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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** B efore the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Annual Assessment of the Status of ) CS Docket No. 97-141 Competition in Markets for the ) Delivery of Video Programming ) FOURTH ANNUAL REPORT Adopted: December 31, 1997 Released: January 13, 1998 By the Commission:Chairman Kennard and Commissioners Ness, Furtchgott-Roth and Tristani issuing separate statements. Table of Contents Paragraph I. Introduction 1 A. Scope of this Report . . . . .. . . 2 B. Summary of Findings and Reccommendations. . 6 II. Competitors in Markets for the Delivery of Video Programming .. . . 12 A. Cable Industry. . .. . . . . .. . . 12 B. Direct Broadcast Satellite Service . 54 C. Home Satellite Dishes. . . . .. . . 68 D. Wireless Cable Systems . . . .. . . 71 1. Multichannel Multipoint Distribution Service. . . . . .. . . 71 2. Local Multipoint Distribution Service 79 E. Satellite Master Antenna Television Systems 82 F. Broadcast Television Service. .. . . 90 G. Other Entrants. . .. . . . . .. . . 97 1. Internet Video . . . . .. . . 97 2. Home Video Sales and Rentals . 103 3. Interactive Video and Data Services . 107 H. Local Exchange Carriers . . .. . . 108 I. Electric and Gas Utilities. . .. . . 120 III. Market Structure and Conditions Affecting Competition . . . .. . . 122 A. Horizontal Issues in Markets for the Delivery of Video Programming. 122 1. Market Definition. . . .. . . 123 2. Concentration in Local Markets 126 3. Competitors Serving Multiple Dwelling Units.. . . . . .. . . 129 4. Regional Concentration of Cable Systems. . .. . . . . .. . . 140 5. Concentration in the National Market. 149 B. Vertical Integration and Other Programming Issues.. . . . . .. . . 157 1. Status of Vertical Integration 157 2. Other Programming Issues.. . . 166 C. Technical Advances.. . . . . .. . . 171 IV. Competitive Responses. . . . .. . . 178 A. New Case Studies. .. . . . . .. . . 178 B. Preliminary Findings . . . . .. . . 205 V. Issues Relating to Federal Laws and Regulations. .. . . . . .. . . 211 A. Over-the-Air Reception Devices.. . . 212 B. Inside Wiring . . .. . . . . .. . . 219 C. Pole Attachments. .. . . . . .. . . 222 D. Television Towers for DTV . . .. . . 227 E. Program Access Issues. . . . .. . . 229 F. Horizontal Ownership Issues . .. . . 239 G. Copyright Act . . .. . . . . .. . . 241 H. MVPD Carriage of Broadcast Signals . 248 I. Public Service Obligations for DBS . 253 J. Navigation Devices.. . . . . .. . . 256 VI. Video Description .. . . . . .. . . 258 VII. Administrative Matters . . . .. . . 272 Appendices A. List of Commenters B. Cable Industry Tables C. DBS and HSD Tables D. SMATV Tables E. Horizontal Issues Tables F. Vertical Integration Tables G. Program Access Matters Resolved I. INTRODUCTION 1. This is the Commission's fourth annual report ("1997 Report") to Congress submitted pursuant to Section 628(g) of the Communications Act of 1934, as amended ("Communications Act"). Section 628(g) requires the Commission to report annually to Congress on the status of competition in markets for the delivery of video programming. Congress imposed this annual reporting requirement in the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act") as a means of obtaining information on the competitive status of markets for the delivery of video programming. A. Scope of this Report 2. In this 1997 Report, we update the information in our previous reports and provide data and information that summarizes the status of competition in markets for the delivery of video programming. The information and analysis provided in this report is based on publicly available data, filings in various Commission rulemaking proceedings, and information submitted by commenters in response to a Notice of Inquiry ("Notice") in this docket. To the extent that information included in previous reports is still relevant, we do not repeat that information in this report other than in an abbreviated fashion, and provide references to the discussions in prior reports. 3. Throughout this year's report, we provide information regarding the implementation of the Telecommunications Act of 1996 ("1996 Act") and the effect that its provisions and those of the 1992 Cable Act have had on the status of competition in markets for delivery of video programming. The 1996 Act was intended to establish a "pro-competitive de-regulatory national policy framework" for the telecommunications industry. Consistent with this philosophy, the 1996 Act extends the pro-competitive provisions of the 1992 Cable Act by adding several provisions that focus on removing barriers to competitive entry and on establishing market conditions that promote competition. Among the 1996 Act's provisions that affect competition in video markets are the provisions that: (a) prohibit restrictions on the use of certain over-the-air reception devices; (b) change the definition of a cable television system; (c) permit cable operators to offer discounted bulk rates in multiple dwelling units; (d) provide for competition in multichannel video programming distribution ("MVPD") "navigation" equipment markets; (e) allow the entry of exempt public utility companies into video markets; (f) eliminate entry barriers for entrepreneurs and small businesses; and (g) establish open video systems ("OVS"). Recent activity brought about by these provisions is discussed in this report. 4. In Section II we examine the cable television industry, existing MVPD and other program distribution technologies, and potential competitors to cable television. Among the MVPD systems or techniques discussed are direct broadcast satellite ("DBS") services and home satellite dishes ("HSDs"), wireless cable systems using frequencies in the multichannel multipoint distribution service ("MMDS") or local multipoint distribution service ("LMDS"), satellite master antenna television ("SMATV") systems and broadcast television service. We also consider several other existing and potential distributors of and distribution technologies for video programming including, the Internet, home video sales and rentals, and interactive video and data services ("IVDS"), local exchange telephone carriers ("LECs"), and electric and gas utilities. 5. In Section III of this report, we examine market structure and competition. We evaluate horizontal concentration of cable television systems and vertical integration between cable television systems and programming services. We also discuss competitors serving multiple dwelling unit ("MDU") buildings. We further discuss program access and technological advances. In Section IV, we examine evidence of competitive responses by industry players that are beginning to face competition from other MVPDs. Section V is a discussion of issues relating to federal laws and regulations concerning the emergence of a freely competitive MVPD marketplace. Finally, in Section VI, we report on video description of video programming. B. Summary of Findings and Recommendations 6. A comprehensive review of this nature necessarily entails a detailed examination of an enormous amount of data. The exposition and discussion that follows is intended to serve, among other things, as a useful basis for determining what, if any, regulatory or congressional actions are needed to promote competition in the MVPD marketplace and thereby bring to consumers greater choice and improved service at the lowest possible price. 7. At the broadest level, we note that 87% of MVPD subscribers receive service from their local franchised cable operator. While this represents a slight decrease from last year, it shows the cable industry continues to occupy the dominant position in the MVPD marketplace. Further, cable operators on average increased their rates 8.5% for regulated programming and equipment over the 12-month period from July 1996 to July 1997. 8. The cable industry's large share of the MVPD audience is a cause for concern, in large part, only to the extent it reflects an inability of consumers to switch to some comparable source of video programming. Below we identify and discuss alternative sources of multichannel video programming, as well as regulatory and technological developments that have enhanced, or soon may enhance the competitive significance of alternative providers. In each case, however, we note various factors that place the alternative provider at a competitive disadvantage. For example, legal and technical constraints limit the ability of direct-to-home satellite providers to carry the signals of local broadcasters that are a staple of a cable operator's programming fare. Likewise, pending the deployment of digital and compression technology, a wireless cable operator is limited to a total of 33 channels, while the capacity of cable systems is such that almost 60% of cable subscribers are served by a cable operator that has a channel capacity of at least 54 channels. 9. As discussed below, the Commission recently has taken a series of steps to minimize and eliminate obstacles to competition. On December 18, 1997, we adopted a Notice of Proposed Rulemaking that seeks to ensure that MVPDs are not foreclosed from obtaining, and offering to their subscribers, cable programming that is distributed by programmers that are vertically integrated with cable operators. We have adopted and enforced rules preempting governmental and private restrictions that unreasonably interfere with a consumer's right to install the dishes and other equipment necessary to receive programming services from direct-to-home satellite, wireless cable, and other alternatives to franchised cable. In October 1997, we adopted new rules that make it easier for the owners and residents of a multiple dwelling unit to change providers, by providing certainty to alternative MVPDs regarding their rights to use the internal wiring installed in the building by the incumbent provider. The Commission also has increased the amount of spectrum available for wireless uses, and eliminated restrictions on the use of that spectrum, for the benefit of wireless providers. The Commission also has encouraged the development of digital television which may provide new competition. 10. Initiatives such as these are critical to the development of a competitive marketplace that, one day, will render superfluous cable rate regulation and other rules. In Section IV, below, we note the significant steps that cable operators have taken when subject to head-to-head competition, in the relatively few areas where such competition has developed. In such cases, cable operators have responded quickly with a mix of increased programming choices, lower rates, and improved customer service. The exact combination of these responses has varied among operators, as it should in a competitive market where consumer demand -- not monopolist strategies or government regulations -- dictates the supplier's response. We will continue to strive to make a competitive marketplace a reality for all consumers. 11. The following paragraphs contain a more detailed summary of the findings in this 1997 Report: OVERVIEW OF VIDEO PROGRAMMING DISTRIBUTION MARKET: þ Geographic and Product Markets: For purposes of analysis, competition in the delivery of video programming involves local markets in which consumers can choose among particular multichannel or other video programming distribution services. The products that are sold in these markets consist of bundles of attributes -- antenna service, basic or optional tiers or packages of video programming channels, premium per-channel charge services, pay-per-view channels, and others. Providers of these services increasingly will participate in a broader telecommunications market that includes both video and nonvideo products as new communications services are added to their offerings. National, regional, and local markets are also involved in the video programming purchasing activities of these video providers. þ MVPD Market Overview: A total of 73.6 million households subscribed to multichannel video programming services as of June 1997, up 2.8% over the 71.6 million households subscribing to MVPDs in September 1996 reported in the 1996 Report. This subscriber growth accompanied a 2.9 percentage point increase in multichannel video programming's penetration of television households to 75.9% in June 1997. During this period, the number of cable subscribers continued to grow, reaching 64.2 million as of June 1997, up 1% over the 63.5 million cable subscribers in September 1996. Since the 1996 Report, cable's share of total MVPD subscribers, however, continued to decrease from 89% of all multichannel video subscribers as of September 1996 to 87% of all multichannel video subscribers as of June 1997. Conversely, noncable subscribers continued to grow, constituting 13% of all multichannel video subscribers as of June 1997, up from 11% last year. The total number of noncable MVPD subscribers grew from 8.1 million as of September 1996 to 9.5 million as of June 1997, an increase of almost 20% since the 1996 Report. Local markets for the delivery of video programming generally remain highly concentrated and are still characterized by some barriers