CS Docket No. 95-61
Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming
Adopted:
May 4, 1995
Released:
May 24, 1995
By the Commission:
Comment Date: June 30, 1995
Reply Comment Date: July 28, 1995
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Summary of this Notice of Inquiry . . . . . . . . . . . . . . . . . . . . 5 III. Overview of the 1994 Competition Report . . . . . . . . . . . . . . . 10 IV. Defining the Market for Delivered Video Programming A. The Market for Delivered Video Programming . . . . . . . . . . . . . . 18 B. Status of the Cable Industry and Its Competitors 1. Cable Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2. Cable Overbuilds . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3. Wireless Cable Systems . . . . . . . . . . . . . . . . . . . . . . . 30 4. Satellite Master Antenna Systems . . . . . . . . . . . . . . . . . . 35 5. Direct-to-Home Satellite Services . . . . . . . . . . . . . . . . . 39 6. Local Exchange Carriers/Video Dialtone . . . . . . . . . . . . . . . 47 7. Broadcast Television Service . . . . . . . . . . . . . . . . . . . . 56 8. Other Distribution Technologies . . . . . . . . . . . . . . . . . . 60 9. Other Distributors . . . . . . . . . . . . . . . . . . . . . . . . . 62 10. Technological Advances . . . . . . . . . . . . . . . . . . . . . . . 64 V. Market Structure and Competition . . . . . . . . . . . . . . . . . . . . 74 A. Horizontal Concentration in the Cable Industry 1. Horizontal Concentration in Local Markets . . . . . . . . . . . . . . 75 2. Horizontal Concentration Nationally . . . . . . . . . . . . . . . . . 77 B. Vertical Integration in the Cable Industry . . . . . . . . . . . . . . 84 C. Market Performance Indicators . . . . . . . . . . . . . . . . . . . . . 92 D. Market Structure Characteristics that May Increase Concentration or Pose Impediments to Competition . . . . . . . . . . . . . . . . . . . 93 VI. Recommendations for Promoting Competition in the Market for Delivered Video Programming . . . . . . . . . . . . . . . . . . 96 VII. Procedural Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 97I. INTRODUCTION
1. On October 5, 1992, Congress enacted the Cable Television
Consumer Protection and Competition Act of 1992 ("1992
Cable Act").(n1) Section 19(g) of the 1992 Cable Act directs
the Commission to report annually to Congress on the status
of competition in the market for the delivery of video
programming.(n2) The Commission issued its first report in
compliance with this statutory requirement on September
28, 1994.(n3) This Notice of Inquiry ("NOI") is designed
to assist the Commission in gathering the information necessary
to prepare the second of these annual reports on competition
in the market for the delivery of video programming.
2. The 1992 Cable Act clearly indicates Congress' preference for competition, rather than regulation.(n4) However, in 1992, Congress found that sufficient competition to cable television systems did not exist in most local markets, and as a result cable operators had "undue market power . . . as compared to that of consumers and video programmers."(n5) Accordingly, Congress established a regulatory scheme to promote competition and to ensure that consumer interests are protected in the absence of effective competition to cable.(n6) Thus, the 1992 Cable Act provides that where effective competition is present, cable television rates shall not be subject to regulation by government but shall be regulated by the market.(n7) Alternatively, where effective competition is absent, the Commission is to protect the interest of subscribers by ensuring that basic cable rates are reasonable and cable programming service rates are not unreasonable.(n8)
3. Congress also sought to foster the development of
competition to cable operators by requiring, in the "program
access" provisions, that programming be made available
to all multichannel video programming distributors on fair
terms and conditions.(n9) In addition, the 1992 Cable Act
provides that a cable operator shall have a uniform rate
structure throughout the area served by its cable system,(n10)
and that a franchise authority may not grant an exclusive
franchise or unreasonably refuse to award an additional
competitivefranchise.(n11) A critical element of the regulatory
framework mandated by Congress is to promote the emergence
of competition over time by fostering the entry of alternative
multichannel video programming distributors.
4. The Commission has also sought in a variety of proceedings
to promote the growth of competition in the marketplace
for the delivery of video programming. This NOI presents
an opportunity to assess whether progress is being made
in developing competition and to determine whether further
actions are necessary.
II.SUMMARY OF THIS NOTICE OF INQUIRY
5. This NOI is intended to solicit information, data
and public comment that will be used to prepare the Commission's
second annual report, the 1995 Competition Report. The
purpose of this report is to monitor and summarize the
status of competition in the marketplace for video programming.
We intend to gather sufficient information to prepare
an analysis of the current status of competition for the
delivery of video programming and to evaluate changes in
the competitive environment since the 1994 Competition
Report was submitted to Congress last September.
6. Accordingly, commenters are invited to submit data,
information and analysis regarding the cable industry,
existing and potential competitors to cable systems, and
the prospects for increased competition in the market for
the distribution of video programming. We ask specific
questions to solicit current information and data regarding
changes since the 1994 Competition Report and fact-based
projections for the future development of competition in
this market. Parties also are asked to provide any other
information or analysis deemed relevant for this report.
7. The Commission recognizes that much of the information
that we will need for the 1995 Competition Report can be
obtained from publicly available sources. In addition,
a considerable amount of relevant, and even necessary information,
has been provided in filings with the Commission in connection
with a variety of ongoing proceedings. The Commission
also recognizes that parties that choose to file comments
in response to this NOI have limited resources. Accordingly,
we are not asking parties to provide the Commission with
information that is otherwise publicly available. Nor
are we asking parties to repeat here the substance of comments
that have been filed in other proceedings. Nonetheless,
while the Commission intends to look to publicly available
sources and filings in other proceedings as sources of
information, commenters should feel free to comment or
provide information on any matter that they believe is
relevant to the issues on which the Commission will report.
8. As stated in the 1994 Competition Report, we view
this annual statutory requirement as a "work in progress
in which certain parts are continually updated and revised"
because the market for the delivery of video programming
is "dynamic and evolving."(n12) We begin, in Section III of
this NOI, with an overview of the 1994 Competition Report,
including its findings regarding the status of competition
as of September 1994 and a summary of the framework for
analyzing competition in the market for delivered video
programming.(n13) Section IV seeks information and comment
regarding the relevant product and geographic markets for
delivered video programming. We wish to examine distributors
already in the market, entities that are potential entrants
in this market and other technologies that might impact
the nature of competition. The 1994 Competition Report
analyzed the cable television industry and compiled statistics
regarding the development of existing and potential competition
for the provision of video programming by alternative delivery
technologies. In this NOI, we seek data to update this
information to assess the current state of such competition
and to analyze evolving trends. In Section V, we ask for
comment on the structure of the market for the delivery
of video programming and the effect of market structure
on competition. In Section VI, we seek recommendations,
as appropriate, for promoting further competition in the
market for delivered video programming.
9. In addition, throughout this NOI we ask that commenters
consider the economic framework for analyzing competition
in the market for the provision of video programming.
Parties are invited to comment on the findings of the 1994
Competition Report regarding the relevant product and geographic
markets, our evaluation of the market structure and our
conclusions concerning the cable industry's market power.
We also invite comment on the relevant economic methodologies
for assessing the extent of competition and market performance
in the market for the delivery of video programming. Finally,
in addition to comments on specific issues raised in this
NOI, we seek any information that commenters believe will
assist the Commission in the preparation of this report.
