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R #R W" "K W"} %"K W" E)0I$ G) #=X4P 'U[P#AlphaStar P   I$ AlphaStar! a #a B&-I$ ' #=X4P 'U[P#C-Band P  I$ C-Band!! yO-, X-w  Federal Communications Commission`(#FCC 96496 ă  yxdddy   @-  -@ X #C\  P6QɓP#l  yOIZ Before the  FEDERAL COMMUNICATIONS COMMISSION  yOX"}Washington, D.C. 20554#XP\  P6QyoXP# lU  X -#Xj\  P6G;yoXP#  X-In the Matter of hh,V) ` `  hh,V)  X-Annual Assessment of the Status ofhh,V)CS Docket No. 96133  X-Competition in the Market for thehh,V)  X-Delivery of Video Programminghh,V)  XQ - THIRD ANNUAL REPORT ă   X# - Adopted:` ` December 26, 1996hh,VReleased:ppJanuary 2, 1997 By the Commission:  X-4 Table of Contents ă  X-`(#LParagraph  Xk-I.Introductionp>"(#v 1  X=-A` ` Scope of this Reportp>"(#v 2  X-B.` ` Summary of Findingsp>"(#v 4  X-II.The Telecommunications Act of 1996p>"(#v 5  X-III.Competitors in Markets for the Delivery of Video Programmingp!(#p 11  X-A.` ` Cable Industryp!(#p 11  XW-B.` ` Direct Broadcast Satellite Servicep!(#p 36  X)!-C.` ` Home Satellite Dishesp!(#p 49  X"-D.` ` Wireless Cable Systemsp!(#p 51  X$-E.` ` Local Exchange Carriers p!(#p 67  X&-F.` ` Satellite Master Antenna Television Systemsp!(#p 80  Xq(-G.` ` Broadcast Television Servicep!(#p 86"q(,))ZZ$'"Ԍ X-ԙH.` ` Other Entrantsp!(#p 95  X-IV.Market Structure Conditions Affecting Competitionpv!(#j 114  X-A.` ` Horizontal Issues in Markets for the Delivery of Video Programmingpv!(#j 114  Xv-B.` ` Vertical Integration in the Cable Industrypv!(#j 140 ` `  XH-C.` ` Technical Advancespv!(#j 170  X -V.Issuespv!(#j 185  X -A.` ` Legal and Regulatory Obstaclespv!(#j 185  X -B.` ` Competitive Responsespv!(#j 201  X-VI.Administrative Matterspv!(#j 234 Appendices  X4-A.` ` List of Commenters  X-B.` ` Cable Industry Tables  X-C.` ` DBS and HSD Tables  X-D.` ` FCC MDS Auction Information  X|-E.` ` Top Ten SMATV Operators  XN-F.` ` Horizontal Issues Tables  X -G.` ` Vertical Integration Tables  X-H.` ` Program Access Matters Resolved  "h$,-(-(ZZ(#"  X- XX Њ I.INTRODUCTION  X-  1.` ` Section 628(g) of the Communications Act of 1934, as amended,   ("Communications Act") requires the Commission to report annually to Congress on the status  X-  zof competition in the market for the delivery of video programming.z yO-ԍCommunications Act of 1934, as amended, 628(g), 47 U.S.C. 548(g) (1996) ("Communications Act"). Congress imposed this   annual reporting requirement in the Cable Television Consumer Protection and Competition Act  Xv-  of 1992 ("1992 Cable Act"),\vXz yO -ԍPub. L. No. 102385, 106 Stat. 1460 (1992).\ as one means of obtaining information on the competitive status   Mof markets for the delivery of multichannel video programming delivery that would aid both   =Congress and the Commission in determining when there was competition sufficient to reduce  X1-  or eliminate many of the regulatory restraints imposed on the cable industry by that legislation. 1z yO - zԍThe 1992 Cable Act imposed a regulatory scheme on the cable industry designed to serve as a transitional   ,mechanism until competition develops and consumers have adequate multichannel video programming alternatives.  {MZ-  Implementation of Section 19 of the Cable Television Consumer Protection and Competition Act of 1992 (Annual  {O"-  Assessment of the Status of Competition in the Market for the Delivery of Video Programming), CS Dkt. No. 9448,   <Notice of Inquiry, 9 FCC Rcd 2896 2 (1994). The 1992 Cable Act also requires the Commission to publish an   wannual statistical report on the average rates for cable programming service and for converter boxes, remote control   units, and other equipment provided by cable systems. Pursuant to Section 623(k) of the Communications Act, 47   U.S.C. 543(k), that report must compare the rates charged by cable systems that are subject to effective competition   Ywith those not subject to effective competition. In a separate proceeding, the Commission is obtaining information  {O-  for the required comparisons of cable rates. See Implementation of Section of the Cable Television Consumer  {O-Protection and Competition Act of 1992, Rate Regulation, MM Dkt. No. 92266, Order, 10 FCC Rcd 13200 (1995).   X -  This is the Commission's third annual report ("1996 Report") to Congress submitted in  X -  xcompliance with this statutory requirement. N z {O- .ԍThe Commission's first two reports appear at: Implementation of Section 19 of the 1992 Cable Act (Annual  {O-  Assessment of the Status of Competition in the Market for the Delivery of Video Programming), CS Dkt. No. 9448,  {O-  First Report, 9 FCC Rcd 7442 (1994) ("1994 Report") and Annual Assessment of the Status of Competition in the  {Ob-  Market for the Delivery of Video Programming, CS Dkt. No. 9561, Second Annual Report, 11 FCC Rcd 2060  {O,-(1996) ("1995 Report"). In this 1996 Report, we update our two prior reports   and provide data and information that summarizes the status of competition in the market for the   kdelivery of video programming. In the two prior reports we described the methodology and   theory underlying our competitive analysis. We do not repeat that information in this report other   than in an abbreviated fashion, and provide reference to the relevant discussion in prior reports.   [The information and analysis provided in this third report are based on publicly available data,   Kfilings in various Commission rulemaking proceedings, and information submitted by commenters  Xf-in response to a Notice of Inquiry ("Notice") in this docket.fz {O$- zԍAnnual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, CS Dkt. No. 96133, Notice of Inquiry, 11 FCC Rcd 7413 (1996). "Qb,-(-(ZZI"Ԍ X- A.` ` Scope of this Report  X-  2.` ` Section II of this report contains a brief review of the Telecommunications Act  X-  of 1996 ("1996 Act").Vz yO4-ԍPub. L. 104104, 110 Stat. 56 (1996).V In Section III we examine the cable television industry, existing   multichannel video programming distributors ("MVPDs") and distribution technologies, and   [potential competitors to cable television. Among the alternative distribution technologies and   providers discussed are direct broadcast satellite ("DBS") services and home satellite dishes   j("HSDs"), wireless cable systems using frequencies in the multichannel multipoint distribution   service ("MMDS") or local multipoint distribution service ("LMDS"), local exchange telephone   carriers ("LECs"), satellite master antenna television ("SMATV") systems, and broadcast   ztelevision service. We also consider several other existing and potential distributors of and   distribution technologies for video programming, including electric utilities, the Internet, and interactive video and data services ("IVDS").  X -  3.` ` In Section IV of this 1996 Report, we examine market structure and competition. Xz {O- >ԍAppendix H of the 1994 Report describes methods for assessing the status of competition in markets for  {O-the delivery of multichannel video programming. 1994 Report, 9 FCC Rcd at 7623, App. H.   We evaluate horizontal concentration and vertical integration between cable television systems   =and programming services. We also discuss in this section program access and technological   advances. In Section V we discuss some evidence of potential obstacles to the emergence of a   freely competitive multichannel video programming distribution ("MVPD") marketplace, and   evidence of competitive responses by industry players that are beginning to face competition from other MVPDs.  X- B.` ` Summary of Findings  X-4.` ` In this 1996 Report, the Commission makes the following findings:  X- The 1996 Act embodies Congress' intent to promote a "procompetitive national policy   framework" and eventual deregulation of markets for the delivery of video programming. Several   of the 1996 Act's provisions are intended to build on prior efforts, particularly the 1992 Cable   xAct, by removing additional barriers to competitive entry in these markets and establishing market   xconditions 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. The Commission has adopted rules to implement the open video system provisions  X -  \of the 1996 Act and has adopted rules to implement the 1996 Act provision which preempts   certain local government and nongovernment restrictions on reception devices, including antennas   ?and dishes for reception of overtheair broadcast, wireless cable and DBS signals. The   Commission has adopted similar rules with respect to certain home satellite dish services. A  X!-  change in the definition of a cable system made by the 1996 Act now permits SMATV operators"!,-(-(ZZ "   xto serve buildings regardless of ownership without being subject to regulation as cable operators, provided that public rightsofway are not used in the process.  X- We find that incumbent franchised cable systems continue to be the primary distributors   of multichannel video programming, although other MVPDs, particularly those using alternative   Ltechnologies (e.g., DBS, wireless cable and SMATV systems), continue to increase their share   of subscribers in many markets. Subscribership for distributors using technological alternatives   to traditional cable service now accounts for 11% of total MVPD subscribership. Noncable   MVPD subscribership has been increasing an average of 22% per year since 1990, with cable   subscribership currently down to 89% of all MVPD subscribers. Notwithstanding this decrease   in cable systems' share of total MVPD subscribers, the actual number of cable subscribers  X -  continues to increase. In fact, since the 1995 Report, the number of cable subscribers increased   jby two million compared to the increase in combined subscribership for all other MVPDs of 2.3 million.  X - Local markets for the delivery of video programming generally remain highly   jconcentrated, and structural conditions remain in place that could permit the exercise of market   power by incumbent cable systems. Overall, our conclusion concerning competition in markets   for the delivery of multichannel video programming remains unchanged from last year it   remains difficult to determine to what extent these markets will be characterized over the long   term by vigorous rivalry among multiple MVPDs offering closely substitutable services or,   Mconversely, the extent to which many of these markets will remain dominated by one or two   providers facing less vigorous rivalry from MVPDs offering highlydifferentiated or niche programming services.  X- We find a growing but still very limited number of instances where incumbent cable   <system operators face competition from MVPDs offering services with very similar attributes (i.e.,   overbuilds/wired delivery). Where such competition exists, such as in Dover Township, New   Jersey, the effects of competition are readily apparent. We also find a substantially increased   presence of MVPDs deploying somewhat differentiated services, particularly DBS service   xproviders. Increased competition among DBS service providers has led to lower equipment prices   and, possibly, increases in the number of cable subscribers choosing to drop or reduce cable   yservices in favor of DBS services. Moreover, some cable system operators appear to be taking   .steps to improve their service offerings in response to the availablity of DBS service. MVPDs   using other distribution technologies, such as 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. Consequently, it remains difficult to   predict the extent to which competition from MVPDs using noncable delivery technologies will constrain cable systems' ability to exercise market power in the future.  Xj$- As a result of acquisitions and trades, cable multiple system operators ("MSOs") have   .continued to increase the extent to which their systems form regional clusters. The number of   Mclusters of systems serving at least 100,000 subscribers increased from 97 to 137, and these clustered systems now account for service to approximately 50% of the nation's cable subscribers."%',-(-(ZZ%"Ԍ X- {ԙNationally, concentration among the top cable MSOs has continued to increase, but still   remains within the moderately concentrated range at 1326 (an HerfindahlHirschman Index   ("HHI") between 1000 and 1800). If all MVPDs are included in the calculation, national   -concentration falls just above the threshold of the moderately concentrated range with an HHI of   1013. DBS providers DIRECTV and PRIMESTAR rank among the ten largest MVPDs in terms of nationwide subscribership with over 2.0 and 1.5 million subscribers, respectively.  X_- Vertical integration of national programming services between cable operators and   zprogrammers declined from last year's total of 51% to just 44% this year. We find, however,   -insufficient evidence to make any determination of the effect to date of these developments. The   decline is due largely to the sale of Viacom's cable system assets. In addition, of the 16  X -  programming services that were launched since the 1995 Report, 10 are not vertically integrated.   Access to programming remains one of the most critical factors for the successful development   of competitive MVPDs. Competing MVPDs have complained about the potential unavailability   [of programming distributed by means other than satellite or produced by programmers that are   not vertically integrated with cable systems. To the extent that it appears that the denial of access   ?to programming serves to deter entry of competitors in markets for the delivery of video programming, we will be concerned about these developments.   XM- NTechnological 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   jspectrum 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.  X- Our findings as to particular distribution mechanisms operating in markets for the delivery of video programming include the following:  X~-  0` ` Cable Systems: The cable industry has continued to grow in terms of subscriber   penetration, average system channel capacity, the number of programming services available,  XP-revenues, audience ratings and expenditures on programming since the 1995 Report.   X$-  n0` ` DBS Service Providers: Subscribership to DBS services increased from 1.7 million   homes last year to nearly 4 million homes at the end of October 1996. This increase is   attributable in part to the development of competition from two new DBS services in the last year   ԩ AlphaStar and EchoStar and price competition among providers that has significantly lowered the cost of receiving equipment.  X"-  20` ` Wireless Cable Systems: 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.   iThroughout most of the year, LECs continued to expand their investment in the wireless industry,">&,-(-(ZZ$"   ibut some have recently cut back on that investment. We also observe a continuation of the trend toward increased consolidation among wireless companies.   X-  20` ` SMATV Systems: SMATV subscribership increased 10.5% over the past year in   systems that serve 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.  XH-  "0` ` Broadcast TV: Broadcast service continues to serve as both a transmission medium   for many households, and a primary source of programming for most viewers regardless of   Ldistribution media. Regulatory changes and technological advances may, at some point in the   Kfuture, permit the use of broadcast television and other existing and potential video technologies, such as low power television, for distribution of multichannel video programming.   X -  0` ` LEC Entry: The 1996 Act expands opportunities for LECs to enter markets for   the delivery of multichannel video programming. Since adopting rules implementing the 1996   yAct's open video system ("OVS") provision, we have certified the conversion of Bell Atlantic's   lDover, New Jersey, video dialtone system to an OVS and authorized two additional OVS   .operators. In the last year, some LECs have continued to expand franchised cable operations, both within and outside their telephone service areas.  X-  0` ` Utilities: Section 103 of the 1996 Act removes regulatory barriers to entry in  X-  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,  X-has granted all 18 applications filed thus far under the 1996 Act.  X- II.THE TELECOMMUNICATIONS ACT OF 1996  X|-  b5.` ` The Telecommunications Act of 1996, enacted February 8, 1996, marks a   fundamental shift toward competition throughout the entire telecommunications marketplace.   Congress specifically stated its intent to establish a "procompetitive deregulatory national policy  X7-  framework" for the telecommunications industry.}7z yO-ԍH. R. Rep. No. 104458, 104th Cong. 2d Sess. 1 (1996) ("Conference Report").} Consistent with this philosophy, the 1996 Act   ]contains several provisions that focus on removing barriers to competitive entry and on   establishing market conditions that promote competitive firm rivalry. In addition to encouraging  X-  Lcompetition in the local telephone exchange market, the 1996 Act also encourages competition in the market for the delivery of multichannel video programming.  X!-  6.` ` Eliminating a significant statutory barrier to entry, the 1996 Act removes the   <statutory provision that prevented local telephone companies from providing video programming""X,-(-(ZZ!"  X-  yservices directly to subscribers in their telephone service areas.K z yOy-ԍ1996 Act, sec. 302(b)(1). K The 1996 Act also directs the   Commission to eliminate all of its video dialtone rules and attendant policies, and to eliminate   the requirement that a common carrier obtain authorization pursuant to Section 214 of the  X-  Communications Act for the provision of video programming. Xz yO-ԍ1996 Act, secs. 302(a), 302(b)(3) (codified as Communications Act 651(c), 47 U.S.C. 571(c)). ĥ In place of these provisions, the   k1996 Act provides for a new "open video system" or "OVS" framework for the provision by  X-  telephone companies and others of multichannel video programming. z yO& -ԍ1996 Act, sec.302 (codified as Communications Act 651, 47 U.S.C. 571). The Commission has  Xv-  [promulgated rules pursuant to this new statutory provision, vxz {O - ԍImplementation of Section 302 of the Telecommunications Act of 1996 (Open Video Systems), CS Dkt. No.  {Oi -  9646, Report and Order and Notice of Proposed Rulemaking, 11 FCC Rcd 14639 (1996); Implementation of Section  {O3-  302 of the Telecommunications Act of 1996 (Open Video Systems), CS Dkt. No. 9446, Second Report and Order,  {O-  11 FCC Rcd___ , FCC 96249 (June 3, 1996), ("Second OVS Report & Order") summarized at 61 Fed. Reg. 28698  {O-  (June 5, 1996); Implementation of Section 302 of the Telecommunications Act of 1996 (Open Video Systems), CS   Dkt. No. 9446, Third Report & Order and Second Order on Reconsideration, 11 FCC Rcd ___, FCC 96334 (Aug.  {OY-8, 1996) summarized at 61 Fed. Reg. 43160 (Aug. 21, 1996). including extending the program   /access requirements to common carriers providing video programming pursuant to Section  XH-302(b)(1)(A) of the 1996 Act.% H z yO- ԍ47 C.F.R.  76.1000 et al; 1996 Act sec. 302 (codified as Communications Act 653(b)(1)(A), 47 U.S.C.  {O-573(b)(1)(A)). See Second OVS Report & Order, FCC 96249 133204. %  X -  7.` ` Several other provisions of the 1996 Act focus on eliminating regulatory barriers   to entry into markets for the delivery of video programming. For example, pursuant to Section  X -  207 of the 1996 Act, the Commission has implemented rules preempting certain local government   and nongovernment restrictions on reception devices, including antennas for reception of over X -  ztheair broadcast, wireless cable, and DBS. z {O- Lԍ1996 Act, sec. 207; Preemption of Local Zoning Regulations of Satellite Earth Stations, IB Dkt. No.95-59,   <Report & Order, Memorandum Opinion & Order and Further Notice of Proposed Rulemaking, 11 FCC Rcd ___,  {O-  iFCC96-328 (Aug. 6, 1996), summarized at 61 Fed. Reg. 46557 (Sept. 4, 1996). In addition, Section 205 of the  yO-  + 1996 Act grants exclusive jurisdiction to the Commission to regulate the provision of directtohome satellite services.  yO-1996 Act, sec. 205(b) (codified as Communications Act 303(v), 47 U.S.C. 303(v)). Section 301(a)(2) of the 1996 Act redefined the   statutory exceptions to a cable system so as to permit more efficient operation by SMATV  X-  [operators.Zz yO#- ԍ1996 Act, sec.301(a)(2) (codified as Communications Act 602(7), 47 U.S.C.  22(7)). The redefinition   effectively eliminated the commonly owned building requirement for a SMATV system serving multiple buildings.  {O$-This redefinition was recommended in the 1994 Report, 9 FCC Rcd at 7558 252. Pursuant to Section 202(f)(1) of the 1996 Act, the Commission has revised Section",-(-(ZZ"   76.501 of the rules to permit the common ownership of a cable system and a broadcast television  X-network.g\z {Ob- ԍ1996 Act, sec.202(f)(1); Implementation of Sections 202(f), 202(i) and 301(i) of the Telecommunications  {O,-  xAct of 1996, Cable Television Antitrafficking, Network Television, and MMDS/SMATV CrossOwnership Rules, CS Dkt. No. 9656, Order, 11 FCC Rcd 15115 (1996).g  X-  8.` ` In addition to removing statutory and regulatory barriers to competition among  X-  actual and potential MVPDs, the 1996 Act also contains a number of provisions that directly   affect competition in the cable industry. For example, Section 304 of the 1996 Act contains   provisions affecting cable system operators, such as multiple dwelling unit ("MDU") bulk  X_-  discounts and uniform rate structure rules._z yO -ԍ1996 Act, sec.301 (codified as Communications Act 623, 47 U.S.C. 543(m)). Section 301(c) of the 1996 Act contains immediately   effective deregulatory provisions for small cable system operators and Section301(b) of the 1996   Act contains deregulatory provisions for large cable system operators that take effect within three  X -  years of enactment of the 1996 Act. |z yOG-ԍ1996 Act, sec.301(b) (codified as Communications Act 623(m), 47 U.S.C. 543(m)). In addition, Section 301(b)(3) of the 1996 Act broadens   <the definition of effective competition so as to increase the ability of cable operators to assert the  X -  existence of effective competition and avoid rate regulation. z yO-ԍ1996 Act, sec.301(b)(3) (codified as Communications Act 623(l), 47 U.S.C. 543(l)). Section 301(f) of the 1996 Act,   addressing cable equipment compatibility, provides for narrowly drawn compatibility requirements   that do not adversely affect the features, functions, protocols or other products and services   options of such equipment other than those specifically specified in the equipment compatibility  X-requirement.z yO-ԍ1996 Act, sec.301(f) (codified as Communications Act 624(A), 47 U.S.C. 544a).  Xb-  9.` ` The 1996 Act also contains provisions to encourage open competition in MVPD  XK-  equipment markets. Section 304 of the 1996 Act tasks the Commission with adopting regulations   to assure the commercial availability of converter boxes, interactive communications equipment  X-  and other equipment used by consumers to access multichannel video programming services., z yO-ԍ1996 Act, sec.304 (codified as Communications Act 629, 47 U.S.C. 549).  X-  The 1996 Act also provides for the sunset of these provisions when the Commission determines:   (1) the market for MVPDs is fully competitive; (2) the market for converter boxes and interactive   communications equipment is fully competitive; and (3) elimination of the regulations would  X-promote competition and the public interest. z {O.$- #ԍ1996 Act, sec. 304 (codified as Communications Act  629(e), 47 U.S.C.  549(e)). See also  {O$-  Implementation of the Cable Television and Consumer Protection and Competition Act of 1992 (Cable Home Wiring),   <MM Dkt. No. 92260, First Order on Reconsideration and Further Notice of Proposed Rulemaking, 11 FCC Rcd  {O&-  x4561 (1996); Telecommunications Services Inside Wiring (Customer Premises Equipment), CS Dkt. No.95184,  yOT'-Notice of Proposed Rulemaking, 11 FCC Rcd 2747 (1996).Ę " r,-(-(ZZ"Ԍ X-  ԙ 10.` ` Finally, we note there are additional provisions aimed at encouraging market entry.  X-  Pursuant to Section 101 of the 1996 Act, the Commission has instituted a proceeding to identify   and eliminate market entry barriers for entrepreneurs and other small businesses in the provision  X-  [and ownership of telecommunications services.Q\z {O4- ԍ1996 Act, sec.101 (codified as Communications Act 257, 47 U.S.C. 257); Section 257 Proceeding to  {O-  ;Identify and Eliminate Market Entry Barriers for Small Businesses, GN Dkt. No. 96113, Notice of Inquiry, 11 FCC Rcd 6280 (1996).Q Pursuant to Section 103 of the 1996 Act, the   Commission established rules that enable public utility holding companies to enter into   telecommunications markets and has approved exempt telecommunications company status for  Xv-18 companies.\vz yO - ԍ1996 Act, sec.103 (codified as Public Utility Holding Company Act of 1935  34, 15 U.S.C. 79z5c);  {O -  wImplementation of Section 34(a)(1) of the Public Utility Holding Company Act of 1935, as added by Section 103 of  {O -the Telecommunications Act of 1996, GC Dkt. No. 96101, Report & Order, 11 FCC Rcd 11377 (1996).   XH- III.XCOMPETITORS IN MARKETS FOR THE (#  X1-DELIVERY OF VIDEO PROGRAMMING X` hp x (#%'0*,.8135@8:annual, industrywide cash flows from 1992 to 1995.7} eJ {O*-ԍCash flow estimates are based on the same methodology described supra note 50. Based on Commission estimates, the   industry generated cash flow of $9.72 billion in 1992, $10.31 billion in 1993, $10.05 billion in  XO-  1994, and $10.63 billion in 1995.L8O eJ {O-ԍInfra App. B, Tbl.7.L The Commission's 1995 estimate represents a cash flow increase of 5.7% from 1994.  X -  C 28.` ` An analysis of the industry's cash flow for any one year may not provide a   complete picture of the trend in the industry's performance. A more informed analysis may be   provided by comparing each quarter of 1994, 1995, and the first two quarters of 1996, with the   same quarters of the previous year. These quarterly growth rates are shown in Appendix B,   Table 8B. As in Appendix B, Table 8A, we present detailed quarterly cash flow for the same   14 publicly held MSOs. After exhibiting slow yearoveryear cash flow growth in the first two" 8,-(-(ZZQ"   quarters of 1995 (2.1% and 1.5% respectively), yearoveryear cash flow growth was much   ystronger in the third and fourth quarters of 1995 (10.1% and 9.4% respectively). In the first two quarters of 1996, yearoveryear cash flow growth slowed to 5.6% and 8.0% respectively.  W<` `  3. Capital Acquisition and Disposition  X-  Xv-  29.` ` In 1995, the cable industry displayed an increased ability to acquire financing from   a variety of public and private sources. The industry also made some of the most substantial   .capital investments ever. In recent months, however, there have been reports that some cable   operators have been having difficulty financing the significant capital investments that they had   been planning to make. For example, on October 24, 1996, TCI president John Malone was   reported to have said that "[t]he days of heavy capital spending on cable are behind us" during   a presentation to institutional investors at which he explained TCI's plans to cut back on system  X -upgrades in its systems that are small or lessthreatened competitively.9( eJ {ON- ԍE.g., John M. Higgins, Malone Reveals More Details on Revival Plan, Multichannel News, Nov. 11, 1996,  {O-  at 3, 70. See also John M. Higgins & Leslie Ellis, TCI's Woes Rock Market, Multichannel News, Oct.28, 1996,  {O-  at 1; Eben Shapiro & David D. Kirkpatrick, TCI's Malone Unveils Strategy to Storm DigitalSatellite Firms,Cut  {O-Spending,Wall St. J., Oct. 28, 1996, at B6.  