to both entry and expansion by competing distributors. DBS service is widely available and constitutes the most significant alternative to cable television. The digital technology employed by DBS provides high channel capacity and high picture quality. However, DBS service is different from cable service in a number of respects, including: (1) local broadcast signals are not available by satellite; (2) up front equipment and installation costs; and (3) the need to purchase additional equipment to receive service on additional television sets. Competitive overbuilding by franchised cable systems remains minimal, but is increasing and appears to improve service and/or pricing where it exists. MVPDs using other distribution technologies have not posted subscribership increases comparable to DBS increases, but are in the process of testing digital technology that has the potential to improve significantly the competitiveness of their services. MARKET PARTICIPANTS þ Cable Systems: Incumbent franchised cable systems remain the primary distributors of multichannel video programming. A cable operator is typically franchised by a unit of local or state government to install and maintain cable facilities in public rights-of-way for the purpose of offering broadcast and satellite services throughout a community. Since the 1996 Report, the cable television industry has continued to grow in terms of subscribership (up to 64.2 million subscribers as of June 1997, a 1% increase from September 1996), channel capacity (average channel capacity increased 13.6% to 58.6 channels by June 1997), programming services distributed (17% increase in the distribution of national cable programming services), revenues (12.2% increase between September 1996 and June 1997), audience ratings (8.6% increase between September 1996 and June 1997 to an average 38 share for cable programming services), and expenditures on programming (an approximate 10.6% increase). Although cable subscribership continued to increase in absolute terms, its share of overall MVPD subscribership decreased from 89% to 87%, continuing the gradual decline in market share noted in the 1996 Report. Rates for cable services have increased over the last year. A Commission survey of cable industry prices indicates that the average monthly rate for programming services offered on basic and cable programming service ("CPS") tiers and equipment charges increased from $26.57 on July 1, 1996, to $28.83 on July 1, 1997, an increase of 8.5%. Cable operators participating in the survey state that the increase in cable rates is largely attributable to inflation, increased programming costs, channel additions, and system upgrades. Consumers Union and Consumers Federation of America filed a petition asking the Commission to freeze current rates for all regulated cable services while it investigates why rates are increasing so rapidly and considers changes to its cable rate regulation formula. The petitioners argue that these rate increases are due, in part, to the greater consolidation of the cable industry and other developments that have increased concentration in the cable industry and undercut competition in the video marketplace. þ Direct-to-Home ("DTH") Satellite Service (DBS and HSD): Video service is available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers' premises, and from medium and low power satellites requiring larger satellite dish antennas. It is estimated that there are in excess of 5.1 million DBS and medium power (Primestar) subscribers and between 3.8 and 4.0 million HSD users, although only about 2.1 million HSD subscribers actually purchase programming packages. DIRECTV and Primestar, which have the largest number of DBS subscribers, are again among the 10 largest providers of multichannel video programming service. Although the DBS share of the video market is continuing to expand, there are indications that its future growth may be slower than previously expected. The sale of large (HSD) dishes has declined as small (DBS) dish services have become more readily available. DBS service is available nationwide (although some households cannot receive it due to physical obstacles), employs an advanced digital transmission technology, has some unique programming distribution rights, and is not subject to a variety of regulatory burdens imposed on franchised cable operators (e.g., franchise fees). DBS service includes a significant number of pay-per- view programming options and is particularly competitive for high revenue producing cable subscribers. DTH satellite service, while it has certain advantages over traditional cable service, is not, by itself, a direct substitute for cable service given the continued popularity of broadcast television programming and the absence of local broadcast signals from satellite distribution. DBS service more closely replicates cable service in areas where access to local broadcast signals is possible through over-the-air antenna reception. DTH subscribership varies from 23.6% in Montana to 2.3% in New Jersey, with a share of approximately 9.8% of national MVPD subscribership. þ Wireless Cable Systems: As of June 1997, approximately 252 MMDS or wireless cable systems were in operation, mainly in urban areas. An MMDS operator transmits signals to microwave antennas installed at subscribers' residences. To function properly, wireless cable requires a clear line of sight from the transmitter to the point of reception and thus is more difficult to operate in areas where terrain, trees, or buildings block reception. Since September 1996, the wireless cable industry suffered an aggregate loss of 8.8% of its subscribers. In some markets, wireless cable providers intentionally stopped marketing their analog service in anticipation of the near term availability of digital transmission systems. Digital service, after a number of delays, has now been introduced in a number of markets and appears to produce dramatically better picture quality and increased numbers of channels. As of June 1997, wireless cable had a 1.5% share of national MVPD subscribership. þ SMATV Systems: SMATV systems use some of the same technology as cable systems, but do not use public rights-of-way, and focus principally on serving subscribers living in MDUs. SMATV subscribership increased 10.7% since the last report. Many SMATV operators are upgrading facilities, implementing digital transmission and microwave headend technologies, and expanding service offerings to include DBS programming, Internet access, telephone service, and security services. SMATV systems had a 1.6% share of the national MVPD subscribership as of June 1997. þ Telephone Companies: The 1996 Act significantly expanded the opportunities for local telephone companies to compete in video programming distribution markets. Telephone company (local exchange carrier or LEC) entry into this business, however, has proceeded sporadically and has been highly dependent on the business strategies of the individual companies involved. Virtually none of the video delivery by LECs at this time involves facilities that are technically integrated with existing telephone plant or that are used to distribute both video and telephone traffic. Some LECs (Ameritech, BellSouth, GTE, and SNET) have continued to expand franchised cable operations within their telephone service areas or to acquire in-region MMDS systems. Others (US West, Bell Atlantic, and SBC) have minimized or abandoned further activities in multichannel video programming within their regions. Tele-TV and Americast, two joint ventures organized by LECs to provide original video programming and packaging, have significantly scaled back their operations. þ Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery of video programming -- the open video system ("OVS"). Under these rules, a LEC or other entrant may provide in-region distribution of video programming to subscribers, although the OVS operator must provide non-discriminatory access to unaffiliated programmers on a portion of its channel capacity. The Commission has certified Bell Atlantic to operate an OVS system in Dover Township, New Jersey. The Commission also has certified five other OVS systems in eight areas. þ Video Cassette and DVD Sales and Rentals: Video cassettes provide feature films similar to those distributed by cable operators on premium channels and others involved in the distribution of video programming. The most recent available data (for 1996) show that 88% of U.S. television households have a video cassette recorder ("VCR"). The U.S. video cassette rental and sales market is estimated to receive $15.6 billion in annual revenues, an amount that significantly exceeds the combined total spending of $7.2 billion in 1996 for similar products distributed by cable television, satellite, and other MVPD pay television services. The introduction of Digital Versatile Discs ("DVD") and Disc Players, which became available to the public in 1997, could provide a significant alternative to VCRs and cassettes and to premium and pay-per-view channels with similar content distributed by MVPDs. þ Electric Utilities: Section 103 of the 1996 Act removed regulatory impediments to the entry of "registered" public utility holding companies, including in particular providers of electric power, into telecommunications and video markets. Over the last year, a number of publicly- and investor-owned utilities have announced plans or have commenced ventures involving multichannel video programming distribution. Utilities, however, are not yet actual participants in the market for the distribution of video programming. þ Internet Video: Video programming may be distributed over the Internet or other data channels for viewing on computer terminals. This is accomplished by using video compression technologies and through downloading of the video data for later playback or through video "streaming." Due to bandwidth and other limitations, this method of video distribution does not yet produce programming that is comparable in length, quality, or convenience to broadcast video. Before Internet distribution of video becomes competitive in the video distribution marketplace, significant improvement must be made in this form of delivery. þ Broadcast Television: Broadcast television is available to the public both through direct reception and through MVPD distribution and continues to be the public's primary source of video programming, regardless of transmission medium. The four major television broadcast networks still account for a 59% share of prime time television viewing for all television households. The number of television broadcast stations continued to increase (to 1561 in 1997 from 1550 in 1996). Television broadcasting remains a significant alternative to other means of video programming distribution for viewers, programmers and advertisers. However, viewership of broadcast station programming continued to gradually decline as viewership of cable and satellite network programming increased. Approximately 23% of all television households receive television programming entirely from over-the-air television broadcast reception. In the years ahead, fundamental changes in the nature of broadcast television will be taking place. The Commission has adopted rules for implementation of digital television ("DTV") and broadcasters have continued testing DTV as they plan for the use of DTV spectrum. Under the Commission's rules for DTV, digital encoding and transmission technology will permit stations to broadcast: one or perhaps two High Definition Television ("HDTV") signals; multiple streams of Standard Definition Television ("SDTV") signals; or a combination of the two. The first DTV stations will begin broadcasting in the top ten markets by November 1998, with the digital transition currently scheduled to be completed by 2006. LOCAL, REGIONAL, AND NATIONAL HORIZONTAL MARKET DEVELOPMENTS þ Multiple Dwelling Unit Buildings as a Separate Market: Video distribution competition within and for multiple dwelling unit buildings ("MDUs") appears to be developing as a distinct market separate from neighboring areas. Competitors for this market face different economics, technical applications, and regulatory issues. þ Local Market Competition for Video Subscribers: Local markets for the delivery of video programming generally remain highly concentrated and continue to be characterized by some barriers to entry and expansion by potential competitors to incumbent cable systems. Competitive overbuilding by franchised cable operators remains minimal but is increasing (particularly by LECs) and appears, to varying degrees, to improve service and/or pricing where it exists. It remains difficult to determine whether or when competition from closely substitutable multichannel video programming services will affect currently non-competitive markets. DBS service is available in almost all areas and constitutes the most significant alternative to cable television. Its major advantage is its ability to offer service which is significantly different from cable service with respect to signal quality and programming options. Its major disadvantages, however, include its inability to provide local broadcast