III. OVERVIEW OF THE 1994 COMPETITION REPORT
11. Specifically, the Commission wrote that the relevant market consists of a relevant product and a relevant geographic area. In the 1994 Competition Report, the Commission used the 1992 Cable Act's definition of "multichannel video programming service"(n14) as a starting point for the definition of the relevant product.(n15) The Commission also analyzed the status of other multichannel video programming distributors ("MVPDs") that were not included in the statutory definition,(n16) and "discuss[ed] other video programming distribution media as potential substitutes for cable services."(n17) The Commission defined the relevant geographic market as the "area to which buyers will reasonably turn and from which competing suppliers sell their products," and wrote that "[g]iven the current state of competitive entry, it would seem reasonable to define, at least tentatively, the local franchise area as the geographic market relevant to an analysis of the cable industry."(n18)
12. The Commission observed that cable television was the only provider of multichannel video programming for most households.(n19) The Commission found that cable television was available to over 96% of all homes and almost 60% of all households subscribed to basic cable service in 1993.(n20) We observed that since 1990, when the Commission last provided Congress with an analysis of the cable industry and the state of competition,(n21) the cable industry had grown with respect to subscriber penetration, average system channel capacity, the number of programming services available, revenues, expenditures on programming, and capital investment.(n22)
13. In addition, the 1994 Competition Report analyzed the status of existing and potential competitors to local cable systems.(n23) The Commission stated that while competitors were emerging, alternative video programming distributors were not available to a sufficient number of subscribers to create a competitive environment in most video programming delivery markets. We reported the existence of approximately fifty "overbuilds" scattered across the country where more than one cable system has cable lines passing the same homes in direct competition for subscribers.(n24)
14. With respect to alternative distribution technologies, the Commission observed that some inroads had been made since the 1990 Cable Report on the status of competition in the cable industry. Direct broadcast satellite ("DBS") service, which the Commission first authorized in 1982, became available to consumers in 1994.(n25) Another four million households received multichannel video programming using home satellite dishes ("HSDs").(n26) The Commission found that multipoint multichannel distribution service ("MMDS"), or "wireless" cable systems, were increasing in number and obtaining the financial resources necessary for growth and expansion. The Commission indicated that, in June 1994, there were 143 systems serving 550,000 subscribers.(n27) Satellite master antenna television ("SMATV") systems, also known as "private cable systems," showed growth in terms of numbers of systems and subscribers. Industry sources indicated that there were between 3,000 and 4,000 such systems serving about one million subscribers in August 1994.(n28) In addition, at the time the 1994 Competition Report was issued, the Commission had begun to authorize local telephone companies to provide video dialtone ("VDT") service within their local telephone service areas. Five technical or market trials and one permanent VDT service were authorized and another twenty-three applications were pending which, if granted, would allow service to 8.5 million homes.(n29) The 1994 Competition Report also considered electric utilities as potential distributors of video programming.(n30)
15. The 1994 Competition Report also evaluated broadcast television and other technologies as competitors to multichannel video program distributors.(n31) We observed that, for the more than one-third of all households that do not subscribe to cable, broadcast television satisfies the demand for video programming. We also noted that even in the households that subscribe to cable, two-thirds of prime time viewing was of retransmitted broadcast stations. Despite the size of its audience, the Commission found that broadcast television does not constrain cable rates to reasonable levels. However, the Commission identified possible technological and regulatory advances that might allow broadcast television, low-power television and local multipoint distribution service ("LMDS") to become distributors of multichannel video programming.(n32)
16. Turning to market structure conditions, the Commission
analyzed multiple system operator ("MSO") ownership of
cable systems and programming services, including changes
since the 1990 Report. We concluded that there had been
a moderate increase in the horizontal concentration of
cable MSOs nationwide and, if consummated, several proposed
mergers would result in a further increase in concentration
and increased "clustering," or regional concentration,
of cable system ownership.(n33) Vertical integration in the
industry (i.e., the ownership of programming services by
MSOs) was approximately the same in 1994 as in 1990, with
cable MSOs continuing to invest in video programming vendors.
Since 1990, there had been growth in diversity and quality
of programming services that were offered or whose launch
was announced.(n34) The Commission stated that it appeared
the program access rules adopted as a result of the 1992
Cable Act had been successful in ensuring the availability
of programming to competing multichannel video program
distributors.
17. Finally, the Commission evaluated overall economic performance in local markets for the distribution of multichannel video programming services. We found that competitive rivalry in most such markets "is largely, often totally, insufficient to constrain the market power of incumbent cable systems."(n35) However, we also wrote that "entry of competitors to local cable systems over the coming months and years should exert a significant, favorable effect on market conduct and performance . . . ."(n36)
IV. DEFINING THE MARKET FOR DELIVERED VIDEO PROGRAMMING
A. The Market for Delivered Video Programming
18. The Commission intends to draw upon the relevant market concept to define the market for analysis in the 1995 Competition Report. As in the 1994 Competition Report, the Commission intends to define the relevant product market by analyzing the degree to which products or services are "reasonably interchangeable by consumers for the same purposes."(n37) The relevant geographic market is defined in a similar manner. The relevant geographic market is the area in which products compete with substantial parity. As with the definition of the relevant product market, its scope is defined by the geographic area to which buyers can reasonably turn or from which competing suppliers are likely to sell.(n38)
19. In the 1994 Competition Report, the Commission used
the 1992 Cable Act's definition of "multichannel video
programming service" as a starting point for the definition
of the relevant product.(n39) The Commission also analyzed
the status of other MVPDs that were not included in the
statutory definition, and "discuss[ed] other video programming
distribution media as potential substitutes for cable services."(n40)
We invite comments about that definition of the relevant
product market, and in particular, responses to the following
questions:
(a)What changes (if any) have occurred, since the 1994
Competition Report, in the relevant product market relative
to the delivery of video programming?
(b)Was the Commission's analysis of the relevant product
market in the 1994 Competition Report correct? Or, was
it too broad? Or, was it too narrow?
(c)In the 1990 Cable Report, the Commission noted that
cable provided four services: (1) an "antenna service"
delivering high quality retransmitted broadcast signals;
(2) a "premium" service offering uninterrupted recent movies;
(3) a "general interest basic" service consisting of imported
distant broadcast channels; and (4) a "specialized basic"
service with channels thatoffer either news, sports or
entertainment.(n41) Should the Commission's analysis treat
cable service as a single product or as a combination of
these or other services comprising separate relevant products?
(d)What technologies are being used to provide services
that should be included in the definition of the relevant
product market? What technologies might be added to that
list within the next two years?
(e)Can subscribers create their own service comparable
to cable by combining over-the-air broadcast service with
service from a non-cable MVPD and "premium" programming
obtained from a non-cable MVPD or personal VCR?
(f)What approach should the Commission use to identify
alternative video services that compete with cable services?
Should the Commission attempt to assess how many cable
subscribers would switch to alternative video service providers
in response to a "small but significant non-transitory
price increase"(n42) for a particular cable service? If the
effect of such a price increase were to be assessed, should
the current regulated cable rate be used as the base price
for computing the price increase?
20. With regard to the relevant geographic market, the
Commission wrote that "[g]iven the current state of competitive
entry, it would seem reasonable to define, at least tentatively,
the local franchise area as the geographic market relevant
to an analysis of the cable industry, but that over time
this definition may be broadened."(n43) We invite comments
about that analysis and definition of the relevant geographic
market and, in particular, responses to the following questions:
(a)What is the relevant geographic area within which customers
can turn for alternative sources of delivered multichannel
video programming? Are franchise areas relevant geographic
areas? Or are they too broad? Or too narrow?
(b)As cable operators increasingly cluster their operations,
are the relevant geographic areas going to become increasingly
regional? On the other hand, will relevant areas remain
local, and perhaps smaller than franchise areas, if it
is likely that substantial numbers of potential subscribers
in any given area will not be able to choose from the same
range of service providers as otherpotential subscribers
in the same area (e.g., because they do not live in multiple
dwelling units ("MDUs") or do not have line-of-sight access
to satellites)?
(c)How should the relevant geographic areas be defined
in light of entry by firms that operate regionally (VDT)
and nationally (DBS)?
B. Status of the Cable Industry and Its Competitors
1. Cable Industry
22. Cable Industry Output. (a) The percentage of cable
households that subscribe to satellite programming services
and the changes in such percentage since last year;
(b) the percentage of total subscribers that receive cable
service from cable systems that offer "lifeline basic service,"
defined as a limited, low price package that includes only
broadcast stations and public, educational and governmental
("PEG") channels and the changes in this percentage since
last year; and (c) the percentage of subscribers receiving
satellite programming on the basic tier and the number
of such channels.
23. Attributes of Cable Services. The extent of customer
satisfaction with cable services, including quantity and
quality of programming, and other quality attributes of
cable services such as service response times.
24. Cable Industry Advertising and Nonsubscription Revenue.
The amount of industry revenue obtained from local advertising
spots made available to cable operators by programming
networks; the amount of national and regional advertising
sold by programming networks; recent developments and trends
concerning cable industry participation in advertising
markets; and other potential sources of revenue.
25. Cable Industry Capital Investment. (a) Cable operators' access to loans from banks and other lenders, to equity capital from investors and recent developments in those markets; (b) the extent to which cable systems are upgrading their facilities by deploying conventional cable technology (e.g., bigger headends) versus advanced technologies such as fiber optics and signal compression; (c) the extent to which cable systems have deployed fiber optic plant, the combinations of fiber and coaxial cable that are proving to be the most efficient, the amount of fiber that was deployed over the past year and the percentage of that deployment that was replacement of existing coaxial wiring; (d) the extent to which cable systems and programmers have begun to deploy the facilities needed to take advantage of enhanced services that can be provided using digital compression, the current status of the manufacture and deployment of digital converters and the current status of, and activities associated with, the National Digital Television Center launched by Tele-Communications Inc. ("TCI").(n45)
26. Cable Industry Responses to Competition. The steps
cable operators are taking to build subscribership in anticipation
of the entry of competitive alternatives. In particular,
cable industry responses to actual or potential competition
in local markets, including, in particular, any pricing
responses, changes in advertising and service quality,
and changes in tiering or packaging of services.
2. Cable Overbuilds
28. The Commission intends to analyze in the 1995 Competition
Report the status of competition from cable overbuilds
and the reasons for that level of competition. Among other
things, we will be looking at the following issues: (a)
the number of cable operators facing competition from cable
overbuilds, the locations of those overbuilds, and changes
in those figures over the past year; (b) the manner in
which those overbuilders market their services to subscribers,
and the numbers of subscribers choosing to subscribe to
the services of the incumbent and the overbuilder, respectively;
(c) the percentage of the franchise area served by the
overbuilder and the percentage of the area served by the
incumbent cable system that is also served by the overbuilder;
(d) the effects of overbuild competition on cable rates,
services and service quality; and (e) the nature and extent
of current barriers to overbuild competition, such as the
overbuilder's need to incur substantial sunk costs combined
with the incumbent cable operator's ability to prevent
recovery of those costs by lowering price, instituting
litigation and bringing regulatory challenges. We invite
any party with specific information on overbuild competition
to comment on these issues and any other matters that they
feel are relevant to the issue of overbuild competition.
