NEWS Report No. DC 95-142 ACTION IN DOCKET CASE December 11, 1995 SECOND ANNUAL REPORT TO CONGRESS ON CABLE COMPETITION ISSUED (CS DOCKET 95-61) In compliance with Section 628(g) of the Communications Act, the Commission has adopted the second annual report "on the status of competition in the market for the delivery of video programming." The Report provides information about cable industry performance, and the status of competitive entry by other multichannel video programming distributors ("MVPDs") and other competitive technologies. The Report also provides information about structural issues affecting competition, such as horizontal concentration, vertical integration and technological advances. The report concludes that cable television systems remain the primary distributors of multichannel video programming services to consumers. Although some progress has begun toward a competitive marketplace for the distribution of video programming, the Commission found that cable television systems continue to enjoy market power in local markets. The Commission found that in the last year, direct broadcast satellite ("DBS") systems have attracted many subscribers to newly available services. Additionally, multichannel multipoint distribution ("MMDS") and satellite master antenna television ("SMATV") systems have also increased in subscribership. Several local exchange carriers ("LECs") have modified their plans for offering wire based video services, including plans for the construction of video dialtone ("VDT") systems, from the scale of entry reported in last year's report. Some LECs, however, are continuing their deployment of wire based facilities in local markets either through VDT or cable entry, and, in certain cases are focusing their efforts on wireless entry through investment in MMDS facilities. While subscribership for distributors using alternative technologies has generally increased over the last year, as of September 1995, overall subscribership for cable operators was over 91% of total MVPD subscribership. Key findings of the report include the following:  Industry Growth: By most measures, the cable industry has posted strong growth over the past year. The number of homes passed by cable grew from approximately 90.6 million at the end of 1993 to approximately 91.6 million at the end of 1994. The number of subscribers increased from 57.2 million to 59.7 million between the end of 1993 and the end of 1994. Penetration (i.e., the number of subscribers as a percent of homes passed) rose 3.3% from the end of 1993 to the end of 1994 to a penetration of 65.2%. Channel capacity grew, with 96% of all systems now having at least 30 channels. Cable systems with more than 53 channels accounted for the biggest growth during 1994, with a 9.9% increase in the number of such systems. Total cable revenues, as well as revenues from regulated services, remained stable over the year. The industry's cash flow, a measure of earnings before interest, taxes, depreciation, and amortization, for 1994 was $9.94 billion, a 1.6% decline from the 1993 cash flow of $10.1 billion. Capital expenditures continue to increase, rising 28% in 1994 to $3.8 billion.  Horizontal Concentration: Since 1994, there has been an increase in horizontal concentration of cable multiple system operators ("MSOs") nationwide, and the industry would now be considered "moderately concentrated" under standard measures of industry concentration. A number of cable MSO acquisitions and system trades appear to be motivated by, and have resulted in, increased "clustering," or regional concentration of cable system ownership. Based on recent reports of additional proposed transactions, it appears that this trend will continue.  Competitive Entry: The percentage of subscribers choosing competitive alternatives to incumbent cable operators has increased since our last report, although cable subscribership (61.7 million homes) continues to dwarf the combined subscribership for all other MVPDs combined (i.e. DBS, home satellite dishes ("HSD"), MMDS and SMATV systems), which serve 5.8 million homes. There are only a few scattered areas of the country where the local cable system faces direct competition from a second cable system (overbuilds), although instances of overbuild competition, particularly from LECs, appear to be increasing. Additional findings regarding competitors in the market for the delivery of video programming include the following: The number of subscribers to DBS services has more than doubled since the end of 1994, increasing from 602,000 to approximately 1.7 million. Prices have declined for some DBS receiving equipment used by those distributors that require subscribers to buy their own equipment. MMDS or "wireless" cable systems experienced a 33% growth in subscribers since the end of 1994, from a total of 600,000 to 800,000. In addition, a number of LECs have made substantial investments in wireless operators. In 1992, the Commission adopted a regulatory framework for LEC provision of VDT services. Subsequent court decisions and Commission actions permit LECs to offer video programming in their service areas. The first permanent VDT system is expected to shortly begin operation in Dover Township, New Jersey. Additional applications for permanent authorizations and trials, including U S West Inc.'s plan for Omaha, Nebraska, have been approved. The Commission also streamlined the Section 214 process for some LECs to construct stand-alone cable systems within their local service areas. Since the 1994 Report, some LECs modified their plans for entry into video distribution markets and, in addition to pursuing VDT, have announced plans to enter the market deploying either wired cable or wireless cable facilities. A number of LECs have also announced joint ventures to collaborate on the production and acquisition of video programming. SMATV systems increased their combined subscribership from approximately 850,000 at the end of 1994, to approximately 950,000. Other regulatory changes and technological advances may, at some point in the future, permit other existing and potential video technologies -- broadcast television, low power television ("LPTV"), local multichannel multipoint distribution services ("LMDS") -- to be used to distribute multichannel video programming.  Vertical Integration: The number of national programming services increased from 106 to 129 in the last year. Of these 129 services, 66 are vertically integrated, representing approximately 51% of all national services, which is a slight decline from last year's figure of 53%.  Technological Advances: Technological advances are occurring that will permit distributors to increase the quantity of service (i.e., increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). New system architectures are being developed that combine fiber optic and coaxial cable in order to expand the uses of wired transmission media. Digital compression is currently being deployed, which will enhance the service of both wired and wireless providers by allowing increased channel capacity and the provision of video, voice and data services that cannot be offered currently. Action by the Commission December 7, `1995, by Second Annual Report (FCC 95- 491). Chairman Hundt, Commissioners Quello, Barrett, Ness and Chong with Commissioner Barrett issuing a separate statement. - FCC - Cable Services Bureau News Media contact: Morgan Broman at (202) 416-0852. Cable Services Bureau contacts: Marcia Glauberman and Jon Ogur at (202) 416-0800. Office of General Counsel, Competition Division Contacts: James W. Olson and Martin L. Stern at (202) 418-1880