X -  `30.` ` Cable Industry Financing in 1995: The cable industry has typically relied on   various combinations of private and public financing, with the exact distribution of these   combinations varying greatly from year to year. Redemptions caused private debt financing (i.e.,   <debt held by banks, insurance companies, and institutional investors) to decrease by $808 million  XM-  in 1995, while public debt financing increased by $4.5 billion.M:MeJ {O-ԍInfra App. B, Tbl. 10.M The remaining industry   yfinancing is obtained through a mixture of private equity (i.e., individuals, venture capital firms,   investment banks, limited partnerships) and public equity offerings (i.e., stock markets). New   private and public equity offerings totalled $1.1 billion and $4 billion, respectively, in 1995.   Overall, the cable industry obtained $8.8 billion in new financing in 1995, which is an increase  X-  of $2.1 billion over the 1994 total.:;JeJ {O-ԍId.: This growth in new financing during 1995 helped increase   combined cash flow and new investment to the highest level ever. The $20 billion total   combined figure in 1995 ($11.2 billion from cash flow plus $8.8 billion from new financing) was  X-an increase of 20.1% over the $16.7 billion reported in 1994.<eJ {O""- ԍPaul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1996, at 115.  Xg-  }31.` ` Cable Industry Financing: Recent Developments. The cable industry appears to   =be on a pace that will result in it obtaining significantly less in new capital in 1996 than in prior   years. Cable operators are reported to have raised approximately $1.6 billion in capital during";6 <,-(-(ZZ"  X-  zthe first half of 1996.=eJ {Oy- NԍPaul Kagan Assocs., Inc., Cable TV Finance, Sept. 16, 1996, at 1; Paul Kagan Assocs., Inc., Cable TV  {OC-Financing Snapshot July, Cable TV Finance, Aug. 30, 1996, at 6. Included in this total was a net redemption of $1.6 billion of privately  X-  held debt;r>$eJ yO-ԍPaul Kagan Assocs., Inc., Cable TV Finance, Sept. 16, 1996, at 1.r $2.6 billion raised in the bond market;:?eJ {ON-ԍId.: and $626 million raised in the public equity  X-  market.@FeJ {O -ԍPaul Kagan Assocs., Inc., Cable TV Financing Snapshot July, Cable TV Finance, Aug. 30, 1996, at 6. If the industry continues to obtain new financing at this rate, it will raise a total of $3.2 billion in new financing for 1996, which is less than 45% of 1995's total.  X-  32.` ` Capital Expenditures. In 1995, the cable industry invested $5.4 billion in   construction of new plant and equipment (including maintenance, inventory, system upgrades,   converters, passing of new homes, and rebuilding of existing systems). This was a 42% increase  XJ-  over the $3.8 billion spent on construction in 1994.KA\JeJ {O- ԍPaul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July  {O-  J1995, at 92; Paul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1996, at 115.K This also represents the third consecutive  X3-  zyear that cable industry capital expenditures experienced doubledigit growth.B\3 eJ yO- kԍBetween 1992 and 1994, cable industry investment in construction of new plant and equipment increased  {O-  36% and 27% respectively, from $2.2 billion in 1992 to $3 billion in 1993, to $3.8 billion in 1994. 1995 Report,  {Or-11 FCC Rcd at 2073 33; 1994 Report, 9 FCC Rcd at 2071 26. Of the $5.4   billion in capital expenditures, the industry spent $3.4 billion on the upgrade and buildout of   existing systems. Approximately $1 billion was spent on new settop converters and other  X -  iinventory.C eJ {O- ԍPaul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1996, at 115. In contrast, it was recently reported that TCI is going to reverse this pattern, and will  X -begin spending more on settop converters and less on system upgrades over the next few years.D zeJ {O-ԍHiggins, Malone Reveals More Details, supra; Shapiro & Kirkpatrick, TCI's Malone Unveils Strategy, supra.  X -  } 33.` ` Cable System Transactions. The number of mergers, acquisitions, and exchanges  X-  [between MSOs increased from 64 in 1994 to 128 in 1995.E eJ {OQ"-ԍInfra App. B, Tbl. 10. Transactions announced since 1995 are listed in Appendix F. The information for 1995 also marks   a change in the seven year trend reported in prior reports that while total number of subscribers  Xf-  .served by systems sold increased, the number of systems sold declined.iFfeJ {O%-ԍSee 1995 Report, 11 FCC Rcd at 2074  34.i This past year, the   number of subscribers to, and homes passed by, the systems changing hands in these transactions"O0F,-(-(ZZ"   both increased, by 46% and 38%, respectively. In addition, the total dollar value of the   transactions increased 43% between 1994 and 1995. Consistent with the trend begun in 1994,   ihowever, the average dollar value per subscriber of these transactions decreased, in 1995 by 1.8%   >(from $1,869 to $1,836) and the average cash flow multiple decreased, in 1995 by 5.8% (from   y10.3 to 9.7). Overall, the transactions announced in 1995 involved more subscribers and higher  X-purchase prices than in any year since 1982.GeJ {O- ԍPaul Kagan Assocs., Inc., YearToDate Cable System Sale Summary, Cable TV Investor, Jan.26, 1996, at 11.  X_-  !34.` ` For the nine months from January to September of 1996, 81 transactions were   announced, involving 7.5 million subscribers, 12.1 million homes passed, and purchase prices  X1-  totaling $15.6 billion dollars (which represents $2,078 per subscriber).MH1"eJ {O -ԍInfra App. B, Tbl. 10.M While these totals all   ?represent decreases over the first nine months of 1995, it is worth noting that this year's   transactions, on average, have been much larger than those announced last year. Moreover, the   kprice per subscribers is, on average, much higher thus far in 1996 than it was in 1995 ($2,078  X -  versus $1,836).:I eJ {O:-ԍId.: These results, however, appear to be largely the result of a single transaction,  X -U S West Media Group's ("U S West") purchase of Continental Cablevision.ZJ( FeJ {O- ԍPaul Kagan Assocs, Inc., Continental Blinks to Get Deal Done, Cable TV Investor, Oct. 21, 1996, at 3;  {O-  KAnnounced/Proposed Cable System Sales, Cable TV Investor, Feb. 29, 1996, at 10; U S West Media Group, U S  {OI-  West Media Group and Continental Cablevision Close Merger (news release), US West Media Group, Nov.15,  {O-1996, at 2. The price per subscriber of U S West's purchase of Continental Cablevision was $2,190. Infra App.F.Z   W<` `  4. Status of Overbuilding  Xb-  "35.` ` Finally, as we noted above, overbuilding was one of the first competitive situations  XK-  experienced by incumbent cable operators. Since the 1995 Report, the development of new  X6-  overbuilds by nonLEC entities continues to be limited.}K66 eJ {O-ԍFor a discussion of LEC overbuilds, see infra sec. III.E. } We are aware of only two new such   jnonLEC overbuilding plans. In the last year, the city of Raleigh, North Carolina, granted Fiber  X-  South a franchise to overbuild its incumbent operator, Time Warner.L eJ {O!-ԍLocal and State Actions, Warren Cable Regulation Monitor, Aug. 19, 1996. In addition, the city of   Chicago, Illinois, granted 21st Century Cable TV a franchise to overbuild parts of the city  X-encompassing 270,000 homes.M^Z eJ {O$- ԍHarry A. Jessel, 21st Century Comes to Chicago, Broadcasting & Cable, Apr. 1, 1996, at 44; Michael Gillis,  {O%-  YCable Companies Plan for Lakefront Battle, Chicago SunTimes, Apr. 1, 1996, at 14; Lee Hall, TCI Chicago Braces  {Oy&-for Cable Competitor; 21st Century Expects Speedy Start, Electronic Media, Apr. 1, 1996, at32. "M,-(-(ZZ"Ԍ X- B.` ` Direct Broadcast Satellite Services   X-  `#36. ` ` Direct broadcast satellite ("DBS") operators are like other MVPDs in that they:   <(1)downlink programming from many different satellites pursuant to contracts with programmers;   {(2)package the programming into service offerings; and (3) make those service offerings   available to subscribers over a proprietary facility. However, DBS services use satellites instead   Zof broadband wires or terrestrial microwave stations to transmit their programming to subscribers.   In addition, we note that DBS operators have a public interest obligation to reserve between 4%  XH-and 7% of their channel capacity for noncommercial programming.iNZHeJ {O - ԍTime Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957, 97577 (D.C. Cir. 1996) (The court found that   jthis obligation, as a condition of being allowed to use a scarce public commodity, was in the public interest by assuring public access to diverse sources of information.)i  X -  $37.` ` For the purposes of this 1996 Report, we include Primestar Partners, L.P.   ("PRIMESTAR") and AlphaStar as DBS providers even though they currently do not use high  Zpowered Kuband frequencies allocated for DBS service as defined under the Commission's rules.   Instead, they provide programming using mediumpowered Kuband frequencies allocated   pursuant to the Commission's Fixed Satellite Service. Nonetheless, PRIMESTAR's and   jAlphaStar's services share many of the same attributes of the multichannel video programming   services offered by the other DBS operators, and it appears that consumers and industry   participants view their services as close substitutes for the services of MVPDs using DBS frequencies, such as DIRECTV and EchoStar.  X6-  %38.` ` Since we issued the 1995 Report, DBS subscribership has increased substantially,   to the point that DBS systems have a higher combined subscribership than any other MVPD   alternative to incumbent cable systems. As discussed below, it appears that the advent of price   jcompetition among DBS providers has contributed to the increase in DBS subscribership, with   initial equipment costs dropping to as low as $199 plus installation costs. However, DBS   providers continue to be unable to provide local broadcast network signals (and network   =programming), requiring DBS subscribers to obtain those signals over the air or through basic   cable subscriptions. In addition, the firstyear annual cost of DBS service remains significantly  X-  =higher than for cable serviceO"eJ {O- 0ԍSee, e.g., First Year Cost to the Satellite Consumer, SkyREPORT, Sept. 1996, at 3 (box) (the cost of   programming alone is shown as comparable to, or greater than the average annual expenditure for cable services).   SkyREPORT is published by Media Business Corporation in conjunction with the Satellite Broadcasting and Communications Association. and, if cable joins DBS systems in the use of digital encryption,   many cable systems will be able to offer substantially more programming than can be offered by  XR-  zDBS systems.PReJ {O$-ԍSee, e.g., infra sec. IV.C. (technical advances section, explaining digital encryption and use of bandwidth). Nonetheless, most observers project continued strong growth for the DBS   jindustry through the end of the decade. For example, two industry analysts recently projected";f P,-(-(ZZ"  X-  ]that there would be a total of 1315 million DBS households by the year 2000.QeJ {Oy-ԍJohn M. Higgins, DirecTv DSS Sales Falling Short, Multichannel News, Oct. 21, 1996, at 3. Another   observer projects that DBS operators will account for service to over 20% of all MVPD  X-subscribers by the year 2000.RZeJ {O- ԍMultichannel Futures, SkyREPORT, Oct. 1996, at 3 (citing Dennis Liebowitz at Donaldson, Lufkin & Jenrette).  X-  &39.` ` Subscribership. Subscribership to DBS services continued to increase rapidly over  X-  the past year. In the 1995 Report, the Commission noted that, according to industry reports,   nearly 1.7 million households subscribed to DBS services at the end of September 1995, an  Xc-  increase of approximately 1.1 million subscribers from the previous year._SceJ {O -ԍ1995 Report, 11 FCC Rcd at 2080 49._ Based on the revised   =total of 1.6 million households, it appears that DBS subscribership increased by approximately   -2.0 million households during the twelve months between the end of September 1995 and the end  X -  of September 1996, to a total of nearly 3.6 million households.T FeJ {O-ԍInfra App. C, Tbl. 1. See also Price Wars Boost DBS by 188,000, SkyREPORT, Oct.1995, at 89. As of the end of October 1996,  X -there were 3.82 million DBS subscribers.:U eJ {O-ԍId.:  X -  '40.` ` Since DIRECTV and USSB began offering service in June 1994, DBS services   have grown at a rate making DBS receiving equipment one of the most successful new consumer  X -  \electronics product introductions in history in terms of units sold.V( j eJ {O- ԍE.g., Randy Minkoff, Tempo Lake: Star WarsThose Small Satellite Dishes Take the Battle for TV Viewers  {O-  iInto a Higher Orbit, Chicago Tribune, Oct. 6, 1996, at __, 1996 WL 2714299; Jetcom, Inc., Jetcom Enters Into  {OZ-  ,Distribution Agreement for New DIRECTV USSB DSS Products Manufactured by Uniden, (press release) Bus. Wire,  {O$-July 24, 1996.  DBS subscribership is   anticipated to continue to grow rapidly over the next few months, with some reports over the   summer projecting that over 5 million households may be receiving DBS service by the end of  Xf-  1996.WfZ eJ yOq- ԍIt was reported in SkyREPORT that "[c]onsensus estimates put DBS yearend numbers at near 5.25  {O9 -million...." DBS Wars Roil Video Waters, SkyREPORT, Sept. 1996, at 1. The DBS industry appears to have experienced somewhat slower growth in recent   months, however, with DIRECTV and PRIMESTAR each revising downward their projections   two times in recent months, and industry observers now projecting a yearend total of between  X!-  4.3 and 4.5 million DBS subscribers.X!eJ {O$-ԍE.g., DBS's Slow Holiday Season, Cable World, Dec.9, 1996, at 9, 219. These lower projections may not necessarily indicate a   slower overall growth rate. As demonstrated in the tables in the appendix to this report, monthly" FX,-(-(ZZF"  X-  xincreases in DBS subscribership have fluctuated significantly.LYeJ {Oy-ԍInfra App. C, Tbl. 2.L In its relatively short history, the   DBS industry has experienced two periods of significantly enhanced monthly increases in   subscribershipOctoberDecember, 1995, and JuneJuly, 1996, possibly due to heightened marketing during those periods.   X-  (41.` ` Individual DBS Service Providers. DBS subscribers generally use relatively small   Ldishes (1824 inches for DIRECTV/USSB and EchoStar, and 3639 inches for PRIMESTAR and   [AlphaStar) to receive the programming from the individual orbital location from which the DBS   operator is transmitting the service. Both services and equipment are available to subscribers   from a variety of retail outlets, including large national consumer electronics retailers. Two more   DBS operators, EchoStar (1824 inch dishes) and AlphaStar (3639 inch dishes), initiated service  X -  since the 1995 Report was released. Consumers may now choose DBS services from four   jdifferent sources (DIRECTV and USSB are treated as a single product offering for this purpose  X -since they are complementary products).pZX ZeJ yO- ԍDIRECTV and USSB are complementary services because subscribers use the same receiving equipment   hfor the two services, and they offer mutually exclusive programming. In addition, a customer must subscribe to both services in order to receive all of the most popular cable programming. p  X - |X` hp x !%'0*,.8135@8:,-(-(ZZ"  X-  to the one month's free programming when they buy USSB's 12 month programming package.vz {Oy-ԍDISH Sales Successful for Dealers, SkyREPORT, July 1996, at 10.v  X-  z PRIMESTAR reportedly indicated in October 1996 that it plans to spend over $20 million on   promotional activities during the remaining months this year, including a renewal of its NASCAR  X-sponsorship.\Zz {O- =ԍCharles Paikert, PrimeStar Eyes Image for 4thQuarter Campaign, Multichannel News, Oct. 7, 1996, at44.  {O-  See also Mitchell & Breznick, DBS Price Wars, supra. (TCI, which is the largest PRIMESTAR distributor, reportedly will spend $8 million on marketing of PRIMESTAR through the end of the year).  X-  ,45.` ` Over the past year, the trend toward bundling video programming with   xtelecommunications and information services appears to have had an impact on the DBS industry.   AT&T acquired a 2.5% interest in DIRECTV from Hughes with an option to increase its holdings   {by up to 30% during the next five years. AT&T ran a promotion from October 9 through  X1-  October 14 during which it offered a $100 rebate on DIRECTV equipment to its long distance  X -  customers if they purchased oneyear programming subscriptions for $354.b ~z {OI-ԍMitchell & Breznick, DBS Price Wars, supra.b On August 29,   l1996, Cincinnati Bell announced agreements to market DIRECTV and USSB services and  X -  Kequipment to its customers.0Z z {O- kԍCincinnati Bell, Cincinnati Bell Enters the Home Entertainment Industry with DIRECTV and USSB (press   release), DBS Online! Press Release Archives, Aug. 29, 1996, http://www.dbs.digifix.com/DBS/ NewPR/960830_01.html.0 DIRECTV has also entered into an "agency agreement" with RCN,   <a SMATV operator using the assets that belonged to Liberty Cable to serve approximately 40,000   subscribers in New York City, whereby subscribers in buildings served by RCN can purchase  X -programming from DIRECTV after they purchase a digital decoder box. 2 z {O-  ԍCharles Paikert, DirecTv Gets NYC Port, Multichannel News, Oct. 7, 1996, at 12; Alan Breznick, A DBS  {OT-Shakeup? More Dish Players Enter Corwded Field, Cable World, Oct. 7, 1996, at 1.  Xy-  -46.` ` "Headend in the Sky" Service Providing Digital Direct Broadcast Service to  Xd-  yMVPDs. Last year the Commission reported that TCI proposed to offer a "headend in the sky"   ("HITS") service, which involved providing to other MVPDs the same programming feed  X8-  distributed to PRIMESTAR subscribers._8 z {Ow -ԍ1995 Report, 11 FCC Rcd at 2087 59._ The subscribing MVPDs could then combine HITS   jservice with local broadcast channels and transmit the programming package over the MVPDs'   networks to their subscribers, who would use set top boxes to receive the service. The   Commission also reported that other DBS operators, such as DIRECTV and EchoStar, suggested  X-  that they may also use their DBS facilities to provide service to MVPDs.: z {O%-ԍId.: In October 1996,   TCI launched a test of HITS service delivering 80 channels of digital programming in addition",-(-(ZZ"   to the analog programming that was already available to subscribers at a TCI system in West   Hartford, Connecticut. The service is being offered without charge for a few weeks to months  X-before a commercial test is initiated.z {OK-ԍFred Dawson, Digital HITS Hartford, Multichannel News, Oct. 21, 1996, at 1, 78.  X-  n.47.` ` Preemption of Local Zoning Regulations. Section 207 of the 1996 Act directs the   LCommission to promulgate regulations prohibiting restrictions that "impair a viewer's ability to   jreceive video programming services through devices designed for... direct broadcast satellite  Xa-  services."EaZz yOl -ԍ1996 Act, sec.207. E On August 6, 1996, the Commission fulfilled that requirement by adopting   >regulations that, among other things, prohibit restrictions, including state or local laws and   regulations, that impair the "installation, maintenance, or use of" direct broadcast satellite  X -antennas less than one meter in diameter or located in Alaska.\ z {O- ԍ47 C.F.R. 1.4000(a) (1996); Preemption of Local Zoning Regulations of Satellite Earth Stations, IB Dkt.   No. 9559, Report & Order, Memorandum Opinion & Order and Further Notice of Proposed Rulemaking, 11 FCC  {OI-Rcd __, FCC 96328 (Aug. 6, 1996), summarized at 61 Fed. Reg. 46557 (Sept. 4, 1996).   X -  /48.` ` Developments Concerning Carriage of Local Broadcast Signals. DBS companies  X -  have commented in the past that they have a competitive disadvantage due to the fact that they  X -  cannot distribute local broadcast signals, because of technological and copyright law obstacles. z {O-ԍE.g., 1994 Report, 9 FCC Rcd at 7477 69; 1995 Report, 11 FCC Rcd at 208687 58.   =They have been working on several possible solutions to those problems, including improved   digital compression and spot beam technology that may permit the carriage of a large number of  X}-  local broadcast channels within the spectrum available on a DBS satellite.}z {O- ԍSee, e.g., Jim Barthold & Alan Breznick, DBS Zeroes In on Local Broadcast Signals, Cable World, Dec.9, 1996, at 1, 215. With regard to the   effect of copyright law on DBS operators' ability to carry local broadcast signals, in July 1996   ASkyB requested a declaratory ruling from the United States Copyright Office that DBS systems  X8-  may, under the satellite carrier compulsory license,D8 z yO-ԍ17 U.S.C. 119.D "retransmit the signals of network affiliated   television broadcast stations to subscribers who reside within the local market served by those  X -  stations."  z yOE"- ԍLetter from Marilyn Kretsinger, Acting General Counsel, United States Copyright Office, to William S.  {O #-Reyner, Jr., Esq., Hogan and Hartson (Aug. 15, 1996) ("Copyright Office Letter"). Such a ruling would permit DBS operators to use some of their capacity to provide   local broadcast programming in some major markets, which could address what has been  X-  identified as a substantial competitive disadvantage faced by DBS MVPDs.mz {Oq&-ԍSee, e.g., 1995 Report, 11 FCC Rcd at 208687 58.m The Copyright Office replied: "v,-(-(ZZ"Ԍ ԙXThe Office has considered your arguments regarding localized retransmission of  network stations, and we would not question the reporting of a network station  that was retransmitted locally to subscribers. Such an opinion by the Office is not,  3of course, a resolution of the substantive rights of copyright owners or users,  X- #which, as I note above, must ultimately be determined by the federal courts. I am  simply stating that inclusion of locally retransmitted network stations is not subject  Xv-to challenge by the Copyright Office.Vvz {O-ԍCopyright Office Letter, supra.V    It was reported that ASkyB will seek a reduction in copyright fees when the current fee schedule   expires on July 1, 1997, and that it will also try to negotiate retransmission agreements with all  X -of the local affiliates whose signals it plans to carry. Zz {O% -ԍChris McConnell, ASkyB Seeking Copyright Deal, Broadcasting & Cable, Aug. 26, 1996, at 22.   X - C.` ` Home Satellite Dishes  X -  n049.` ` Unlike DBS subscribers, home satellite dish ("HSD") users employ relatively large   (48 foot) dishes and often purchase programming through program packagers that are licensed   [by programmers to facilitate subscribers' receipt of their programming transmitted from various   zCBand satellites. Because they are typically used to receive programming from satellites at   several different orbital locations, most HSDs include motors that permit the receiving dishes to   rotate and face the various satellites. HSD owners have access to more than 265 channels of   <programming placed on C-band satellites by programmers for receipt and distribution by MVPDs,  X-  of which 115 channels are scrambled and approximately 150 are unscrambled.z yO- kԍTelephone Conversation on Oct. 15, 1996 between Commission staff and Harry Thibeadeau, Manager of Industry Affairs, SBCA. HSD owners   Lcan watch the unscrambled channels without paying a subscription fee. To receive scrambled   Lchannels, however, an HSD owner must purchase an integrated receiverdecoder ("IRD") from   an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide,  X-  approximately 30 program packagers offer packages of scrambled channels to HSD owners.DDz yO-ԍSBCA Comments at 4.D   Like DBS systems, however, HSD program packagers do not provide local broadcast station signals, which are generally not available on CBand satellites.  Xe-  150.` ` As the Commission reported last year, it has proven difficult to obtain accurate   kestimates of the total number of HSD users, which includes: (1) viewers who subscribe to a   packaged programming service, which affords them access to most of the same programming   provided to subscribers of other MVPDs; (2)viewers who receive satellite programming services   illegally without subscribing; and (3)viewers who receive only nonsubscription programming.  X-  \A recent estimate by industry analysts is that there are approximately 4.5 million HSD users",-(-(ZZZ"   overall, which is consistent with many estimates of last year's total, indicating little overall  X-  change in the number of HSD users.az {Ob-ԍConversation with Harry Thibeadeau, supra.a It is perhaps more illuminating to consider the number   of subscribers to package programming services since they are the only Cband subscribers that  X-  can receive much of the same programming generally provided to cable subscribers. After  X-  reaching a peak of 2,379,900 authorized subscribers in December 1995,iZz {O-ԍDTH Subscribers Chart, SkyREPORT, July 1996, at 8.i HSD package  X-  programming subscribership declined to 2,314,900 subscribers at the end of October 1996.z {O* -ԍDTH Subscribers Chart, SkyREPORT, Sept. 1996, at 8; Conversation with Harry Thibeaudeau, supra.   Some observers attribute this decline to the growth of DBS services, citing in particular the fact  X_-  that DBS equipment is substantially less expensive than the typical HSD, and has become much  XH-less expensive over the past year.H~z {Ow- {ԍJim McConville, Cband Faces Erosion, Broadcasting & Cable, Aug. 19, 1996, at 64; Inside Business, Satellite Bus. News, Sept. 11, 1996, at 3.   X - D.` ` Wireless Cable Systems  W <X` ` 1. Multichannel Multipoint Distribution Service  (#  X -  251.