programming and the expense of its equipment and installation. In addition, its current advantage in channel capacity may be transitory once cable systems deploy digital distribution technology. MVPDs using other distribution technologies have not posted subscribership increases comparable to DBS subscribership increases, but are in the process of testing digital technology that has the potential to improve significantly the competitiveness of their services. Consequently, it remains difficult to predict the extent to which competition from MVPDs using non-cable delivery technologies will constrain cable systems' ability to exercise market power in the future. þ Local Interservice Competition; Telephone Companies Offering Video and Cable Operators Offering Telephony: The 1996 Act repealed a statutory prohibition against an entity holding attributable interests in a cable system and a LEC with overlapping service areas. At the time of the 1996 Act's passage, members of the local telephone industry indicated that they would begin to compete in video delivery markets, and cable television operators indicated that they would begin providing local telephone exchange service. The expectation was that there would be a technological convergence that would permit use of the same facilities for provision of the two types of service. This technological convergence has yet to take place. Almost all of the video service being provided by LECs is being provided using conventional cable television technology or wireless cable operations that stand alone from the provider's telephone facilities. The provision of telephone service by cable firms over integrated facilities remains primarily at an experimental stage. The one area where many cable operators appear poised to compete head-to-head with local telephone companies is in the provision of Internet access. Technology in this area appears to be rapidly advancing and service is being deployed on a commercial basis in a large number of cable systems. þ Regional Clustering of Cable Television Operations: A trend toward regional clustering of cable television operations continued during the course of the last year. As a result, 139 cable systems serve in the aggregate over half of all cable subscribers. The consolidation of systems into regional clusters appears to have a number of technical and economic advantages for system operators. This trend also has marketing advantages for system operators and should accommodate their entry into broader telecommunications markets where other competitors are providing service throughout or across large regional areas. Regulatory controls attach to cable systems on a political subdivision basis, however, resulting in the application of non-uniform regulations at the local level throughout a larger region. þ Cable and MVPD Concentration at the National Level: Ownership patterns among cable multiple system operators ("MSOs") at the national level also have changed, in part because of the regional clustering phenomenon. Whether concentration at the national level is viewed as having decreased or increased is dependent on an analysis of certain transactions that have been announced but have not yet been consummated. In particular, TCI, the largest MSO, has announced a series of transactions whereby certain systems it currently owns will be owned or managed by other operators with a more significant regional presence in the markets where these systems are located. These transactions have been announced as system divestitures, although they will result in continuing financial or ownership relations between TCI and the entities acquiring management or control over the systems involved. Whether these transactions should ultimately be viewed as increasing the size of TCI depends in part on the specific details of the transactions involved which are not now before the Commission and that may not have been finalized. If the arrangements are such as to create attributable interests, the result could be a significant increase in TCI's attributable share of the national market and in the indices that have been used to measure concentration at the national level. PROGRAMMING AND VERTICAL OWNERSHIP MARKET DEVELOPMENTS þ The proportion of national programming services that are vertically integrated with cable operators declined slightly from last year's total of 46% to 40% this year. Eight of the 16 national programming services launched since the 1996 Report have been vertically integrated with an MSO. In local and regional markets, system operators are increasingly distributing local non-broadcast news channels, some of which are programmed by affiliates of the operator and a significant number of which are programmed by non-affiliated local television stations. The integration of regional sports programming with system ownership has taken place through the merger of eight TCI-affiliated Fox/Liberty regional sports networks with seven Cablevision-affiliated SportsChannel regional sports services. CASE STUDIES OF COMPETITIVE RESPONSES þ Competitive Response in Markets with Wireline Competition: Although there have not been a large number of instances in the past year, several new wireline providers have entered incumbent cable operators' markets. A review of a limited number of markets where an incumbent cable operator faces competition from one or more MVPDs also using wired delivery indicates that the incumbent operator is responding by offering new services and new products, providing better customer service and lowering prices. CHANGES IN TECHNOLOGY þ Technological Change: Advances in and development of digital technology will permit all distributors of video programming to increase the delivered quantity of service. Digital technology increases the number of programming channels that may be communicated over a given amount of bandwidth or spectrum space. MVPDs and broadcasters continue to pursue improved digital compression ratios and deployment of digital technology. REGULATORY ACTIVITIES AND ISSUES þ Over-the-air Reception Devices: Video delivery services that use the radio spectrum to deliver service, such as broadcast, DBS, and MMDS services, typically require consumers to install and make use of external antennas and other reception equipment. Pursuant to Section 207 of the 1996 Act, the Commission has issued regulations to prohibit restrictions that impair a viewer's ability to receive video programming services through devices designed for over-the-air reception of television broadcast signals, MMDS, or DBS services. This action gives more control and choice to consumers to select alternative sources of video programming without regard to certain restrictions imposed by local governments or community associations. The Commission has preempted a number of such restrictions in individual cases. Petitions for reconsideration of the rules are pending, as is a further proceeding addressing the applicability of Section 207 to antenna installations on property in which the viewer does not have an ownership interest and exclusive use or control, such as rental apartments. Depending on the outcome of those proceedings, additional antenna placement rights may be necessary if competition for individual MDU subscribers is to take place on a broader basis. þ Inside Wiring: The ability of video service providers to compete to provide service to MDUs or to serve the residents of MDUs often is dependent on who owns or controls the inside wiring in the buildings. In October 1997, the Commission adopted inside wiring rules designed to promote competition for and within MDUs. The rules provide certainty for alternative video programming providers and MDU owners regarding whether the existing inside wiring will be available for use when the incumbent's service is terminated. The rules adopted were limited in scope, applying only where the incumbent MVPD no longer has a legally enforceable right to remain on the premises. If the Commission had more explicit authority to address wiring transfer and compensation issues, competition for and within a building, could be enhanced. þ Pole Attachments: Wireline video and telecommunications competition is heavily dependent on the ability of market participants to obtain access to utility poles, conduits, and rights of way at reasonable rates. The 1996 Act directed the Commission, within two years, to issue new pole attachment and conduit rate formulas. A proceeding is in progress to undertake the necessary review of these rules. The pole attachment rate regulation function is one that is shared between the Commission and state and local governments, with state and local governments having priority in those situations where they choose to regulate. The initial congressional decision to exempt cooperatives and government entities appears to have been based, at least in part, on the implicit assumption that these entities were functioning not just as businesses providing utility pole and conduit space but as public representatives performing a regulatory or quasi regulatory function. Commenters suggest that when cooperatives and government entities are themselves engaged in the provision of communications services a conflict of interest may result such that the rates charged to competitors may no longer be cost based and that competition may accordingly be distorted. þ Program Access: The 1992 Cable Act contains provisions that are intended to foster the development of competition to traditional cable systems by regulating the access of competing MVPDs have to vertically integrated, satellite distributed cable programming services. 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 multichannel video programming. However, exclusive arrangements can also produce efficiency benefits for the parties involved, and may increase competition through product differentiation, which can produce increased choice for consumers in programming and distribution markets. The Commission has commenced a rulemaking proceeding to seek comment on a number of possible mechanisms for improving the effectiveness of the existing rules including: (1) establishing specific time deadlines for resolving program access cases; (2) improving the discovery process (e.g., some cable competitors propose that vertically-integrated programmers be required to disclose what they actually charge cable operators; (3) including monetary damages among the available enforcement tools to discourage program access violations; (4) possibly applying the program access rules to certain situations in which programming is moved from satellite delivery to terrestrial delivery; and (5) revising the manner in which the rules apply to program buying cooperatives. It is not clear to what extent, if any, the provisions of the 1992 Cable Act cover programming distributed by means other than satellite or by programmers unaffiliated with MSOs. This is an issue of concern for a number of MVPDs competing with incumbent cable operators. þ Cable Horizontal Ownership Regulation: The 1992 Act directed the Commission to set limits on the number of cable subscribers that could be reached by an individual MSO. In October 1993, the Commission adopted rules providing that, with limited exceptions, no MSO could pass more than 30% of the households passed by cable nationwide. The statutory provision involved, however, was found to be unconstitutional by a United States District Court and the Commission stayed the enforcement of its rules pending further judicial review. The appeal of the statutory provision has been consolidated with an appeal of the rules adopted by the Commission and the Court has indicated that it would not proceed with resolution of the matter prior to the Commission acting on pending petitions for reconsideration of the rules. As a result, the Commission will be required to complete its review of the rules while the issue of the constitutionality of the underlying statute remain unresolved. þ Mandatory Carriage of Local Broadcast Station Signals: Relations between local broadcast stations and MVPDs concerning carriage of broadcast programming are mediated in part by the mandatory broadcast signal carriage rules that were required by the 1992 Act and by related provisions in the 1996 Act regarding open video systems. In addition, the Commission was required to initiate a proceeding at the time it prescribed standards for advanced television, now referred to as digital television ("DTV"), to establish any changes in the signal carriage requirements of cable television systems necessary to ensure the carriage of broadcast signals of local commercial television stations that have been changed to conform with such modified standards. In the context of adopting digital television standards, the Commission sought comment on relevant must carry rules or policies that might be needed both during the transition to DTV and once DTV has replaced the current analog system. The Commission has indicated that it intends to seek further comment on this issue. þ Television Broadcast Station Tower Siting Regulation: The Commission has adopted an aggressive schedule for implementation of broadcast DTV. Digital television may provide a means for broadcast television