29. We also note that Section 621(a) of the Communications
Act prohibits the unreasonable denial of a competitive
franchise.(n49) However, a split has developed in the federal
circuit courts of appeal over the interpretation of the
1992 Cable Act's prohibition on exclusive franchises.(n50)
The Commission stated in the 1994 Competition Report that
it would recommend the revision of that section to clarify
that it applies prospectively to all denials of franchises
including those that would compete with existing franchises.(n51)
In connection with these developments, we invite comments
concerning the following questions:
(a)To what extent do cable systems have exclusive franchises?
(b)How many, if any, applications for competitive franchises
have been filed since the enactment of the 1992 Cable Act?
How many competitive franchises have been awarded? How
many have been denied? Has Section 621(a) promoted the
award of competitive franchises?
(c)To what extent have the activities of local franchising
authorities been an impediment to overbuilding by additional
cable systems? Have incumbent cable operators used local
franchising processes to delay or prevent overbuilding?
3. Wireless Cable Systems
31. We intend to update the information concerning the
current status of competition from MMDS system operators
that was presented in the 1994 Competition Report.(n57) Among
the issues that we intend to explore are: (a) the number
of wireless cable systems and subscribers, including the
number of new systems that have begun operations and the
number of systems that have ceased operations; (b) the
average number of subscribers served by established systems,
the penetration as a percentage of the number of homes
seen, and the penetration as a percentage of homes passed
by cable; (c) the marketing strategies and methods of competition
employed by wireless cable operators (in terms of both
price and product differentiation); (d) plans for development
of new wireless cable systems; (e) the projected growth
of the industry in terms of subscribers and revenue; and
(f) the current status of consolidation in the wireless
cable industry, including numbers of systems changing hands,
the sales prices for those systems, and the relative share
of MMDS subscribers served by the largest wireless MSOs.
We note that the 1994 Competition Report's analysis of
these issues was based largely on public information, and
we intend to use such information to the extent possible
in the 1995 Competition Report. Commenters should nevertheless
feel free to comment or provide any information on the
foregoing that they wish to bring to our attention. In
addition, we invite comments on any problems with the information
presented last year, the method used to develop the information,
or any additional information that the Commission should
consider.
32. We also request information on the following questions:
(a)Have MMDS systems achieved success by emphasizing price
competition (offering comparable services, or the most
desired services, at substantially lower rates), or has
it proven to be a more successful strategy to emphasize
product differentiation (offering services that are not
available from principal competitors, or offering higher
quality services)?
(b)How are MMDS system operators planning to deploy digital
compression technology?(n58) To what extent will the use of
digital compression technologyenable them to offer a range
and quality of programming options that is comparable to,
or better than, the range of services offered by competing
cable system operators?
(c)What are the costs associated with the deployment of
digital compression technology? Will MMDS system operators
be able to employ digital compression technology at low
enough costs to remain competitive with incumbent cable
operators?
(d)Is there a trend towards increasing concentration of
MMDS system ownership?(n59) If so, what are the competitive
implications of this trend? Is it likely to lead to increased
competition with cable systems?
(e)We note that Bell Atlantic, NYNEX and Pacific Telesis
have recently announced plans to invest in wireless cable
systems.(n60) We seek comment on the strategic issues underlying
these investments, and whether commenters view these investments
as part of a trend towards increased local telephone company
("LEC") investment in wireless cable facilities. Are such
interests likely to lead to increased competition with
cable systems? Are there competitive questions raised
by these investments?
(f)What impediments are there to the development of wireless
cable, and how have they changed since the 1994 Competition
Report?
(g)Have MMDS operators been the targets of significant instances of alleged anticompetitive conduct since the issuance of the 1994 Competition Report?(n61)
b. Local Multipoint Distribution Service
34. In the 1994 Competition Report, the Commission identified
one LMDS system authorized by the Commission and in commercial
operation.(n63) As was the case then, we cannot now reach any
conclusions on the feasibility of LMDS as a technology
that could be used to offer competitive service in the
video marketplace because the Commission has before it
an open proceeding concerning the authorization of services
for use of the 28 GHz band.(n64) We also recognize that considerable
information concerning the competitive potential of this
technology has been provided to the Commission in comments
filed in that proceeding. We do not ask parties to repeat
here the substance of comments that have been filed in
other proceedings, except to the extent they wish to bring
particular matters to our attention.
4. Satellite Master Antenna Systems
36. We intend to update the information concerning
the current status of competition between cable and SMATV
system operators that was presented in the 1994 Competition
Report.(n67) The issues that we expect to explore include:
(a) the current and projected future numbers of SMATV
systems and subscribers, and their locations; and (b) the
channel capacities of SMATV systems, and the existing and
projected future developments in channel capacities. We
note that the 1994 Competition Report's analysis of these
issues was based largely on public information, and we
intend to use such information to the extent possible in
the 1995 Competition Report. Commenters should nevertheless
feel free to comment or provide any information on the
foregoing that they wish to bring to our attention. In
addition, we invite comments on any problems with the information
presented last year, the method used to develop the information,
or any additional information that the Commission should
consider.
37. We also request comments concerning the following
questions:
(a)To what extent is competition from SMATV systems characterized
by competition for the exclusive right to serve all subscribers
in an individual multiple dwelling unit, and to what extent
by competition for individual subscribers within a multiple
dwelling unit (where each subscriber may choose between
two (or more) service providers)? What are the relative
shares of multiple dwelling units served by the cable and
SMATV industries?
(b)What effects, if any, have state mandatory access laws
had on the economic viability of SMATV systems?
(c)To what extent is the SMATV industry becoming more
concentrated? To what extent is the industry changing
from one of small proprietor owned or developer owned systems,
to one characterized by multiple system operators that
serve entire metropolitan areas or regions? What are the
sources of new investment in the industry? Are wireless
cable system operators purchasing SMATV systems, and vice
versa? Are any other MVPDs purchasing SMATVsystems in
significant numbers?
(d)Are SMATV system operators engaging in marketing strategies
designed to differentiate their services from cable services
(particularly bundling with home security and intercom
systems), and to what extent has price competition been
a successful growth strategy for SMATV operators?
(e)Are there SMATV and other non-cable operators that specialize
in serving hotels and motels? How does their share of
this business compare to the cable industry's share? What
are the types of services that are offered by these operators
to hotels and motels?
(f)To what extent are SMATV operators using 18 GHz technology
to interconnect SMATV systems?(n68) Have such developments
facilitated increased competition from SMATV operators?
Is the use of 18 GHz links leading to the creation of
systems that serve wider geographic areas?
(g)Has the loosening of the SMATV-cable cross-ownership
restriction had any effect on SMATV operators?(n69) In particular,
is there likely to be a significant exodus of SMATV operators
from the market or acquisition of SMATV operators by incumbent
cable operators? Or will the eased exit policy induce
the increased entry of SMATV systems?
(h)What is the competitive effect of the Communications
Act definition of a cable system, which includes any system
that interconnects separately owned buildings even where
there is no use of public rights-of-way?(n70) Should that definition
be modified, as recommended by the Commission in the 1994
Competition Report?
(i)Are there other barriers to increased competition by
SMATV systems? In particular, what effect do perpetual
exclusive contracts (or ones of greater than15 to 20 years
in duration) between building owners and cable system operators
have on competition by SMATV system operators? To what
extent do SMATV systems typically enter into exclusive
contracts? What is the typical duration of these contracts?
What should public policy be regarding these contracts?
38. Finally, the Commission also has before it a proceeding
concerning home wiring issues in which SMATV operators
have extensively participated.(n71) We recognize that considerable
information has been provided to the Commission in comments
filed in that proceeding concerning the potential competitive
effect of various potential outcomes. We do not ask parties
to repeat the substance of comments that have been filed
in that proceeding, except to the extent that they wish
to bring to our attention particular matters that are relevant
to the 1995 Competition Report.
5. Direct-to-Home ("DTH") Satellite Services
K---band service, is also analyzed as a DBS service, although
it operates in the Fixed Satellite Service ("FSS").(n73) Using
a relatively small dish, DBS subscribers receive programming
that is comparable to cable programming. There are now
over one million subscribers for the three DBS services
combined.(n74) EchoStar Satellite Corporation and AlphaStar,
a venture of Tee-Comm Electronics, Inc., expect to begin
DBS service in 1995.(n75)
40. We intend to update the information concerning the
current status of competition from DBS systems that was
presented in the 1994 Competition Report(n76) and request comments
concerning the following questions:
(a)To what extent do the subscribership of these DBS services
overlap? What is the total estimated subscriber base for
each individual service provider and for the industry as
a whole?
(b)What is the projected subscribership of each DBS service
and of the industry as a whole at the end of 1995? At
the end of each subsequent year through the end of 1999?
On what are these projections based?