` ` Last year the Commission reported a trend among MMDS sytems toward the  X -  development of digital technology to boost channel capacity. z {O0- zԍ1995 Report, 11 FCC Rcd at 2093  7374. MVPDs that use microwave frequencies in the multichannel   multipoint distribution service ("MMDS"), multipoint distribution service ("MDS"), and instructional television fixed   ,service ("ITFS") to transmit video programming to subscribers equipped with special rooftop antennas are typically   referred to as wireless cable systems. As we have done in past reports, when discussing wireless cable systems that use these services, we herein alternatively refer to them as MMDS systems or wireless cable systems. That trend continues this year,   with industry participants expressing their belief that digitalization will permit them to be more  Xy-  <competitive with incumbent cable systems.Ty z {O- ԍSee, e.g., Paul Kagan Associates, Inc., Wireless Cable Investor, Sept. 13, 1996, at 1. Wireless cable   operators have access to a maximum of 33 channels of 6MHz and most operators currently use traditional analog   ytransmission technologies. The 33 channels include 20 ITFS channels that are primarily used for educational   purposes and are available for wireless cable use only when an ITFS licensee is willing to lease time on its channels on a parttime basis. T Digitalized MMDS systems were authorized by the   LFCC in July and are just beginning to be deployed, with some predicted to become operational  XK-  in the first half of 1997.V\K<z {O8$- \ԍSee, e.g., BellSouth, BellSouth Buys Rights to Use Wireless Cable Licenses for New Orleans (BLS Investor  {O%-  ZNews), May 29, 1996; Linda Haugsted, PacBell Details Some Wireless Cable Plans, Multichannel News, June 24, 1996, at 67.V Certain trends reported last year continue, including increasing"K`,-(-(ZZv"  X-  subscribership and consolidations.iz {Oy-ԍ1995 Report, 11 FCC Rcd at 209193 6972.i LEC investment in wireless cable, which appeared to be increasing   throughout the year, has recently become less certain due to Bell Atlantic's and NYNEX's  X-announcement of the suspension of their agreement with CAI Wireless Systems, Inc. ("CAI").KZz {O- \ԍBell Atlantic Inc., Bell Atlantic, NYNEX, CAI Wireless Systems Suspend Business Agreement for One Year  {O-  (news release), Dec. 13, 1996; Jason Thompson, Details of CAI/Bell Atlantic and NYNEX Agreement Announced,  {Oq-  [Bus. Wire, Dec. 13, 1996; Mike Mills, Bell Atlantic Drops TV Strategy; Phone Firm, NYNEX Pull Out of CAI  {O;-  Project on HighQuality, Wash. Post, Dec. 14, 1996, at G2; Michael Katz, Bell Atlantic, NYNEX Pull Plug On  {O -  KWireless Deal, Broadcasting & Cable, Dec. 16, 1996, at 18; Leslie Cauley, Bell Atlantic, NYNEX Plan to Suspend  {O -Agreement With CAI Wireless Systems, Wall St. J., Dec. 16, 1996, at B7.K  X-  352.` ` MMDS Auctions. On March 28, 1996, the Commission completed its auction of  X-  authorizations to provide MMDS in 493 Basic Trading Areas ("BTAs"), raising over $216 million   after 181 rounds of bidding. The MMDS auctions were designed to distribute unused spectrum   ythrough competitive bidding while protecting the service areas of incumbent MMDS providers  XJ-  within the BTAs.Jz {O- ?ԍSee Amendment of Parts 21 & 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(j)  {Ok-  of the Communications ActCompetitive Bidding, MM Docket No. 94131, Report & Order, 10 FCC Rcd 9589, 9591,  {O5-  recon., Memorandum and Order on Reconsideration, 10 FCC Rcd 13821 (1995). Many of the BTAs auctioned were   of areas surrounding the 35mile protected service areas of authorized or previously proposed MDS and MMDS  {O-facilities. Id., 10 FCC Rcd at 9591 3.  As shown in Appendix D, Table 1, the ten leading bidders, in terms of their   >total amount bid, were eight publicly held and two privately held wireless cable companies.   Interestingly, companies with LEC investment generally paid considerably more in this year's  X -  [auction than did other MMDS companies, even after taking into account the size of the market   [and other factors. The top ten bidders made 77% of the total money bids, covering 62% of the  X -  available licenses. In addition to being high bidders, CAI, Pacific Telesis Group ("PacTel"), ^ z {O- ԍIn this Report, we occasionally refer to PacTel subsidiary Pacific Bell ("PacBell") when the later company is referenced in the cited document rather than PacTel.   Heartland Wireless Communications, Inc. ("Heartland"), and People's Choice TV Corp. ("PCTV")   Gold won many of the licenses for the major population centers. For example, as can be seen   in Appendix D, Table 2, these operators won the ten largest BTAs, as ranked by population.   Publicly held operators also won 36 of the top 40 markets. Heartland and American Telecasting,   Inc. won the most licenses, 93 and 56 respectively, by concentrating primarily on licenses in small population BTAs.  X-  453.` ` Subscribership. Between the end of 1994 and the end of 1995, the total number   of subscribers to wireless cable systems increased by 41%, from 600,000 to 847,000  X-  subscribers.z {O\&-ԍPaul Kagan Assoc., Inc., Wireless Cable Industry Projections, Wireless Cable Investor, Jan. 31, 1996, at2. While this increase exceeded expectations, growth in 1996 has been slower than   expected and predictions for the next few years vary greatly. At the beginning of this year, at"J,-(-(ZZ"   least one analyst predicted subscriber growth would increase at a rate of more than 50% per year  X-  through 1996 and 1997, reaching 3 million subscribers by 1999.:z {Ob-ԍId.: WCAI projects that by the  X-  \year 2000, the wireless cable industry's subscribership will grow to over 4 million.jZz yO-ԍWireless Cable Assoc. Int'l, Inc. ("WCAI") Comments at 4.j Even if   <these projections bear out, this level of subscribership still represents only a fraction of the wired  X-cable industry's 62.1 million subscribers served at the end of 1995.Lz {O? -ԍInfra App. D, Tbl. 1.L   Xv-  554.` ` Actual subscriber growth for the first half of 1996, however, has been less than  X_-  Z20%.g_|z {O - ԍPaul Kagan Assoc., Inc., Wireless Cable Investor, Sept. 13, 1996, at 11 (reporting second quarter   -subscribership growth for publicly traded wireless cable MSOs of 11.5% and half year growth of 19.6%). WCAI   estimates that, as of July 1996, the industry experienced 12.5% growth from its July 1995 estimate of 800,000   subscribers. The WCAI figure is estimated in a different manner than the Kagan figures used in Appendix D, Table 1, which were based on SEC filings. WCAI Comments at 3.g In part, this is because operators planning to deploy digital wireless cable systems chose   [to delay heavy marketing efforts until the increased channel offerings made possible by digital  X1-  technology were available.+1. z {O- MԍSee, e.g., Kent Gibbons, PCTV's Story: Waiting for Digital, Multichannel News, Dec. 9, 1996, at 54; John  {O-M. Higgins, Cable Woes No Help for Wireless Stocks, Multichannel News, Dec. 9, 1996, at 18687.+ Between the end of 1994 and the end of 1995, the number of   homes capable of receiving a wireless cable operator's signal (commonly referred to as homes  X -  \seen) rose from 27.3 million to 29.2 million, a 7.% increase.{ z {O>-ԍPaul Kagan Assoc., Inc., The 1995 Wireless Cable Databook 23 (1995).{ The growth of subscribership,   relative to homes seen, increased the industry's penetration rate from 2.2% at the end of 1994  X -to 2.7% at the end of 1995.$ z {O- LԍId. WCAI estimates that as of July 1996, the industry was comprised of approximately 200 systems serving   about 900,000 subscribers. WCAI Comments at 3. One wireless operator, Heartland, reports samesystem subscriber  {O4-  hgrowth resulting in penetration levels of 4.5% as of July 1996. Paul Kagan Associates, Inc., Wireless Cable Investor, Sept. 13, 1996, at 11.   X -  655.` ` Financial Performance. The wireless cable industry's total revenues for 1995 were  X-  ?$302 million, a 49% increase from 1994.z {OK"-ԍPaul Kagan Assoc., Wireless Cable Industry Projections, Wireless Cable Investor, Jan. 31, 1996, at3. During 1995 the industry's negative cash flow  X{-  /decreased from $14.2 million in 1994 to $3.9 million in 1995.{z {O$-ԍId. For a description of cash flow calculations, see supra sec. III.B. One analyst projects that the  Xd-wireless cable industry will have positive cash flow in 1996.:d,z {OA'-ԍId.:"d,-(-(ZZ"Ԍ X-  Pԙ756.` ` Status of LEC Investment. In the 1995 Report, the Commission reported that Bell  X-  yAtlantic, NYNEX and PacBell had all invested in wireless cable operations.az {Od-ԍ1995 Report, 11 FCC Rcd at 2095  79. a In 1996, one new  X-  .LEC, BellSouth, entered the wireless cable industry.Zz {O- ԍBellSouth, BellSouth Buys Rights to Use Wireless Cable Licenses for New Orleans, BLS Investor News, May 29, 1996. However, late in 1996, Bell Atlantic and  X-  <NYNEX announced a suspension of their investment in wireless.z {O" - ԍBell Atlantic, Bell Atlantic, NYNEX, CAI Wireless Systems Suspend Business Agreement for One Year (news  yO -release), Dec. 13, 1996. Also late in 1996, a proposed   acquisition by PacTel of a wireless system in northern California collapsed, although PacTel  X-states it is continuing with plans for a southern California digital wireless system.p z yON - ԍPacific Telesis had planned to acquire Wireless Holdings, Inc. and Videotron Bay Area, Inc. (both of which  {O-  are joint ventures between Le Groupe Videotron, Ltee. and Transworld Telecommunications, Inc.). E.g., Transworld  {O-  Telecommunications, Inc., Pacific Telesis Group Files Arbitration Proceeding Against Transworld  {O-  Telecommunications, Inc., Le Groupe Videotron Ltee. and Other Parties, Sept. 27, 1996, at 1; Pacific Telesis Calls  {Ot-  ;Off Wireless Cable Deal, Comm. Daily, Nov. 14, 1996, at 6. If the proposed acquisition had occured, it would have   =provided Pacific Telesis with access to seven million lineofsight homes in California and nine million total  {O-  nationwide when combined with the 1995 acquisition of Cross Country Wireless, Inc. Pacific Telesis, New  {O-  iAcquisition Makes Pacific Telesis a Wireless Digital TV Leader, press release, Nov. 29, 1995. These lineofsight   numbers do not include licenses won by Pacific Telesis in the Commission's MDS auction. Cross Country Wireless,   Inc.'s rights and licenses cover Orange County and parts of Los Angeles, Riverside and San Bernadino counties.  {O*-  Brad Smith, PacTel Sees Video's Future as Wireless, Broadcasting & Cable, July 8, 1996, at 36. See also, Linda  {O-Haugsted, PacBell Details Some Wireless Cable Plans, Multichannel News, June 24, 1996, at 67.  Xx-  Xa-  857.` ` On May 29, 1996, BellSouth won, in a courtrun auction, the MMDS licenses for   New Orleans, Louisiana. BellSouth announced its intentions to offer more than 100 digital  X3-  channels of wireless cable programming in New Orleans by mid1997.3Fz {O*- ԍBellSouth, BellSouth Buys Rights to Use Wireless Cable Licenses for New Orleans, BLS Investor News, May 29, 1996. In that auction (in   which BellSouth was the sole bidder), BellSouth agreed to pay $12 million for the rights to 30  X -  analog wireless cable channels. z {OV-ԍKent Gibbons, BellSouth Eyes `Big Easy' for Digital MMDS Entry, Multichannel News, June 3, 1996, at 53. BellSouth has also commenced negotiations with National  X -  Wireless Holdings, Inc. to acquire all of its wireless cable assets in the Miami, Florida area. z {O"- ԍNational Wireless Holdings, Inc., National Wireless Enters Into Letter Of Intent With BellSouth For Miami  {Oc#-Wireless Cable Assets (news release), Sept. 18, 1996.   On October 28, 1996, BellSouth announced that it had signed a letter of intent agreeing in   [principle to acquire Wireless Cable of Atlanta, Inc. ("WC of Atlanta") for stock valued at $43.5" V,-(-(ZZ "  X-  million.z {Oy-ԍBellSouth, BellSouth to Buy Wireless Cable of Atlanta (news release), Oct. 28, 1996. On November 5, 1996, BellSouth announced that it had spent $13.3 million to  X-  xpurchase licenses in areas surrounding Atlanta from CS Wireless Systems, Inc. ("CS Wireless")|\Zz yO- {ԍCS Wireless, formed in February of 1996, is owned 54.2% by CAI, 35% by Heartland, and 10% by the  {O-  wBANX Partnership (coowned by Bell Atlantic and NYNEX). CAI Wireless Systems, Inc., CAI and Heartland Close  {O-CS Wireless Transactions (news release), Feb. 23, 1996.|  X-  and CAI.~z {O - \ԍBellSouth, BellSouth Buys North Georgia Wireless Cable Rights From CS Wireless Systems (news release), CAI Wireless Systems, Nov. 5, 1996. The licenses being purchased from WC of Atlanta, CS Wireless, and CAI are  X-expected to allow BellSouth to reach 1.2 million lineofsight homes in the Atlanta area.:z {OD -ԍId.:  X-  958.` ` On December 13, 1996, Bell Atlantic, NYNEX and CAI announced a oneyear   suspension of their 1995 joint business agreement and CAI's option to repurchase Bell Atlantic's  X_-  and NYNEX' $100 million investment in CAI securities._j z {Oz- ԍBell Atlantic, Bell Atlantic, NYNEX, CAI Wireless Systems Suspend Business Agreement for One Year (news release), Dec. 13, 1996. The companies also announced the   suspension of their plans to jointly launch wireless systems in Hampton Roads, Virginia, and  X1-Boston, Massachusetts.e 1 z {O- ԍId. Prior to this development, CAI had announced that it had completed construction of a digital wireless   <cable system which Bell Atlantic was leasing in the Hampton Roads area of Virginia (which includes Norfolk and   xVirginia Beach) and was near completion of a similar system in Boston, Massachusetts, which was being leased by  {O-  <NYNEX. CAI Wireless Systems, Inc., CAI Wireless Delivers First Digital Wireless Cable Networks in Boston and  {O-  Hampton Roads, Virginia (news release), Apr. 25, 1996; Kent Gibbons, Bell Atlantic Anxiety Pummels CAI Stock,   yMultichannel News, Oct. 7, 1996, at 8. Testing had begun on these facilities in preparation for the launch of  {O\-  commercial digital programming services. Id. The Hampton Roads system, which cost $6 million to build, was  {O&-  expected to start delivering over 100 channels of programming in the first quarter of 1997. Joe Estrella, Bell Atlantic  {O-  Starts Testing Digital Wireless Cable In VA., Multichannel News, May 27, 1996, at 33. The Boston system, which   cost $12 million to build, has a downtown transmitter and six boosters in the suburbs and was being tested to ensure  {O-  lineofsight access to at least 75% of the city's 1.5 million homes. Id. at 37. NYNEX had stated that it intended   to launch its digital Boston system in the second quarter of 1997 and would launch in the New York City area three  {O-  <to six months thereafter. Kent Gibbons, Telcos: We're Sticking With MMDS, Multichannel News, Oct. 28, 1996, at 3.e  X -  :59.` ` Consolidation. The trend toward consolidation experienced by the nonLEC   Mwireless cable industry in 1995 has continued into 1996. For example, on February 23, 1996,   Heartland announced that it had closed five transactions, acquiring wireless cable systems with" !,-(-(ZZ! "  X-  7.6 million combined lineofsight homes and 59,900 subscribers."z {Oy- .ԍHeartland Wireless Communications, Inc., Heartland Closes Announced Acquisitions and Divestitures (news   <release), Feb. 27, 1996. The systems acquired include: Cablemaxx, Inc., American Wireless Cable Systems, Inc.,   most of the assets of Fort Worth Wireless Cable T.V. Associates and Wireless Cable TV Associates No. 38, and certain assets of Three Sixty Corp.  To complete these   acquisitions, Heartland issued $180 million in new common stock and assumed $20 million in preexisting debt.  X-  A;60.` ` Simultaneous to the closing of these acquisitions, Heartland and CAI announced  X-  the creation of CS Wireless with systems serving 5.7 million lineofsight homesz {O - ԍCAI Wireless Systems, Inc., CAI and Heartland Close CS Wireless Transactions (news release), Feb. 23, 1996. and 58,400  Xv-  subscribers as of March 31, 1996.av z yO3-ԍCS Wireless Systems, Inc., Form S1/A 25 (1996).a For Heartland, the combined effect of the activity described   in the preceding paragraphs resulted in a net increase of one million lineofsight homes and  XH-38,900 subscribers.Hz {O- .ԍHeartland Wireless Communications, Inc., Heartland Closes Announced Acquisitions and Divestitures (news release), Feb. 27, 1996.  X -  <61.` ` In addition, on July 29, 1996, Wireless One, Inc. acquired TruVision Wireless,  X -  Inc., increasing Wireless One's lineofsight homes by approximately 2 milliond z yO-ԍWireless One, Inc., Form 8K, July 29, 1996, at 17.d and subscribers  X -  by 15,435 as of April 30, 1996.D z {O#-ԍId. at 1718.D After this acquisition, Wireless One was operating in 21   markets which had, as of April 30, 1996, 34,100 subscribers out of a total of over 2 million line X -ofsight homes (plus licenses to serve 6.37 million additional lineofsight homes). z {O- ԍPaul Kagan Assoc., Inc., Wireless One $125 Mil. Bond Registration, Wireless Cable Investor, Aug. 5, 1996, at 7.  X-  B=62.` ` Digital Developments. On July 10, 1996, the Commission issued a declaratory   ruling which enables wireless cable operators, MMDS and ITFS licensees to increase their   channel capacity and service offerings through the use of two digital modulation techniques,  XM-  Quadrature Amplitude Modulation and Vestigial Sideband.y^Mrz {Op#- \ԍRequest For Declaratory Ruling on the Use of Digital Modulation by Multipoint Distribution Service and  {O:$-  YInstructional Television Fixed Service Stations, Declaratory Ruling & Order, __ FCC Rcd __, FCC 96304 at 2 (July  {O%-10, 1996), partial recon. pending.y The Commission ruled that these   digital modulation techniques could be implemented without causing harmful electromagnetic"6",-(-(ZZ"  X-  interference to nearby analog or digital stations.Az {Oy-ԍId. at 15.A The wireless cable industry hailed this  X-  regulatory development as a significant improvement in the competitive posture of the industry.DZz yO-ԍWCAI Comments at 5.D  X-  #>63.` ` In order for wireless cable operators to provide digital services, subscribers must   use specialized digital settop converters. In May 1996, PCTV and American Telecasting   announced the issuance of a joint request for proposals ("RFP") for a purchase of up to 500,000  Xv-  digital settop converters. Eight manufacturing companies responded to the RFP.vz {O - kԍPeople's Choice TV Corp. and American Telecasting, Inc., People's Choice TV and American Telecasting  {O -Announce Request for Proposals on Digital SetTop Boxes (news release), June 26, 1996. In addition,   PacTel has announced plans to launch in 1997 a digital wireless cable service in the Los Angeles  XH-  and Orange County area, which encompasses four million homes.HFz {O?-ԍLinda Haugsted, PacBell Details Some Wireless Cable Plans, Multichannel News, June 24, 1996, at 67. While PacTel has not   disclosed any definite programming plans, it has stated that it will offer approximately 120  X -channels, including 14 broadcast stations, and 40 channels of nearvideoondemand.: z {O-ԍId.:  X -  ?64.` ` In addition, since the 1995 Report, several wireless cable operators have begun to   -test technology which will allow them to use their systems to provide highspeed Internet access   /and other data services similar to those offered by other MVPDs. In May 1996, CAI began   testing Internet access technology in Washington, DC, using technology capable of sending   information to users at the rate of ten megabits per second with a normal telephone line used as  X{-  the return path.{j z {O- {ԍCAI Wireless Systems, Inc., First Wireless Internet Access Product Being Tested in Washington by CAI  {O`-Wireless Systems (news release), May 23, 1996, at 1. In June 1996, CAI demonstrated the transmission of a signal which integrated   both digital video (including local broadcasting stations and national cable television  XM-  programming) and 10 megabit per second Internet access (with a telephony return path).M z {O- ԍCAI Wireless Systems, Inc., CAI Wireless System's Rochester Demonstration Proves Viability of Digital  {O-Wireless Cable Technology (news release), June 28, 1996, at 1. In   /September 1996, CAI began testing technology which would allow 27 megabits per second  X-  Internet access using General Instrument SURFboard modems and a telephony return path."z {O"- /ԍCAI Wireless Systems, Inc., CAI Wireless to Launch Wireless Internet Service Using General Instrument's  {O#-SURFBoard Cable Modems (news release), Sept. 16, 1996, at 1. In   addition to CAI's efforts, PCTV and American Telecasting have been conducting Internet access   trials on American Telecasting's Lakeland, Florida system with the help of Zenith Electronics"#~,-(-(ZZ'"  X-  Corporation, Conifer Corporation, and Comwave.z {Oy- ?ԍPeople's Choice TV Corp, Wireless Companies Successfully Test HighCapacity Internet Access (news release), June 27, 1996, at 1. Recently, the Commission issued   developmental authorizations to test twoway Internet access to American Telecasting for  X-  Henderson, Nevada, and to PCTV for Phoenix and Tuscon, Arizona.$"z {O- ԍAmerican Telecasting, Inc., Experimental Authorization, File No. 3287EXR96, granted by the Mass Media  {Oo-  ;Bureau Oct. 1, 1996; People's Choice TV Corp., Request to Use Developmental Authorization, File No. 50106CM  KP97, granted by letter dated Nov. 12, 1996, from Charles E. Dziedzic, Assistant Chief, Video Services Division, Mass Media Bureau.  In addition, Atlantic  X-  Microsystems, Inc., a whollyowned subsidiary of CAI, received a developmental authorization  X-to develop and test a twoway digital system on two MDS channels in Hartford, Connecticut./z {Oc - ԍAtlantic Microsystems, Request to Use Developmental Authorization, File No. 50112CMP57, granted by   letter dated Nov. 21, 1996, from Charles E. Dziedzic, Assistant Chief, Video Services Division, Mass Media Bureau,   to Gerald Stevens Kittner, Esq. CAI states that this authorization allows it to conduct a market trial of one and two  way voice, video and data services, in addition to video, using its wireless cable facilities in Hartford, Connecticut.  {O-  CAI Wireless System, Inc., CAI Wireless Systems Receives First FCC Market Trial Approval To Use Wireless Cable  {OO-Spectrum for TwoWay Services (press release), Dec. 16, 1996. /  Wv<X` ` 2. Local Multipoint Distribution Service  (#  XH-  @65.` ` LMDS frequencies are microwave channels in the 28 GHz band that may be used  X1-  Zto deliver twoway multichannel video programming as well as voice and data service.1 z {On- ԍSee In the Matter of Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate   the 27.529.5 GHz Frequency Band, to Reallocate the 29.530.0 GHz Frequency Band, to Establish Rules and  {O-  YPolicies for Local Multipoint Distribution Service and for Fixed Satellite Services, CC Dkt. No. 92297, First Report  yO-  & Order and Fourth Notice of Proposed Rulemaking, ___ FCC Rcd __, FCC 96311  1415 (July 22, 1996),   {O-summarized at 61 Fed. Reg. 39425 (July 29, 1996) ("First LMDS Order").  As with   distribution using MMDS frequencies, LMDS requires that subscribers have a special antenna.   The propagation characteristics of the 28 GHz band are such that an LMDS system must operate   in multiple "cells" with radii of three to six miles in order to provide service to a metropolitan   !area that could be covered by a single wireless cable transmitter. With the exception of   CellularVision of New York, L.P.'s ("CellularVision") 6,500subscriber LMDS system in  X -  <Brooklyn and Queens, New York, Bz {O -ԍ CellularVision USA, Inc., Form 10Q, Aug. 13, 1996, at 7. Subscriber total is as of August 12, 1996. LMDS frequencies are not currently used to distribute video  X-  programming in the United States.&z {O#- ԍThis operation was authorized by the Commission in 1991 on a waiver basis. Hye Crest Management, Inc.  {O#-  (For License Authorization in the PointtoPoint Microwave Radio Service in 27.5-29.5 GHz Band and Request for  {O$-  Waiver of the Rules), File No. 10380CFP88, Memorandum Opinion & Order, 6 FCC Rcd 332 (1991). Other applications for LMDS service were subsequently frozen by the Commission.  The first fully commercial operation of 28 GHz technology,"$,-(-(ZZ"  X-  however, was launched in Caracas, Venezuela, in 1994.z {Oy-ԍFred Dawson, New Wireless Tech Ready to Roll, Multichannel News, Sept. 12, 1994, at 1. Canada recently issued licenses for   66 major and 127 lesser markets for what are known there as "local multipoint communications  X-systems."Zz {O-ԍCanada Takes the Lead in LMDS Race, Multichannel News, Nov. 11, 1996, at 61. !M   X-  A66.` ` On July 17, 1996, the Commission adopted a frequency band plan that allocated   !1000 MHz of spectrum to LMDS and permitted LMDS systems, geostationary and non  /geostationary Fixed Satellite Service (FSS) systems, and feeder links for nongeostationary  X_-  kMobile Satellite Service (NGSO/MSS or Big LEO) systems to operate in the 28 GHz Band.o_z {O -ԍFirst LMDS Order, __ FCC Rcd at ___ 25. o   In the same order, the Commission proposed to allocate an additional 300 MHz of spectrum to   >LMDS at 31.031.3 GHz in order to provide greater technological flexibility for this nascent  X -  >industry.C ~z {OI-ԍId.  95.C The Commission also sought comment on whether incumbent LECs and cable   operators should be eligible to bid at auction for a LMDS license in their geographic service  X -area.D z {O-ԍId.  105.D Service and auction rules relating to LMDS will be established in the near future.\ z {O?- ԍFCC News Release, FCC Adopts Final Band Plan For The 28 GHz Frequency Band (CC Docket No.92 {O -  297), Report No. DC 9665, at 1. The Commission stated that service rules for satellite systems proposing to operate in the 28 GHz band will be addressed in a forthcoming Report and Order.    X - E. ` ` Local Exchange Carriers  W<` `  1. Introduction   Xb-  B67.` ` The legal and regulatory changes that occurred in the past year as a result of   [passage of the 1996 Act are likely to have a significant effect on LEC entry into markets for the  X4-  Ldelivery of video programming.4 z yO- ԍLocal exchange carriers ("LECs") are local telephone companies that operate in local service areas commonly known as local access and transport areas ("LATAs"). Given the short period of time since the passage of the 1996   Act, however, LEC entry into markets for the delivery of video programming has not changed   0dramatically. LECs represent a major competitive presence in only a few markets for the   delivery of video programming. LECs continue to weigh their options for entry into markets for  X-  the delivery of video programming and continue to move toward that entry, by means of the"%,-(-(ZZ"   technology (MMDS, wireline) and method (cable franchise, MMDS license, open video system)  X-believed to be most appropriate for each company and local market.&z {Ob- [ԍIn the 1994 Report, the Commission noted an increase in LEC videorelated activity since the Commission's  {O,-  1990 Cable Report, spurred by the adoption of the video dialtone ("VDT") framework and technological advances.  {O-  ;1994 Report, 9 FCC Rcd at 7495505  10320. The 1995 Report noted an evolution in formerly optimistic LEC  {O-  plans for entry into markets for the delivery of video programming, in terms of mode of entry and timing. 1995  {O-  Report, 11 FCC Rcd at 2110  103. In particular, in the year between the 1994 Report and the 1995 Report, some   LECs proceeded with previouslystated VDT plans, while others suspended action on VDT plans in order to review  {O-  other means of entry, such as MMDS or cable systems. The 1995 Report further noted that previously anticipated   largescale wirebased entry by LECs had not materialized, and that some LECs appeared to be reassessing options  {O -for entry into markets for the delivery of video programming. Id. at 211011  102.&  W<` ` 2. Statutory Changes and Commission Action  X-  }C68.` ` As noted above, the 1996 Act fundamentally changed the statutory framework for   jLEC entry into markets for the delivery of video programming by repealing the telephonecable   crossownership restriction that had generally prohibited a common carrier from providing video  XH-  iprogramming directly to subscribers in its local telephone service area. Hz yO- ԍThe telephonecable crossownership restriction was enacted as part of the Cable Communications Policy   iAct of 1984, Pub. L. No. 98549,  613(b) (previously codified at 47 U.S.C.  533(b)). Section 302(b)(1) of the  {O/-  <1996 Act repealed the restriction. 