stations to become more competitive in the market for delivery of video programming by permitting multiplexed services. In order to provide digital television service, broadcasters will need to modify their facilities, and, in many cases, to construct new transmitters and new towers. Of particular concern to broadcasters is the effect of local and state regulation on their ability to upgrade existing towers or to construct new towers in a timely manner. The Commission has initiated a proceeding to seek comment on whether any action is necessary in this regard to permit a rapid roll-out of DTV. þ DBS Public Service Obligations: Competitive relationships in markets for the distribution of video programming are dependent in part on how different regulatory requirements are applied to the various market participants. The 1992 Act directed the Commission to initiate a rulemaking to impose public interest or other requirements for providing video programming on DBS service providers and mandated that DBS providers reserve between 4% and 7% of their channel capacity exclusively for noncommercial programming of an educational or informational nature. Such a proceeding was initiated. However, the statutory requirement was found to be unconstitutional. That ruling has subsequently been reversed. The Commission has resumed its rulemaking and has sought updated comments relating to this requirement. þ Copyright: On August 1, 1997, the Copyright Office released a report on licensing regimes for broadcast signals. The report contains a number of legislative suggestions, including harmonization of cable and satellite carrier licenses (except to the extent that technological differences or differences in the regulatory burdens justify different copyright treatment); adjustment of license fees to reflect fair market value; and limiting or eliminating special provisions relating to small cable systems. The Copyright Office also recommends that the compulsory license for satellite retransmission be extended and that extensive changes be made to modify the "unserved household restriction." Changes in compulsory copyright license rates, structure, and coverage will have consequences for the competitive relationships among MVPDs. At present there is no mechanism for systematic coordination of copyright and communications policies and regulations. Under the Copyright Act, satellite compulsory copyright license fees for retransmission of broadcast signals are to be set at "fair market value," considering the competitive distribution environment and the economic impact of the fees on copyright owners, satellite carriers, and the continued availability of retransmissions to the public. On October 27, 1997, the Librarian of Congress, whose responsibility it is to adjust the fee, issued an order setting a rate of 27 cents per subscriber for satellite retransmission of distant superstation and broadcast network signals, an increase of 21 cents over the prior rate of six cents per subscriber. Legislation has been introduced that would delay the new fee structure pending a study of whether it would be an impediment to competition. DBS operators' current lack of local broadcast programming impairs DBS services' competitiveness with cable service. A consideration of satellite services' carriage of local or broadcast network programming would include a balance of the possibility of private negotiation for program rights, the scope of any compulsory satellite license or other copyright limitations, the scope of any must-carry or other carriage obligations, and the extent of statutory parity between cable and DBS. In considering possible changes in copyright, existing differences between the copyright treatment of cable transmissions and of satellite retransmissions of broadcast signals should be removed where possible so that the compulsory licenses do not affect the competitive balance between the satellite carrier and cable industries. þ Navigation Devices: Navigation devices are television set-top boxes and other equipment that consumers use to access video programming. Section 304 of the 1996 Act requires the Commission, in consultation with appropriate industry standard-setting organizations, to adopt rules to assure the commercial availability of navigation devices from manufacturers, retailers and other vendors not affiliated with any MVPDs. The rules, which will expire once the Commission determines that a competitive market for navigation devices has developed, may not jeopardize the security of video services or impede a video provider's ability to prevent theft of service. A proceeding is in progress to consider rules to implement this provision. þ Video Description: Video description is an aural description of a program's key visual elements that is inserted during natural pauses in program dialogue for the benefit of viewers with visual disabilities. It generally describes actions that are not otherwise reflected in the dialogue, such as the movement of a person in a scene. The 1996 Act required the Commission to report to Congress on appropriate methods and schedules for phasing video description into the marketplace and other technical and legal issues related to the widespread deployment of video description. On July 29, 1996, the Commission submitted to Congress its first report on video description pursuant to this requirement. In this proceeding, we requested information regarding video description to permit us to provide Congress with additional findings. The most widespread video description technology uses the second audio programming ("SAP") channel, a subcarrier that allows each video programming distributor to transmit a second soundtrack. It appears that economic barriers, technical limitations, and unresolved legal issues continue to limit the availability of the service at this time. The costs of providing video description are still quite high, significantly higher than those associated with closed captioning, and video description must compete with Spanish language audio tracks for use of limited SAP channel capacity. Continued public funding could foster the development of video description services to the point where widespread implementation of video description could become feasible, and could ultimately create a commercial market for video description. The advances of digital technology may allow the development and expansion of video description to occur more quickly than occurred in the case of closed captioning. II. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Industry 12. This section addresses the performance of franchised cable system operators in three areas: (1) general performance -- both the quantitative and qualitative measures of services provided, subscriber levels, and viewership; (2) financial performance -- revenue and cash flow status; and (3) capital acquisition and disposition -- the amount of funds raised and used to improve existing physical plant and acquire new systems. In addition, this section discusses other performance indicators, including system transactions, cable overbuilds, stock prices, rates charged by cable operators, and new services such as digital video services, cable data access, and cable telephony. 1. General Performance 13. Since our last report, the cable industry has grown in several ways including subscribership, homes passed, penetration, premium subscriptions, viewership, and channel capacity. In addition, during all of 1996 and the first half of 1997, the industry began to expand its service offerings to customers in certain areas to include digital video service, cable modems, and cable telephony. 14. Cable's Capacity to Serve Television Households. The number of U.S. homes with at least one television set grew from 95.9 million at the end of 1995 to 97 million at the end of 1996, an increase of 1.1%, with no change as of the end of June 1997. The number of homes capable of receiving cable programming on those television sets ("homes passed") increased from 92.7 million at the end of 1995 to 93.7 million at the end of 1996, and 94.2 million by the end of June 1997. This represents about a 1.1% increase between the end of 1995 and the end of 1996. The proportion of television homes passed by cable decreased slightly to 96.6% from January to December 1996, but grew to 97.1% between January and June 1997. The number of homes subscribing to cable has been increasing since December 1995, rising to 65.5% of all television households by the end of 1996, and to 66.2% of television households by the end of June 1997. 15. Subscribership and Capacity Usage. Cable subscribership grew from 62.1 million subscribers at the end of 1995 to 63.5 million subscribers at the end of 1996, an increase of 2.3%, and to an estimated 64.2 million subscribers at the end of the first half of 1997, a six month increase of about 1%. Cable penetration (the proportion of homes passed that actually subscribe) also grew, increasing from 67% at the end of 1995 to 67.8% at the end of 1996, and 68.2% penetration at the end of the first half of 1997. The number of homes subscribing to premium cable services increased by 5.7% in 1996 to 31.5 million homes from 29.8 million homes at the end of 1995, and the number of premium services to which homes are subscribing (known as "premium units") increased 5.6%, with 54.5 million premium units subscribed to by the end of 1996, and an estimated 57.2 million units subscribed to by year's end 1997, another 5% increase. 16. System Statistics. Average channel capacity for cable systems has continued to increase. In October 1996, cable systems with a capacity of 30 or more channels accounted for 77.1% of all cable systems, or 8,134 systems, and 83.9% of all cable systems, or 8,260 systems in October 1997. The percentage of systems with channel capacities of 54 channels or more accounted for 16.4% of all cable systems in October 1996, or 1,724 systems, and 19% of all cable systems or 1,886 systems in October 1997. The average cable system channel capacity grew from about 47 channels at the end of 1995 to approximately 53 channels at the end of 1996, an increase of 12.7%. 17. In October 1996, the number of subscribers served by systems with capacities of 30 channels or more grew to 98.2% of subscribers. In October 1997, the number of subscribers served by systems with capacities of 30 channels or more remained at 98.2% of subscribers The number of subscribers served by systems with capacities of 54 or more channels increased 6.4% between the beginning of October 1996 and the beginning of October 1997, from 55.3% of subscribers at the beginning of October 1996 to 58.4% of subscribers at the beginning of October 1997, or by 2.15 million subscribers. 18. Viewership. Over the past decade, non-premium cable viewership has grown significantly, while viewership of broadcast television stations has steadily declined. The 24-hour a day, 7-day a week audience of all non-premium cable programming increased from an average 11.5 share of television viewing hours in the 1987-1988 broadcast year to an average 36.25 share of television viewing hours in the 1996-1997 season. Over the same period, the 24-hour a day, 7-day a week audience of the broadcast television stations, whether delivered over the air or by an MVPD, declined from an average 87.7 share of television viewing hours in the 1987-1988 season to an average 66.5 share of television viewing hours in the 1996-1997 broadcast season. The viewing shares of the 24-hour a day, 7-day a week audience of premium channels has not changed over the last decade, with a average 6.92 share in 1987-1988 and 1996-1997. 19. Networks. The number of basic cable networks increased from 104 to 126, 21.2%, between 1995 and 1996. In the same period, the number of premium and pay-per-view networks decreased. The number of premium networks decreased by three channels, and the number of pay-per- view networks decreased by one channel. This fluctuation is considered normal by industry representatives, and is not assumed to be directly attributable to any particular event. 20. Programming Payments. License fees paid by cable system operators to basic cable network programmers increased by 16.3%, from approximately $2.683 billion in 1995 to $3.121 billion in 1996. Analysts estimate that in 1997, fees will increase by an additional 13.5% to $3.54 billion. A study of television programming costs submitted by the NCTA suggests that these increases are part of a trend toward increased programming costs in both the broadcast and cable television industries that reflects sharply increased payments to sports teams, leagues, athletes, film producers, distributors, talent, and syndicators of television programming. Copyright fees paid by cable system operators for broadcast signal carriage under Section 111 of the Copyright Act increased 6.5% from $165 million in 1995 to $176 million in 1996. From January 1, 1997, to October 21, 1997, $77.798 million in copyright fees have been collected from cable system operators. 2. Financial Performance 21. Data concerning cable industry revenue and cash flow indicats that the cable industry remained financially strong in 1996 and the first half of 1997. 