(c)Where are most DBS subscribers located (i.e., urban
versus rural areas)? How many subscribers are located
in areas served by cable operators? What factors account
for cable subscribers' choice to receive DBS services?
What percentage of DBS subscribers also subscribe to cable
services, and what cable services do they receive?
(d)What is the total estimated channel capacity of each
operator? What are the plans of each operator to increase
the digital compression ratio from the initial ratio used
at the time of launch (so as to offer more channels at
a later date)?
(e)How does each operator market its services? Are current
marketing efforts targeted equally to potential subscribers
in areas served by cable systems and potential subscribers
in areas unserved by cable systems?
(f)Has the inability to offer local broadcast channels
affected the competitive impact of DBS service? Have there
been any developments that would permit DBS dish owners
to use their systems to receive local broadcast channels?
(g)Are the prices for DBS services nationally uniform,
or do they vary depending on the location of the subscriber?
If they vary, what are the reasons for the price differentials?
(h)What is the availability of equipment for those who
wish to subscribe to this service? If there is an equipment
shortage, when is it projected to be eliminated? What
is the basis for this projection?
(i) How are equipment prices projected to change over
one year? Over three years? What is the basis
for this projection? Do installation and equipmentcharges
limit the extent to which DBS services serve as reasonable
substitutes for cable services?
(j)What developments have there been concerning licensing and distribution arrangements for DBS equipment (such as plans for Sony to begin production and for other manufacturers to be licensed)?(n77)
41. We would like to update the information reported
on existing permittees that were identified in the 1994
Competition Report.(n78) What are the projected launch dates
for these systems and their anticipated service offerings?
What type of arrangements have been made for licensing
and distribution of the equipment and systems for services
that are not yet launched? Is it anticipated that these
services will use the same or different receiving equipment
as DirecTV and USSB?
42. In addition to the issues addressed in the questions
set forth above, the Commission observes that local zoning
and other regulations may potentially serve as an impediment
to the development and expansion of DBS service.(n79) In that
regard, we note that the Commission recently adopted a
Notice of Proposed Rulemaking concerning the issue.(n80) We
seek comment on these issues.
b. Home Satellite Dishes
44. We intend to update the information concerning the
current status of competition from HSD systems that was
presented in the 1994 Competition Report.(n81) Amongthe issues
that we intend to explore are: (a) the current and projected
future numbers of HSD systems and subscribers, and their
locations; (b) the channel capacities of HSD systems and
the numbers of channels of programming offered in program
packages; (c) prices for HSD systems and program packages;
and (d) the extent to which HSD owners subscribe to cable
services and the reasons given for such subscriptions.
We note that the 1994 Competition Report's analysis of
these issues was based largely on public information, and
we intend to use such information to the extent possible
in the 1995 Competition Report. Commenters should nevertheless
feel free to comment or provide any information on the
foregoing that they wish to bring to our attention. In
addition, we invite comments on any problems with the information
presented last year, the method used to develop the information,
or any additional information that the Commission should
consider.
45. We also request comments concerning the following
questions:
(a)How are HSD services marketed to subscribers? What
is the projected growth of HSD use in the next year? Three
years? What is the basis for this projection?
(b)Has the inability to offer local broadcast channels
affected the competitive impact of HSD services? Have
there been any developments that would permit HSD owners
to use their systems to receive local broadcast channels?
(c)The HSD industry reportedly had a record year in 1994
in terms of systems sold and subscriptions to packaged
programming services.(n82) To what can that success be attributed?
(d)Sales of new HSD systems and new subscriptions to HSD
package programming services grew at substantially slower
rates in the last few months of 1994.(n83) To what can that
decline be attributed? Is that decline related to the
rollout and marketing of DBS?
46. In addition to the issues addressed in the questions
set forth above, the Commission recognizes that local zoning
and other regulations may potentially serve as impediments
to the development and expansion of HSD services.(n84) We seek
comment on these issues concerning zoning(n85) and other local
regulations that affect competition from HSD services.
6. Local Exchange Carriers/Video Dialtone Services
48. In 1992, the Commission established a video dialtone ("VDT") framework which allows LECs, consistent with the Communications Act, to make available on a nondiscriminatory common carrier basis, a platform capable of transmitting video programming supplied by an unaffiliated entity.(n89) Since that time, the Commission has authorized technical and market trials as well as permanent VDT service.(n90) In addition, in 1993, the U.S. District Court for the Eastern District of Virginia held the cross-ownership prohibition unconstitutional as applied to Bell Atlantic in its service areas; in 1994 US Westobtained a similar ruling in the U.S. District Court for the Western District of Washington.(n91) Since the Commission issued the 1994 Competition Report, several other courts have struck down the cross-ownership prohibition.(n92)
49. In light of these decisions, the Cable Services Bureau, Common Carrier Bureau and the Office of the General Counsel announced that they will no longer enforce the cross-ownership restriction against: (1) any telephone companies that are parties to cases in which the Commission is enjoined from enforcing Section 613(b), including NYNEX, Ameritech, BellSouth, Bell Atlantic, US WEST, GTE, and most members of the United States Telephone Association, Organization for the Protection and Advancement of Small Telephone Companies and National Telephone Cooperative Association; and (2) any other telephone companies, to the extent they operate in the Fourth and Ninth Circuits, regardless of their status as parties to any suit.(n93)
50. The Commission has several ongoing proceedings regarding video dialtone services. The Commission issued a Fourth Further Notice of Proposed Rulemaking to consider changes in its video dialtone rules in light of court decisions such as those described above, and to consider the extent to which Title II and Title VI of the Communications Act apply to telephone companies providing video programming directly to subscribers in their telephone service areas over video dialtone facilities.(n94) The Commission also issued a Third Further Notice of Proposed Rulemaking which sought information and comment on a number of issues including (1) channel capacity issues, (2) criteria for evaluating the viability of additional wire-based video competition in particular markets in the context of a proposal to use these criteria to modify the Commission's ban on the acquisition by telephone companies of cable facilities in their telephone service areas for use in the provision of video dialtone, (3) whether the Commission should require or permit LECs to provide preferential access or discounted rates to commercial broadcasters and/or certain types of not-for-profit programmers; and (4) whether we should adopt additional rules with respect to poleattachments and conduit rights.(n95) The Commission is also processing a series of Section 214 applications for video dialtone facilities and services.(n96)
51. We intend to update the information concerning the
current status of the deployment of VDT technology that
was presented in the 1994 Competition Report.(n97) Among the
issues that we intend to explore are: (a) the current
projections for competition from VDT networks that are
the subject of pending applications for Section 214 authorization;
and (b) the results obtained in various market trials for
which reports have been filed with the Commission (including
information on channel capacity and digital versus analog,
system architecture, pricing, penetration rates, subscriber
interface equipment, programmer customers). We note that
the 1994 Competition Report's analysis of these issues
was based largely on public information and filings with
the Commission, and we intend to use such information to
the extent possible in the 1995 Competition Report. Commenters
should nevertheless feel free to comment or provide any
information on the foregoing that they wish to bring to
our attention. In addition, we invite comments on any
problems with the information presented last year, the
method used to develop the information, or any additional
information that the Commission should consider.
52. We also recognize that considerable information has
been provided to the Commission in filings in the VDT proceedings
described above concerning various issues relevant to the
1995 Competition Report. While we do not ask parties to
repeat their comments that have been filed in other proceedings,
we request any supplemental information parties choose
to submit on these issues.
53. In addition to the foregoing, the Commission seeks
comments concerning the following questions:
(a) How will the prices and services offered over VDT
networks compare to the prices and services charged by
cable operators? How will this comparison change over
time? What is the basis for this prediction?
(b) What are the technological impediments and advantages
to the deployment of VDT platforms as competitive alternatives
to cable systems?
(c)What is the status of the build-out of systems for which
Section 214 authorizations have been granted?
(d)Have the plans for deployment of VDT networks for
which Section 214 authorizations have been granted, or
the plans for deployment of VDT networks that are the subject
of applications currently pending before the Commission,
been affected by events since the 1994 Competition Report?
(e)What are the current plans for deployment of VDT systems
that are not currently the subject of applications before
the Commission?
(f)Are there particular market characteristics, such as
relatively high population density, that are necessary
to support competition between VDT and cable systems?
Will this limit competition to certain types of geographic
areas, such as large metropolitan areas?
54. We also note that in January 1995, Rochester Telephone
and its Vancouver, Canada based partner USA Video Corporation
reportedly ended their video-on-demand trial due to lack
of customer demand for the services.(n98) Commenters are asked
to discuss any implications of this development.
55. Finally, we note that in October 1994, Bell Atlantic,
NYNEX, and Pacific Telesis Group announced the formation
of a joint venture in the area of interactive video networks.
One part of the venture reportedly will produce content
for the networks and the other will develop technical systems.
Another company, named Interactive Digital Solutions,
was formed by Silicon Graphics and AT&T in October 1994
to develop network infrastructure and related services.(n99)
Finally, Ameritech, BellSouth and SBC Communications announced
a definitive agreement with Disney Corporation to develop
and package video programming and interactive services.(n100)
We seek comment on the competitive implications of these
developments.