1996 Act sec. 302(b)(1). For a discussion of the former provision, see 1994  {O-  Report, 9 FCC Rcd at 74957505  10320; 1995 Report, 11 FCC Rcd at 2097100  8689. See also Telephone  {O-  CompanyCable Television CrossOwnership Rules, Sections 63.5463.58, CC Dkt. No. 87266, Further Notice of  {O-  KProposed Rulemaking, First Report & Order, and Second Further Notice of Inquiry, 7 FCC Rcd 300 (1991), aff'd  {OW-  in part and modified in part, Memorandum Opinion & Order on Reconsideration, 7 FCC Rcd 5069, aff'd, National  {O!-  YCable Television Ass'n v. FCC, 33 F.3d 66 (D.C. Cir. 1994); Telephone CompanyCable Television CrossOwnership  {O-  Rules, Sections 63.5463.58, Second Report & Order, Recommendation to Congress, and Second Further Notice of  {O-  Proposed Rulemaking, CC Dkt. No. 87266, 7 FCC Rcd 5781 (1992), aff'd, Memorandum Opinion & Order on  {O-  Reconsideration and Third Notice of Proposed Rulemaking, 10 FCC Rcd 244 (1994); Telephone CompanyCable  {OI-  wTelevision CrossOwnership Rules, Sections 63.5463.58, CCDkt.No. 87266, Third Report and Order, 10 FCC Rcd  {O-  7887 (1995); Telephone CompanyCable Television CrossOwnership Rules, Sections 63.5463.58, CC Dkt. No. 87266, Fourth Report and Order, 11 FCC Rcd 818 (1995). Pursuant to Section 302   of the 1996 Act, LECs have four regulatory options for entering video programming delivery   markets within their own regions: (1) Title III radiobased systems, such as MMDS; (2) Title   [II common carriage systems; (3) Title VI cable systems; or (4) new Title VI open video systems  X -  ("OVS"). tz yO!-ԍ1996 Act sec. 302 (codified at Communications Act 651, 47 U.S.C. 571). While opening up new avenues for entry, this provision also prohibits: (1) a LEC   from acquiring more than a 10% financial or management interest in an existing cable operator   =providing cable service within the LEC's local telephone service area; (2) a cable operator from   jacquiring more than a 10% financial or management interest in a LEC providing local telephone   service in the cable operator's franchise area; and (3) joint ventures between cable operators and"&,-(-(ZZy"   LECs in the same market to provide either video programming or telecommunications services  X-in that market, subject to certain exceptions.z yOb- Lԍ1996 Act sec. 302 (codified at Communications Act 652, 47 U.S.C. 572). The exceptions generally deal with small cable systems or LECs or cable systems in rural areas.  X-  nD69.` ` Section 302 of the 1996 Act and the regulations adopted to establish OVS provide   ]that if a LEC certifies compliance with certain nondiscrimination and other requirements  X-  established by the Commission, the open video system will be entitled to reduced regulation  Xv-  under Title VI.1Nv z {OG - yԍ1996 Act sec. 302 (codified at Communications Act 653, 47 U.S.C. 573); Implementation of Section302  {O -  Kof the Telecommunications Act of 1996 (Open Video Systems), CS Docket9646, Report & Order and Notice of  {O -  Proposed Rulemaking, 11 FCC Rcd 14639 (1996); Implementation of Section 302 of the Telecommunications Act  {O -  xof 1996 (Open Video Systems), CS Dkt. No. 9646, Second Report & Order, __ FCC Rcd___, FCC 96249 (Jun.  {Oo -  Z3, 1996), ("Second OVS Report & Order") summarized at 61 Fed. Reg. 28698 (Jun.5, 1996); Implementation of  {O9-  Section 302 of the Telecommunications Act of 1996 (Open Video Systems), CS Dkt. No. 9646, Third Report & Order  {O-  and Second Order on Reconsideration, __ FCC Rcd ___, FCC 96334 (Aug. 8, 1996) summarized at 61 Fed. Reg. 43160 (Aug. 21, 1996).1 An open video system's carriage rates are entitled to a presumption that they   are just and reasonable where one or more unaffiliated video programming providers occupy   channel capacity on the system at least equal to that of the open video system operator and its  X1-  affiliates.m16 z {O-ԍSecond OVS Report & Order, FCC 96249  11228.m Open video systems are subject to the Commission's rules governing must carry,   retransmission consent, program access, sports exclusivity, network nonduplication, syndicated  X -  exclusivity, and public, educational and governmental ("PEG") access channels.L z {O|-ԍId.  133204.L In addition,   while open video systems are exempt from local cable franchise requirements, localities are   ypermitted to assess a fee on an open video system's gross revenues at a rate not exceeding the  X -franchise fee imposed by that locality on the local cable operator. Z z {O- ԍ1996 Act sec. 302 (codified at Communications Act  653(c)(2)(B), 47 U.S.C. 573); Second OVS Report  {O-& Order, FCC 96249  20722.   W<` `  4. Current and Planned LEC Entry   Vb-` `  a.Video Delivery  X4-` `  i.hh,Status of VDT Systems  X-  E70.` ` Last year, we reported that 16 applications for permanent, commercial VDT service   had been approved by the Commission and two applications were pending before the   Commission. None of the permanent, commercial systems were operational at that time. Bell   Atlantic's Dover, New Jersey system was constructed and scheduled to begin service shortly after"',-(-(ZZ"  X-  the release of the 1995 Report. The remaining systems were either in planning or in early  X-construction stages. We also reported on the status of eight approved VDT trials.bz {Od-ԍ1995 Report, 11 FCC Rcd at 210205  94.b  X-  X-  F71.` ` VDT systems authorized prior to enactment of the 1996 Act had until November   6, 1996, to effect a transition to one of the four statutorilyrecognized options for provision of  X-  Zvideo programming services.l\Zz {O- MԍSecond OVS Report & Order, FCC 96249 9. The Commission contemplated reasonable extensions of  yOd -  time for authorized VDT systems that made diligent progress toward transitioning to the new regulatory selection.   {O, -Id. 12.l No action was required where trials had ended or were scheduled  Xx-  to end before the deadline,x~z yO -ԍOf the eight trials, five had ended or were scheduled to end by the November 6, 1996 deadline. or where the permanent, commercial VDT systems had not begun  Xa-  ?operation."az yO - LԍThe five grants for permanent, commercial VDT service to Ameritech had been abandoned in favor of cable  {O-  franchises. See 1995 Report, 11 FCC Rcd at 210607  97. None of the remaining 10 approved and 2 pending   applications for permanent authority reported last year were operational by November 6, 1996. Thus, no action was required by those LECs.  On October 17, 1996, the Commission approved Bell Atlantic's request for  XJ-  .certification to operate its VDT system in Dover Township, New Jersey, as an OVS system.e8 J z {O- ԍBell Atlantic New Jersey, Inc. (Certification to Operate an Open Video System), 11 FCC Rcd 13249 (CSB  {O-  Y1996) ("Bell Atlantic OVS Certification") Bell Atlantic has also been granted an extension of time to March 1, 1997  {O-  to complete its transition from a VDT service to an OVS. Bell AtlanticNew Jersey, Inc. (Extension of Time to  {OQ-  -March 1, 1997 to Complete Transition to Open Video System), Order, __ FCC Rcd ___, DA 962009 (CSB Dec.  {O-  2, 1996). See also Comments of Bell Atlantic at 5. See infra Section V.B. for details on the effects of the entry   of this system. In its comments, Bell Atlantic noted that it was continuing its market trial, scheduled to end during   -the fourth quarter of 1996, of Asymmetric Digital Subscriber Line ("ADSL") service in Fairfax, Virginia. ADSL   is a VideoonDemand service. Comments of Bell Atlantic at 78. Bell Atlantic has since elected to end this trial.   JBell Atlantic also announced, simultaneously with the end of the trial, the intention to deploy an advanced switched   digital wireline video network in Philadelphia by 1998 and in the rest of the midAtlantic area after that. Bell  {O-  Atlantic Corp., Bell Atlantic VideoonDemand Effort Begins Commercial Transition; Company Winds Up Market  {O-  ZTrial (news release), Oct. 2, 1996; VideoonDemand Service Is Stopped in Reston, Virginia, Wall Str. J., Oct. 3,  {Oa-1996, at B4, and Bell Atlantic Ends VideoonDemand Trial, Comm. Daily, Oct. 4, 1996, at 4.e  X3-  US West has elected to pursue cable franchises for its former Omaha, Nebraska, VDT trial.3z yO- zԍLetter from Robert H. Jackson, US West's Executive Director Federal Regulatory, to Meredith J. Jones, Chief, Cable Services Bureau, Apr. 16, 1996.   BellSouth has obtained a cable franchise in Chamblee, Georgia, for the area served by its former  X -  VDT trial and has filed an election to utilize the cable regulatory option.$ Pz {O$- ԍBellSouth, Inc., News from the BellSouth Video Front,  yO$-  http://www.bellsouth.com/investor/bellnews/jun96/art1.html (1996); BellSouth Telecommunications, Inc.,   {O%-  Implementation of Section 302 of the Telecommunications Act of 1996 (Open Video Systems), Notice of Election and Request for Extension of Time, CS Dkt. No. 9646 (filed Nov. 6, 1996). Sprint has applied" (<,-(-(ZZ_ "   \for cable franchises in Wake Forest and Wake County, North Carolina, and has notified the  X-Commission that it will pursue this option for its VDT trials.z {Ob- ԍFederal Communications Commission, Public Notice, Cable Services Action (Sprint, Inc.), DA 961837, Nov. 1, 1996.   X-` `  ii.hh,MMDS  X-  2G72.` ` In the 1995 Report the Commission noted that Bell Atlantic, NYNEX and PacBell  Xx-  jhad made significant investments in wireless cable.x"z {OK - ԍ1995 Report, 11 FCC Rcd at 2085  79. The Bell Atlantic and NYNEX agreement with CAI gave the two   LECs warrants for a 45% share of voting stock in CAI. CAI Wireless Systems, Inc., Form 10K, Mar. 31, 1995, at  yO -  -3. Pursuant to Commission rules, warrants are not attributed unless or until exercised. 47 C.F.R.  29.912 Note   ;1(A). If exercised, however, these warrants would constitute controlling shares. Bell Atlantic and NYNEX also had   the right to lease the facilities of any CAI MMDS system within their LATAs which became digital. CAI Wireless Systems, Inc., Form 10K, Mar. 31, 1995, at 4. As noted above, BellSouth entered this  Xa-  domain this year with its acquisitions of licenses for a wireless cable system in New Orleans. az yO- ԍThe New Orleans wireless system is not yet operational. BellSouth has also announced its intent to acquire  {Ov-wireless systems in Miami, Florida, and Atlanta, Georgia. For more details, see sec. II.D.1.    However, as also noted above, Bell Atlantic and NYNEX have suspended their wireless cable   =ventures with CAI. Currently, the only operational MMDS system directly owned by a LEC is  X -the 42,000 subscriber system in Riverside, California owned by PacBell. z {O-ԍPacific Telesis Group, Pacific Telesis Acquires Wireless Cable TV Company  (news bulletin), Apr. 18, 1995.  X -` `  iii.hh,Cable Franchises  X -` `  hh,a.VInRegion Cable Franchises  X-  H73.` ` In the 1995 Report, we reported that a number of LECs had pursued cable   franchises in their service areas as a means of providing video services to their customers. The   most aggressive of the LECs in this area was and continues to be Ameritech. Ameritech has  XO-  acquired 27 cable franchises in Illinois, Michigan, Ohio, and Wisconsin, to serve communities"O) ,-(-(ZZ+"  X-  with a total population of more than 1.2 million.z yOy- ԍThese franchises are located in: Glendale Heights, Glen Ellyn, Naperville, and Vernon Hills, Illinois;   Clinton Township, Fraser, Garden City, Lincoln Park, Northville, Northville Township, Plymouth, Plymouth   Township, Southgate, Sterling Heights, Troy, Wayne and Canton Township, Michigan; Berea, Columbus, Hilliard,   [North Olmsted, Perry Township, Riverlea, Upper Arlington, Clinton Township and Worthington, Ohio; and   Greendale, Wisconsin. Ameritech Comments at 3; Telephone conversation between Commission staff and George  {Oa-Callard, Ameritech New Media Counsel, Dec. 3, 1996.  See also Comm. Daily, Sept. 19 and Oct. 2, 1996.  Seventeen of these cable franchises are  X-currently operational. Bz yO- jԍThe seventeen operational cable franchises are: Glendale Heights and Naperville, Illinois; Canton Township,   Fraser, Garden City, Lincoln Park, Northville, Northville Township, Plymouth, Plymouth Township, Southgate, Troy   ,and Wayne, Michigan; and Berea, Columbus, North Olmstead and Upper Arlington, Ohio. Telephone conversation between Commission staff and George Callard, Ameritech New Media Counsel, Dec. 3, 1996.   X-  I74.` ` In addition, in the last year, BellSouth has acquired cable franchises in seven areas  X-  =in the southern United States.* z yO- \ԍThe seven areas are: Chamblee, Georgia, formerly a VDT trial; Gwinnett County, Georgia; Daniel Island,   South Carolina; St. John's Community/World Golf Village, near Jacksonville, Florida; Brentwood and Franklin,  {O-  Tennessee; and Vestavia Hills, Alabama, a suburb of Birmingham. BellSouth, News from the BellSouth Video Front,   http:www.bellsouth.com/investor/bellnews/jun96/art1.html (1996); CableFAX Daily, Oct. 3, 1996, at 1. BellSouth  {O-is also, according to CableFAX, pursuing a franchise for Nashville, Tennessee. See also Comm. Daily, Dec. 5, 1996. GTE has received five cable franchises, which will pass over  X-  400,000 homes.~z yO- ԍThese franchises include: Clearwater, Florida (where it previously was approved to provide permanent,   Ycommercial VDT service); St. Petersburg, Florida; Camarillo, Thousand Oaks, and Ventura County, California. GTE   reports that it is already signing up subscribers for the Clearwater, Florida system and plans to pass 95,000 homes  {Ot-  xin this area. GTE Launches Its First Cable Franchise in Florida, Multichannel News, July 1, 1996, at 2. See also  {O>-  Local and State Actions, Warren's Cable Regulation Monitor, Aug. 26, 1996; Notebook, Television Digest, Sept. 2,  {O-  1996, GTE plans to pass 122,000 homes in Thousand Oaks, California. Ameritech Gets 2 More System Approvals, CableFAX, Feb. 8, 1996. PacBell has obtained cable franchises for San Jose$z yOb- ԍPacific Bell Video Services lauched its commercial video service initially to 7500 homes in the San Jose   area in September, with plans to expand its video reach to 25,000 homes within one year and to a total of 175,000  {O-  homes by 2000. Pacific Telesis Corp., Pacific Bell Video Service Launches Commercial Cable TV Service in San  {O-  ,Jose (press release), Aug. 30, 1996; Pacific Telesis Corp., San Jose First California City to Get Cable TV Franchise  {O-From Pacific Bell Video Services (press release), June 25, 1996. and the surrounding  Xv-  Santa Clara County in California.vz {O!-ԍLocal and State Actions, Warren's Cable Regulation Monitor, Aug. 19, 1996. SNET has received a statewide cable franchise in  X_-  Connecticut, where previously it had applied to provide VDT service._lz {O|#-ԍSNET Gets Statewide Cable Franchise in Connecticut, Comm. Daily, Sept. 26, 1996, at 1. Finally, SBC has   received authorization to perform an 18month cable trial in Richardson, Texas, a suburb of  X1-Dallas.E1z yO&-ԍSBC Comments at 34.E"1*,-(-(ZZ"Ԍ X-ԙ` `  hh,b.VOutofRegion Cable Systems  X-  J75.` ` We previously reported on outofregion cable systems owned by LECs.z {OK- ԍ1994 Report, 9 FCC Rcd at 7498  107 n.305. In particular, we discussed SBC in Montgomery County, Maryland, and Arlington, Virginia, and US West in the Atlanta, Georgia, area The   Kmajor development in this area is the acquisition of Continental Cablevision, Inc., the third largest  X-  cable MSO with nearly 4.2 million subscribers, by U S West."z {Ow- lԍSee Comm. Daily, Nov. 18, 1996 at 3; U S West and Continental Set Terms for $11.8Billion Merger,  {OA -  ;Comm. Daily, Oct. 8, 1996, at 3; John M. Higgins, Continental Settles for Less,  Multichannel News, Oct. 14, 1996,  {O -  at 3; Paul Kagan Associates, Inc., U S West Becomes Country's Third Largest Cable Company, Cable TV Investor,   JFeb. 29, 1996, at 23. The subscriber count is in addition to the 511,000 subscribers on U S West's Atlanta, Georgia   hsystem. U S West, Media Group Reports ThirdQuarter Operating Cash Flow Increase of 22 Percent (news release),   YOct. 17, 1996. U S West is also reportedly interested in acquiring some of Time Warner's systems which serve 12.1  {O- -million subscribers. Paul Farhi, Waiting to be Wired, Wash. Post, Nov. 3, 1996, at H1. Approximately 280,000  X-  subscribers involved in the transaction were inregion,wj z {O-ԍContinental Cablevision Proxy Statement, Oct. 11, 1996, at V11.w and the Commission granted a temporary   waiver on October 18, 1996, to U S West so that it could complete the acquisition and  X_-  subsequently sell these inregion systems._ z {O - /ԍU S West, Inc. & Continental Cablevision, Inc. (Petition for Special Relief), CSR4788X, Memorandum Opinion & Order, 11 FCC Rcd 13260 (CSB 1996). These systems are in addition to those, described above, of LECs electing to convert their VDT authorizations to cable franchises.  X -` `  iv.hh,OVS  X -  #K76.` ` The Commission has certified three OVS operators. As noted above, on October   17, 1996, Bell Atlantic received approval for its certification to convert its Dover, New Jersey,  X -  ZVDT system to OVS.u V z {O-ԍBell Atlantic OVS Certification, 11 FCC Rcd 13249.u Bell Atlantic subsequently purchased the division of Futurevision which   had been the only operating program package provider on the Dover system, and has begun  X-  offering programming on this system using those resources.z {O)- ԍBell Atlantic, Bell Atlantic Now Offering Video Services in Dover Township New Jersey (news release), Nov. 1, 1996. MFS was granted certifications   on December 9, 1996, for the operation of OVS systems in Boston and New York, both of which"y+B,-(-(ZZ"  X-  zare being used to provide programming.z {Oy- OԍSee Metropolitian Fiber Systems/New York, Inc. (Certification to Operate an Open Video System),   Consolidated Order, __ FCC Rcd ___, DA 962075 (CSB Dec. 9, 1996) (granting the Nov. 27, 1996 applications   <of MFS/McCourt and MFS of New York for certifications to operate OVS systems in Boston, Massachusetts and   Lthe Island of Manhattan, New York, respectively). Previously, on November 6, 1996, MFS had filed similar  {O-  applications that were denied. Metropolitian Fiber Systems/New York, Inc., Consolidated Order, __ FCC Rcd ___, DA 961912 (CSB Nov. 15, 1996). On October 10, 1996, Digital Broadcasting Open  X-Video Systems received approval to offer OVS service in southern California.Dz {O- ԍSee Public Notice, DA 96-1703 (Oct. 10, 1996). Digital Broadcasting Open Video Systems proposes to use LEC facilities for the transmission of video services.   X-` `  v.hh,Switched Digital Video  X-  X-  L77.` ` This year, Bell Atlantic announced plans to upgrade its infrastructure to a switched   <broadband network in Philadelphia and southeastern Pennsylvania, with eventual service to over  X_-  i12 million homes and small businesses across the midAtlantic region over the next three years._z {O- ԍBell Atlantic, Bell Selects Equipment Supplier for Initial Switched Broadband Network Deployment, M2Presswire, July 15, 1996, at 1996 WL 10348457.   NYNEX also recently announced plans for largescale deployment of switched fiber networks in   jthe Boston and New York areas, with plans to be able eventually to provide video to up to five  X -million subscribers.& z {O- ԍNynex Selects Next Level Communications for Network Upgrade, Telephone IP News, Nov. 1, 1996 at __,  {O-  x1996 WL 11267086; Fred Dawson, Nynex Takes GI's Next Level for Switched Fiber Network, Multichannel News,  {OW-  ,Oct. 21, 1996 at ___, 1996 WL 13824261; Nynex To Plunge Fiber Deeper Into Neighborhoods Than Ever Before, Broadband Networking News, Oct. 29, 1996 at ___, 1996 WL 8162893.  V -` `  b.Video Programming and Packaging  X -  M78.` ` In the 1995 Report, we reported on two LEC joint ventures for video programming   and packaging: TeleTV, comprised of Bell Atlantic, NYNEX, and PacTel; and Americast,  X-  comprised of Ameritech, BellSouth, SBC, GTE, and Disney Corporation.Y\z {O)- ԍ1995 Report, 11 FCC Rcd at 2109  100. Since then SNET has joined Americast. See Americast Video  {O-  Gets New Partner, Comm. Daily, June 19, 1996, at 3; Phone Group Adds Partner in TV Venture, N. Y. Times, June 19, 1996, at D1.Y Throughout most   Kof the year, it was reported that both companies had made some progress toward providing video   .programming and packaging services. For instance, TeleTV had begun to offer an analogto XM-  /digital conversion service,cM z {O%-ԍTelephony, Comm. Daily, Sept. 6, 1996, at 7.c and Americast announced that it would offer a basic national"M,,-(-(ZZI"  X-  package to program packagers sometime in 1996.sz {Oy-ԍCompetition Conference Notebook, Comm. Daily, Mar. 13, 1996.s Despite this progress, trade press reports   jbegan warning in the summer of 1996 that the viability of both ventures was precarious, in part  X-  due to the proposed merger of SBC and PacTel.^Zz {O- ԍSee, e.g., Merger Not Likely Between TeleTV and Americast, Comm. Daily, Jun. 28, 1996, at 3; Baby Bells  {O-  kPush the Pause Button Again on TeleTV Interactive Unit, Wall St. J., June 7, 1996, at B4; Baby Bells' TV  {Oq-Developers Are on Hold and Frustrated, N.Y. Times, Aug. 5, 1996, at D1. Recently, in fact, there have been reports  X-  indicating that TeleTV's business plan is undergoing fundamental changes.z {O - ԍKent Gibbons, Telecos Scrap MMDS Plans for Boston, Virginia Launches, Multichannel News, Dec. 16, 1996, at 8. Some reports   Kindicate that the venture is being scaled back, and possibly, terminated and the LEC investors are  X-  shifting devotion of their resources to entry into markets for long distance services.xz {O- kԍLeslie Cauley, Bell Atlantic, NYNEX, PacTel to Shut Down TeleTV, Wall St. J., Dec. 6, 1996, at __, 1996   WLWSJ 11808685 (attributing the shift in focus to the suspension by Bell Atlantic and NYNEX of their investment  {O-  in wireless); David Lieberman, Regional Bells May Disconnect TeleTV, USA Today, Dec.9, 1996, at 2B; Mike  {Ot-  Mills, Bell Atlantic Group to Trim Project; Interactive TV Effort Takes Back Seat to Partners' Other Interests, Wash. Post, Dec.7, 1996, at F2.x The LEC   investors, however, reportedly deny this scenerio and PacTel stated that funding will remain  X_-unchanged at $300 million a year for the next three years.s_ z {O- LԍTeleTV Partners Stand by Programming Venture, Warren's Cable Reg. Monitor, Dec. 16, 1996, at__, 1996  {Oj-  WL 14976755; Telco's TeleTV Venture Remains on Track, For the Moment, Video Tech. News, Dec.16, 1996,  {O4-  at__, 1996 WL 2194192; TeleTV Venture Finalising a Business Plan, Computergram Int'l, Dec.10, 1996, at __,  {O-  h1996 WL 13467550; Kent Gibbons, Telecos Scrap MMDS Plans for Boston, Virginia Launches, Multichannel News, Dec. 16, 1996, at 8. s   X1<` ` 5.   Conclusion   X -  N79.` ` As with the 1995 Report, both the degree and the method of LEC planned entry   [into video programming services markets remains unclear, but now, as a result of the 1996 Act,   ZLECs have four possible modes of entry. A large, nationwide competitive presence has not been   realized, and no single technology has been chosen for entry into the markets for the delivery of   video programming. LECs continue to test various technologies and construct various types of   Msystems for video delivery, and it appears that LECs will use different technologies as each   =situation warrants. Bell Atlantic was the only LEC to build and begin operating a VDT system   before passage of the 1996 Act, and Bell Atlantic and MFS remain the only LECs with   .operational OVS systems in the nation. The other modes of current LEC entry are via wireless   >cable and cable franchises. Overall, while LECs may offer MVPD competition in some local  X -markets in 1997, to date, LECs have yet to become a significant competitive presence. " -H,-(-(ZZ"Ԍ X- F.` ` Satellite Master Antenna Television Systems  X-  O80.` ` SMATV systems are private cable systems that do not use public rightsofway,   which allows them to operate without being subject to franchise requirements. SMATV systems   are defined in the Communications Act as an exception to the definition of a cable system.  X-  Historically, SMATV systems generally served commonlyowned multiple dwelling units   ("MDUs") such as apartments or condominiums, commercial establishments such as hotels,   xinstitutions (i.e., hospitals), or groups of buildings in close proximity such as universities or resort  XH-  =facilities.^Hz {O - ԍSee 1995 Report, 11 FCC Rcd at 211011  10405; Amendment of Part 94 of the Commission's Rules to  {O -  Permit Private Video Distribution Systems of Video Entertainment Access to the 18 GHz Band, PR Dkt. No. 965,  {OU -Report & Order, 6 FCC Rcd 1270, 1275 (1991) ("18 GHz Order"). More recently, some SMATV systems have been using microwave transmissions   Llinked to system headend(s) to serve multiple buildings that are not commonlyowned without  X -  using public rightsofway.o z yO-ԍCommunications Act  602(7)B, 47 U.S.C. 522(7). o The 1996 Act amended that exception by easing the statutory   restrictions on SMATV operators, permitting them to use wires to connect separatelyowned  X -  Kbuildings, provided they do not use public rightsofway. ~z yO- ԍ1996 Act sec. 301(a)(2) (codified at Communications Act 602(7)B, 47 U.S.C. 522 (7)). The exception   previously stated that a cable system did not include a facility that serves only subscribers in one or more multiple   xunit dwellings under common ownership, control, or management, unless such facility or facilities uses any public   K"rightofway." The exception now states that a cable system does not include "a facility that serves subscribers  {O;-  without using any public rightofway." See 1996 Act sec. 301(a)(2) (codified at Communications Act 602(7)B, 47 U.S.C. 522 (7)).  This may permit significant SMATV   system growth in areas where many different residential buildings can be interconnected without crossing public streets.  X-  nP81.` ` Industry estimates place the total number of SMATV residential subscribers as of   September 1996 at approximately 1.05 million, an increase of 10.5% over the 950,000 subscribers  Xb-  reported in the 1995 Report.b z {O - ԍ See, e.g., infra App. E; Telephone conversation between Commission staff and John Mansell, Senior Analyst,  yO-Paul Kagan Associates, Inc., on Nov. 5, 1996.  The estimated number of SMATV operators serving MDUs had  XM-  risen to 5200 operators by December 1995,MR z {OP - ԍPaul Kagan Associates, 1995 Network Private Cable Programmer Census, Private Cable Investor, Dec. 31, 1995, at 5. an increase of 41% since December 1994 when  X6-  there were 3700 operators.6z {O#- MԍPaul Kagan Associates, Inc., 1994 Network Private Cable Counts, Private Cable Investor, Dec. 31, 1994, at 3. Industry analysts attribute this growth to technical improvements"6.,-(-(ZZ*"  X-  which now make it profitable for operators to install SMATV systems in smaller MDUs.z yOy- >ԍTelephone conversation between Commission staff and John Mansell, Senior Analyst, and Margot Black  yOA-of Paul Kagan Associates, Inc., on Nov. 5, 1996.  