22. Cable Industry Revenue. Financial analysts report annual cable industry revenue for 1995 was $24.898 billion, which grew 8.9% to $27.120 billion in 1996. For 1996, revenue per subscriber grew 5.6% to reach $431.85 per subscriber per annum by year's end. While total industry revenue data for the first part of 1997 are not available, analysts estimate 1997 year-end total revenue will be approximately $30 billion, an increase of 9.9% from the 1996 total year-end revenue. 23. When total cable system revenue is categorized by source, the greatest revenue growth as a percentage of total revenue in 1996 was in the pay-per-view sector, which increased 20.9% from $535 million annual revenue in 1995 to $647 million annual revenue in 1996. Industry analysts predict this will increase in 1997 to an annual revenue of $815 million. Advertising revenues retained by MSOs increased 16% in 1996 from $1.4 billion in annual revenue in 1995 to $1.7 billion in 1996. Industry analysts predict this will increase in 1997 to annual revenue of almost $2 billion. Advertising revenues retained by progammers increased by 18.4%, from $4.9 billion in 1996 to an estimated 1997 year-end figure of $5.8 billion. Home shopping and premium tier revenues grew the least in 1996. Revenue from home shopping services grew from $144 million in 1995 to $145 million in 1996, a 0.7% increase. Annual revenue from pay tiers grew from $4.8 billion in 1995 to $4.9 billion in 1996, an increase of 4%. 24. In addition, the Commission calculates its own estimate of annual industry-wide revenue. The Commission estimates that the cable industry's annual revenue increased between the end of 1995 and the end of 1996 by approximately 6.5% to approximately $26.05 billion dollars. This increase is similar to the increase the Commission calculated for last year when annual revenue increased by approximately 6% from $23.07 billion to $24.45 billion between December 1994 and December 1995. 25. Cable Industry Earnings Before Interest, Taxes, Depreciation, and Amortization. Measurement of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), commonly referred to as "cash flow" by the industry, is often used to value the financial position of cable firms. Financial analysts report that industry-wide cash flow increased by 9.1% between the end of 1995 and the end of 1996, from $11.161 billion to $12.177 billion. For the year ending December 31, 1996, the cable industry generated approximately $193.90 in annual cash flow per subscriber, about $10 higher than the $183.27 per subscriber generated for the year ending December 31, 1995. There are currently no data available on industry cash flow for the first half of 1997, and analysts have not yet made predictions for year-end cash flow. The ratio of cash flow to revenue ("cash flow margin") increased from 44.8% in 1995 to 44.9% in 1996. 26. The Commission generates its own estimate of industry-wide cash flow, and estimates that industry-wide EBITDA in 1996 was approximately $12.4 billion, a 9.3% increase over 1995. This is up from last year's estimated increase of 5.8% from approximately $10 billion in 1994 to $10.6 billion in 1995. 3. Capital Acquisition and Disposition 27. Cable Industry Financing. From January to December 1996, the cable industry secured more private debt financing, but less public debt financing, than between January and December 1995. In the first half of 1997, issuance of public debt by the cable industry rose, though the industry acquired less private debt. This change is likely due to the low interest rates available in the public market throughout 1997. 28. Cable Industry Financing -- January to December 1996. The cable industry has typically relied on combinations of private and public financing, with the exact distribution of these combinations varying greatly from year to year. In 1996, the cable industry acquired $2.6 billion of net new private debt financing (i.e., financing received by MSOs from banks, insurance companies, and other institutional investors). This represents a significant increase over 1995's negative net activity of $808 million in private debt financing. In 1996, $2.94 billion of public debt was issued and $1.586 billion was redeemed, yielding $1.354 billion in net new public debt financing. This represents 78% less public debt financing than in 1995. The remaining industry financing was obtained through a mixture of private equity (i.e., equity received by MSOs from individuals, private corporations, venture capital firms, and investment banks) and public equity offerings (i.e., stock markets), which yielded a combined $2.9 billion in total equity activity, compared to the $5 billion in total public and private equity activity during 1995. 29. Cable Industry Financing -- Recent Developments through June 1997. From January through June 1997, the cable television industry acquired less private debt than during the same period in 1996. Between January and June 1997 the industry acquired $735 million of private debt compared with $1.7 billion for the same period of 1996. However, considerably more public debt was issued between January and June 1997 than during the same period in 1996. Approximately $7.5 billion of net new public debt was issued for the first half of 1997 while approximately $2.7 billion was issued during the same time period in 1996. Again, this is likely due to attractive interest rates available in the public market throughout 1997. Public equity activity was $1.2 billion from January through June 1997 down from $3.5 billion of activity from January through June 1996. 30. Capital Expenditures. In 1996, the cable industry invested approximately $5.6 billion in construction of plant and equipment. This includes maintenance, new builds, rebuilds, converters, upgrades, and inventory, and is a 3.3% increase over last year's $5.4 billion expenditures. 31. Increased capital expenditures are expected to continue in 1997 and beyond. Many of the large cable MSOs have made commitments to capital improvements for their systems. For example, MediaOne is currently undertaking a multi-billion dollar capital expenditure program to upgrade or substantially rebuild all of its systems by the end of 2000 by deploying hybrid fiber-coaxial ("HFC") networks in combination with digital compression technology. In 1997, MediaOne spent approximately $650 million on these rebuilds, which, combined with expenditures of $829 million in 1995 and 1996, represents an investment of more than $300 per subscriber since 1994. In 1996, MediaOne completed many of its proposed upgrades and in 1997 these upgrades continue to be made. Cablevision Systems is in the process of upgrading its Long Island, New York, and select New Jersey systems to a 750 MHz HFC network in order to provide over 470,000 of its customers with better picture quality, reduction in power interruptions, and better overall quality control for the operator. Cablevision has completed its upgrades in numerous locales in its Long Island, New York, system and upgrades in numerous locales in New Jersey. Time Warner has agreed to upgrade all its cable systems to a capacity of at least 550 MHz with 50% of all subscribers having access to at least 750 MHz. Time Warner has plans underway to invest $4 billion in capital costs in connection with the upgrade of its cable systems, and at the end of 1996 had invested $1.4 billion. In 1997, Marcus Cable upgraded its Glendale, California, system to 750 MHz HFC, in order to provide its customers with increased channel capacity, enhanced picture and sound quality, and improved reliability. These upgrades will enable future delivery of services such as video conferencing and Internet access. Bresnan Communications upgraded 75% of its systems to 750 MHz, HFC architecture by the end of 1997, with upgrades of an additional 13% of its systems to 550 MHz. Bresnan, for example, spent over $5.35 million to upgrade its system in Marquette, Michigan, to 750 MHz capacity. One example of upgrades made by Comcast is its upgrade to a 750 MHz system in the Detroit metropolitan area, where Ameritech competes with Comcast. Jones Intercable's most notable expenditure in 1997 has been its approximately $36 million construction of a new HFC network in Alexandria, Virginia, and Prince George's County, Maryland. 4. Other Performance Indicators 32. Cable System Transactions. The number of mergers, acquisitions, and exchanges between MSOs has fluctuated greatly over the past few years. The number of systems sold doubled between 1994 and 1995 from 64 to 128 transactions, but between 1995 and 1996, there was 19.5% decrease in systems sold for a total of 103 transactions by year's end. Of these 103 transactions, 8 were system swaps, thus making up 16 of the 103 transactions. In 1995, approximately 20 of the 128 transactions were 10 different swaps. From January 1997 through June 1997, 44 transactions have been recorded with 11 swaps making up 22 of those transactions. Among systems changing hands, the total number of subscribers served and the average system size of these systems continue to vary greatly from year to year. Among 1996 transactions, the average system size decreased 11.4% from an average 85,450 subscribers per system in 1995 to an average 75,728 subscribers per system in 1996. Among transactions between January and June 1997, the average number of subscribers per system was 54,210. The total number of subscribers affected by system transactions decreased 28.7% from approximately 11 million subscribers in 1995 to approximately 8 million subscribers in 1996. Thus far in 1997, the total number of subscribers affected has been 2.4 million. The total dollar value of transactions decreased 19.1% between 1995 and 1996, following a 43.2% increase between 1994 and 1995. The average dollar value per subscriber of 1997 transactions has been approximately $1,700 through June. 33. Overbuilding. Head-to-head competition, where two or more wireline cable television systems compete for the same subscribers in the same local market, has increased over the past year. As of July 1997, cable franchises have been awarded to competitors to incumbent cable operators in 81 communities in 14 states covering 5.43 million homes. This activity results almost entirely from LECs entering the market as permitted by the 1996 Act. 34. Stock Prices. During the 3rd Quarter of 1997, market valuation of the cable industry experienced a sharp increase. Analysts attribute the increase to Microsoft's investment in Comcast, the dissolution News Corp.'s planned venture with EchoStar and subsequent alliance of its ASkyB assets with Primestar, and the rollout of the new cable data service, @Home. Analysts expect an increase in the market value of cable stocks to continue, and expect that future appreciation will be driven primarily by accelerating revenue and cash flow growth. 35. While the Standard and Poor's Index 500 ("S&P 500") has steadily increased since January 1992, with more significant increases beginning mid-way through 1995, the prices of cable stocks, as represented by the Kagan MSO Index, have also generally increased, though with some fluctuation. The Kagan MSO Index remained almost even with the S&P 500 throughout most of 1992, but rose sharply above it in November 1992 following enactment of the 1992 Cable Act. The Kagan MSO Index remained above the S&P 500 until shortly after the 1996 Act in February 1996, fell below the S&P 500 in April 1996, and remained below the S&P though June 1997. 5. Price Survey and Cable Rate Issues 36. Section 623(k) of the Communications Act requires the Commission to publish annually a statistical report on average rates for the delivery of basic cable service, other cable programming services, and equipment. Specifically, Section 623(k) directs the Commission to compare prices charged by cable systems facing effective competition with those not facing effective competition. 37. The Commission recently issued its annual report for 1997 based on results of a survey of cable industry prices conducted in the summer of 1997. The survey requested data as of July 1, 1995, July 1, 1996, and July 1, 1997. Cable operators were asked to provide price data on cable services and to explain any change in rates between July 1, 1995, and July 1, 1996, and between July 1, 1996, and July 1, 1997. After the data were collected, the Commission supplemented the survey data with information about the respondents' regulatory status to compare prices and channel capacity between noncompetitive regulated and unregulated cable operators as well as competitive and noncompetitive operators. 38. Based on 485 completed questionnaires, the Commission found: (a) the average monthly charge for programming services and equipment rose for both the competitive and noncompetitive groups, with the noncompetitive group charging higher average monthly rates than the competitive group in each of the time periods studied; (b) subscribers that purchase cable services from regulated operators typically pay less, on a per channel basis, for programming services and less for equipment than subscribers that purchase services from unregulated operators; (c) both competitive and noncompetitive operators attribute most of their rate increases to inflation, increased programming costs, channel additions, and system upgrades, although competitive and unregulated operators also attribute portions of their rate increase to increased equipment costs; (d) both competitive and noncompetitive operators increased their average channel capacity, now offering subscribers additional satellite channels, and had corresponding reductions in their average monthly rates per channel. 