that the bundling of
    cable programming has on cable rates, we interviewed and reviewed
    information provided by officials representing cable companies,
    sports programming networks, over-the-air broadcast networks, a
    cable association, and a cable program buying cooperative. In
    addition, we reviewed documents of three cable companies
    containing specific bundling requirements that cable programming
    networks set forth in their agreements with these companies. We
    also obtained information from the panel of seven experts on the
    effects of bundling and obtained information from a study
    conducted by Economists Incorporated that discusses how bundling
    benefits cable subscribers. To provide information on trends in
    players' salaries and their relationship to cable rate increases,
    we interviewed cable industry officials and obtained information
    from public sources, professional sports leagues, and our expert
    panel. To obtain information on increases in average players'
    salaries and team payrolls (1994-95 through 1997-98) for four
    major sports leagues-the National Football League, Major League
    Baseball, the National Basketball Association, and the National
    Hockey League-and, recent prices cable networks paid for the
    rights to air games, we used data from cable and broadcast
    industry trade periodicals and sports Web sites. The leagues
    confirmed data we had obtained and supplied correct or missing
    information.27 Also, during our expert panel, we asked the seven
    participants to address the question of whether salaries of
    players in professional sports had risen over the last 4 years
    and, if so, whether this contributed to increases in cable rates.
    At the conclusion of the panel, we administered a survey
    instrument that allowed the participants to indicate the extent to
    which they believed players' salaries contribute to increases in
    cable rates. To accomplish our assignment, we also received
    assistance from Professor Douglas Gomery of the College of
    Journalism, University of Maryland, College Park, who specializes
    in media studies. Professor Gomery reviewed and commented on our
    overall methodology. In addition, he conducted research on sources
    of information on sports programming 27We were unable to obtain
    confirmation from Major League Baseball on prices cable networks
    paid for the rights to air professional baseball games. Page 28
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
    Appendix I Scope and Methodology costs; differences in the prices
    small and large cable operators pay for sports programming; cable
    programming bundling practices; players' salaries and leagues'
    payrolls; and the impact of players' salaries on cable rates.
    Professor Gomery also reviewed and commented on our final report.
    Page 29                  GAO/RCED-99-136 Sports Programming Costs
    and Cable TV Rates Appendix II Cable Sports Programming Services
    American Sports Classics BAY TV Classic Sports Network CNN/SI
    Comcast SportsNet Empire Sports Network ESPN ESPN2 ESPNews
    Football Channel Fox Sports Americas Fox Sports Arizona Fox Sports
    Bay Area Fox Sports Northwest Fox Sports Pittsburgh Fox Sports
    Rocky Mountain Fox Sports South Fox Sports Southwest Fox Sports
    West Fox Sports West 2 Golf Channel Home Team Sports Jock Talk TV
    Little Leaguers Sports/News Network Madison Square Garden Network
    Midwest Sports Channel New England Sports Network NewSport NTN
    Entertainment Network PASS Sports Prime Network Speedvision
    Network SportsChannel Chicago SportsChannel Florida SportsChannel
    New England Sports Channel New York SportsChannel Ohio
    SportsChannel Pacific SportsChannel Philadelphia Sunshine Network
    Source: The Federal Communications Commission. Page 30
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
    Appendix III Expert Panel Participants Dale Hatfield, Chief,
    Office of Engineering and Technology, Federal Communications
    Commission Thomas W. Hazlett, Professor and Director of
    Telecommunications Policy, University of California at Davis, and
    Resident Scholar, American Enterprise Institute Gene Kimmelman,
    Co-Director, Washington Office, Consumers' Union Robert Pepper,
    Chief, Office of Plans and Policy, Federal Communications
    Commission Donald J. Russell, Chief, Telecommunications Task
    Force, Antitrust Division, U.S. Department of Justice David
    Waterman, Associate Professor, Department of Telecommunications,
    Indiana University Steven S. Wildman, Director, Telecommunications
    Science, Management and Policy Program, Northwestern University
    Page 31                 GAO/RCED-99-136 Sports Programming Costs
    and Cable TV Rates Appendix IV Comments From the Federal
    Communications Commission Page 32      GAO/RCED-99-136 Sports
    Programming Costs and Cable TV Rates Appendix V Sampling Error of
    Estimates From FCC's May 1999 Report on Cable Industry Prices
    Because the FCC's price survey is based on a nationwide sample of
    cable systems, estimates from the survey are subject to sampling
    error. The following table contains the sampling errors for all
    the estimates we used from the FCC's 1998 price survey. Some of
    these estimates and sampling errors were contained in the May 1999
    Report on Cable Industry Prices. The table does not include
    sampling errors for competitive cable systems because, in
    conducting the price survey, the FCC sampled all available
    competitive cable systems. Sampling error of Description
    Estimate        estimatea Percentage increase in rates for
    noncompetitive cable systems from July 1, 1997, through July 1,
    1998                                6.9                0.5
    Percentage increase in rates per channel for noncompetitive cable
    systems from July 1, 1997, through July 1, 1998
    1.6                0.7 Average monthly cable rate for
    noncompetitive systems as of July 1, 1998
    $30.53               $0.35 Average monthly programming services
    rate for noncompetitive systems as of July 1, 1998
    $27.88               $0.33 Average monthly rate for equipment
    rentals for noncompetitive systems as of July 1, 1998
    $2.65               $0.10 Percentage increase in rates
    attributable to programming costs for noncompetitive systems from
    July 1, 1997, to July 1, 1998
    33.6                7.7 Percentage increase in rates attributable
    to programming costs for noncompetitive systems from July 1, 1996,
    to July 1, 1997
    24.4                3.4 Percentage increase in programming costs
    attributable to sports programming costs for noncompetitive
    systems from July 1, 1997, to July 1, 1998
    22.4                2.5 Percentage increase in rates attributable
    to sports programming costs for noncompetitive systems from July
    1, 1997, to July 1, 1998
    7.5                2.3 Percentage increase in programming costs
    attributable to sports programming costs for noncompetitive
    systems from July 1, 1996, to July 1, 1997
    19.6                7.5 Percentage increase in rates attributable
    to sports programming costs for noncompetitive systems from July
    1, 1996, to July 1, 1997
    4.8                2.1 Note: Estimates from the May 1999 report.
    aSampling errors are stated at the 95-percent level of confidence
    based on standard errors provided by the FCC. They were computed
    as 1.96 times the standard errors provided by the FCC. Page 33
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
    Appendix VI GAO Contacts and Staff Acknowledgements GAO Contacts
    Judy A. England-Joseph, (202) 512-7631 Richard A. Hale, (202) 512-
    3090 Acknowledgments    In addition to those named above, Charles
    E. Wilson, Jr., Karen E. Bracey, Richard C. LaMore, Andy C.
    Clinton, Michael R. Volpe, and Mindi G. Weisenbloom made key
    contributions to this report. (385758)           Page 34
    GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
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