The   result has been an increase in the overall number of systems,  X-  although many of these SMATV systems may serve only single MDUs. Industry reports suggest  X-  that SMATV growth is strongest in the South and Southwest, z {O-ԍOpTel Comments at 2; Richard Nelson, The Big, Private Cable & Wireless Cable, May 1996, at 9. but is also growing in other  X-  zregions such as New York City, Boston and Washington.Y\z {O - LԍRCN Comments at 23; Paul Kagan Associates, Inc., NuVisions Cable Expanding in New York, Private Cable  {O -  JInvestor, Jan. 31, 1996, at 7; Paul Kagan Assocs. Inc, LodgeNet Enters SMATV Market, Private Cable Investor, Feb. 29, 1996, at 8. Y At the same time, the SMATV   jindustry has continued to experience system consolidations. Much of the growth in the larger  Xv-  SMATV operators has come by acquiring smaller operators. vz {O-  ԍPaul Kagan Associates, Inc., Top Private Cable Operators Chart, Private Cable Investor, Dec. 31, 1996, at 2. In fact, for the first eight months   of 1996, the value of mergers and acquisitions has totaled approximately $65 million as compared  XH-with $75 million for all of 1995. H0 z {O)-ԍPaul Kagan Associates, Inc., Cable Deal Roundup, Private Cable Investor, Aug. 31, 1996, at 2.  X -  Q82.` ` Many SMATV operators are installing more technologically advanced plant and  X -  equipment, and are moving aggressively with marketing and product innovations. Increasingly,   SMATV systems are using 18 GHz microwave facilities to link headends to rooftop antennas and  X -  <to link buildings, which increases efficiencies.3  z {OH- ԍ1995 Report, 11 FCC Rcd at 2111  105; Bartholdi Comments at 44. The Commission held in 1991 that  {O-microwave transmissions do not "use" public rightsofway. 18 GHz Order, 6 FCC Rcd at 1271  10.3 While industry analysts have historically noted  X -  that many SMATV systems have been competitively hampered by limited channel capacity,  z {O-ԍVeronis, Suhler & Associates, SMATV Communications Industry Forecast (10th ed., 1996) 147.X1Í.X1Í. a   yrecent industry survey found that on average, SMATV operators had added six more channels  X-  since last year, raising total average channel capacity to 39.6 channels. ( {O-ԍRichard Nelson, The Big, Private Cable & Wireless Cable, May 1996, at 910. In addition, some  Xy-  \SMATV operators are experimenting with digitalization,yB( {Ol"- ԍGlenn Martin, Competing for MDUs, Private Cable & Wireless Cable, July 1996, at 4243. Digital compression increases system capacity to several hundred channels. and other SMATV operators are   installing fiber optics to create the type of hybrid fiber coaxial ("HFC") architecture found in the  XK-  most technically advanced cable systems.K( {O&- {ԍRichard Nelson, supra. Operators installing fiber optics include Residential Communications Network ("RCN"), OpTel, Inc. ("OpTel") and MultiTechnology Services ("MTS"). Still other SMATV operators are combining"K/,-(-(ZZ"   technologies to create "hybrid systems," such as DBS/SMATV or MMDS/SMATV systems as   part of a "niche market" strategy. For example, Satellite Connection, a national CBand  X-  lprogramming company, has contracted with DIRECTV to provide programming for its 10  X-  zchannel, alldigital DBS/SMATV system serving a 120 unit RV Park in HonDah, Arizona.~( {O4-ԍMerging Technologies, Private Cable & Wireless Cable, Feb. 1996, at 26.~  X-  As described above, RCN has a venture with DIRECTV to provide programming to subscribers  X-  in its MDUs in metropolitan New York.3Z( {O- kԍPaul Kagan Assocs., DIRECTV Unveils Multiple Dwelling Unit Program, Private Cable Investor, Aug. 31,  {Ob -  1996, at 7; Jim McConville, DIRECTV Makes Big Apple Deal, Broadcasting & Cable, Oct. 7, 1996, at 72. The   -DBS/SMATV arrangement allows DIRECTV to expand its subscriber base into the SMATV market by offering a  {O -  full package of local and national programming. See DIRECTV, RCN's Liberty Cable to Deliver DirecTV to New  {O -  JYork City Multiple Dwelling Unit Market (press release), Oct. 2, 1996, at 12; Peter Lambert, DBS Players Pursuing  {O -MMDS Distribution, Cable World, Aug. 12, 1996, at 26.3 In Melbourne, Florida, Coastal Wireless Cable   Television has developed an MMDS/SMATV system to serve the large residential MDU and  X_-hotel/motel markets._( {O-ԍRichard Cuellar, Costal Connection, Private Cable & Wireless Cable, Feb. 1996, at 9.  X1-  _R83.` ` Increasingly, SMATV operators are also customizing their products and services   .to suit niche markets and MDU subscribers' needs. For example, many SMATV systems offer   [programming not available from their community's local franchise cable system, such as sports  X -  packages, concerts and other special programming.6 n ( {O - ԍ1996 Programming Guide, Private Cable & Wireless Cable, May 1996, at A134. The United Nations TV   ("UNTV") network was introduced on Liberty's basic programming tier in 1993. UNIV, which is a news format  {O-  network similar to CSPAN, is popular among New York City's large international community. See Bartholdi   Comments at 17. MST's NuVisions Cable TV in Brooklyn/Queens, NY offers subscribers the "Telebet" service,  {O/-  which allows them to bet on horses races in New York's three major racetracks.  See Paul Kagan Assocs., Inc.,  {O-NuVisions Cable Expanding in New York, Private Cable Investor, Jan. 31, 1996, at 7. 6 Some SMATV systems have added more   Madvanced electronic features such as "pictureinpicture," "pickandpay" (or payperview   programming), interactive games and videoondemand ("VOD") programming as part of their   x"customdesigned" programming packages for subscribers. Many of these SMATV systems also   offer alarm line monitoring and closed circuit security cameras, a feature particularly important  Xy-  to many MDU residents.&y( {O - ԍPaul Kagan Assocs., Inc., LodgeNet Enters SMATV Market, Private Cable Investor, Feb. 29, 1996, at 8;  {O -  LodgeNet Home Market Rollout, Aug. 31, 1996, at 4; OpTel Comments at 2. SMATV operators note that the  {O!-  competing cable operators often do not provide such services.  See Bartholdi Comments at 1516; OpTel Comments at 2. In addition, some of the larger SMATV operators, like OpTel and"y0,-(-(ZZi"   MTS, are also competing with the incumbent LECs to provide local and long distance telephony  X-and Internet access to their SMATV subscribers in MDUs.^( {Ob- ԍOpTel Comments at 2; Richard Nelson, The Big, Private Cable & Wireless Cable, May 1996, at 9-10; Paul  {O,-  Kagan Associates, Inc., Liberty Growth Curve, Private Cable Investor, July 31, 1996, at 2; LodgeNet Enters SMATV  {O-Market, Private Cable Investor, Feb. 29, 1996, at 6.   X-  S84.` ` SMATV Operator Concerns. Several SMATV operators expressed concern that  X-  zsome of the provisions of the 1996 Act may affect the competitiveness of SMATV systems.   NOpTel raises concerns over potential interpretations of the 1996 Act's revised "effective  Xx-  Kcompetition" standardx( {O - LԍSee OpTel Comments at 23. 1996 Act sec. 301(b)(3) (codified as Communications Act  623(l), 47 U.S.C. 543(l)). OpTel, RCN and Bartholdi raise concerns over the 1996 Act's provision   exempting from the uniform rate structure provision cable systems subject to effective  XJ-  Zcompetition.JH( {OC- /ԍSee OpTel Comments at 34; RCN Comments at 89; Bartholdi Comments at 18, 2930. 1996 Act sec.   301(b)(2) (codified as Communications Act 623(d), 47 U.S.C.  543(d)). RCN, OpTel and Bartholdi note that their   wlower subscriber prices have been essential in attracting customers, and are concerned that incumbent cable operators   will use the new uniform rate exemption to target MDUs where the SMATV operator is negotiating to become the  {Oe-MVPD, with the result of eliminating competition. Id.Ċ Both of these provisions are the subject of pending proceedings, thus we decline  X3-to address them further in the context of this report.3 ( {O- [ԍImplementation of Cable Act Reform Provisions of the Telecommunications Act of 1996, CS Docket No. 9685, Order and Notice of Proposed Rulemaking, 11 FCC Rcd 5937 (1996).  X -  X -  T85.` ` RCN, Bartholdi and WCAI raise concerns over the demarcation point for inside  X -  wiring V ( yO- kԍRCN Comments at 7; Bartholdi Comments at 47, 49; Bartholdi Reply Comments at 2; WCAI Comments at 2425. and the effect of the Commission's inside wiring rules on SMATV operators'   competitiveness. The Commission is addressing the issues raised regarding access to inside  X -wiring by competing MVPDs in a separate proceeding.& ( {O- zԍImplementation of the Cable Television Consumer Protection and Competition Act of 1992 (Cable Home  {O-  hWiring), MM Dkt. No. 92260, First Order on Reconsideration and Further Notice of Proposed Rulemaking, 11 FCC  {O-  Rcd 4561 (1996). See also, Telecommunications Services Inside Wiring (Customer Premises Equipment), CS Dkt. No. 95184, Notice of Proposed Rulemaking, 11 FCC Rcd 2747 (1996).   X- G.` ` Broadcast Television Service  Xd-  U86.` ` Broadcast television service is both a source of video programming and a  XM-  transmission medium for video programming.uM( {O&-ԍSee 1995 Report, 11 FCC Rcd at 211315  112115.u The number of commercial and noncommercial"M1.,-(-(ZZg"  X-  television stations increased to 1550 from 1542 over the last year.R\( {Oy- ԍFederal Communications Commission, Broadcast Station Totals as of August 31, 1996, FCC News Release  {OC-  (Sept. 10, 1996); Federal Communications Commission, Broadcast Station Totals as of August 31 1995, FCC News Release (Sept. 8, 1995).R Although the overall   audience for broadcast television programming has declined in the last year, it is still viewed by   za large majority of the television audience. During the 19951996 television season, the four   major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 62% share of prime   time viewing among all television households; UPN and WB, the two newest networks, achieved  X-  a combined 9% share of prime time viewing.( {O* -ԍPeople's Choice: Ratings According to Nielsen, Sept. 915, Broadcasting & Cable, Sept. 23, 1996, at 32. The amount of prime time programming  Xv-  jprovided by UPN and WB was six hours and five hours, respectively.PZv~( {O - ԍClosed Captioning and Video Description of Video Programming, MM Dkt. No. 95176, Report, __ FCC   Rcd __ (July 29, 1996). During the 19951996 television season, ABC, CBS, and NBC offered 22 hours of weekly prime time programming and Fox offered 15.P The most recent data   available for households subscribing to cable service indicates that, even in cable homes,   Lprogramming originating on local broadcast television stations accounted for a combined 61%   share of all day viewing in the 199495 television season, while nonpremium cable networks and  X -pay cable services achieved a combined 50% share of all day viewing.X\ ( {Ok- =ԍNational Cable Television Assoc., Viewing Shares Broadcast Years 1984/19851994/1995, Cable Television  {O5-  iDevelopments, Spring 1996, at 5 (citing A.C. Nielsen Co. statistics). Reported audience shares exceed 100% due to multiple set viewing.X  X -  }V87.` ` Broadcast total advertising revenues reached $27.9 billion in 1995.N Z ( {Oa- ?ԍSteve McClellan, Broadcast Advertising Up 3%, Broadcasting & Cable, Mar. 4, 1996, at 2728. The   Television Bureau of Advertising supplied this data, which is based on information gathered from the Competitive Media Reporting's MediaWatch Service.N Advertising   revenues for the four major networks alone reached $12.4 billion in 1995, an increase of 4% over  X -  1994.i!Z ( {OU-  ԍId.  This figure represents sales for ABC, CBS, Fox, and NBC. This figure does not include UPN or WB,   but the Television Bureau of Advertising and Competitive Media Reporting estimate that UPN received $250 million for advertising in 1995, and that WB received $65 million.i In addition, for the new season which began on September 15, 1996, ABC, CBS, Fox,   and NBC received a record $5.8 billion in preseason advertiser commitments, despite losing 8%  X-  of their prime time viewers last year."( {OI"-ԍPaul Farhi, Half a Minute for Half a Million, Wash. Post, Sept. 19, 1996, at F1. In comparison, cable programming networks received  Xy-$3.7 billion in advertising revenue in 1995, an increase of 14% over 1994.%#y( {O$- [ԍNational Cable Television Assoc., Cable Advertising Revenue, Cable Television Developments, Spring 1996,  {O%-at 9 (citing Paul Kagan Assocs., Inc., Cable TV Advertising, Sept. 25, 1995, at 3).% "b2#,-(-(ZZ"Ԍ X-  W88.` ` The role of broadcast television service as a directlyreceived transmission medium   has continued to change in recent years, with fewer homes receiving broadcast signals directly   Zover the air. Overtheair broadcast television service continues to serve as the sole transmission   >medium for approximately onequarter of all television households. It is also one means by  X-  which subscribers to satellite services (e.g., DBS) receive local signals because satellite services   generally do not retransmit broadcast television signals or are limited in those areas that may be  Xv-served with broadcast signals.$v( yO- ԍ17 U.S.C.  119(a)(2)(B). There is a controversy between broadcast stations and satellite providers   regarding the determination of whether a household is unserved by a particular broadcast network. DBS operators   may only offer broadcast network signals directly to households that are located in unserved areas as defined by the  {OG -  Copyright Act, 17 U.S.C.  119(d)(10). See Complaint, Cannan Communications, Inc. v. PrimeTime 24 Joint  {O -Venture, Dkt. No. 296CV086 (N.D. Tex. 1996).  XH-  X89.` ` The ability of the broadcast spectrum to compete as a transmission medium with   cable is effectively limited by the amount of broadcast spectrum and channels that are assigned   to television markets. The scarcity of video programming outlets available via "overtheair"   broadcasting can have a significant impact on competition. In nearly all markets, the number of   channels available solely through the broadcast transmission medium is considerably fewer than  X -  =those available on most cable systems.% |( yO- ԍIn the top 20 television markets, there are, on average, 15.5 commercial and noncommercial operational   ibroadcast stations. The largest television markets New York, Los Angeles, and Chicago have 22, 23 and 16   wbroadcast stations in operation respectively. Television markets 2650 have even fewer broadcast stations on the   g average of 9.47 operational stations per market. Television markets 51100 have on average 7.9 stations, and markets  {O"-101211 have on average 4.75. Warren Publishing, Inc., Television & Cable Factbook I7275 (1995).  WB attributes its difficulties in obtaining increased  X -  broadcast television coverage to the scarcity of unaffiliated broadcast stations in many markets.O& . ( yO-ԍWB Television Comments at 23.O   Essentially, WB asserts that a sixth broadcast network cannot attain national coverage solely by  X-using local broadcast stations as affiliates and that it must rely on cable carriage.' ( {O- ԍId. at 24. Nineteen percent of WB's national coverage is from its affiliation agreement with superstation  {O-  WGNTV (Chicago); without this cable presence, WB would only reach 65% of all television households. Id. at  {O-  2. Statistics in the TV & Cable Factbook indicate that 129 of the 211 television markets have fewer than six   <commercial stations. Of the 211 television markets, 150 have only one or no commercial stations that are not  {O%-affiliated with one of the four largest networks. Television & Cable Factbook, supra, at I7275.  Xb-  Y90.` ` Recently, the Commission has sought to increase the video distribution capacity   of the current analog broadcast spectrum. In seeking comment on revisions to our local broadcast   ownership rules, we noted that in many markets, several television broadcast station allotments   remain vacant. Currently, local broadcasters in the market are forbidden from applying for   Llicenses for these vacant allotments. The Commission invited comment on whether we should   Nentertain a waiver request to the local television ownership rule to enable a current local   Zbroadcast television licensee to apply for a channel allotment that has remained vacant or unused for a long period, such as five years. "3v',-(-(ZZq"Ԍ X-  ԙZ91.` ` In making this proposal, we noted that "it may not be in the public interest to have   \allotted broadcast channels lie fallow particularly in markets where it might be possible to   allow additional NTSC stations to come on the air without adversely impacting the proposed   DTV allotment table and the transition to digital television." We stated that evidence that the   allotment has remained vacant for a period of years "may suggest that the operation of another   xtelevision station on a standalone basis in the community in question is not economically viable"   and that the public interest may be advanced by permitting an existing licensee in the market to  X_-  acquire a license for the currentlyvacant allotment rather than allow the channel to remain  XH-unused.(H( {O - ԍReview of the Commission's Regulations Governing Television Broadcasting, MM Dkt. No. 91221, Second  {O -  ZFurther Notice of Proposed Rule Making, __ FCC Rcd ___ FCC 96437  45 (Nov. 7, 1996). The Sixth Further  {OU -  KNotice of Proposed Rule Making in the DTV proceeding sought comment on a similar point, asking whether the   hCommission should permit existing broadcasters, either individually or jointly, to use a vacant channel allotment for  {O -  additional broadcast or subscription programming. Advanced Television Systems and Their Impact on the Existing  {O -  Television Service, MM Dkt. No. 87268, Sixth Further Notice of Proposed Rule Making, 11 FCC Rcd 10968, 10988  {O{-51 (1996) ("Sixth ATV NPRM").   X -  [92.` ` To the extent that the capacity of the analog broadcast spectrum is expanded by   <these proposals, such expansion may eventually increase the analog broadcast spectrum's ability   to compete with cable as a transmission medium. However, the amount of analog capacity  X -available will still be limited until the transition to digital technology.)~ ( yO- ԍIn 1987, the Commission froze new broadcast licenses or construction permits in areas near the top 30  {Ob-  markets at that time.  See Advanced Television Systems and Their Impact Upon the Existing Television Broadcast  {O,-  Service, MM Dkt. No. 87268, Order, 2 FCC Rcd 5125 (1987). Further, the Commission set September 20, 1996   as the deadline for applications for new analog broadcast television station licenses in areas not affected by the freeze   hand no applicant that filed after October 24, 1991 which was still in the approval process as of that date will receive  {O-  a digital channel corresponding to the analog channel applied for. Sixth ATV NPRM, MM Docket No. 87268, 11 FCC Rcd at 10973 10 (1996).   X -  3 \93.` ` The Commission's effort to implement a swift transition to digital transmission   technology also has the potential to significantly increase the capacity of the broadcast spectrum,   and such a development might advance the ability of broadcast transmission to compete with  Xb-  [cable.V*bZ ( yOm- .ԍTwo experimental advanced television stations are now operational. WRALHD in RaleighDurham, North   Carolina, received the first experimental license from the Commission on June 20, 1996 and began broadcasting on  yO -  July 23, 1996. The station plans to broadcast intermittently until receivers are widely available and will primarily  {O!-  be performing propagation tests throughout 1996. See WRALHD RaleighDurham Becomes First Commercial HDTV  {O"-  Station, Comm. Daily, July 25, 1996, at 6. WHDTV in Washington, D.C., began broadcasting on August 6, 1996,  {OY#-and has been conducting technical tests. See Mass Media, Comm. Daily, Aug. 7, 1996, at 7.V Most importantly, digital encoding and transmission technology will permit a station   to broadcast multiple streams of Standard Definition Television ("SDTV") programming, a single  X4-  High Definition Television ("HDTV") signal, a combination of the two, or a combination of"44*,-(-(ZZ"  X-  yvideo with other digital ancillary services.+$( {Oy- \ԍSee Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM   Dkt. No. 87268, Further Notice of Proposed Rulemaking and Third Notice of Inquiry, 10 FCC Rcd 10540 (1995);  {O -  Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No. 87268, Fifth Further Notice of Proposed Rule Making, 11 FCC Rcd 6235 (1996). The increase in broadcast spectrum capacity that   xdigital technology allows may in the future result in a broadcast transmission service that is better able to compete with cable systems.  X-  ]94.` ` In previous reports, we noted that low power television ("LPTV") stations can offer   multichannel video programming services on a subscription basis and that such service exists in  Xv-  a rural area of Minnesota.,v( {O - _ԍ1994 Report, 9 FCC Rcd at 7507  127, 129; 1995 Report at 2116  117. See also 47 C.F.R. 73.642(a)(2). Construction permits have been issued to a multichannel LPTV  X_-  applicant in Pinconing, Michigan,-_( yO- ԍJohn D. Zimmer, Low Power Television/Television Translator Broadcast Station Construction Permit, File No. BPTTL940415FC (Oct. 7, 1996). and there is an eightchannel LPTV system operating in  XH-  Anchorage, Alaska..Hf ( {O_- MԍGold Belt, Inc., Low Power Television/Television Translator Broadcast Station License, File No. BLTTL yO)-960304JK (Apr. 24, 1996). However, such service remains extremely limited and does not appear to   have a significant impact on competition in the video market. In addition, the potential for even   Kmore multichannel LPTV systems to become operational may be constrained by the current freeze   on licensing LPTV stations within 100 miles of the 36 largest markets in order to preserve  X -spectrum availability for the transition to digital television service.!/ ( {O]- ԍNotice of Limited Low Power Television/Television Translator Filing Window from Apr. 1, 1994 through  {O'-Apr. 15, 1995, Public Notice No. 41954 (MMB Mar. 3, 1994). The application freeze remains in effect.!   X - H.` ` Other Entrants  W<` ` 1. Electric and Gas Utilities   Xb-  Q^95.` ` Section 103 of the 1996 Act removed a significant regulatory barrier which had   deterred registered public utility holding companies' entry into telecommunications, information  X4-  =services, and video markets. Specifically, prior to enactment of the 1996 Act, the Public Utility   \Holding Company Act of 1935 ("PUCHA") imposed strict "line of business" restrictions on   registered public utility holding companies which sought to diversify into telecommunications or  X-  [information services markets.0"( {O$- .ԍPrior to the 1996 Act, a registered public utility holding company could only enter into "any business (other than the business of a public utility company as such)" that was "'/,-(-(o&"Ԍ mXreasonably incidental, or economically necessary or appropriate to the operations of one or more  }integrated publicutility systems . . . which the [SEC] shall find necessary or appropriate in the  "public interest or for the protection of investors or consumers and not detrimental to the proper functioning of such systems or systems.   yO@-  PUHCA Section 11(b)(1). The courts and the SEC interpreted these provisions to require a functional relationship  {O-  ;between a nonutility interest and the system's core utility operations. See Michigan Consolidated Gas Co. v. SEC,  {O-  ,444 F.2d 913 (D.C. Cir. 1971); Central and Southwest Corporation et al., Order Authorizing Acquisition of Limited  {O-  Purpose Communications Subsidiary and Certain Related Financing, 56 SEC Dkt. No. 2392, Release No. 3526061 (1994). Section 103 of the 1996 Act, which added a new Section 34 to"5. 0,-(-(ZZ"   PUHCA, now permits registered public utility holding companies to enter telecommunications   industries without prior SEC permission through the acquisition or maintenance of an interest in  X-  an "exempt telecommunications company" or "ETC."1. ( yO - ԍAccording to new PUHCA Section 34(a)(1), an ETC is "any person determined by the [Federal   JCommunications] Commission to be engaged directly or indirectly, wherever located, through one or more affiliates   h(as defined in Section 2(a)(11)(B) of PUHCA), and exclusively in the business of providing: (A) telecommunications   services; (B) information services; (C) other services or products subject to the jurisdiction of the Commission; or   (D) products or services that are related or incidental to the provision of a product or service described in (A), (B), or (C)." Congress essentially eliminated disparate regulatory treatment among different types of utility companies by this action.  X-  _96.` ` On September12, 1996, the Commission adopted final rules to implement Section   103. Following Congress's mandate, the rules provide a straightforward procedure for   determining ETC status, thus expediting the entry of public utility holding companies into the  XH-  telecommunications industry.I2\H( {O- ԍIn re Implementation of Section 34(a)(1) of the Public Utility Holding Company Act of 1935, as added by  {Oi-  ;Section 103 of the Telecommunications Act of 1996, GC Docket No. 96101, Report & Order, 11 FCC Rcd 11377, FCC 96192 (1996).I Since enactment of the 1996 Act, the Commission has granted  X3-  all 18 of the applications for a determination of ETC status filed thus far.33( yO- ԍUnder the language of the statute, parties were free to file for a determination of ETC status before the Commission adopted its final rules. Most of these ETCs   Nhave been affiliates of public utility holding companies such as Central and South West   Corporation, Entergy Corporation, Northeast Utilities, American Electric Power, Allegheny Power, and the Southern Company.  X -  n`97. ` ` Most registered public utility holding companies are entering telecommunications   markets by providing service in voice and data markets. There also is some evidence, however,   jthat registered public utility holding companies are beginning to contribute to the performance  X{-  of MVPD markets. The Southern Company recently entered into a partnership with a real estate   ?developer to develop a 303 unit apartment community in Duluth, Georgia. According to   KSouthern, this complex will provide a onestop utilities package for its residents, including energy"M6"3,-(-(ZZ "   management control, alarm monitoring, long distance telephone service, and wireless cable. The   -wireless cable package will reportedly be provided by Wireless Cable of Atlanta, and will provide  X-basic and premium service, including HBO, Showtime and The Movie Channel.y4( yOK-ԍSouthern Company Internet Homepage, http//www.premierhome.com/cable.htm.y  X-  a98.` ` The 1996 Act has spurred some entry by other utilities. Boston Edison and RCN   announced an agreement to form a joint venture to provide local and long distance telephone   service, video, highspeed Internet access and, eventually, energy management and property  X_-  monitoring services.5_X( {Oh - ԍSee Boston Edison Co., Boston Edison & CTEC's RCN Unit Form Partnership to Offer Local Phone, Long {O2 -Distance, Video & Internet Access (press release), Sept. 30, 1996. Similarly, KN Energy ("KN") is offering a "onestop shopping" service   in Scottsbluff, Nebraska, where KN will offer consumers satellite television service by the DISH   znetwork, as well as long distance service, wireless internet service, and energy management  X -  {systems.6 ( {O- .