39. Comparison of Prices Charged by Cable, DBS, and MMDS. The Commission found that the average monthly rate charged by cable operators, as of July 1, 1997, was $26.33 for programming services (including basic and expanded basic services, but excluding New Product Tiers ("NPTs"), premium, and pay-per-view services) and $2.52 for equipment. The average monthly rate for programming and equipment combined was $28.83. On average, cable industry subscribers received 49.4 channels at an average monthly rate per channel of $0.63. 40. While it is difficult to make a direct meaningful comparison between rates charged by cable operators and other MVPDs, such as DBS and MMDS, because the offerings are not directly comparable, it is possible to make a rough comparison since there are similarities. A comparison of monthly charges for cable, DBS, and MMDS services is shown in Table B-10. The level of service from DBS that would be most comparable to typical cable service would be the basic service without premium channels. On average, that level of service from DIRECTV and Primestar, the two DBS providers with the largest number of subscribers, was $27.49 as of July 1997. This rate was for programming service only, not including equipment, and was for a basic programming package of 47 channels, for an average monthly cost of $0.66 per channel. The average monthly rate for MMDS service was $21.29 for an average programming package of 22.7 channels, or an average monthly cost of $0.94 per channel. This rate includes the cost of equipment. 41. It is difficult to compare the cost of equipment since service from DIRECTV requires the purchase of equipment. Service from Primestar and from MMDS providers includes $10 for the cost of equipment. Cable service does not involve purchasing equipment, but does include the rental of equipment. As of July 1997, the one time cost of equipment for DIRECTV was, on average, about $200. However, for purposes of making a comparison, if we assume the cost of equipment can be spread over five years (or 60 months) and without considering the time value of money, we can estimate an "equivalent" cost for equipment on a monthly basis of $3.33. This would result in a combined average cost for programming and equipment of $30.82 per month for DBS service, or $0.66 per channel. As indicated, however, this rate does not take into account the upfront installation costs associated with DBS and the cost for service to additional television sets which must be considered before making a comparison to the per channel rate for cable given above. 42. There are several caveats to consider when making this comparison. Cable service includes the retransmission of local broadcast channels, while DBS service typically does not include local channels. Depending on a number of factors including terrain and their location relative to the station's transmitter, subscribers to DBS service can receive local broadcast channels over-the-air without charge if they have an antenna, or if they prefer, they can subscribe to basic cable service as a way of receiving local broadcast channels. As of July 1997, cable basic-only service cost on average $11.20 per month. The comparison also does not include the cost of installation. On average, cable installation cost $39.59, as of July 1997, and DBS installation costs varied from $50 for a do-it-yourself kit to about $150 to $200 for professional installation. The average MMDS installation charge as of July 1997 was $35. When comparing MVPD prices, a number of other factors should be considered. Cable service is typically analog service while DBS service is digital, and the DBS digital-quality picture and sound are superior to analog cable transmission. MMDS service is also typically analog service and the number of channels that can be offered over analog MMDS service is limited. In addition, DBS subscribers usually do not take the basic-only service package because the level of service that most DBS subscribers are interested in includes the more complete programming packages with additional premium movie channels and sports programming channels. 43. Tier Adjustments. Year-to-year comparisons in cable, or in MVPD rates more generally, suffer from the fact that the nature of the service in question continues to evolve so that rates, rather than being for a constant level of service, are for somewhat different service offerings. Estimating a price per channel is one means of trying to take this change into account, although it is clear that all channels are not perceived to be equally valuable. Shifts in desirable programming from premium or pay channels to basic or CPS tier channels may also reflect a change in the quality of the service measured. NCTA, for example, states that sports is an area of competition among MVPDs, and that in response to sports channels carried in the DBS basic package, virtually all cable systems have migrated their regional sports networks from premium service tiers to basic and CPS tiers. According to NCTA, of the approximately 10,750 cable systems nationwide, regional sports networks are carried as a basic or expanded basic service on approximately 4,259 systems, as compared with 41 systems that carry them as premium services. Similarly, the Disney Channel, originally a premium service, is now carried as a basic or CPS tier channel on cable systems serving more than 22 million subscribers. MediaOne indicates that it has shifted premium channels, such as regional sports services and the Disney Channel, to CPS tiers. In the Northeast, MediaOne has moved SportsChannel New England from a premium tier to its expanded basic tier. In Michigan, it is repositioning Pro-Am Sports Service ("PASS") from partial premium carriage to full-time cable programming service tier carriage. On MediaOne's Stockton, Yuba City, and Fresno, California, systems, SportsChannel Pacific was formerly carried as a premium service, but is now carried as part of the CPS tier. 44. Regional sports programming channels and other premium service migration typically results in a price increase for tier service, but a rate decrease for those who subscribed to the channel prior to its migration. For example, in Montgomery County, Maryland, cable customers who previously purchased Home Team Sports ("HTS") as a premium service have experienced an overall reduction in their cable rates. Prior to the July 1, 1997, migration of HTS to the "preferred" tier, customers paid $42.35 monthly for preferred service plus HTS received as a premium service. Effective July 1, 1997, those same customers began paying $34.39 for the preferred service that included HTS. However, customers who had not subscribed to the HTS as a premium service experienced an increase in their rates from $31.39 for their preferred service to $34.39 for preferred service that now included HTS. Comcast's SportsNet is expected to be distributed to subscribers without their being assessed a separate charge and to replace services offered on a premium basis. System operators themselves will pay as much as a $1.50 a subscriber for this service, a cost they will either absorb or pass on to subscribers. 6. New Services 45. Several cable operators are beginning to provide digital video, data, and voice services over their cable systems. Cable operators have generally needed to upgrade their cable plant and equipment prior to providing digital video, cable modem, or cable telephony services, particularly the two-way services. Digital signal transmission, for example, is less tolerant of system interference than is analog signal transmission. Accordingly, cable systems previously providing only analog service may require upgrading to eliminate poor electronic connections and other sources of interference prior to carrying digital signals. In addition, operators may increase system capacity prior to commencing digital transmission. As an alternative to providing new services over existing cable plant, several cable operators are marketing non-video services, such as cellular telephone services, or leased-line telephone services, provided over non-cable facilities in addition to cable video services. 46. Digital Video Services. Compared to the analog signal transmission historically used in cable systems, digital signal transmission can provide superior video picture quality and, through digital compression techniques, increased channel capacity. Subscriber reception of digital video signals requires a set-top device to decompress and decode incoming signals and to translate the digital signals into the analog signals used by current television sets. MSOs beginning to offer digital video service include TCI, Cablevision Systems, Comcast, Cox, Time Warner, and US West's MediaOne. Adelphia and Jones also plan to begin offering digital video service in selected markets. TCI is using a 12:1 digital to analog compression ratio to provide 36 digital channels in its current digital video service. 47. Internet and High Speed Data Services. Internet and other data can be transmitted faster over some cable systems, using cable modems, than over current twisted-pair telephone systems, using telephone modems or integrated services digital network ("ISDN"), asymmetrical digital subscriber line ("ADSL"), or high-bit rate digital subscriber line ("HDSL") technology and equipment depending on the architecture. MSOs offering cable modem service in 1997 include U.S. West's MediaOne, TCI, Time Warner, Comcast, Cox, Jones Intercable, Cablevision Systems, and Adelphia. TCI provides cable modem service throughout its systems in Hartford, Connecticut, Arlington Heights, Illinois, and Fremont, California, providing both upstream and downstream data transmission over its two-way plant in these areas. TCI plans to offer cable modem service in six to twelve additional markets during 1998. US West's MediaOne offers data service marketed as "MediaOne Express," to approximately 10,000-20,000 customers in a widespread offering. Other MSOs conducting cable modem market trials include Century, Charter, Fanch, Marcus, Media General, and Prime Cable. There are currently about 50,000 cable modem subscribers as of October 1997, which is projected to grow to 197,000 next year as the service becomes more widely available. 48. Several systems are upgrading to improve their ability to provide these services. Indeed, cable systems' ability to transfer data at high speeds may give cable operators a strategic advantage in competing for revenues associated with Internet and other data services. Microsoft's $1 billion investment in Comcast this June in exchange for a 11.5% interest in the company may indicate the importance of cable operators to future competition in this area. Microsoft is reportedly considering investing in other cable companies as well. 49. Cable modem subscribers may benefit from numerous new services designed to take advantage of their high data transfer speeds. It is local and regional networks together that provide the high speed network to the subscriber and distinguish these systems from traditional dial-up on-line services which operate at much slower speeds. The @Home local network, for example, has its own routing and caching (storage) servers which allow the most frequently accessed material from its own content centers and from the Internet to be transferred from the source to these storage areas. @Home provides service for Comcast, Cox, TCI, InterMedia Partners, Marcus, and Cablevision Systems customers, as well as Canadian MSOs Rogers and Shaw. Service is currently available in numerous localities in Maryland, New Jersey, California, and Connecticut. The Road Runner service, rather than building its own national network backbone and customer service infrastructure, has formed a partnership with MCI to provide these services. MCI is providing the high speed Internet connections to the local cable system headends, managing a network operations center to monitor performance of local cable system data networks, and is operating a specialized help desk to provide technical support to subscribers. Road Runner provides service for Time Warner Cable and several MSO affiliates including Cablevision Systems Corp., Century Communications, and Fanch Communications. A number of other providers, such as WebTV, WorldGate, ICTV, NetChannel and Wink TV, are introducing services that will provide Internet content over television sets. 50. In September 1997, Cable Television Laboratories launched its "OpenCable" initiative to encourage development of interactive set top boxes. These boxes may include greater computing power, two-way capabilities, interactive programming guides, graphics acelerators and cable modems. As cable operators convert to digital technology, the industry has made a major commitment to establishing an open standard for the next