7. Broadcast Television Service
57. The Commission intends to explore in the 1995 Competition
Report the implications of the developments mentioned in
the preceding paragraph for competition from broadcast
television and requests comments concerning the following
questions:
(a)Has the role of broadcast networks changed with the entry of new networks (United Paramount and Warner) in the last year? What is the effect of the fact that at least one of these networks (Warner) is relying on cable carriage of a superstation to provide access to households in areas where they have been unable to enter into affiliation agreements with local broadcast stations?(n102)
(b)To what extent is any constraining effect of broadcast
networks on the conduct of cable systems affected by the
fact that they provide programming that is an important
component of the services offered by cable systems? How
is any constraining effect limited by the fact that a substantial
percentage of broadcast network audiences are viewing the
programming through distribution over cable systems?
(c)What is the competitive effect of broadcast television
in conjunction with multichannel distribution services
such as DBS, which is prohibited from offering network-affiliated
broadcast television stations except in limited areas,(n103)
on the program delivery market?
58. In addition to the issues addressed in the questions
set forth above, advances in broadcast technology, such
as digital compression and advanced television, could (a)
permit multiple programs to be broadcast over a single
channel, and (b) expand greatly the overall number of broadcast
video signals available in a particular geographic market.(n104)
We ask for comment on the extent to which such changes
would strengthen over-the-air broadcast as a competitor
to cable.
59. In addition to full-power broadcast television stations,
the Commission licenses low-power television ("LPTV").
These stations, assigned to the same VHF and UHF broadcast
spectrum as full-power stations, operate at lower power,
reach more limited geographic areas and are afforded secondary
status to full-power stations.(n105) Under existing Commission
rules, an entity could use LPTV stations to offer multichannel
video programming service that could be a competitor, especially
to premium channels or packages of such channels.(n106) The
Commission's rules permit LPTV stations to offer "subscription
television," whereby the broadcaster charges a fee for
the provision of one or more scrambled channels and the
equipment to decode the signal.(n107) Furthermore, the rules
permit an LPTV operator to own more than one such station
in a market, unlike the restriction of one station to a
market for full-power stations.(n108) Thus, multiple LPTV stations
in a market could be combined to provide multichannel video
service. On the other hand, the allocation of spectrum
for LPTV use has been frozen in the largest markets in
the United States.(n109) In light of these developments, the
Commission invites comment concerning the extent to which
LPTV technology might be deployed to provide a competitive
alternative to cable services if the spectrum is made available
for this purpose.
8. Other Distribution Technologies
61. We also want to examine in the 1995 Competition Report
whether the deployment of interactive video and data service
(IVDS) will affect competition in the MVPD market. Among
the issues regarding IVDS that the Commission may explore
in the 1995 Competition Report are: (a) the identities
of the licensees, and the locations in which they are authorized
to provide service; (b) the types of services that licensees
currently envision offering, and the schedule for deploying
those services; and (c) the extent to which these services
could be substitutes or complements for services offered
by cable system operators, and what those services are.
Accordingly, we invite comments on the proposed issues,
method of developing information, or any additional information
that the Commission should consider. We recognize that
information may have been provided to the Commission in
filings in IVDS proceedings which may be relevant to the
1995 Competition Report. We do not ask parties to repeat
here the substance of comments that have been filed in
that proceeding except to the extent that they wish to
bring particular matters to our attention.
9. Other Distributors
programming, such as electric utilities.(n112) The 1994 Competition
Report stated that some municipal electric utility companies
are actively engaged in or contemplating overbuilding.(n113)
The Commission also learned that plans to use electric
power lines to provide multichannel video services are
not well-developed. Nonetheless, the possibility of entry
by electric utilities cannot be ignored due to the fact
that those companies have already incurred substantial
costs to deploy a network that reaches nearly every household
in the country.
63. A number of electric companies are considering the
development of broadband networks that are capable of distributing
video programming and telephone services.(n114) One reason for
this activity has been the need for two-way communications
capabilities in order to implement energy management solutions.
A number of power companies have also formed alliances
with cable companies or telephone companies,(n115) which could
limit the competitive threat posed by the video transmission
potential of these networks. Nonetheless, there remains
significant interest in developing this potential "third
line" into homes. In connection with these developments,
we invite comments concerning the following questions:
(a)What is the likelihood that a significant number of
power companies might enter the market for the delivery
of video services? Which are the existing, emerging or
potential providers of video programming service among
these companies?
(b)Is it more likely that power companies might choose
to serve as "pipeline" companies, and offer the use of
their facilities to other video programming providers?
(c) What are the joint ventures, existing or planned,
between cable or other communications companies (e.g.,
LECs, long distance telephone companies) and utilities
to implement energy management programs or to provide video
services. Should the Commission be concerned about those
ventures because they may result in the elimination of
a potential source of entry into the market for the delivery
of multichannel video programming? To what extent do these
joint ventures yield increased efficiency due to economies
of scale and scope or for other reasons?
10. Technological Advances
65. One significant technological development that may
have profound effects on the future of competition in markets
for the delivery of video programming is the development
of digital compression technology. Digital compression
is a technology that reduces the amount of information
needed to transmit digitally recorded video, audio and
text. This reduction in size or "compression" of digital
information can increase the capacity of MVPDs' distribution
systems by as much as eight times. It seems likely that
such technology will be gradually integrated into information
distribution systems, paralleling the transition from analog
programming to digitally formatted programming and the
introduction of high definition television ("HDTV"). The
more quickly programmers and distributors transition to
a digital format the sooner they will realize the benefits
of compression technology.
66. A number of barriers stand in the way of the transition
to digital compression. The first barrier is the determination
of a standard digital encoding scheme. Without a standard
scheme it is conceivable that not all digital programming
would be compatible with all distribution systems. A number
of different coding schemes have been developed, but the
front runner seems to be MPEG-2, developed under the guidance
of the Motion Picture Experts Group.(n117) General Instrument,
a leading supplier of set-top boxes, is including an MPEG-2
option on its soon to be shipped DigiCipher digital set-top
boxes. Other equipment suppliers, including Hewlett Packard
and Scientific Atlanta, are similarly proceeding in the
development of their own boxes.
67. Another potential barrier to the implementation of digital conversion is the cost of set-top boxes. If MPEG-2 does in fact become the industry standard, consumers must be provided hardware and software needed to process digital signals. Right now, the most basic of digital set-top boxes costs in the range of $600.(n118) Some observers believe that MSOs will not begin to invest substantially in digital boxes until prices fall beneath $400.(n119)
68. A third potential barrier may be the supply of digitally
encoded programming. The process of converting analog
programming to a digital format has gone through many refinements,
but it still imposes additional costs.(n120) As digital distribution
channels begin toemerge, the amount of digital programming
will grow, but it may be a number of years before digitally
encoded programming displaces analog programming. We ask
for comment on the amount of digital programming that is
available.
69. In connection with these developments, we invite
comments concerning the following questions:
(a)How will competitors using different technologies take
advantage of digital compression to enhance their services?
Are some competitors likely to derive a greater benefit
than others by the use of digital compression?
(b)Is it more likely that digital compression will result
in convergence of costs and services among competitors
using different technologies, or is it more likely that
it will lead to greater divergence among competitors?
(c)What will be the likely barriers, if any, to the deployment
of digital compression technology? How can the Commission
remove barriers to deployment of this technology?
70. The Commission also expects to explore in the 1995
Competition Report the different transmission media used
for distribution of multichannel video programming, such
as copper wire, coaxial cable, optical fiber, broadcast
and other terrestrial radio frequency communications, terrestrial
microwave and satellites, and how they affect, and will
affect, industry structure and competition for the provision
of video services. We will also explore the hybridization
of different transmission media as well as system configurations
and designs which may also affect competition. In connection
with these issues, we intend to develop information concerning
the competitive effects of the various compression, modulation,
digitization, multiplexing, data storage and switching
techniques that are designed to increase network capacity,
efficiency and functionality, and to enhance available
services.
71. In connection with these issues, we invite comments
concerning the following questions:
(a)What are the capabilities of each technology and the
types of services for which each may be applicable?
(b)How will the new technologies be combined with existing
technologies?
(c)When will these technological advances be deployed
and what is the potential competitive impact of the deployment
of these advances?
(d)What changes can be expected from the widespread availability
of such technologies? Will technological advances principally
affect distribution in local or national markets, or will
it affect both equally?
(e)Should the Commission's regulatory framework be modified
in any way to eliminate impediments to the competitive
deployment of these new technologies?
(f)Should the Commission adopt standards for any or all
of these transmission media?
72. The Commission is also interested in technologies that will facilitate consumer access to the various distribution media and services they are expected to provide. To facilitate consumer needs in the video services area, the Commission established new cable-consumer equipment compatibility regulations, which include measures that assure improved compatibility between existing cable system equipment and consumer television equipment. They also include provisions for achieving more effective compatibility through new cable and consumer equipment.(n121)
73. The Commission is aware that future cable services
may require additional functionality for set-top boxes/terminals.
In connection with these set-top boxes/terminals we invite
comments concerning the following questions:
(a)What are the advantages and disadvantages of having
subscribers own set-top boxes?