ԍSee KN Energy, Inc., KN Energy Launches OneStop Shopping for Rural America's One Package, One Bill,  {OI-One Call for a Multitude of InHome Services (press release), Sept. 7, 1996. A further example is the project wherein Metricom is working with PEPCO in  X -Washington, DC, to build a network to provide wireless access to the Internet.7 ( {O- >ԍSee Metricom, Inc., Metricom's Wireless Comm. Network Brings Portable Internet to the Nation's Capital (press release), May 25, 1996.   W <` `  2. Internet Video  X -  b99.` ` Last year we reported that software that would deliver realtime audio and video   [over the Internet was becoming available and that while the Internet had the potential to affect  Xy-  the video marketplace, it was too early to assess its impact.%8yj ( {O- ԍ1995 Report, 11 FCC Rcd at 2121 127. In the context of accessing video from a personal computer, "realtime" video refers to the ability to view video without first downloading an entire file to the computer's hard disk.% We still believe it is premature   to assess the impact of the Internet on the video marketplace. However, at least one industry   analyst reports that in the last year the number of Internet users increased by 50% and the  X4-  demographic profile of users has shifted to reflect overall population averages.94 ( {O- ԍAngela Hickman and Carol Levin, Internet Crowd Diversifies, PC Magazine, Oct. 8, 1996, at 41 citing   hCommerceNet and Nielsen Media Research survey of 2,800 Internet users. Although Internet usage is acknowledged   as being difficult to measure, the reported trends are relevant because: (1) they validate Internet growth, independent   Kof interested parties such as hardware and software vendors; and (2) the shift in the Internet user profile suggests  {O"-  that the general population is bringing the Internet into the mass market. Id. The key statistics developed by the   study include: (1) 22% to 24% of people ages 16 and older in the United States have access to the Internet, up 50%   from last year, and (2) newcomers to the Internet include more women, are less likely to hold a college degree, are   less likely to view themselves as computer professionals, are less likely to own either their own homes or a home  {O%-computer, and are less likely to live in a household with an income of $80,000 or more. Id. In addition, in"479,-(-(ZZ9"   the past year there have been developments in the ability of computer hardware and software to deliver video.  X-  #c100.` ` For example, this year Toshiba is offering a personal computer that offers builtin  X-  television and radio tuners in addition to audioCD access and embedded speakers.:( {O-ԍBruce Brown, Home is Where the PC Is, PC Magazine, Oct. 22, 1996, at 39. Rather than   /offering television via the Internet, this personal computer reportedly incorporates existing   television technology into a platform shared by a computer. Such a melding of television and computer hardware is presently the exception in video delivery by computer.  X1-  Pd101.` ` In addition, considerable commercial activity has been directed in the past year at   software that renders video deliverable to any existing computer via an Internet connection.   Currently there are two primary means to accomplish such video delivery: (1) downloading a  X -video file for later playback; and (2) streaming.  X -  `e102.` ` Downloading a video file and the necessary software application to "play" the   video file once it is opened is presently the most common way to receive video via a personal  X-  computer.;Z( {O- ԍSee, e.g., FAQ Frequently Asked Questions, netvideo) dedicated Internet digital video storage and  {Oe-  xdistribution http://www.netvideo.com/netvideo/faq.html. The most common video file types are QuickTime and  {O/-  MPEG. Id. MPEG ("Moving Pictures Experts Group") is the internationally recognized standard for motion picture   hcompression. By discarding repetitive information in motion video and synchronous audio, MPEG compression can  {O-squeeze video data by a factor of 200 thereby greatly reducing the size of the data file and its download time. Id. While compression techniques used in this process significantly reduce the size of   jthe video file, a typical consumer will expend considerably more time downloading the file than  Xb-  it will take to "play" it.<b( yO%- ԍThe downloaded file resides on the hard disk of the user's computer. The video file must be downloaded entirely before it can be played using an appropriate player or helper application. The time to download a file depends on a number of factors,   jincluding: (1) the speed of the Internet connection; (2) how busy the server sending the video file is; and (3) the size of the video file.  X-  f103.` ` A oneminute video could take 2030 minutes or more to download to a personal   computer if the consumer were using a 9600 baud modem connection to the Internet. Faster   modems, different compression coding techniques, the user's hardware and software, and the   Kspeed of the actual Internet connection all factor into the time necessary to download a file. Ideal   combinations of these factors can eliminate the need to download files before viewing them. A"8j <,-(-(ZZ4"  X-  .10megabyte file=@( yOy- ԍThe following two examples illustrate the size of a 10megabyte file. The body of this report in electronic   form is a Word Perfect file of approximately 460,000 kilobytes; the appendices represent approximately 734,000   Ykilobytes (demonstrating that tables and figures tend to greatly increase file size as compared to text). It would take   approximately 8.4 copies of this report (including appendices) to equate to a 10megabyte file. A 15 second video   of Michael Jordan highlights is available for downloading as a compressed file of 707 kilobytes from   http//www.nba.com/finals96/theater/video/finals/199/.avi. If, instead of 707 kilobytes, the file were 10 megabytes,   then, on the basis of straight extrapolation, it would be expected to provide about 212 seconds (or 3.5 minutes) of video. can be downloaded, on average, in the following times for different modem  X-speeds,>( {Oj - ԍCable vs. Telephone Modem Speeds, Cable Datacom News, http://CableDatacomNews.com/speeds.html (except the information relating to ADSL). Figure 1  Figure 1  other factors remaining constant.  X-% ` ` Modem Speed/Typehh,VppTransfer Time  X-  X-` ` 9.6 Kbps modemhh,Vpp2.3 hours  Xv-` ` 14.4 Kbps modemhh,Vpp1.5 hours  X_-` ` 28.8 Kbps modemhh,Vpp46 minutes  XH-` ` 128 Kbps IDSNhh,Vpp10 minutes  X1-` ` 1.54 Mbps T1 connectionVpp52 seconds  X -` ` 4 Mbps cable modemVpp20 seconds  X -` ` 10 Mbps cable modemVpp8 seconds  X -` ` 1.5 to 6.4 Mbps ADSL technologyc?Z *  yO- zԍData rates for ADSL in the downstream direction (from the network to the subscriber) vary depending on  {O-  distance, that is, the length of the local loop. See, e.g., http://www.adsl.com/general_tutorial.html. This accounts for the variance in transfer time.cpp12 to 53 seconds %  X -  g104.` ` "Streaming" is a means of receiving video from the Internet that eliminates both   ]the wait time associated with downloading a video file and the storage of that file on the  X-  consumer's hard disk. Video using a streaming format can be viewed in real time by a consumer   iusing a 28.8 Kbps telephone modem (or faster) connection. At least four Internet video consumer  Xb-products have attracted attention and comment.@bL  {O_- ԍGary Welz, Internet Video Product Comparison, Multimedia Web, http://netday.iworld.com/devforum/multimedia/mw960925.shtml  X4-  h105.` ` StreamWorks from Xing Technology AZ4 {O#- \ԍXing Tech. Corp., Corporate Background, http://www.xingtech.com/about_xing/corp_background.html:    Xing introduced "StreamWorks," the first live and on-demand system for delivery of video and audio over the   Internet, in 1995. StreamWorks is the basis of Internet radio and TV broadcasts from Europe, North America and   Asia, including financial news broadcasts from NBC and Bloomberg, music selections from Capitol Records, live"&@,-(-(&"   itrade show video coverage from Comdex, Networld+Interop, NAB, Internet World, and engineering classes from  {O -Stanford University. Id.  of Arroyo Grande, California, permits both"49A,-(-(ZZ "  X-  real time and on demand viewing of video by allowing users to access "streams" of encoded   yvideo packets from either a live feed or an encoded file. A viewer connected to a StreamWorks   Internet server would view a video through a personal computer as though watching a TV   obtaining its programming from a VCR. CUSeeMee from White Pine offers a streaming tool   used primarily for live videoconferencing, but which also permits viewing of recorded  X-  programming on a fixed schedule for all viewers.B {O( -ԍWhite Pine Software, Welcome to White Pine Software, http://www.goliath.wpine.com VDOnet CorporationvC| {O - ԍVDOnet Corp., NBC Desktop Video, PBS, and Cisco Join VDOnet Initiative to Bring Multicast Video to  {O -  ;the Internet, http://www.vdo.net/info/pr19.html (June 13, 1996). VDOnet has announced that NBC Desktop Video,   iCisco Systems Inc., and PBS (Public Broadcasting Service) are working with it to develop multicast programming   -- such as pay-per-view, advertiser supported programming, and broadly available informational live events and  {O-programming on the Internet. Id.v of Palo Alto,  Xv-California, offers VDOLive, a product incorporating adaptive streaming technology.Dv2  yOY- ԍBy using a compression scheme, VDOLive's system is purportedly able to effectively scale in bandwidth  {O!-according to the user connection and the actual Internet load.  Id.  XH-  i106.` ` A third mechanism for video delivery is being developed for Javaenabled  X1-  >browsers.E1  yOn-ԍJava) is a computer language/platform developed and licensed by Sun Microsystems, Inc. OnlineTV reports that in July it began offering realtime live video through its  X -  Internet site to anyone with a Java enabled browser.WF  yO-ԍOnlineTV Corp., http://onlinetv.com/ W Online TV states that its video offerings  X -  do not require downloads, plug-ins, or installations.G  {O`- ԍId. The company believes that the elimination of file downloading and player/helper applications will have mass market appeal. The company states that its goal is to   zbecome the first digital television network to bring regularly scheduled video content to the  X -Internet.NH  yO-ԍhttp://onlinetv.com/info.htmlN  X -  Qj107.` ` Despite the technological advances embedded in these commercial services, it   appears that consumer reaction to them continues to be tempered by issues related to the capacity   and reliability of the Internet backbone and the speed at which an individual can receive data.   "The ability of the Internet to significantly impact the market for the delivery of video   programming will likely remain tangential at least until higher data transfer speed becomes widely available.  X-":H,-(-(ZZ)"Ԍ X-  k108.` ` Bundling of Video Services with Cable Modem and Other Services. As discussed   in several places above, many MVPDs are beginning to combine their video service offerings   with other services (e.g., local or long distance telephony, Internet access, cellular service, paging,  X-  xmusic, etc.) in packages designed to win customers.I$ {O6- }ԍE.g., sec. III.B., D. and F. supra. A recent example of cable system interest in bundling is Cox   YCommunications' reported commitment of more than $1 billion over 199697 for upgrades to supply a "fullservice  {O-  xnetwork." Steve McClellan, Cox Planning Big Moves in DTV, Phone Businesses, Broadcasting & Cable, Dec. 16, 1996, at 9192. Cable system operators and other MVPDs   have shown considerable interest in deploying modems that permit subscribers to receive high  \speed access to the Internet and, perhaps, other data transmission services. For example, a   number of cable system operators recently announced large orders for cable modems, and the   nearterm deployment of Internet access services was one of the most discussed topics at a recent  XJ-industry trade show.JJ {O - MԍE.g., Richard Tedesco, CableNet: Modems Dominate Multimedia, Broadcasting & Cable, Dec.16, 1996, at 94.  X -  `l109.` ` The commercial viability of bundled services is unknown, but will depend on a   Lnumber of factors, including consumer demand, service quality and the technical requirements   Lof the bundled components. For example, some analysts maintain that the success of services   offering access to the Internet through broadband cable wires may be threatened by technological  X -  issues.K  {O- >ԍAndrew W. Davis, Switched Network vs. Hybrid Fiber Coaxial for TwoWay Video From Telcos or Cable, Advanced Imaging, Mar. 1, 1996, at 65. To the extent that bundling does emerge as technologically feasible and economically   desirable for MVPDs, it has the potential to substantially affect competition in markets for the  X-  [delivery of multichannel video programming.Lh  {O- ԍSee, e.g., William Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of  {Ou-Industry Structure (1982). For example, according to one recent research   \report, nearly 80% of American households would like to receive these telecommunications  Xd-services from a single provider, if the overall cost remained the same.Md  {O- ԍMTAEMCI Consumer Research, Branding & Bundling Telecommunications Services: Telephony, Video  {O-and Internet, http://www.americasnetwork.com.  W6<` `  3. Interactive Video and Data Services  X-  X-  bm110.` ` The interactive video and data service ("IVDS") is a pointtomultipoint,  X-  Mmultipointtopoint, short distance communications service in which licensees may provide   information, or services to individual subscribers at locations within a service area, and  X-  subscribers may provide responses.JN  yO&-ԍ47 C.F.R.  95.803(a).J This radiobased interactive service is available for a";N,-(-(ZZ"   variety of uses that may be delivered by, and coordinated with, broadcast television, cable  X-  {television, MMDS, DBS, or any other future television delivery technology.O {Ob- ԍAmendment of Part 0, 1, 2, & 95 of the Commission's Rules to Provide Interactive Video & Data Services, GEN Dkt. No. 912, Report & Order, 7 FCC Rcd 1630 (1992). By itself,   =however, the service is not capable of delivering voice or fullmotion video. Among the types   of services that IVDS licensees may offer, in conjunction with video or data delivery systems,  X-are polls, educational classes, home banking, and home shopping.@P" yOw-ԍ 47 C.F.R.  95.805.@   Xv-  n111.` ` The Commission awarded 18 IVDS licenses by a lottery in 1993 and auctioned an  X_-  additional 594 licenses in 1994.@Q_ yO -ԍ 47 U.S.C.  309(j).@ Each license permits service within a specified service area, which is equivalent to a cellular radio service area.  X -  5o112.` ` During 1996, the Commission made two significant revisions to its rules   concerning IVDS. First, it revised the IVDS "buildout" requirement to eliminate the oneyear   jrequirement (requiring service to 10% of the population or area within the license service area),  X -  while retaining the threeyear and fiveyear requirements (30% and 50%, respectively). R B {O- [ԍAmendment of Part 95 of the Commission's Rules to Modify Construction Requirements for Interactive Video  {O-and Data Services (IVDS) Licenses, WT Dkt. No. 95131, Report and Order, 11 FCC Rcd 2472 (1996).    Second, the Commission revised the rules to permit full mobile use of IVDS Response  X -  LTransmitter Units ("RTUs"), which are the customer units."S  {O-  ԍAmendment of Part 95 of the Commission's Rules to Allow Interactive Video and Data Service Licensees  {O-to Provide Mobile Service to Subscribers, WT Dkt. No. 9547, Report and Order, 11 FCC Rcd 6610 (1996)." This latter change, especially, is expected to assist licensees in becoming competitive in the general telecommunications market.  Xb-  Ap113.` ` A t this time, however, it appears that IVDS services are not available to sufficient   xnumbers of consumers to affect the video marketplace. The Commission intends to hold a second   jIVDS auction in early 1997 (current estimate), which will award an additional 856 licenses. This   will permit additional licensees to fillout the geographic areas in the country that currently have no licensees or service.  X-  X- IV.MARKET STRUCTURE CONDITIONS AFFECTING COMPETITION  X- A.` ` Horizontal Issues in Markets for the Delivery of Video Programming  X-  X|-  q114.` ` In this section of the 1996 Report, we examine several issues concerning horizontal   structure and rivalry in markets for the delivery of video programming. First, we discuss the  XP-  /market definition we used in the 1995 Report, and have used again here. Next, we examine  X;-  ychanges since the 1995 Report in concentration and the extent of competition in local markets. ";< S,-(-(ZZ"   .Finally, we examine changes in concentration at the national and regional levels, including the  X-effects of some recent cable mergers and acquisitions.   X-  W<` ` 1. Market Definition  (#`   Xv-  r115.` ` We begin our examination of horizontal issues by recalling our definition of the   relevant market, which consists of two elements, a relevant product market ("relevant product")  XH-  Zand a relevant geographic market ("relevant geographic area"). In the 1995 Report, we reaffirmed   our use of the 1992 Cable Act's definition of "multichannel video programming service" as a  X -  ystarting point for the definition of the relevant product.fT  {O -ԍ1995 Report, 11 FCC Rcd at 2122 129. f We also repeated our belief that the   relevant geographic area is local, rather than regional or national, because buyers' alternative   jsources of delivered video programming are limited to those sources available in the immediate  X -  area where buyers live.OU Z {O-ԍId. at 212223 130.O We also noted that commenters generally agreed on the cable franchise  X -area as the relevant geographic area.  X-  s116.` ` In the Notice, we invited comment on changes in the structure of markets for the   >delivery of video programming, including changes in the definition of the relevant product.   MAlthough no commenters explicitly addressed the definition of the relevant product in their  XO-  zfilings, they relied (as in previous years) on the 1992 Cable Act's definition of "multichannel   video programming service." As a result, we will continue to use this definition as the basis for  X!-  the relevant product in the 1996 Report. We also sought comment in the Notice on the relevant  X -  .geographic area and whether it has changed since the 1995 Report. As in past Reports, most commenters have generally relied on the cable franchise area as the relevant geographic area.  X-  `t117.` ` Because cable system operators, the largest distributors of multichannel video   programming, remain subject to the franchise process, it is clearly necessary to take into account   the cable franchise area in developing a definition of the relevant geographic area. However, we   also need to consider other geographic areas because the service areas of rival MVPDs may be   larger or smaller than cable franchise areas. Broadcast television and MMDS deliver multiple   jchannels of video programming to entire metropolitan areas areas generally much larger than   a cable franchise region. A SMATV may offer service to only one apartment building an area   much smaller than a cable franchise. Satellite providers such as DIRECTV and Echostar offer   service to the entire nation. These supplyside geographic areas, which are based on the   "footprint" of the relevant supplier, are relevant because they influence the range of choices   available to consumers (the demand side of the market). Because most customers cannot   mreasonably be expected to move to another community simply to receive better video   programming, perhaps the most relevant starting point for the definition of the relevant"!=U,-(-(ZZ "   igeographic market is an assessment of the range of choices a typical consumer has among MVPD offerings to his or her home.  X-  u118.` ` Based on these considerations, we find that the relevant geographic area for   assessing MVPD competition is local and that its extent can be defined by the overlap of the   "footprints" of the various service providers. This area of overlap determines the number of   xMVPD choices available to a typical household. Of equal importance is the relative attractiveness   of the MVPD choices to the household. A rough approximation of their attractiveness is   provided by the subscriber shares of the MVPDs in the local area. In order to obtain a summary   measure of horizontal concentration in the typical local area, we will focus, in the next section,   -on aggregate national subscribership data, which generally reflect the amount, significance, price and quality of choices available to a typical American household.  W <` `  2. Concentration in Local Markets  X -  v119.` ` In both the 1994 and 1995 Reports, we concluded that local markets for the   idelivery of video programming were highly concentrated and characterized by substantial barriers  X{-  to entry by potential distributors.V{ {O-ԍ1994 Report, 9 FCC Rcd at 7541 201; 1995 Report, 11 FCC Rcd at 212324 132. We noted that, in general, sellers in highly concentrated   markets may be able to coordinate their conduct, lessen competition, and increase their rates of   return. As a result, a high degree of concentration accompanied by substantial barriers to entry   jmay result in prices above competitive levels and suboptimal product quality, innovation, and  X-service.  X-  Bw120.` ` In order to obtain a summary measure of concentration in local markets for the   /delivery of video programming, we calculated a HerfindahlHirschman Index ("HHI") for an   Kaverage local market using national subscribership numbers as a surrogate for market share in the  X-  HHI.WZ {O- ԍ1994 Report, 9 FCC Rcd 7623, App. H; 1995 Report, 11 FCC Rcd at 212324 132. In addition to   calculating HHIs in previous competition reports, the Commission has used the HHI in its evaluation of proposed  {OI-  Jtelecommunications mergers. See Applications of Craig O. McCaw and American Tel. & Tel. Co.,File No. ENF93 {O-  44, Memorandum Opinion and Order, 9 FCC Rcd 5836 (1994), recon. denied, Memorandum Opinion and Order on  {O-  Reconsideration, 10 FCC Rcd 11786 (1995), aff'd sub nom., SBC Comm., Inc. v. FCC, 56 F.3d 1484 (D.C. Cir.  {O-  1995); Bell Atlantic Mobile Systems, Inc. and NYNEX Mobile Comm. Co., Order, 10 FCC Rcd 13368 (WTB 1995),  {Mq -application for review pending on other grounds.  As we noted in the 1995 Report, the HHI is a measure of horizontal concentration that  X-  is calculated by summing the squared market shares of the sellers in a market. The United States   Department of Justice ("DOJ") and Federal Trade Commission ("FTC") regularly use the HHI to  Xi-  evaluate the effects of proposed mergers on competition.Xi {O$- ԍUnited States Department of Justice & Federal Trade Commission, Merger Guidelines, 1.5, 4 Trade Reg.  {O%-Rep. (CCH) 13,104 at 20,5735 ("Merger Guidelines"). The DOJ and FTC consider markets"i> X,-(-(ZZ"   jwith an HHI below 1000 as "unconcentrated;" markets with an HHI between 1000 and 1800 are  X-"moderately concentrated;" and markets with an HHI above 1800 are "highly concentrated."Y {Ob-ԍMerger Guidelines, 1.51, 4 Trade Reg. Rep. (CCH) 13,104 at 20,5735 to 20,5736.  X-  @x121.` ` This concentration measure suggests that, on average, local markets for the delivery  X-  of video programming remain highly concentrated. Using the nationwide total number of   subscribers to cable and noncable MVPDs found in Appendix F, Table 1, as a surrogate for   measuring the availability and attractiveness of various options available to the average local  X_-  market, we calculate an HHI of 7905, a decrease from the HHI of 8395 in September of 1995.Z\_Z yOj - ԍThese figures were calculated using the "percentage of MVPD total" figures found in Appendix G, Table  {O2 -  1 of the 1995 Report, 11 FCC Rcd 2180, App. G, Tbl. 1, and infra, App. F, Tbl. 1 of the 1996 Report. The 1995  {O -figure differs from the HHI reported in paragraph 132 of the 1995 Report due to changes in last year's data.  XH-   While the HHI has decreased, an HHI of 7905 remains several times greater than the 1800   threshold at which a market may be considered "highly concentrated." The HHI decrease can be   =attributed to the measurable increase in the noncable MVPD share of subscribers, which rose   ^from less than 5% in 1992, to 9% at the end of September 1995, and 11% at the end of September 1996.  X -  ny122.` ` As noted in the 1995 Report, an alternative approach to measuring concentration  X -  in the average local market is to assign equal market shares to all MVPDs that have similar  X-  capabilities to serve subscribers in such a market.`[~ {O-ԍ1995 Report, 11 FCC Rcd at 2124 133.` Under this approach, a market with five or   fewer firms that have similar abilities to serve customers would be highly concentrated for  Xd-  purposes of a merger analysis.\d {O%-ԍMerger Guidelines 1.41, 4 Trade Reg. Rep. (CCH) 13,104, at 20,5734 to 20,5735. In most markets for the delivery of video programming, there  XM-  are currently one cable operator and up to four rival DBS service providers.L]M {O-ԍSee supra sec. III.B.L Thus, under this   approach, a local market served by five video distributors with roughly comparable levels of   deployed capacity would have an HHI of 2000, which is still in the highly concentrated range.   yIn some programming delivery markets, there may also be, in addition to the cable operator and   \DBS providers, one or more of the following: (1) an overbuilder, (2) an MMDS provider, (3)  X-  some SMATV operators, and/or (4) some additional HSD providers.^4  yO!-ԍWe are not aware of any market where all of these additional providers offer service. If these additional   =competing MVPDs have similar levels of capacity deployed in a market, then, the HHI in these   markets would lie below the 1800 threshold for a highly concentrated market. It should be noted   that this approach to assessing competition rests on the assumption that the available noncable  X~-  MVPDs offer services that are viewed as closely substitutable for cable services by subscribers._~  {O&-ԍMerger Guidelines 1.41, 4 Trade Reg. Rep. (CCH) 13,104, at 20,5734 to 20,5735. "~?V _,-(-(ZZP"   /The actual degree of substitutability between cable and noncable multichannel services is   discussed above in the sections on the individual distribution technologies and below in the section on product differentiation.  W<XX` ` 3. Extent and Nature of Competition in Local Markets(#`  X-  Xv-  Qz123.` ` Whether cable operators can exercise market power under the local conditions   described above depends on other factors that affect the extent of competition. Two important   >factors that affect both the extent and nature of competition in video programming delivery   markets are the ability of the existing alternative distributors to offer differentiated programming services and the conditions of entry.  X -  {124.