generation of cable boxes. CableLabs received 23 responses from computer and consumer electronics companies and other vendors to its OpenCable request for information. The shift from proprietary technology to an open standard may lead to more manufacturers of the boxes, may spur a retail distribution market, and may prompt new high speed data and Internet service providers like those described here. 51. Cable Telephony. Cable telephony requires sizeable and expensive upgrades and presents a number of technical and regulatory obstacles. Because other services can provide greater immediate revenue streams, many cable operators have limited their telephony efforts. Some analysts predict that cable telephony is not expected to be a significant revenue source in most markets for the industry in the near future. Cable telephony, however, is currently being offered by a few operators in several test markets. Among the MSOs offering telephone service are: Cox, US West's MediaOne, Cablevision Systems, Jones Intercable, TCI, and Time Warner. Cox is currently offering voice telephone service over its own network to more than 24,000 residential customers in Orange County, California, and expects to offer residential voice telephony service to almost 225,000 households in various markets by the end of 1997 including Omaha, Nebraska. A number of public statements have been made by members of the cable industry indicating that a reassessment of the industry's ambitious proposals to enter the telephone business is taking place. Cox offers telephone service to business customers in Oklahoma City, Oklahoma, Hampton Roads, Virginia, and New Orleans, Louisiana, over leased telephone networks. Cablevision System's cable telephone trials are being marketed to 115,000 households on Long Island, New York, with 5,000 subscribers as of March 1997. Additionally, US West's MediaOne launched cable telephony to one-third of the households in its Atlanta cable franchise area during 1997. Although this rollout is being described as a "commercial launch," it appears to be more of a trial. TCI's telephone service over its own fiber network is currently available to 90,000 households in Hartford, Connecticut, Arlington Heights, Illinois, and Fremont, California. TCI plans to offer telephone service over its own plant to an estimated 250,000 households by the end of 1997. TCI currently has 1,000 telephone subscribers. Jones Intercable offers telephone service to 20,000 customers in Alexandria, Virginia, and in Maryland's Prince George's County. By the end of 1997, Jones Intercable plans to reach 30,000 customers. Currently, Jones provides telephone service over it own fiber network to MDUs and uses the existing copper twisted pair wiring inside the buildings to offer the service to customers. It plans to begin offering service over the coaxial cable already installed for their cable customers soon. 52. Multi-Service Offerings. Several MVPDs are beginning to combine their video service offerings with other services (e.g., offering video programming with local or long distance telephony, cable modem and Internet access, and digital video). Cox announced plans in September to launch one of the largest multiservice offerings, including cable video, telephone, and Internet access to 25,000 renters in Irvine, California, apartment communities. Additionally, Cox currently offers cable data service bundled (over one cable wire only) with their cable service to approximately 714,000 households in various markets, and expects to increase that number to over one million by the end of 1997. As indicated in the previous paragraph, TCI is currently offering cable television and cable telephone to in selected markets Jones Intercable currently offers Internet access to 41,000 of its cable television customers in Alexandria, Virginia. As indicated above, Jones also offers telephone service to its cable television customers in Alexandria and in Maryland's Prince George's County. 53. Some analysts maintain that the success of offering multiple services through broadband cable wires may be threatened by technological difficulties (e.g. software bugs, disconnects, bad connections). US West's MediaOne, for example, is reported to be having software problems adding telephone service to certain systems, although it states that the overall technical approach is still on track. Ameritech reportedly does not plan to use its cable systems to offer telephony, at least in the near term, because it is seen as prohibitively expensive and technically difficult. To the extent that bundling emerges as technologically feasible and economically desirable for MVPDs, it has the potential to affect competition in markets for the delivery of multichannel video programming. B. Direct Broadcast Satellite Services 54. DBS Service Providers. Direct broadcast satellite ("DBS") operators use satellites instead of broadband wires or terrestrial microwave stations to transmit their programming to subscribers, who must buy or rent a parabolic "dish" antenna that is approximately 18 inches in diameter, and pay a subscription fee to receive the service. Each DBS operator transmits its programming services to subscribers from specific orbital locations. Permissible orbital locations are established by international telecommunications regulations and Commission rules. DIRECTV, United States Satellite Broadcasting ("USSB"), and EchoStar currently offer DBS video programming. Primestar is a medium powered fixed satellite service ("FSS") that shares many of the attributes of DBS operators. As with DBS, subscribers to Primestar must buy or rent a parabolic dish antenna and pay a subscription fee to receive service, though the Primestar dish is approximately three feet in diameter. 55. Subscribership. DBS systems serve more subscribers than any type of MVPD other than franchised cable system operators. The four DBS providers furnished programming to nearly 5.1 million subscribers as of June 1997. This is an increase of more than 2.2 million subscribers since July 1996, and 400,000 more subscribers than the 1.8 million subscribers DBS providers gained in the previous 12 months, July 1995 to July 1996. Predictions vary regarding the continued growth of DBS. Some industry analysts expect the DBS industry growth to continue, reaching 15 million subscribers by 2001 (14.5% of the total television market). However, while DBS is gaining about 6,000 subscribers daily, some service providers have lowered their projections for the future, with at least one forecaster lowering its projection to 14.6 million subscribers by 2002. In addition, DIRECTV, which had projected that it would have 10 million customers by 2000, no longer expects to meet this figure. 56. DBS services offer many features which consumers rate highly, such as digital picture quality, compact disk sound clarity, increased channel capacity, near video on demand ("NVOD") movies and other interactive programming and data services. According to a Nielsen Media Research survey, on a scale of one to five (with five being the most satisfied), 80% of DBS subscribers rate overall satisfaction with their satellite service as a four or a five. By comparison, 45% of cable subscribers rate overall satisfaction with their cable service as a four or a five. The large number of channels and programming variety, especially sports and movies, are also cited as reasons for consumers choosing one of the DBS services. However, DBS's advantages may be minimized once cable systems install digital technology and can offer comparable programming features. 57. Among consumers' main concerns regarding DBS are (a) multiple pricing strategies for hardware and programming, (b) the inability to receive local broadcast stations, and (c) the need to purchase additional equipment to receive programming on additional television sets. A May 1997 study by USSB of 11,320 consumers found that 600 of those surveyed had shopped "recently" for digital satellite system, and 70% of those did not buy the service, which may , in part, explain the lowered projections for new subscribers. A recent study reports that only 68 of 647 cable subscribers surveyed indicated that they were "very likely" to switch to DBS. 58. Impediments to carriage of local broadcast signals by DBS services reduce the satellite services' ability to compete effectively with cable television. However, the DBS industry is working on at least a partial solution to this situation, and is developing antennas to improve over-the-air broadcast transmission reception for DBS subscribers. Also, the launch of Echostar III and IV, will increase channel capacity and, according to Echostar, facilitate the possibility of retransmission of local channels to some of Echostar's markets. Capitol Broadcasting Company, Inc. ("Capitol") has announced its "Local TV on Satellite" plan for retransmitting local signals by satellite. Capitol states that it will operate a satellite in the Ka-band with 61 spotbeams that will cover the continental United States, Alaska and Hawaii. Capitol intends to offer DBS providers a local station package of all over-the-air, full power, commercial television stations within a given station's designated market area. 59. The "upfront costs" to subscribers that DBS operators may charge are an additional disincentive for some consumers considering DBS service. The costs for the basic equipment, installation, and one month of programming range from $185 for Primestar service, where the consumer rents equipment, up to $379 for DIRECTV's service. There may also be a $300 cost for the additional integrated reception device ("IRD") antenna that is required in order to view different channels on other televisions in the household and an additional basic programming package for $5 per month per television. Industry observers expect the cost of IRDs to decline. This decline, however, may be offset by continued monthly charges for service to additional televisions in the household. 60. To overcome the "upfront costs," DBS providers also have developed a number of discount programs and equipment plans to increase demand for their programming services. In the 1996 Report, we noted that the prices charged for digital satellite system ("DSS") equipment used to receive programming from DIRECTV, USSB and Echostar declined, with the price of the basic mode DBS antenna dropping to just $199 in some cases, as also noted in Table C-3 of this report. This decline has continued. Discount retailers, such as WalMart, are selling equipment for $49 and some mail order firms are offering the equipment for as little as $25. In June 1997, Echostar dropped its requirement that new subscribers pay the $300 annual programming fee in advance to purchase the $199 DBS receiver and other equipment. Some DBS customers can now buy programming on a month-to-month basis. Echostar also plans to introduce a $129 "no frills" second-set receiver, and will provide customers with self-installation kits or offer $100 off the professional installation charge. In July 1997, DIRECTV eliminated its pre-paid programming requirement, but dropped its $200 equipment rebate. To attract new customers, DIRECTV offered a 50% discount off the $159 price for NFL Sunday Ticket to new subscribers. Video Magazine subscribers could buy a six-month subscription to DIRECTV's Total Choice Platinum programming package by October 15, 1997, and be eligible for the free equipment offer. Thomson Consumer Electronics, maker of the RCA DSS equipment, offered its own promotion, giving anyone who buys an RCA large-screen television the DSS equipment for free. Primestar announced a discount on installation and one month of free programming this fall. In addition to offering discounted equipment and programming prices, DBS providers are heavily marketing their services. The four DBS companies were expected to spend approximately $1 billion (including the cost of discounts) to promote their products in 1997. 61. Consumers can purchase DBS equipment from various sources, including electronics retailers, and individual DBS operators' toll free numbers and Web sites. Primestar also offers consumers the option of renting, rather than purchasing, equipment. Consumers can choose to install the equipment themselves, or can contact the DBS provider or an electrician to perform the installation. DBS programming service can generally be purchased from an authorized dealer such as Best Buy, Circuit City and WalMart, or can be purchased directly from the DBS provider. 62. Marketing Telecommunications with Information Services. In the 1996 Report, we indicated a trend toward marketing satellite video programming with telecommunications and information services. Results of this trend are mixed. For part of 1997, AT&T was marketing DIRECTV/USSB's satellite programming and equipment with its long-distance services. In December 1997, AT&T sold its interest in DIRECTV, stating that it was difficult to sell a relatively "big-ticket" item such as satellite equipment through telephone solicitations, and that it faced faster than expected reductions in DBS prices due to increased competition from other providers. However, Cincinnati Bell experienced a strong response to its DIRECTV sales campaign when it added a 36 month no-interest equipment purchase plan. Recently, Bell Atlantic and DIRECTV announced an agreement to market DIRECTV to Bell Atlantic's customers in the Northeast. Industry observers predict DBS may provide the means for Bell Atlantic to offer video programming quickly in its newly expanded northeastern territory. 