(b)What functionalities are included in current set-top
boxes?
(c)To what extent can set-top boxes be purchased or leased
from sources other than cable operators?
(d)To what extent do current market conditions, including
Commission rules and regulations, inhibit the development
of a competitive market for set-top boxes?
(e)Could a competitive retail market develop for consumer-owned
set-top boxes? What is the potential size and structure
of such a market? Should the Commission take steps to
promote the development of a competitive retail market
for set-top boxes that is separate from markets for the
provision of video services?
(f)We also seek comment about future cable and broadband
services that are projected to require additional functionality
for set-top boxes, and what steps, if any, the Commission
might take to ensure development of a competitive market
for such equipment.
V. MARKET STRUCTURE AND COMPETITION
74. The Commission intends to explore in the 1995 Competition
Report the status of horizontal concentration and vertical
integration in the cable television industry and market
structure conditions, such as economies of scale and scope
and extensive sunk cost investments, which may affect competition
in markets for the delivery of video programming. The
information that the Commission develops, both from publicly
available sources and comments filed in response to this
NOI, will be used to assess the performance of the market
for delivered video programming and to analyze developments
that have the potential to change that performance.
A. Horizontal Concentration in the Cable Industry
1. Horizontal Concentration in Local Markets
76. The Commission also recognizes that the use of the
franchise area as the relevant geographic area is subject
to question. Some viewers within a franchise area may
have access and subscribe to competitive alternatives such
as services from SMATV, MMDS or DBS operators, but subscribing
viewers may not be sufficient in number to meet the "effective
competition" definition of the 1992 Cable Act. Nonetheless,
cable serviceproviders may be competitively constrained
by the availability of these services.(n122) Competitors in
local markets may also forego price competition, and instead
focus their energies on differentiating their services
from those of competitors, particularly in terms of the
amount and types of programming offered or their responsiveness
to customer needs and complaints. We seek comment on the
foregoing.
2. Horizontal Concentration Nationally
78. In the 1994 Competition Report, the Commission reported
that there has been a moderate increase in the nationwide
horizontal concentration of the cable industry since the
issuance of the 1990 Cable Report, as measured by the Herfindahl-Hirschman
Index ("HHI"),(n125) which is a standard measure of horizontal
concentration.(n126) Whether an HHI measurement, or any measure
of concentration at the national level, is meaningful
depends on the existence of a national cable market. As
we discussed,(n127) the relevant market for the purpose of analyzing
competition in the cable industry is generally local, although
there may be larger markets in the future, should other
technologies become competitive. When examining issues
involving cable programming, however, the relevant geographic
market may well be national, and in that context, the national
HHI provides more useful information.
79. The Commission found in the 1994 Competition Report
that the national market for the distribution of cable
services was unconcentrated as of the end of the first
quarter of 1994. The HHI for the industry as of March
31, 1994, was 898, which represented a modest increase
since 1990.(n128) Based on industry reports, TCI had the largest
market share, 24.8%,(n129) an increase of less than one percentage
point since 1990. The top four companies still had 47%
of the market, and the top ten 63%.
80. By the middle of September 1994, however, transactions had been announced that would significantly alter the market shares of those ten companies. We found that, if those transactions were consummated, the HHI would rise to approximately 1051.(n130) Standard antitrust analysis considers a market with an HHI between 1000 and 1800 to be "moderately concentrated."(n131) As expected, those transactions were consummated. Moreover, several additional mergers have been announced that will result in further national concentration.(n132)
81. In order to evaluate fully the effects of horizontal
concentration nationally, we intend to update and expand
on the information that was provided in the 1994 Competition
Report, including that which was presented in Appendix
G.(n133) We note that the 1994 Competition Report's analysis
of these issues was based largely on public information,
and we intend to use such information to the extent possible
in the 1995 Competition Report. Commenters should nevertheless
feel free to comment or provide any information on the
foregoing that they wish to bring to our attention. In
addition, we invite comments on any problems with the information
presented last year, the method used to develop the information,
or any additional information that the Commission should
consider. In addition, we seek comment on the following:
(a)What are the reasons for the recent transactions that
have resulted in the substantial increases in horizontal
concentration nationally?
(b)What are the potential procompetitive and anticompetitive
effects of horizontal concentration nationally?
(c)To what extent does national concentration actually
affect competition in markets for the delivery of video
programming? Should the Commission be concerned about
the increases in such concentration?
82. In addition to analyzing the concentration of the
cable industry at the national level, we believe it is
appropriate to evaluate the concentration of ownership
on a regional basis. In the 1994 Competition Report, the
Commission wrote, "[c]oncentration in regional, or locally
clustered, marketing areas may also be pro-competitive
or anti-competitive."(n134) We noted that "regional concentration
may result in significant efficiencies," and "may also
reflect the desire of cable operators to enter the telephone
business, or it may reflect strategic decisions by cable
operators to position themselves to compete against LECs
that are poised to enter the market for the distribution
of multichannel video programming."(n135) These efficiencies
from clustering were recognized by the Cable Services Bureau
in its decision approving license transfers associated
with Cox Cable Communications, Inc.'s acquisition of the
cable systems of Times Mirror Company.(n136) We invite comments
concerning these and other possible procompetitive reasons
for clustering.
83. On the other hand, we also noted that there may be
"competitive risks associated with increased regional clustering
of commonly owned cable systems."(n137) In particular, we wrote
that "[a] possible consequence of the accumulation of large
regional clusters of interconnected cable systems is that
such systems may send an entry-deterring signal to potential
rivals."(n138) The Commission did not resolve the issue, however,
concluding instead that even this possible effect of clustering
was not unambiguously anticompetitive because "there may
exist complex tradeoffs between the potential consumer
benefits that are provided by the sunk cost investments
of incumbent cable systems and the potential consumer benefits
that new entrants may offer consumers if not deterred by
incumbent cable systems." We also invite comments concerning
these and other possible competitive effects of clustering.
B. Vertical Integration in the Cable Industry
84. A cable company is vertically integrated if it is
affiliated with an owner of an interest in any video programming
that is carried by cable systems and other MVPDs. Sections
11, 12 and 19 of the 1992 Cable Act were enacted to limit
the ability of vertically integrated cable operators and
other satellite programming vendors to inhibit competitive
entry into the programming supply and distribution markets.
These sections were enacted to ensure that vertically
integrated cable operators do not engage in anticompetitive
practices that limit the ability of unaffiliated video
programming vendors to secure carriage on their cable systems.
In addition, these provisions are intended to prevent
MSOs from limiting competing multichannel video program
distributors' access to the programming sources owned by
those MSOs and to ensure that such programming is available
on fair, nondiscriminatory terms.
85. Specifically, Section 11 of the 1992 Cable Act, in part, required the Commission to establish limits on the number of channels on a cable system that can be occupied by programming services in which the operator has an attributable interest.(n139) To implement this provision, the Commission adopted "channel occupancy limits," under which a vertically integrated cable system may devote no more than 40% of its activated channels to national video programming services in which the system operator has an "attributable interest."(n140)
86. Section 12 required that the Commission adopt rules governing program carriage agreements and related practices between cable operators and other MVPDs and video programming vendors.(n141) We adopted rules that prohibit cable operators from coercing programming vendors into granting them exclusive distribution rights and from discriminating against program suppliers on the basis of the operator's ownership interests ("program carriage" rules).(n142)
87. Section 19 prohibits unfair competitive practices by vertically integrated satellite cable programming vendors, satellite broadcast cable programming vendors, andcable operators, including certain limits on exclusivity provisions in cable carriage agreements.(n143) To implement this section of the 1992 Cable Act, the Commission adopted rules to prevent discriminatory behavior and restrict the types of exclusive contracts that may be entered into between cable operators and vertically integrated program vendors ("program access rules").(n144)
88. In the 1995 Competition Report, the Commission intends
to update the information presented in the 1994 Competition
Report relating to vertically integrated and unaffiliated
programming services, and in particular the information
in Appendix G. In last year's report, a significant amount
of information concerning vertical integration was provided
in comments filed by parties to the proceeding. Nonetheless,
it appears that the Commission can rely to a certain extent
on publicly available information. We invite comments
on any problems with the information presented last year,
the method used to develop the information, or any additional
information that the Commission should consider. We also
request comments and information concerning:
(a) The existing national programming services, and the
extent to which they are affiliated with cable operators.
In particular, the Commission would like to provide a
description of the amount and type of interest, the date
such interest was acquired, any changes since last year,
and the percentage of ownership represented by each MSO's
holdings for each programming service that is affiliated
with cable interests;
(b)The national programming service launches that have
occurred over the past year, and the extent to which those
services are affiliated with cable system operators;
(c)The national programming services that have been announced
for launch since last year, and to what extent they are
affiliated with cable operators;
(d)The number of subscribers and number of cable systems
served by individual programming networks;
(e)The audience ratings, primetime or all day parts,
of national cable programming services;
(f)The ownership of national cable programming services
by entities that are existing or potential competitors
(e.g., broadcast networks) to cable systems.