` ` Product Differentiation. The ability of MVPDs to create varieties of service   /offerings is an important factor that affects the extent of competition in video programming   delivery markets. Such product differentiation affects the nature of competition and the benefits   to consumers. On the one hand, consumers benefit from product differentiation by video  X-  programming distributors because more consumers will be satisfied by varied programming than   jwould be satisfied if all distributors offered the same programming. On the other hand product  Xd-  differentiation allows a firm to raise prices without losing as many of its customers.`d {O- ԍRichard J. Gilbert, Mobility Barriers and the Value of Incumbency, in Handbook of Industrial Organization 503 (Richard Schmalensee & Robert Willig eds., 1992). To the   extent there are few firms offering similar products and entry is difficult, individual firms may  X6-  be able to differentiate their products to the point that there are few, if any, close substitutes.a6" {O -ԍRichard Schmalensee, Product Differentiation Advantages of Pioneering Brands, 72 Am. Econ. Rev. 36061 (1982)   This allows them to exercise market power and reap economic profits and returns on investment   Kthat are greater than can be obtained in competitive markets. Where there are other products that   consumers would switch to in response to relatively slight price changes or where entry is   >relatively easy, however, other firms will seek to obtain some of those profits, resulting in a   product market where consumers have greater choices and pay prices that equal the average costs  X-of production (which includes a normal return on investment).b| {O-ԍDennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 28998 (1994).  X~-  |125.` ` Different MVPDs appear to be pursuing different strategies with regard to product   differentiation relative to cable service. For example, DBS providers, which generally are unable   to carry local broadcast programming at present, are emphasizing both the technical superiority   of their digital service and their unique program offerings (e.g., their comprehensive sports  X"-  -packages) to differentiate their services from those of cable.Sc" {O%-ԍSee supra sec. III.B. S By contrast, MMDS and SMATV   systems generally provide programming and other services similar to those of the incumbent cable" @c,-(-(ZZ"  X-  operator, and compete with the operator on price.%d yOy- ԍSome commenters argue that SMATV operators engage in price competition for entry into MDU buildings  yOA-rather than for individual consumers within those buildings. RCN Comments at 89; OpTel Comments at 45. % Some SMATV operators, however, are   attempting to differentiate their product by providing unique services such as security  X-  <monitoring.Se  {O-ԍSee supra sec. III.F. S LECs appear to be competing with incumbent cable operators on the basis of both   price and product differentiation in those limited areas where LECs have begun to offer video  X-distribution service.Sf {O -ԍSee supra sec. III.E. S Cable overbuilders appear to compete principally on price.QgD {O -ԍSee supra sec. V.B. Q  Xv-  }126.` ` Entry. The conditions of entry include any impediments that wouldbe sellers face   in order to enter a market. To the extent that MVPDs face substantial impediments to entry into   a video programming delivery market, consumers will have fewer potential new supply sources.   Thus, the existence of impediments to entry, combined with the high concentration noted above,  X -  xcould enable incumbent cable operators to exercise market power by charging higher prices, being   less responsive to customer desires, and/or being less efficient and innovative than a successful  X -seller in a competitive market might be.lh  {Ou-ԍSee 1995 Report, 11 FCC Rcd at 2123131. l  X -  ~127.` ` Potential entrants into video programming delivery markets face several substantial  X -  impediments. In order to distribute multichannel video programming, an entrant may (1) incur  X-  =significant sunk costs,ih  {O- ԍBecause sunk costs are associated with investments that cannot be redeployed to another use if their initial  {Ou-  use proves unprofitable, such costs cannot be eliminated even by total cessation of production. See 1994 Report,  {O?-  9 FCC Rcd at 7823, App. H  35; William J. Baumol, John C. Panzar, & Robert D. Willig, Contestable Markets  {O -  Zand The Theory of Industry Structure (1982). Paragraphs 3238 of Appendix H to the 1994 Report describe the policy relevance of sunk costs in the cable distribution and video programming industries. (2) have to obtain a license or certification from federal authorities or   ]a franchise from local authorities, (3) face resistance at the local level from governmental  Xd-  =agencies or bodies,jd  {O5 - ԍSee supra sec. III.E; Cities Question Enforcement of Franchise Requirements on OVS Providers, Comm. Daily, Sept. 13, 1996, at 45. and (4) face incumbentgenerated regulatory or litigation challenges.Jkdz {O"-ԍSee supra sec. V.A.J   Such impediments may be why new (nonDBS) entrants have not yet made major inroads into   =incumbent cable operators' share of subscribers. The 1996 Act attempts to promote entry into  X-  Lmarkets for the delivery of video programming.]l  yO&-ԍ1996 Act, secs. 30105, 110 Stat. at 11832.] It remains to be seen, however, whether the"Al,-(-(ZZ)"   1996 Act and other developments will enable potential entrants to overcome these impediments.   Examples of entry during the past year are discussed above in the sections on distribution technologies.  X-  128.` ` In all but a few local markets for the delivery of video programming, the vast   majority of consumers still subscribe to the service of a single incumbent cable operator. The   resulting high level of concentration, together with impediments to entry and product   differentiation, mean that the structural conditions of markets for the delivery of video   programming are conducive to the exercise of market power by cable operators. The continuing   expansion of DBS, MMDS, and overbuilding is beginning to create an alternative to cable. It   lis difficult to precisely ascertain the impact DBS may be having on cable prices, program   offerings and services in a particular local market. While at least one major cable MSO has   0announced that it is upgrading its systems to offer increased channel capacity and new  X -  programming in response to the nationwide presence of DBS,<m  {ON- yԍJohn M. Higgins, Malone's Turnaround Plan, Multichannel News, Nov. 4, 1996, at __, 1996 WL 13824227;  {O-  JKathryn M. Welling, Not Dead Yet: No Longer a Monopoly, Cable is Still A Good Business, Barron's, Dec. 2, 1996,  {O-  at ___, 1996 WLBARRON'S 13830868; Charles Paikert, Cable Breathes a Bit Easier At Show, Multichannel News,  {O-  Dec. 16, 1996, at 10; see also, Tom Wolzien, Cox Communications: Initiating Coverage with an Outperform Rating,   iBernstein Research, Oct. 11, 1996 (arguing that DBS is expected to only skim cable's growth due to incumbency, cost, and the lack of local signals in the established satellite services).< we note that on the other hand   the US Bureau of Labor Statistics reports that the cable services segment of the Consumer Price   Index has increased at a 8.5% compound annual rate for the eleven months from January 1996   \to November 1996. At the same time, cable subscribership continues to increase, albeit at a  Xy-  -reduced pace from last year.nyH {Or- ԍKim Mitchell, Cable Subscriber Growth Slows to 3%; DBS's Full Impact Seen in '96 Results, Cable World, Dec. 2, 1996, at 1 (citing U.S. Department of Labor Bureau of Labor Statistices). We do, however, see a definite competitive response benefitting   consumers in the few local markets where, in addition to an incumbent cable operator and DBS,   there is direct facilities based competition from MMDS or a cable overbuilder. In these markets,   cable operators are adopting several strategies in response to new entry and increased competition,  X-  .including lower prices, expanded program packages, and improved services .Jo {Op-ԍSee infra sec. V.B.J As noncable   video programming distributors expand further in the future, consumers may be able to rely more   jon competition for the benefits of lower prices and improved programming choices and less on  X-  regulation. However, as we noted in the 1995 Report, it is difficult to predict whether noncable   MVPDs ultimately will provide vigorous rivalry for cable operators or will remain competitors  X-with small market shares or services that are highly differentiated from those of cable systems.`p4  {O#-ԍ1995 Report, 11 FCC Rcd at 2126  138.`  W~<XX` `  4. Concentration of Cable Systems at the National Level (#`  Xg-"gB p,-(-(ZZ"Ԍ X-  129.` `  In the 1995 Report, we noted that the 1992 Cable Act was concerned with, and  X-  placed limits on, the concentration of cable systems at the national level.Oq {Od-ԍ1d. at 212627 139.O These concerns and   <limits reflect the possibility that concentration in the distribution of video programming may have  X-  anticompetitive effects on the supply of programming networks to MVPDs.prZ yO- \ԍIn their decision to approve the Time WarnerTurner transaction with restructuring, the FTC found that   "cable television programming services" sold to MVPDs was a "relevant line of commerce" separate from overtheair   broadcasting and other news and entertainment services, and that the relevant geographic market for examining these  {O -  services is the entire United States. Complaint In the Matter of Time Warner, Inc., FTC Doc. 9610004  2627 (slip. op. Sept. 12, 1996).p For example, if   a few cable operators own a large fraction of multichannel distribution capacity and subscribers,   =they may be able to exercise "monopsony" buying power that would distort the market for the provision of programming networks to all MVPDs.  XJ-  130.` ` In assessing the potential for monopsony buying power in the MVPD programming  X3-  network market, we have in prior Reports examined the percentage of cable subscribers of cable   MSOs on a national basis. Between 1995 and 1996, concentration of cable systems at the   national level increased, whether measured by the subscriber share of the four largest MSOs or  X -  by the HHI. In the 1995 Report, we found that the four largest cable MSOs served 55% of all  X -  cable subscribers nationwide, with TCI (with a subscriber share of 26%), Time Warner (16%),  X -  =Continental (7%), and Comcast (6%) being the four largest.as  {O-ԍ See 1995 Report, 11 FCC Rcd at 212627 139.a In the past year, the percentage   of cable subscribers served by the four largest MSOs has risen to 61.40%, with TCI (27.94%),   jTime Warner (18.94%), Continental/U S West (7.69%), and Comcast (6.83%) remaining the four  X-  largest.qtp  {O- ԍInfra App. F, Tbl. 2A (share of cable subscribers of cable MSOs). Pursuant to Section 11(c) of the 1992   Cable Act, the Commission promulgated horizontal ownership rules which prohibit any entity from having an   J"attributable interest" in cable systems that reach more than thirty percent of all homes passed nationwide by cable,  {O(-  Jor thirtyfive percent if the additional systems are "minoritycontrolled." See Implementation of Sections 11 & 13  {O-  Zof the 1992 Cable Act (Horizontal & Vertical Ownership Limits), MM Dkt. No. 92264, Second Report & Order,  {O-  8 FCC Rcd 8565 (1993) ("Second Ownership Report & Order"); 47 C.F.R.  76.503. The Commission has stayed  {O-  Kenforcement of its horizontal ownership rules pending appellate review. See Daniels Cablevision, Inc. v. United  {OP-  States, 835 F. Supp. 1, 10 (D.D.C. 1993), aff'd in part Time Warner Entertainment Co. v. FCC, 93 F.3d 957 (D.C.   Cir. 1996). In addition, the horizontal ownership rules currently are under reconsideration by the Commission.  {O -  ;Consumer Fed'n. of Am. (Petition for Reconsideration of Second Ownership Report & Order), MM Docket No. 92 {O!-  264 (filed Dec. 15, 1993); Bell Atl. Co. (Petition for Ltd. Reconsideration of Second Ownership Report & Order), MM Docket No. 92264 (filed Dec. 15, 1993).q Examination of changes in the national HHI for cable MSOs reveals a similar increase"Ct,-(-(ZZK"  X-  in concentration. These shares indicate a nationwide cable industry HHI of 1098 in 1995,`u {Oy-ԍ1995 Report, 11 FCC Rcd at 2127 140.` a  X-figure that increased significantly this year to 1326.MvZ {O-ԍInfra App. F, Tbl. 2A.M  X-  $131.` ` However, in assessing the true impact national concentration may have in the   MVPD programming network market, we believe that it is now appropriate to consider the  X-  .presence of all MVPDs and MVPD subscribers in national concentration figures, and not just   cable MSOs and cable subscribers. As their subscribership increases, the significance of DBS,   MMDS and SMATV operators in the MVPD programming network market also increases. As  XJ-  a result, in this and future Reports, we will examine national concentration measures for all  X5-  >MVPDs. While our focus has shifted, Appendix F, Table 2, demonstrates that cable MSOs   continue to be the main distributors of multichannel video programming, with 89% of total   MVPD subscribers. Significantly, Table 2 demonstrates the rapid growth of DBS systems such  X -  [as DIRECTV/USSB and PRIMESTAR indeed, both DIRECTV/USSB and PRIMESTAR count  X -  \among the top ten MVPDs nationwide. However, despite the significant inroads noncable MVPDs have made in subscriber penetration, the largest cable MSOs remain the largest MVPDs.  X-  n132.` ` Table 2 demonstrates that the share of the top four MVPDs (the four largest cable   MSOs) of the nationwide MVPD subscribership market has increased in the past year. In 1995,   the four largest cable MSOs (TCI, Time Warner, Continental, and Comcast), with almost 55%  XO-  <of all cable subscribers, served just under 50% of all MVPD subscribers.uwO {O-ԍ 1995 Report, 11 FCC Rcd at 212627 139, App. G, Tbls. 1 and 2. u Table 2 demonstrates that these same four firms now serve 53.3% of all MVPD subscribers nationwide.  X -  B133.` ` Increased national concentration among the four largest MVPDs is largely the  X-  result of merger and acquisition activity. Since the 1995 Report,Rx~ {O"-ԍId. at 2128 141.R each of the four top MVPDs   has increased subscriber reach through acquisitions. TCI closed its purchase of Viacom's cable  X-  !systems in July 1996,y {O- ԍPaul Kagan Assocs., Viacom Cable's Convoluted Exit, Cable TV Investor, July 23, 1996, at 6; MSOs Clear  {OR -Deal Hurdles, Cable TV Investor, June 20, 1996, at 6. and Time Warner closed its purchase of Cablevision Industries  X-  Corporation ("CVI") in December 1995.zl  {O"- yԍPaul Kagan Assocs., Consolidation/Clustering Drive 1995 Sales to Record, Cable TV Investor, Jan. 26, 1996, at 10. In addition, U S West purchased Continental, the"D z,-(-(ZZp"  X-  third largest MSO, with more than 4.2 million subscribers.2{( {Oy- ԍU S WEST Media Group, U S WEST Media Group and Continental Cablevision Close Merger (press  {OC-  ,release), Nov. 15, 1996; 1996 Paul Kagan Assocs., Inc., Cable Sales on Record Pace Thanks to U S West, Cable TV  {O -  YInvestor, Feb. 29, 1996, at 10; U S West Media Group Announces Continental Cablevision Has Agreed to a Merger,  {O-Creating a World Leader in Cable Communications (press release), Feb. 27, 1996, at 1.2!M  When added to U S West's existing   cable holdings, this acquisition makes US West the third largest MSO, with more than 4.7 million  X-  subscribers.| {O;-  ԍU S West and Continental Cablevision (Petition for Special Relief), CSR4788X, Memorandum Opinion and Order, 11 FCC Rcd 13260 (CSB 1996). Finally, Comcast acquired the cable television operations of the E.W. Scripps  X-Company.} {O -ԍComcast Corp., Comcast Completes Scripps Cable Acquisition (press release), Nov. 13, 1996.  X-  P134.` ` To assess the potential for monopsony power resulting from concentration in the   [MVPD programming network market, the shares in Table 2 can appropriately be translated into   LHHI figures because MVPD programming networks are often purchased on a "persubscriber"   {basis. Table 2 shows the nationwide purchaser MVPD or HHI to be 1013 "moderately concentrated" under the Merger Guidelines approach.  X -  135.` ` The still relatively small nationwide share of subscribers to noncable MVPD   service 11% implies that MVPD programming networks generally cannot rely exclusively   on these distributors as an outlet for their programming. The available evidence suggests that a   successful launch of a new mass market national programming network that is, the initial   subscriber requirement for longterm success requires that the new channel be available to at  X-  =least ten to twenty million households.~ {O- ԍSee Affidavit of Christopher H. Murvin at 8, Affidavit of Jefferi K. Lee at 6, and Affidavit of Roger  {O-  Williams at 8 in Implementation of Sections of the Cable Television Consumer Protection and Competition Act of  {O-  <1992: Rate Regulation (Leased Commercial Access), MM Dkt. No. 92266 & CS Dkt. No. 9660; and Program  {OZ-  Providers Comments at 12 in Implementation of Sections of the Cable Television Consumer Protection and  {O$-  Competition Act of 1992: Rate Regulation (Going Forward), MM Dkt. No. 92266 & MM Dkt. No. 96215. On   hthe other hand, we note that FTC Chairman Pitofsky and Commissioners Steiger and Varney wrote in their Separate Statement concerning the Time WarnerTurner transaction:  X[T]he launch of a new channel that could achieve marquee status would be almost impossible  1without distribution on either the Time Warner or TCI cable systems. Because of the economies  ^of scale involved, the successful launch of any significant new channel usually requires distribution  on MVPDs that cover 40-60% of subscribers. . . . TCI and Time Warner are the two largest  MVPDs in the U.S. with market shares of 26.7% and 17% respectively. Carriage on one or both  systems is critical for new programming to achieve competitive viability. Attempting to replicate  the coverage of these systems by lacing together agreements with the large number of much smaller MVPDs is costly and time consuming.   {ON%-  KSeparate Statement of Chairman Pitofsky, and Commissioners Steiger and Varney, In the Matter of Time Warner  {O&-Inc., FTC File No. 9610004, at 78 (Sept. 12, 1996). Noncable MVPDs currently serve fewer than eight"Ei~,-(-(ZZj"  X-  >million subscribers nationwide,L {Oy-ԍInfra App. F, Tbl. 1.L a figure that appears to be too small an audience in most   circumstances to provide programmers a distribution mechanism that can substitute for cable.   zHowever, the presence and continued growth of these noncable distribution channels may mitigate the dependence of programming networks on cable MSOs.  X-  C136.` ` Our reexamination of national MVPD concentration reveals a moderate and   increasing level of concentration at the national level. Continued noncable MVPD growth   especially from smaller firms such as Echostar and MMDS suppliers may tend to decrease   national concentration levels. On the other hand, continued growth from larger noncable   MMVPDs such as DIRECTV and PRIMESTAR could increase national MVPD concentration.   =However, in the event that noncable MVPD subscribers increase, it may be possible that new   lMVPD programming networks will be able to substitute noncable MVPDs for cable as a successful initial distribution outlet.  W < ` ` 5. Regional Concentration of Cable Systems   X-  }137. ` ` In the 1995 Report, we noted that the desire of cable MSOs to develop "clusters"   >of contiguous cable systems appeared to be a major factor underlying many cable mergers,  Xd-  acquisitions, and exchanges ("swaps").`dZ {Oo-ԍ1995 Report, 11 FCC Rcd at 2128 142.` Cable MSOs continue their trend towards creating large  XM-  regional system clusters.M {O-ԍSee 1994 Report, 9 FCC Rcd at 751821  15056; 1995 Report, 11 FCC Rcd at 212831  14247. The number of clusters of systems serving at least 100,000  X6-  subscribers increased from 97 at yearend 1994 to 137 by yearend 1995.6~ {Oe- lԍPaul Kagan Assocs., Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook, 3940 (1996). The latter number   of clusters accounted for 50% of all cable subscribers. Among the largest MSOs, Time Warner   [had 32 clusters, TCI 32, Cox 9, and Comcast 6. Small MSOs continued to expand their clusters,  X-  too. {Oz- ԍSee 1995 Report, 11 FCC Rcd at 2129 143; Paul Kagan Assocs., Inc., Rural/Small MSOs Charge Spurred  {OD-by Private Equity Partners, Cable TV Investor, Dec. 18, 1995, at 7. In the past year, clusters have been created through both the sales of systems and also  X-  systemforsystem swaps between MSOs.4  yO!- \ԍSwaps enable the MSOs to increase their regional clusters while minimizing financial outlays and avoiding capital gains taxes. The three largest systemforsystem swaps since the  X-  1995 Report occurred when Continental swapped its systems in Illinois and Missouri for TCI's  X-  Ksystems in eastern Massachusetts, and its systems in Virginia and Rhode Island for Cox's system"F ,-(-(ZZ"   iin Weymouth and western Massachusetts, and TCI swapped its Springfield, Missouri, system for  X-the Washington Post system in Santa Rosa, California.L {Ob-ԍInfra App.F, Tbl.5.L  X-  138.` ` In the 1995 Report, we noted that clustering could have both procompetitive and  X-  Lanticompetitive effects.`Z {O-ԍ1995 Report, 11 FCC Rcd at 2130 146.` In response to the Notice, commenters reiterated the arguments in   favor of the procompetitive effects. For example, the NCTA and others continue to view   clustering as creating scale economies through better engineering and system architecture, more   zefficient customer service, centralized administration, regional programming and advertising  XL-  Kopportunities, and improved personnel management.L {O - =ԍNCTA Comments at 22; Mass Media, Comm. Daily, Jan. 19, 1995, letter from NTIA Director Larry Irving to FTC Chairperson Janet Steiger. It is also claimed that cable providers will   #be more competitive across a range of markets (e.g., video programming delivery,  X -  telecommunications, Internet access) if they are "full service providers" competing in all such  X -  markets and that they can best achieve that goal if their "core" cable subscribership is clustered.q F {O-ԍContinental Cablevision Corp., Form 10K, (1996) at v45.q  X -  Finally, clustering also makes cable MSOs more similar in geographic scope to the Bell LECs.  yOy-ԍEach of the Bell holding companies operates as a cluster of areas for telecommunications service.   This, the MSOs say, levels the playing field on which they must enter telecommunications  X -  markets.E h  yO-ԍNCTA Comments at 22.E To the extent that this last effect is procompetitive, it exists principally in telecommunications markets, as opposed to video programming delivery markets.  X}-  139. ` ` Clustering could have an anticompetitive aspect to the extent that it reduces the  Xf-  amount of entry into video programming delivery markets. As noted in the 1994 Report,  XQ-  clustering eliminates the operators of adjacent cable systems as potential overbuilders._Q  {O-ԍ1994 Report, 9 FCC Rcd at 7519 154._ These   operators are relatively lowcost potential overbuilders because they can use their existing   headend and parts of their existing trunk lines to serve the new markets compared to  X -  overbuilding by the operator of a distant cable system. The potential cost saving is significant   because the headend and trunk lines comprise about 25% of the capital investment of a cable  X-  system.S  {O$-ԍId. at 7519 154, n.421.S However, the significance of any effect on the amount of entry appears small. First,  X-  overbuilding has not proved a major means of entry into video programming delivery markets.b {O&-ԍ1995 Report, 11 FCC Rcd at 2078 44.b "G,-(-(ZZ"   MIn addition, in recent instances where overbuilding has occurred or is planned, many of the   overbuilders (e.g., LECs) have not been the operators of existing adjacent cable systems. Thus,   while the Commission will continue to monitor the development of clusters of cable systems, this   development does not appear to pose a significant risk to the growth of competition in video   programming delivery markets, and may enable cable operators to compete more effectively in local markets for telephone and other telecommunications services.  X_- B. ` ` Vertical Integration in the Cable Industry  X1-  P140.` ` In this section, we provide information regarding the status of vertical integration  X -  in the cable industry by updating the information provided in the 1995 Report regarding the  X -  /extent to which video programming services are affiliated with cable operators.  yO~ - ԍVertical integration occurs where a cable system (a video programming service distributor) has an ownership interest in a video programming service supplier or vice versa. We also   provide information on the Commission's enforcement activities relating to the program access, program carriage, channel occupancy, and leased access rules implementing the 1992 Cable Act.  X -  X -  P141.` ` Competitive issues raised by vertical integration in the cable industry continue to  X-  zbe an important element of our analysis. As we noted in the 1995 Report, although vertical  X}-  Zrelationships can often have procompetitive effects,Z}  yON- ԍSuch procompetitive effects can include efficiencies in the production, distribution and marketing of video   programming, and incentives to expand channel capacity and create new programming by spreading the risk inherent  {O-in program production ventures. See e.g., H.R. Rep. No. 862, 102nd Cong., 2d Sess. 56 at 4143 (1992). under certain market conditions, strategic   vertical restraints (achieved by vertical integration, exclusive distribution contracts or   Kmonopsonistic pressure) can also deter entry into the market for multichannel video programming  X8-distribution.`8B {O+-ԍ1995 Report, 11 FCC Rcd at 2135  158.` These issues are discussed more fully below.  X!-  W < ` ` 1.  Status of Vertical Integration   X-  142.` ` The degree of vertical integration between cable system operators and satellite  zdelivered programming providers declined over the past year. Whereas 51% of the national  X-  satellitedelivered cable programming services were vertically integrated last year,F yO3!-ԍId. at 2132 150.F this year we  X-  Zfind that 44% of such programming services are vertically integrated,Od  {O#-ԍInfra App. G, Tbls. 12.O a decrease of nearly 14%.   The decline in vertical integration appears to be largely the result of two factors. First, one of"H ,-(-(ZZA"  X-  jthe largest programming providers, Viacom, sold its cable systems to TCI, {Oy- ԍPaul Kagan Assocs., Inc., Viacom Cable's Convoluted Exit, Cable TV Investors, July 23, 1996, at 6; MSOs  {OC-Clear Deal Hurdles, Cable TV Investors, June 20, 1996, at 6. which means that   the following programming services are no longer vertically integrated: All News Channel, The   [Movie Channel, MTV, MTV Latino, Nickelodeon, Nick at Nite, SciFi Channel, Showtime, USA  X-  Network, and VH1. Second, based on information available to the Commission, we find that  X-  10 of the 16 programming services that have been launched since the 1995 Report are not  X-  vertically integrated.