NEWSReport No. CS 97-1 CABLE SERVICES ACTION January 2, 1997 THIRD ANNUAL REPORT TO CONGRESS ON CABLE COMPETITION ADOPTED The Commission has adopted its third annual report "on the status of competition in the market for the delivery of video programming" in compliance with Section 628(g) of the Communications Act. The Report reviews provisions of the Telecommunications Act of 1996 (1996 Act) that affect competition in markets for the delivery of video programming. It reports on information about cable industry performance and the status of competitive entry by other multichannel video programming distributors (MVPDs) and other technologies. The Report also provides information about structural issues affecting competition, such as horizontal concentration, vertical integration and technological advances. It further examines potential obstacles to the emergence of competition and reports on competitive responses by industry players that are beginning to face competition from other MVPDs. The Report notes that the 1996 Act embodies Congress' intent to promote a "pro- competitive national policy framework" and eventual deregulation of markets for the delivery of video programming. Several of the 1996 Act's provisions are intended to remove barriers to competitive entry in these video programming markets and establish market conditions that promote the process of competitive rivalry. Many provisions of the 1996 Act, and the Commission's actions to implement them, have the potential for fostering increased competition in markets for the delivery of video programming. At present, however, incumbent franchised cable systems continue to be the primary distributors of multichannel video programming. Although other MVPDs continued to increase their share of subscribers in many local markets for the delivery of video programming, these markets generally remain highly concentrated, and structural conditions remain in place permitting the exercise of market power by incumbent cable systems. As of September 1996, cable subscribers represented 89% of all MVPD subscribers compared to 91% a year earlier. Notwithstanding the decrease in cable systems' share of total MVPD subscribers, in the last year the increase in the number of cable subscribers was nearly as large as the combined increase in subscribership for all other MVPDs. In fact since the Second Annual Report, the number of cable subscribers increased by 2 million compared to the increase in combined subscribership for all other MVPDs of 2.3 million. The Commission also concludes that it remains difficult to predict the extent to which competition from MVPDs using non-cable delivery technologies will constrain cable systems' ability to exercise market power in the future. The Commission found a growing but still very limited number of instances where incumbent cable system operators face competition from wired MVPDs offering similar services. The Commission also found substantially increased subscribership to direct broadcast satellite (DBS) providers offering differentiated services. Increased competition among these DBS service providers has led to lower equipment prices and, possibly, increases in the number of cable subscribers choosing to drop or reduce cable services in favor of DBS services. MVPDs using other distribution technologies, such as multichannel multipoint distribution service (MMDS), have not posted comparable increases in subscribership, but are in the process of testing digital technology that has the potential to significantly improve the competitiveness of their services. Key findings of the Report include the following:  Industry Growth: The cable industry has continued to grow in terms of subscriber penetration, average system channel capacity, the number of programming services available, revenues, audience ratings and expenditures on programming since the Commission's Second Annual Report in 1995.  Horizontal Concentration: Nationally, horizontal concentration among the top cable multiple system operators (MSOs) has continued to increase due to several acquisitions and mergers among cable companies, but still remains within the moderately concentrated range according to standard measures of industry concentration. If all MVPDs are included for consideration, national concentration falls just above the threshold of the moderately concentrated range. In addition, cable MSOs, through acquisitions and trades, continue to increase the extent to which their systems form regional clusters through the ownership of multiple franchises in the same area. Clustered systems now account for service to approximately 50% of all cable subscribers.  Promotion of Entry and Competition: Several of the 1996 Act's provisions are intended to remove barriers to entry and competition in markets for the delivery of video programming. The Commission has adopted rules to implement these provisions, such as the provision creating open video systems and the provision preempting local restrictions on antennas and dishes for reception of over-the-air broadcast, wireless cable and DBS signals. In addition, in a proceeding that is in progress, the Commission is reviewing competitive issues relating to inside wiring.  Vertical Integration: Vertical integration of national programming services between cable operators and programmers declined from last year's total of 51% to just 44% this year. This decline is due largely to the sale of Viacom's cable system assets. In addition, of the 16 programming services that were launched since the Second Annual Report, 10 are not vertically integrated.  Technological Advances: Technological advances are occurring that will permit MVPDs to increase both quantity of service (i.e., an increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). MVPDs continue to pursue new system architectures, upgraded facilities, use of increased bandwidth and deployment of digital technology. Additional findings regarding competitors in markets for the delivery of video programming include the following: Subscribership to DBS services increased from 1.7 million homes to nearly 4 million homes at the end of October 1996. This increase is attributable in part to the development of NEWStwo new DBS services in the last year -- AlphaStar and EchoStar -- and price competition among providers that has significantly lowered the cost of receiving equipment. Although wireless cable systems showed some growth in subscribership, the most significant development in 1996 was MMDS systems' preparation for the deployment of digital systems in 1997. This will increase the number of channels that MMDS systems can offer and permit them to be more competitive with incumbent cable systems. Moreover, we observe a continuation of the trend toward increased consolidation among wireless cable companies. Satellite master antenna television (SMATV) service subscribership increased approximately 11% over the past year in systems that serve multiple dwelling units (MDUs). Industry analysts attribute the growth, among other things, to technical improvements that increased operating efficiencies and to expanded product offerings, i.e., security features and diverse programming. Broadcast television service continues to serve as both a transmission medium for many households, and the primary source of programming for most viewers regardless of distribution media. Regulatory changes and technological advances may, at some point in the future, permit the use of broadcast television and other existing and potential video technologies for distributing multichannel video programming. The 1996 Act expands opportunities for local exchange carriers (LECs) to enter markets for the delivery of multichannel video programming by setting forth four options for LEC entry: (1) a Title III radio-based system, such as an MMDS system; (2) a Title VI cable system; (3) a Title VI open video system (OVS); or (4) a Title II common carriage system. Since adoption of rules implementing the OVS provision, the Commission has certified the conversion of Bell Atlantic's Dover, New Jersey video dial tone system to an OVS and authorized two additional OVS operators. In the last year, LECs also have continued to expand franchised cable operations, both within and outside their telephone service areas. Section 103 of the 1996 Act removes regulatory barriers to entry in telecommunications and video markets for "registered" public utility holding companies. On September 12, 1996, the Commission adopted final rules to implement Section 103, and, to date, has granted all 18 applications filed thus far under the 1996 Act. Action by the Commission December 26, 1996, by Report (FCC 96-496). Chairman Hundt, Commissioners Quello, Ness and Chong. --FCC-- Cable Services Bureau News Media contact: Morgan Broman at (202) 416-0852. Cable Services Bureau contacts: Marcia Glauberman and Jon Ogur at (202) 418-7200. Office of General Counsel, Competition Division Contacts: Rebecca Dorch and Jeff Lanning at (202) 418-1880.