89. The channel occupancy rules were intended to ensure
that unaffiliated programmers have sufficient opportunity
to distribute their programming through cable carriage
by limiting the number of channels that can be dedicated
to MSO-affiliated programming services.
(a)Has the ability of program vendors, both affiliated
and unaffiliated, to secure carriage been affected by the
channel occupancy rules? Have these rules led to greater
channel availability so that unaffiliated programmers can
reach the desired number of subscribers?
(b)What effect have the occupancy limits had on the ability
of programmers, affiliated and unaffiliated, to launch
new programming services? What is the market penetration
needed to launch a new programming service? Do the channel
occupancy rules allow sufficient channel capacity for an
unaffiliated programmer to receive carriage by enough cable
systems to successfully launch a new service?
(c)Has MSO investment in programming services been affected
by these rules?
90. The 1992 Cable Act attempted to address difficulties
that non-cable MVPDs faced in acquiring programming services
on nondiscriminatory terms.(n145) We request comment on whether
the program access rules and our decisions in response
to program access complaints have served their intended
purpose to alleviate this problem.(n146) The Commission requests
comments concerning the following questions:
(a)How have the program access rules affected the number
of and competition among MVPDs?
(b)Are MVPDs now able to get programming that was previously
unavailable?
(c)Is this programming available on nondiscriminatory
terms? Have the program access rules had an effect on
the price and terms offered to alternative MVPDs?
(d)Are there differences in the treatment of the various
distribution technologies with respect to access? For
example, are there differences between wireless cable,
DBS and HSDs? Do differences exist in rural versus urban
areas?
(e)Has our complaint process worked to ensure that programming
is available to alternative MVPDs?
(f)Has investment in, and the development of, new programming
ventures been adversely affected by the program access
rules?
(g)Should the program access rules apply to LEC access
to cable programming when a LEC is offering multichannel
video programming service in competition with a franchised
cable system, whether through the VDT framework or a franchised
overbuilt cable system? Should the program access rules
apply to LECs' programming in such situations?
(h)Should the program access rules be extended to non-vertically
integrated program providers?
(i)Have the nondiscriminatory rate provisions (e.g., the
volume discount provision) of the program access rules
affected the competitive viability of small systems and
small system operators?
91. Furthermore, we seek comment on whether the program
carriage rules adopted to implement Section 12 of the 1992
Cable Act have served to diminish anticompetitive practices.
Are the rules working to ensure that cable operators do
not take unfair advantage of programming vendors as a condition
of carriage agreements? Have negotiations for carriage
agreements changed? Are there other practices of which
the Commission should be aware regarding program supply?
C. Market Performance Indicators
92. In the 1994 Competition Report, the Commission looked
at several market performance indicators.(n147) Those indicators
included: (a) q ratio measurements; (b) evidence concerning
price changes in local markets following the entry of overbuilders;
(c) competitive price differentials that had been calculated
in prior Commission orders; (d) changes in industry-wide
demand; (e) changes in industry-wide revenue; (f) increases
in availability of programming; and (g) increases in industry-wide
capital investment. We invite comment concerning the use
of these market performance indicators, any updates of
these indicators, the conclusions that were drawn in the
1994 Competition Report, and theappropriate method or methods
for assessing market performance.
D. Market Structure Characteristics that May Increase Concentration
or Pose Impediments to Competition
93. The 1994 Competition Report considered economies
of scale and scope in cable.(n148) Economies of scale exist
when the average cost of production decreases as the quantity
of output produced by a firm increases. For example, economies
of scale exist in cable if a single operator can produce
cable services at lower cost than two operators could in
the same market. In that case, higher concentration might
result from the lower costs of production that would be
achieved. Economies of scope exist when two products can
be jointly produced at lower cost than if they were produced
separately. Thus, economies of scope may exist in video
distribution and telephony if it is more efficient to simultaneously
provide telephone and multichannel video programming services
over the same distribution plant than it is to provide
them separately. We invite comments concerning economies
of scale and economies of scope in the cable industry.
94. The presence of barriers to entry is one of the most
important obstacles to the development of a competitive
market.(n149) In the 1994 Competition Report, the Commission
looked at regulatory and technological impediments to entry
in markets for the delivery of multichannel video programming,
including the Communications Act's definition of a cable
system, state laws impeding competitive entry, pole attachment
issues, and the introduction of digital compression and
other technologies.(n150) We invite comments concerning these
and any other impediments to competitive entry into markets
for the delivery of multichannel video programming. We
also invite comments on the overall magnitude of barriers
to entry into these markets, and actions the Commission
should take to reduce or eliminate barriers to entry.
95. In the 1994 Competition Report, the Commission considered
the presence of substantial sunk cost investments in the
cable industry, and their effect on incentives for incumbent
MVPDs to engage in strategic behavior designed to protect
those investments.(n151) Among the kinds of strategic behavior
that could deter entry are controlling access to program
supply, using litigation to delay or prevent entry, pricing
services below incremental costs, and foreclosing access
to customers through anticompetitive exclusive dealing.
We invite comments concerning that analysis and the implications
of sunk costs for competitiveentry into markets for the
delivery of multichannel video programming.
VI.RECOMMENDATIONS FOR PROMOTING COMPETITION IN THE MARKET
FOR DELIVERED VIDEO PROGRAMMING
96. The legislative history of Section 19 of the 1992
Cable Act states that Congress expected the Commission
to address and resolve problems regarding "unreasonable
cable industry practices, including restricting the availability
of programming and charging discriminatory prices to non-cable
technologies."(n152) Congress also mandated that the Commission
encourage arrangements which promote new technologies and
extend programming to areas not served by cable.(n153) Thus,
commenters are asked to consider whether there are any
actions that the Commission should take to foster competition
in the market for video programming delivery. In light
of the current state of competition and our desire to promote
additional competition, we request that parties recommend
rules or policies, if any, that should be adopted, amended
or eliminated to accomplish this goal. Parties submitting
recommendations should explain how their proposals would
increase competition in the provision of video programming
to consumers or enhance the program distribution market.
We also want to consider any other effects of such proposals
on the cable industry.
VII. PROCEDURAL MATTERS
97. This NOI is issued pursuant to authority contained
in Sections 4(i), 4(j), 403 and 628(g) of the Communications
Act of 1934, as amended. Pursuant to applicable procedures
set forth in Sections 1.415 and 1.419 of the Commission's
Rules, 47 C.F.R.
§§ 1.415 and 1.419, interested parties may file comments
on or before June 30, 1995, and reply comments on or before
July 28, 1995. To file formally in this proceeding, participants
must file an original and four copies of all comments,
reply comments and supporting comments. If participants
want each Commissioner to receive a personal copy of their
comments, an original plus ten copies must be filed. Comments
and reply comments should be sent to the Office of the
Secretary, Federal Communications Commission, Washington,
D.C. 20554. Comments and reply comments will be available
for public inspection during regular business hours in
the FCC Reference Center (Room 239) of the Federal Communications
Commission, 1919 M Street, N.W., Washington, D.C. 20554.
98. There are no ex parte or disclosure requirements
applicable to this proceeding pursuant to 47 C.F.R. § 1.1204(a)(4).
99. Further information on this proceeding may be obtained
by contacting Marcia Glauberman, Jonathan Ogur or Edward
Hearst in the Cable Services Bureau at
(202) 416-0800 or Martin L. Stern or Jeffrey Lanning in
the Office of the General Counsel at (202) 416-0865.
FEDERAL COMMUNICATIONS COMMISSION
William F. Caton
Acting Secretary
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.SUMMARY OF THIS NOTICE OF INQUIRY . . . . . . . . . . . . . . . . . . . . 5
III. OVERVIEW OF THE 1994 COMPETITION REPORT. . . . . . . . . . . . . . . . 10
IV. DEFINING THE MARKET FOR DELIVERED VIDEO PROGRAMMING
A. The Market for Delivered Video Programming. . . . . . . . . . . . . . 18
B. Status of the Cable Industry and Its Competitors
1. Cable Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2. Cable Overbuilds . . . . . . . . . . . . . . . . . . . . . . . . . 27
3. Wireless Cable Systems
a. Multichannel Multipoint Distribution Service
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
b. Local Multipoint Distribution Service . . . . . . . . . . . . . 33
4. Satellite Master Antenna Systems . . . . . . . . . . . . . . . . . 35
5. Direct-to-Home ("DTH") Satellite Services
a. Direct Broadcast Satellite Services . . . . . . . . . . . . . . 39
b. Home Satellite Dishes . . . . . . . . . . . . . . . . . . . . . 43
6. Local Exchange Carriers/Video Dialtone Services. . . . . . . . . . 47
7. Broadcast Television Service . . . . . . . . . . . . . . . . . . . 56
8. Other Distribution Technologies. . . . . . . . . . . . . . . . . . 60
9. Other Distributors . . . . . . . . . . . . . . . . . . . . . . . . 62
10. Technological Advances. . . . . . . . . . . . . . . . . . . . . . 64
V. MARKET STRUCTURE AND COMPETITION . . . . . . . . . . . . . . . . . . . . 74
A. Horizontal Concentration in the Cable Industry
1. Horizontal Concentration in Local Markets. . . . . . . . . . . . . 75
2. Horizontal Concentration Nationally. . . . . . . . . . . . . . . . 77
B. Vertical Integration in the Cable Industry. . . . . . . . . . . . . . 84
C. Market Performance Indicators . . . . . . . . . . . . . . . . . . . . 92
D. Market Structure Characteristics that May Increase
Concentration
VI.RECOMMENDATIONS FOR PROMOTING COMPETITION IN THE MARKET
FOR DELIVERED VIDEO PROGRAMMING . . . . . . . . . . . . . . . . . . . . . 96
VII. PROCEDURAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Footnote 1
Cable Television Consumer Protection and Competition
Act of 1992, Pub. L.