$ {Od - ԍInfra App. G, Tbls. 1, 5. App. G, Tbl. 2 lists existing national programming services without a cable operator holding an attributable interest. As a result of these two developments, 64 of the 145 (45%) national  Xx-  [programming services in operation today, are vertically integrated.x~ {O -ԍInfra App. G, Tbl. 1 (MSO Ownership of National Programming Services). Last year, we found that  Xa-  66 of the 129 (51%) services in operation were vertically integrated.`a {O"-ԍ1995 Report, 11 FCC Rcd at 2132 150.` Although the overall   percentage of programming services that are vertically integrated has fluctuated since 1990 instead   -of following a clear trend, we note that the total number of nonvertically integrated programming services has increased in each of the past three years.  X -  143.` ` Overall, the size of verticallyintegrated ownership interests has remained nearly  X -  the same. Cable MSOs, either individually or collectively, own 50% or more of 47 national cable  X -programming networks, compared with 45 networks last year..  {O- ԍCompare 1995 Report, 11 FCC Rcd at 219698, App. H, Tbl.1 with infra App. G, Tbl. 1. TCI/Liberty  yO-Media and Time Warner hold interests in 24 and 19 of those 47 services, respectively. .  X-  144.` ` However, fewer of the most popular programming services are vertically integrated   jthan was the case last year, although nearly half of the most popular networks remain affiliated   with a cable MSO. In terms of subscribers, 12 of the top 25 most popular cable programming  XM-  networks are vertically integrated, compared with 15 last year.M  {O- ԍInfra App. G, Tbl. 6; Paul Kagan Assocs., Inc., Network Census: June 30, Cable TV Programming, July 31, 1996, at 12. The decline is the result of   -Viacom's sale of its cable systems, offset by the fact that a verticallyintegrated network, Comedy   LCentral, replaced a nonintegrated network, WGN, on the list. Two more of the top 25 services   (CSPAN and CSPAN 2), while not owned in the usual sense by cable operators, were  X-  developed with significant involvement by the cable industry.%V  yO#- jԍCSPAN and CSPAN 2 are nonprofit cable networks, receiving funding through system operators and other  {O$-MVPDs that provide support on a persubscriber basis. 1995 Report, 11 FCC Rcd at 2134  155.% In terms of prime time ratings,  X-  eight of the top 15 cable programming networks are vertically integrated,c {O;'-ԍInfra App. G, Tbl. 7; NCTA Comments, Tbl. 7.c which is a significant"IB,-(-(ZZ"   "decline from last year when 11 of the 15 highestrated cable networks were vertically  X-integrated.g {Ob-ԍ1995 Report, 11 FCC Rcd at 2212, App. H, Tbl. 7.g  X-  145.` ` Vertical integration continues to involve principally the largest cable system   operators. The eight largest cable MSOs have a stake in 63 of the 64 verticallyintegrated  X-  services, or in 98% of all such services.dZ {O-ԍ Infra App. G, Tbl. 5; NCTA Comments, Tbl. 8.d TCI, the largest MSO, holds ownership interests in  Xv-  ! 34 national programming services, approximately 23% of all national cable programming  X_-  <networks.c_ {O -ԍInfra App. G, Tbl. 5; NCTA Comments, Tbl. 8.c This represents a decrease in TCI's level of vertical integration since last year, when  XH-  we reported that TCI held interests in 29.5% of all national programming services, due in part   Lto the restructuring of the Time WarnerTurner transaction. Time Warner, the nation's second  X -  largest MSO, holds interests in 22 national programming services, or approximately 15.3% of all  X -  national programming services.P ~ {O2-ԍInfra App. G, Tbls. 1, 5.P This represents an increase from Time Warner's 14% in  X - 1995.i  {O-ԍ1995 Report, 11 FCC Rcd at 213233 152.i  X -  146.` ` Another change since the 1995 Report was the merger of Time Warner and Turner   [Broadcasting. However, the merger does not account for any increase in vertical ownership in  X-  ythis year's Report because last year cable system operators already had a combined ownership  X}-  interest of greater than 40% in the Turner networks. } {O- >ԍ1995 Report, 11 FCC Rcd at 219698, App. H, Tbl. 1. Prior to the Time Warner acquisition, TCI had a 22.6% equity interest in Turner, Time Warner 18.6%, and Cox and Comcast interests of less than 5%.  On September12, 1996, as a result of  Xf-  /the merger review process, the FTC required a restructuring of the transaction."f  {O- [ԍSee Agreement Containing Consent Order, In the Matter of Time Warner Inc., FTC File No. 9610004 (Sept.   12, 1996). Because of the restructuring, TCI and its subsidiary Liberty Media Corp. agreed to divest their ownership   of 7.5% of Time Warner (the amount they would have obtained from Time Warner in exchange for their ownership interest in Turner).  The FTC   -restructuring required the cancellation of longterm carriage agreements between TCI and several  X8-  Turner networks.X8 {O"- !ԍComplaint, 8  38(b)(2) In the Matter of Time Warner, Inc. According to the FTC's complaint, these   <agreements would lock up scarce channel space on TCI's cable systems for an extended period of time and would   ytend to prevent Time Warner's programming rivals from achieving sufficient distribution outlets. The FTC's   JAnalysis of the Proposed Consent Order states that cancellation of the contracts "would restore incentives for TCI,   Ya cable operator serving nearly a third of the nation's cable households, to place nonTime Warner programming on"&,-(-(&&"   ;its cable systems, in effect disciplining any market power resulting from a combination of Time Warner and Turner programming." Analysis of the Proposed Consent Order to Aid Public Comment, at 9, FTC File No. 9610004. The consent agreement also forbids Time Warner from bundling carriage of"8J,-(-(ZZf"   /"marquee" or "crown jewel" networks Time Warner cannot bundle HBO with any Turner   networks, and Time Warner cannot bundle CNN, TNT and WTBS with any Time Warner   Lnetworks. Time Warner is also prohibited from discriminating on the prices it offers for Turner   programming networks to rival MVPDs, is required to report information on carriage agreements by its cable systems, and its cable systems are required to carry an allnews rival to CNN.  X-  Xv-   147.` ` One other significant development in the past year has to do with the ownership   =of several regional sports programming networks. In 1996, News Corporation's Fox Television   ("Fox TV") entered into a 50/50 joint venture with TCI and Liberty Media. Fox TV contributed   cash and the fX national programming network into the joint venture, and Liberty contributed its   Liberty Sports division, consisting primarily of Prime Sports regional cable sports network  X -  yoperations.e  {O-ԍNews Corp., 1996 Annual Report 9 (1996).e The Prime Sports regional cable network, relaunched this Fall as Fox Sports Net,  X -consists of nine regional sports networks with a combined 25 million subscribers nationwide.: z {O-ԍId.:  X -  148.` ` Since the 1995 Report, 44 new cable services have made announcements about  X -  ztheir plans to begin offering service.t  {Of-ԍNCTA, Cable Television Developments, Spring 1996, at 111122.t Of these 44 new networks, 25 plan to launch service  X-  during the fourth quarter of 1996.j {O-ԍ171 Networks In Works, Comm. Daily, Apr. 29, 1996. j In addition, several services that had planned to launch  X{-  <service during the year since the 1995 Report did not do so. One reason given for not launching   Mis that delays in the deployment of digital compression by cable systems have slowed their   deployment. Without such compression, there is less channel capacity to accommodate a large  X8-number of new channels.:80  {O-ԍId.:  W < #Xj\  P6G;yoXP#` ` 2. Access to Programming   X-  3149.` ` The Commission established rules pursuant to the 1992 Cable Act concerning   jprogramming arrangements between MVPDs and satellitedelivered programming vendors (the  X-  "program access" and "program carriage" rules).;  yO!%- ԍThe Commission's program access are set forth at 47C.F.R. 76.100076.1003, and the program carriage  {O%-rules are set forth at 47 C.F.R.  76.130076.1302. See also 47 U.S.C. 536(a)(2); 47 U.S.C. 548. ; These rules prohibit unfair competition and"K,-(-(ZZ"  X-  discriminatory practices by cable operators and verticallyintegrated programmers yOy- ԍA verticallyintegrated programmer is one that shares ownership interests in common with one or more cable system operators. that may  X-  linhibit competition from other MVPDs.  {O- ԍ1995 Report, 11 FCC Rcd at 2155 157; 1994 Report, 9 FCC Rcd at 752022 157-60, 752830 17378. In addition, the program access rules prohibit   verticallyintegrated programmers from entering into exclusive contracts with cable operators  X-  unless the arrangements are found by the Commission to be in the public interest.Nz yO -ԍ47 C.F.R. 76.1002(c)(2).N In making   kthat public interest determination, the Commission is required to consider, and balance, five  X-enumerated factors concerning the effect and duration of the exclusivity arrangement.N  yOH -ԍ47 C.F.R. 76.1002(c)(4).N  X_-  150.` ` As the Commission has consistently noted, exclusive arrangements can be used to   deter entry and inhibit competition from other MVPDs in markets for the delivery of  X1-  multichannel video programming.1 {O|-ԍE.g., 1990 Report, 5 FCC Rcd at 502132 11230; 1995 Report, 11 FCC Rcd at2135 158. We have also consistently recognized, however, that   yexclusive arrangements can often produce efficiency benefits for the parties involved, and may   increase competition, which can produce lower prices and increased choice for consumers in  X -  programming and distribution markets. ,  {O- ԍSee, e.g., 1990 Cable Report, 5 FCC Rcd at 500811 8291, 503132 12930; 1995 Report, 11 FCC Rcd at 2135 158. When it created the program access regime, Congress   istruck a balance between these opposing effects of exclusive programming arrangements, and the   >Commission has implemented that balance in its rules and determination of program access   complaints. By targeting and eliminating those vertical restraints that can impair competition in   ymarkets for the distribution of multichannel video programming, the Commission's enforcement   <of these rules is designed to contribute to the longterm performance of both distribution markets  Xb-  and programming markets.tb  {O-ԍE.g., 1995 Report, 11 FCC Rcd at 2135  158. t Indeed, the program access rules have been credited as having been  XK-a necessary factor in the development of both the DBS and MMDS industries.K {O!- ԍE.g., Eric Schine, Digital TV: Advantage, Hughes, Bus. Week, Mar.13, 1995, at 14; The Wireless Cable  {O!-Industry, Dillon Read Equity Research, Aug.22, 1994, at3. "4Lt,-(-(ZZ"Ԍ X-  151.` ` Commission Enforcement Activities. The Commission has resolved ten program  X-  access disputes since the 1995 Report. {Od- ԍCorporate Media Partners d/b/a/ Americast v. Continental Cablevision, Inc., 11 FCC Rcd 7735 (CSB 1996);  {O.-  JAmerican Cable Company v. TeleCable of Columbus, Inc., CSR 4206, Memorandum Opinion & Order, 11 FCC Rcd  {O-  J10090 (CSB 1996); Interface Communications Group, Inc., v. Cablevision Systems Corp., CSR 4648P, Order, ___  {O-  =FCC Rcd ___, DA 961520 (CSB Sept. 13, 1996) (involving three separately filed complaints); CAI Wireless  {O-  hSystems, Inc. v. Cablevision Systems, Inc., CSR 4479P, Order, 11 FCC Rcd 3049 (CSB 1996); CAI Wireless Systems,  {OV-  Inc. v. Cablevision Systems, Inc., Order, 11 FCC Rcd 3004 (CSB 1996); Consumer Satellite Systems, Inc. v. United  {O -  xVideo Satellite Group, Inc., CSR 4284P, Order, 11 FCC Rcd 7428 (CSB 1996); OpTel, Inc. v. Century Southwest  {O-  iCable Television, Inc., CSR 4736P, Order, ___ FCC Rcd ___, DA 962146 (CSB Dec. 20, 1996) 1997 WL 558;  {O -  hTELETV Media, L.P. v. Century Communications Corporation, CSR 4822P, Order, ___ FCC Rcd ___ DA 962147  {O~ -(CSB Dec. 20, 1996) 1996 WL 729055. See infra App. H. The Commission also denied a Petition for  X-  =Reconsideration of a program access decision issued in 1995.t  {O - ԍCellularVision of New York, L.P. v. SportsChannel Associates, Order on Reconsideration, 11 FCC Rcd 3001  {O -(CSB 1996); infra App. H. These cases are described in detail in AppendixH.  X-  152.` ` Issues of Concern to Commenters in 1996. Many parties agree that the program  X|-  access rules have helped emerging competitors to cable obtain access to programming, although  Xe-  other parties continue to argue that the rules are unnecessary.Qe  {O-ԍE.g., HBO Comments at 34.Q As discussed below, some   xcommenters allege that denials of access to programming continue to inhibit competition and urge  X7-  expansion of the program access rules. In particular, these parties argue for application of the   zprogram access regime to nonsatellite delivered programming services and to programming   Kservices of nonvertically integrated vendors, both of which are issues that we have addressed in  X -  prior Reports. In addition, commenters urge expedited review of program access complaints,  X -  Zclarification of the exception for preexisting exclusive contracts, expansion of the program access   rules to allow the recovery of damages, and application of the program access rules to exclusive  X -arrangements between verticallyintegrated programmers and noncable MVPDs.  X-  153.` ` Terrestrial Delivery. A number of commenters urge the Commission to expand   ythe application of the program access rules to include all programming regardless of how it is  XU-  distributed.Ub  {Oh - ԍSee, e.g., RCN Comments at 5; WCAI Comments at 2123; Ameritech New Media Reply Comments at4; TELETV Reply Comments at 213. In particular, they argue that, as fiberoptic wiring becomes cheaper and easier to   deploy and use, delivery of programming by terrestrial means instead of via satellite may permit  X'-  cable operators to abuse vertical relationships between themselves and programmers.:' {O$-ԍId.: This fear"'MN,-(-(ZZ"  X-  is raised particularly with regard to local sports networks. {Oy- ԍSee supra para. 148 (observing that Fox TV and TCILiberty have entered into a joint venture to own and operate regional sports programming networks). Other   commenters, however, oppose the application of the program access rules to programming   delivered by means other than satellite, arguing that it would be an unwarranted extension of the  X-program access rules.\" {O-ԍE.g., Viacom Reply Comments at 4 n.4.\  X-  C154.` ` We recognize that improved technology and lower costs are improving the   efficiency of terrestrial distribution of programming, particularly over fiberoptic facilities. As   ya result, it appears that it may become possible for a verticallyintegrated programmer to switch   from satellite delivery to terrestrial delivery for the purpose of evading the Commission's rules  X1-  concerning access to programming.1 {O- ԍSee 1994 Report, 9 FCC Rcd at 7622, App. H  31 (focus should be on "policyrelevant" barriers to entry).  {O`-  See also In re Implementation of Section 302 of the Telecommunications Act of 1996 Open Video Systems, Second   Report and Order ___ FCC Rcd ___, FCC 96249, 103 n.451 (1996) ("[W]e do not foreclose a challenge under   Section 628(b) to conduct that involves moving satellite delivered programming to terrestrial distribution in order to evade application of the program access rules and having to deal with competing MVPDs."). If a trend of such conduct were to occur, we would have   /to consider an appropriate response to ensure continued access to programming. To date, however, we have seen no evidence that such strategic conduct has actually occurred.   X -   155.` ` NonVertically Integrated Programming. Several parties argue for an extension  X -  of the program access rules to nonvertically integrated programmers. h  {O-ԍSee, e.g., RCN Comments at 5; SBC Comments at 6; WCAI Comments at 2022. For example, Ameritech   New Media requests that the Commission recommend to Congress that the law be clarified or   Zchanged to ensure that new MVPDs have access to nonvertically integrated video programming.   In support, it cites press reports which state that two broadcast networks are offering exclusive   <carriage terms to incumbent cable operators for their new 24hour news channels and asserts that  XM-  -such contracts could have a stifling effect on competition.TM  yO-ԍAmeritech New Media Comments at 9. T In addition, WCAI filed an ex parte   kletter on November 18, 1996, alleging that several nonvertically integrated programmers are   -refusing outright to provide service to MMDS operators, and that other nonvertically integrated  X-  programmers expect to be paid surcharges by MMDS operators.q  {OC"-ԍSee WCAI Nov. 18, 1996 ex parte presentation at 12.q WCAI argues that cable   operators have the same power and incentive to induce nonvertically integrated programmers to   /deny competing MVPDs access to their programming as they do with respect to vertically X-  xintegrated programmers. {O&- zԍId. See also David Waterman, Vertical Integration and Program Access in the Cable Television Industry, 47 Fed. Comm. L.J. 511 (1995). Consequently, WCAI argues that the program access rules should be"Nv,-(-(ZZ"   applied to all programming without regard to the degree of integration between programmers and cable operators.  X-  156.` ` Other commenters urge the Commission to reject these calls for expansion of the   /program access rules to cover nonvertically integrated programmers, arguing that such an  X-  interpretation is inapposite to both legislative intent and the policies underlying the rules. {O- /ԍSee, e.g., ESPN Reply Comments; Lifetime Reply Comments at 47; NCTA Reply Comments at 1215; Viacom Reply Comments at 37.   <These commenters argue that Congress clearly intended to limit the power of cable operators and  X_-  itheir affiliates rather than seeking to regulate programmers per se,N_" yO2 -ԍLifetime Reply Comments at 5.N and that Congress reaffirmed   zthis intent by limiting the program access provisions in the 1996 Act to verticallyintegrated  X1-  iprogrammers.1 {O-  ԍE.g., ESPN Reply Comments at 12; Viacom Reply Comments at 5. See Communications Act 628(j), 47 U.S.C. 548(j) (as amended by the 1996 Act to cover programming carried by common carriers). They also argue that no meaningful evidence has been presented indicating that   noncable MVPDs are being denied access to programming from nonverticallyintegrated  X -  .programmers.V  {O-ԍE.g., ESPN Reply Comments at 2.V Finally, commenters opposing extension of the program access rules to non  verticallyintegrated programmers argue that such an extension would only impede the   development of new programming, and would not promote competition with incumbent cable  X -systems.N  yO -ԍViacom Reply Comments at 45.N  X-  #157.` ` As in prior years, we recognize the concern raised by some parties that access to   programming from nonvertically integrated programmers may inhibit competition in markets for  Xb-  the distribution of multichannel video programming.b.  {OA-ԍ1995 Report, 11 FCC Rcd at 2140 169; 1994 Report, 9 FCC Rcd at 753031 179-80. ġ The evidence before us, however, is   linsufficient for us to make any determination concerning the effect, if any, that exclusive   arrangements involving nonvertically integrated programmers may have on competition in local markets for the delivery of multichannel video programming.  X-  158.` ` PreExisting Exclusive Arrangements. Several commenters argue that the   "grandfathering" provision of Section 628(h) of the Communications Act which exempts   exclusive contracts entered into on or before June 1, 1990, and renewed or extended before   October 5, 1992, from the public interest inquiry of exclusive contracts raises serious  X-  -competitive concerns.  {O&- /ԍSee, e.g., Ameritech New Media Comments at 910; OpTel Comments at 67; GTE Service Corp. Reply Comments at 68. For example, Ameritech New Media submits that local exchange carriers"O,-(-(ZZo"   >and their affiliates typically do not have any exclusive distribution contracts because LECs   generally were barred at that time (before June 1, 1990) from providing video programming   services. Thus, Ameritech New Media contends that it is disadvantaged visavis cable operators,   iin that cable operators are able to take advantage of the grandfathering provision, while LECs and  X-  their affiliates are not.S yO-ԍAmeritech New Media Comments at 8.S After review, we find that we do not have and Ameritech New Media   -has not provided sufficient information to permit us to make any decision at this time regarding   >the alleged anticompetitive effects resulting from the grandfathering provisions of Section  X_-628(h).  X1-  159.` ` Expedited Enforcement. To improve enforcement of the existing rules, some  X -  commenters urge expedited review of program access complaints.g X yO% -ԍOpTel Comments at 10; TELETV Reply Comments at 2022.g As a preliminary matter, we   Kbelieve the procedures established in our rules for program access complaints already provide for   an expedited procedure to resolve such disputes, and that commenters have not presented any   additional evidence to suggest that revising these procedures would further accelerate this process.   Nonetheless, we reaffirm our commitment to follow Congress's clear mandate in both the 1992   Act and, most recently, the 1996 Act to promote competition as quickly as possible.   Consequently, the Commission will continue both to process program access complaints in the   most expeditious fashion possible, and to continue vigilant and meaningful enforcement policies in this area.  X6-  160.` ` Penalties and Damage Awards. Several commenters argue that the Commission   should provide for damage awards against parties found to have violated the program access  X -  rules.  {O- =ԍSee NRTC Comments at 89; NRTC Reply Comments at 23, 56; OpTel Reply Comments at 1; TELETV Reply Comments at 1320. According to these parties, without a meaningful penalty, the program access provisions   are insufficient, standing alone, to deter strategic vertical conduct by cable operators. Other   parties disagree, arguing that a damages remedy is neither necessary nor appropriate under the  X-  program access rules.zB {O-ԍSee, e.g., Superstar Satellite Entertainment Reply Comments at 34.z Although we recognize the concerns of the commenters, these parties   have not provided sufficient evidence to persuade us that penalties are necessary at this time to ensure effective enforcement of our program access rules.  Xi-  2161.` ` Sublicensing. OpTel, RCN and others assert that in markets where they compete   against vertically integrated cable MSOs, the MSOs have refused to sublicense popular cable  X=-  network programming, particularly local and regional sports and other popular satellite cable"=P,-(-(ZZ"  X-  >programming.0" {Oy- \ԍWCAI Comments at 21; OpTel Comments at 10; RCN Comments at 4. See also Communications Act    628(b), 47 U.S.C.  548(b). TELETV, a program packager serving CBand satellite subscribers, notes in its   comments on a related matter that in some markets it serves, local and regional sports programming is as popular  yO-with its subscribers as the networks' primetime shows in programming appeal. TELETV Reply Comments at 3.0 OpTel and RCN contend that this refusal precludes them from offering an   attractive program lineup. As a result, they claim to be disadvantaged in trying to attract  X-  subscribers and not to be able to compete effectively against the incumbent cable franchisee.d yO5-ԍOpTel Reply Comments at 12; RCN Comments at 56. d  X-  %162.` ` The parties raising these sublicensing concerns have filed program access  X-  complaints with the Commission concerning the same facts that form the basis for their  Xv-  assertions.&vB {Oi - ԍOpTel, Inc. v. Century Communications, Inc., Complaint, CSR4736P (filed April 19, 1996), Joint  {O3-  lStipulation of Dismissal, DA 962146, __ FCC Rcd __ (CSB Dec. 20, 1996), 1997 WL 558; Interface  {O-  -Communications Group, Inc. v. Cablevision Systems Corp., Order, DA 961520, __ FCC Rcd __ (CSB Sept. 13, 1996), CSR4648P, 1996 WL 523477, Petition for Partial Reconsideration (filed Oct. 15, 1996). We believe that those complaint proceedings are the appropriate arenas for   examining the particular merits of their claims, and decline to interfere with those proceedings  XH-by addressing the comments in this Report.  X -  163.` ` Exclusive Arrangements with NonCable MVPDs. National Rural   -Telecommunications Cooperative ("NRTC") argues in its comments that it is unable to obtain the   mright to distribute programming it deems critical for competitive success because that   programming is covered by exclusive arrangements with other noncable MVPDs in areas  X -  unserved by cable.F 0  yO-ԍNRTC Comments at 34.F NRTC argues that its failure to receive the desired programming is the   Lresult of efforts by the verticallyintegrated cable industry to stifle competition from noncable   MVPDs. TCI responds to NRTC's argument by pointing out that the Commission has explicitly   rejected this concern, and argues that NRTC is in no position to complain about exclusive   =arrangements with its competitors since it also is the beneficiary of exclusive arrangements for  XO-access to programming.MO  yO-ԍTCI Reply Comments at 1113.M  X!-  164.` ` As we discussed in response to NRTC's argument last year, the Commission has   Zdenied a petition by NRTC to include exclusive contracts between DBS operators (which are non X-  cable MVPDs) and verticallyintegrated programmers within the per se prohibition of Section  X-  628(c)(2)(C) of the Communications Act and Section 76.1002(c) of the Commission's rules.\P  {O$- ԍ1995 Report, 11 FCC Rcd at 213839 166 (citing Implementation of Sections 12 & 19 of the 1992 Cable  {O%-  hAct, Dev. of Competition & Diversity in Video Programming Dist. & Carriage, MM Dkt. No. 92265, Memorandum Opinion & Order on Reconsideration of the First Report & Order, 10 FCC Rcd 3105 (1994)).   Instead, the Commission noted that NRTC, or any other aggrieved party, may pursue relief from"Qt,-(-(ZZ"   such exclusive arrangements through other provisions of the program access and program carriage  X-rules.i {Ob-ԍ1995 Report, 11 FCC Rcd at 213839  166.i We see no reason to revise our determination based on the record before us this year.'#'#  V-` `  b.` Additional Competitive Issues Relating to Vertical Integration(#  X-  ^165.` ` Channel Occupancy Comments. In the Notice, we sought comments on the channel  Xx-  [occupancy rules and their effect on competition.e\xZ {O -  ԍNotice, 11 FCC Rcd at 7417 20, 22. The channel occupancy rules restrict the number of channels on  {OM -  xa cable system that may be occupied by programmers affiliated with the owner of that system. See 1994 Report, 9 FCC Rcd at 7521  159 n.432.e PayPerView Network, Inc. d/b/a Viewer's   Choice ("Viewer's Choice") states that the channel occupancy rules are unwarranted and are an  XJ-  .artificial restraint that may deprive consumers of programming they prefer.J~ yOy- zԍViewer's Choice Comments at 23. Viewer's Choice is owned by two major motion picture companies and seven MSOs and offers five channels of payperview programming. Viewer's Choice   claims that, while it is difficult to quantify the precise impact of the channel occupancy rules,   jthese restrictions have limited the ability of affiliated cable systems to offer as many