No. 102-385, 106 Stat. 1460 (1992), codified at 47 U.S.C.
§ 521, et seq.
Footnote 2
Communications Act of 1934, as amended ("Communications
Act") § 628(g),
47 U.S.C. § 548(g).
Footnote 3 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, First Report, CS Docket No. 94-48, 9 FCC Rcd 7442 (1994) ("1994 Competition Report" or "1994 Report").
Footnote 4 Communications Act § 623(a)(2), 47 U.S.C. § 543(a)(2).
Footnote 5 1992 Cable Act, sec. 2, 106 Stat. at 1460.
Footnote 6 Id.
Footnote 7 Communications Act § 623(a), 47 U.S.C. § 543(a).
Footnote 8 Communications Act §§ 623 (b)-(c), 47 U.S.C. §§ 543 (b)-(c).
Footnote 9
1992 Cable Act, § 19, Communications Act § 628, 47 U.S.C.
§ 548. Congress also passed the "program carriage" provision,
1992 Cable Act, §12, Communications Act § 616, 47 U.S.C.
§ 536, and the "channel occupancy" provision, 1992 Cable
Act, § 11, Communications Act § 613(f)(1)(B), 47 U.S.C.
§ 533(f)(1)(B). The latter two provisions help ensure
that vertically integrated cable operators do not, through
anticompetitive means, limit the ability of unaffiliated
video programming vendors to secure carriage on multichannel
distribution systems. In addition, we have held that under
the program carriage provision, injured multichannel video
program distributors have standing to complain of exclusive
programming arrangements that are the result of cable operator
coercion. See Implementation of the 1992 Cable Act --
Development of Competition and Diversity in Video Programming
Distribution and Carriage, Memorandum Opinion and Order,
MM Docket
No. 92-265, 9 FCC Rcd 4415 (1994).
Footnote 10 Communications Act § 623(d), 47 U.S.C. § 543(d).
Footnote 11 Communications Act § 621(a)(1), 47 U.S.C. § 541(a)(1).
Footnote 12 1994 Competition Report, 9 FCC Rcd at 7558, ¶ 253.
Footnote 13 In the market for "delivered video programming," cable operators or alternative distributors supply programming to viewers. By contrast, in the "programming market," producers supply their programming to cable operators or to alternative distributors.
Footnote 14 See Communications Act § 602(12), 47 U.S.C. § 522(12).
Footnote 15 1994 Competition Report, 9 FCC Rcd at 7467, ¶ 49.
Footnote 16 See Communications Act § 602(12), 47 U.S.C. § 522(12).
Footnote 17 1994 Competition Report, 9 FCC Rcd at 7467, ¶ 50.
Footnote 18 Id. at 7468, ¶ 51.
Footnote 19 Broadcast television is not an MVPD under the definition in the 1992 Cable Act. See Communications Act § 602(12), 47 U.S.C. § 522(12).
Footnote 20 1994 Competition Report, 9 FCC Rcd at 7451, ¶¶ 18-19.
Footnote 21 Competition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television Service, Report, MM Docket No. 89-600, 5 FCC Rcd 4962 (1990) ("1990 Report" or "1990 Cable Report").
Footnote 22 1994 Competition Report, 9 FCC Rcd at 7451-61, ¶¶ 17-36.
Footnote 23 We describe each of these competitors more fully below.
Footnote 24 1994 Competition Report, 9 FCC Rcd at 7468-72, ¶¶ 55-60.
Footnote 25 Id. at 7473-78, ¶¶ 62-70.
Footnote 26 Id. at 7478-82, ¶¶ 171-177.
Footnote 27 Id. at 7482-88, ¶¶ 78-90.
Footnote 28 Id. at 7488-92, ¶¶ 91-96.
Footnote 29 Id. at 7495-505, ¶¶ 103-20.
Footnote 30 Id. at 7508-09, ¶¶ 131-33.
Footnote 31 Id. at 7492-95, ¶¶ 97-102.
Footnote 32 Id. at 7505-08, ¶¶ 121-130.
Footnote 33 Id. at 7511-20, ¶¶ 137-56.
Footnote 34 Id. at 7520-36, ¶¶ 157-93.
Footnote 35 Id. at 7556, ¶ 246.
Footnote 36 Id.
Footnote 37 1994 Competition Report, 9 FCC Rcd at 7463, ¶ 40 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 394 (1956)).
Footnote 38 Id. (citing Tampa Elec. Co. v. Nashville Coal Co. ("Tampa Electric"), 365 U.S. 320, 330-33 (1961).
Footnote 39 1994 Competition Report, 9 FCC Rcd at 7468, ¶ 49.
Footnote 40 Id. at 7468, ¶ 50.
Footnote 41 1990 Cable Report, 5 FCC Rcd at 4995-6, ¶¶ 50-52.
Footnote 42 See Department of Justice and Federal Trade Commission, 1992 Horizontal Merger Guidelines ¶ 1.51, 4 Trade Reg. Rep. (CCH) ¶ 13,104, at 20,573-5 to 20,573-6.
Footnote 43 1994 Competition Report, 9 FCC Rcd at 7468, ¶ 51.
Footnote 44 1994 Competition Report, 9 FCC Rcd at 7451-61, ¶¶ 17-36; 9 FCC Rcd at 7566-74, App. C.
Footnote 45 Id. at 7555-56, ¶ 244.
Footnote 46 Id. at 7468, ¶ 54.
Footnote 47 Id. at 7468-72, ¶¶ 55-60.
Footnote 48 Id. at 7472, ¶ 60 n.136.
Footnote 49 Communications Act § 621(a), 47 U.S.C. § 541(a).
Footnote 50 Compare Cox Cable Communications, Inc. v. United States, 992 F.2d 1178 (11th Cir. 1993) (applies prospectively to all denials of franchises including those that would compete with existing franchises) with James Cable Partners v. City of Jamestown, 43 F.3d 277 (6th Cir. 1995) (all existing exclusive franchises shall remain in force, and only new grants of exclusives are prohibited).
Footnote 51 1994 Competition Report, 9 FCC Rcd at 7558, ¶ 251.
Footnote 52 Id. at 7482, ¶ 78.
Footnote 53 ITFS channels are used by educational institutions to interconnect scattered campus locations.
Footnote 54 In the Matter of 101 Applications for Authority to Construct and Operate Multipoint Distribution Stations, Memorandum Opinion and Order on Reconsideration, 9 FCC Rcd 7886 (1994); In the Matter of 4,330 Applications for Authority to Construct and Operate Multipoint Distribution Service Stations at 62 Transmitter Sites, Memorandum Opinion and Order on Reconsideration, 10 FCC Rcd 1335 (1994), joint notice of appeal filed, A/B Financial, Inc., et al. v FCC, Docket No. 95-1027 (D.C. Cir. Jan. 9, 1995).
Footnote 55 Amendment of Parts 21 and 74 of the Commission's Rules With Regard to Filing Procedures in the Multipoint Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(g) of the Communications Act (Competitive Bidding), Notice of Proposed Rulemaking, MM Docket No. 94-131, 9 FCC Rcd 7665 (1994).
Footnote 56 Amendment of Part 74 of the Commission's Rules with Regard to the Instructional Television Fixed Service, Memorandum Opinion and Order, MM Docket No. 93-24 (FCC 95-51 Feb. 7, 1995).
Footnote 57 1994 Competition Report, 9 FCC Rcd at 7482-88, ¶¶ 78-90.
Footnote 58 The Wireless Cable Digital Alliance has commenced the testing of digital technology to be used in wireless systems. The Alliance has shown that the use of a digital signal combined with compression algorithms has the potential to increase the channel capacity of wireless systems from the current maximum of 33 channels to at least 200 and perhaps evenas many as 300. See Comm. Daily, Mar. 7, 1995, at 2. At least one MMDS operator, Cross-Country Wireless, which has indicated that it would be purchased by Pacific Telesis, announced its intention to use digital compression to offer more than 100 channels by the end of 1996. See Comm. Daily, Apr. 18, 1995, at 8. See also Rich Brown, MMDS (Wireless Cable): A Capital Idea, Broadcasting & Cable, May 1, 1995, at 16.
Footnote 59 For example, we note that it has been reported that during 1994 and early 1995, American Telecommunications Inc. became the first wireless company to have over 100,000 subscribers by purchasing over 40,000 subscribers from existing systems. Paul Kagan Associates, Inc., Wireless Cable Investor News Analysis, Dec. 9, 1994, at 1.