63. DBS providers have announced plans to launch various new video and data access products. DIRECTV plans to develop a satellite-delivered PC-based video programming and Internet service ("DIRECPC"), with a telephone return path. Hughes Network Systems ("Hughes"), DIRECTV's affiliate, is retailing the DIRECPC's Internet service through consumer electronics stores to compete with the cable industry's deployment of high speed cable modems. In addition, Hughes recently announced the launch of DIRECDUO, a dual-functioning DBS antenna, which consumers can use to receive both DIRECTV video programming and DIRECPC Internet and interactive data access services. Echostar plans to launch interactive services by the end of this year, and is working with content providers CNN, MTV, ESPN, and Bloomberg Information TV to supply programming. Echostar also plans to carry Data Broadcasting Corp.'s Signal real-time quote service, which provides data directly from the equity, futures and options exchanges to the user's personal computer. In 1998, Echostar plans to add late night broadcasts of Internet content by satellite to interactive set-top boxes for morning access. 64. Information technology companies are developing products for the DBS market. For example, Adaptec has developed software that gives DTH customers access to financial data, games and videos through their dish antenna, using a telephone "return path." Microsoft will incorporate a DIRECTV interactive link in its Windows 98 software. 65. Recent Developments Primestar began transmitting its programming from a new, GE2 satellite in April 1997, which enables Primestar to increase its service from 95 to 160 medium-powered channels. In June 1997, MCI agreed to assign the authorization for ASkyB's high-power DBS service at 110ø west latitude and two satellites to Primestar. Primestar has announced plans to use the 110ø west latitude position to offer a 225 channel service in 1998. Consummation of the agreement is subject to Commission approval. The parties have filed applications with the Commission, and a number of parties have filed objections to the applications. 66. Echostar plans to expand its services by offering more channels with the launch of two more satellites. EchoStar III was launched in October 1997 to provide service at 61.5ø west latitude. EchoStar IV's launch is planned for September 1998. As noted in paragraph 58 above, this expansion may facilitate retransmission of local broadcast channels to some of Echostar's markets. 67. Other DBS Entrants. Continental Satellite Corporation ("Continental"), and Dominion Video Satellite, Inc. ("Dominion") each hold licenses but have not launched any satellites. Tempo launched a satellite in March 1996 at 119ø west latitude and is authorized to provide 11 channels of service from that position and a second orbital location at 166ø west latitude (a total of 22 transponders); Continental is authorized to provide 11 channels of service from 61.5ø and 166ø west latitude (a total of 22 transponders); and Dominion is authorized to provide eight channels of service from 61.5ø and has an application pending to provide eight channels of service at 166ø west latitude (a total of 16 transponders). Of the three, only Tempo's 11 transponders at 119 west latitude are positioned at a full continental United States view ("CONUS") slot. In addition, the Commission has authorized Televisa International, LLC., to operate one million receive-only earth stations in the United States to receive DTH-FSS television services from Mexico's Solidaridad II satellite operating at 113ø west latitude, signaling the first stages of direct competition for the United States DTH market from foreign companies. C. Home Satellite Dishes 68. Programming. Unlike DBS and Primestar subscribers, home satellite dish ("HSD") subscribers must employ relatively large (4 to 8 foot) dishes and must often purchase programming through program packagers that are licensed by programmers to facilitate subscribers' receipt of programming transmitted from various C-band satellites. Typically designed to receive programming from satellites at several different orbital locations, most HSDs include motors that permit the receiving dishes to rotate and receive signals from more than one satellite. HSD owners have access to 500 channels of programming on C-band satellites, of which 350 channels are scrambled and approximately 150 are unscrambled. HSD owners can watch the unscrambled channels without paying a subscription fee, subject to section 705(b) of the Communications Act. To receive scrambled channels, an HSD owner must purchase an IRD from an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide, approximately 20 to 25 HSD program packagers assemble programming from individual program services which they make available in packages ("one-stop shop") to subscribers. Like DBS systems, however, HSD program packagers do not provide local broadcast signals. 69. Subscribership. As the Commission has reported in previous years, it is difficult to obtain accurate estimates of the total number of HSD users, which include: (a) viewers who subscribe to a packaged programming service that affords them access to most of the same programming provided to subscribers of other MVPDs; (b) viewers who receive satellite programming services illegally without subscribing; and (c) viewers who receive only non-subscription programming. Industry analysts estimate that there are approximately 3.8 to 4 million HSD users. The number of subscribers most relevant to an assessment of the MVPD market is the figure for authorized subscribers who receive much of the same programming generally provided to cable and other MVPD subscribers. HSD package programming subscribership has declined by 93,290, or 4.1%, from 2,277,760 reported in December 1996 to 2,184,470 subscribers reported on June 30, 1997. According to one report, sales of HSDs fell to below 200,000 last year from 642,000 in 1994. 70. Much of the decline in HSD subscribership results from owners switching to DBS services in order to receive digital programming. Not only have DBS equipment prices become less expensive than the typical HSD equipment, but DBS firms like DIRECTV have launched aggressive advertising and promotional campaigns encouraging consumers to switch to DBS service. Responding to consumers preference for digital programming, HSD provider General Instrument has introduced a digital receiver, the 4DTV, capable of receiving both digital and analog signals for HSD subscribers who want to upgrade their HSD systems to receive digital quality pictures. However, there are reports of delays in getting the 4DTV equipment, and some program packagers do not yet have access to programming for the digital equipment, though negotiations between programmers and programming packagers are currently underway. These concerns may be diminishing as at least one program provider recently announced that it is adding several digital channels of programming for HSD subscribers with the 4DTV receiver. D. Wireless Cable Systems 1. Multichannel Multipoint Distribution Service 71. MMDS systems, often referred to as "wireless cable," transmit programming to subscribers through 2 GHz microwave frequencies, using Multipoint Distribution Service ("MDS") and leased excess capacity on Instructional Television Fixed Service ("ITFS") channels. An MMDS system's transmission range is dependent upon the transmitter's power, the kind of receiving antenna, and the presence of a line-of-sight ("LOS") path between the transmitter or signal booster and the receiving antenna. MMDS operators have a maximum of 33 microwave channels available in each market, including 13 MDS channels and 20 ITFS channels. 72. The Commission authorized digital MMDS use in July 1996. Digital compression permits MMDS operators to provide six or more digital channels of programming, with an increased range of service, on what was previously a single analog channel. In addition to increased channel capacity, digital technology is expected to improve picture and audio quality, and to permit two-way data transmission services. The Commission has also proposed to amend its rules to facilitate the ability of MMDS operators to provide two-way transmission of Internet and other digital high-speed data services that may further enhance the competitiveness of wireless cable with other MVPDs. However, implementation of digital MMDS technology has been slow because of technical and financial considerations. 73. MMDS Service Areas. There were an estimated 252 MMDS systems in operation in July 1997 compared to the estimated 200 MMDS systems serving 900,000 subscribers in July 1996. The Commission awarded MMDS license rights to 493 Basic Trading Areas ("BTAs") in auctions completed in March 1996, and subsequently authorized auction winners to provide MMDS service in 465 of these BTAs. The MMDS auctions were designed to distribute unused spectrum through competitive bidding while protecting the service area of incumbent MMDS providers within the BTAs. 74. MMDS Capacity to Serve Television Households. The potential commercialization of digital MMDS technology noted in the 1996 Report has proceeded slowly. This has tended to limit MMDS operators' significance as alternative sources of MVPD services. The number of homes with a serviceable line of sight to an MMDS operator's transmission facilities grew from 58,900,000 at the end of 1995 to 60,300,000 at the end of 1996, an increase of 2.4%, and remained unchanged through the end of the first half of 1997. The number of homes capable of receiving an MMDS operator's signal (commonly referred to as "homes seen") grew from 29,200,000 at the end of 1995 to 31,500,000 at the end of 1996, an increase of 7.8%, but it has remained unchanged through the end of the first half of 1997. The proportion of television homes seen by MMDS increased from 30.4% at the end of 1995 to 32.5% at the end of 1996, and remained unchanged, at 32.5%, through the end of June 1997. These measures show MMDS operators' capacity to serve television households lags behind cable and DBS operators' capacity to serve those homes. 75. Subscribership and Capacity Usage. MMDS subscribership grew from 851,000 at the end of 1995 to 1,180,000 at the end of 1996, an increase of 38.6%, and declined to 1,100,000 at the end of June 1997, a decrease of 6.8%. MMDS penetration (the proportion of homes seen that actually subscribe) increased from 2.9% at the end of 1995 to 3.7% at the end of 1996, and decreased to 3.5% at the end of June 1997. Decreases in the number of MMDS subscribers and lack of growth in the number of homes seen by MMDS appear to result in part from MMDS operators' suspension of analog MMDS marketing in some markets in anticipation of the availability of digital MMDS transmission and reception equipment (thus allowing operators to avoid the expense of deploying analog MMDS reception equipment which operators may then be required to replace upon commencing digital transmission). The MMDS industry expects this trend to reverse itself when a number of the larger MMDS operators begin to launch digital wireless cable systems. 76. Financial Performance. The wireless cable industry's total revenues for 1996 were $420 million, a 38.8% increase from the $303 million that the MMDS industry earned in 1995. The industry's negative cash flow position worsened, however, from negative $3.9 million at the end of 1995 to negative $40.5 million at the end of 1996. MMDS operators have had difficulty raising capital, in part because MMDS stock prices have generally declined in 1997. 77. Digital MMDS Services. The introduction of digital MMDS technology should increase the ability of MMDS operators to compete better with cable systems. Digital technology, as noted above, increases channel capacity, thereby expanding potential programming features (e.g., a higher number of channels and more service offerings). Thus, digital technology will permit MMDS operators to provide additional programming features such as numerous pay-per-view channels to their subscribers. Digital technology also improves the audio and video components of programming transmission, giving the viewer increased picture clarity and compact disc quality sound. 78. Internet and High-Speed Data Services. In 1996, several MMDS companies began testing technology that would allow them to provide high-speed Internet access and other digital data services similar to high-speed data services offered by other MVPDs. The Commission has proposed to amend its rules to allow MDS and ITFS licensees to provide two-way communications services in both service frequencies in response to a petition for rulemaking filed by a group of over 100 participants in the wireless cable industry. The proposed rulemaking is intended to facilitate the most efficient use of the affected spectrum, to enhance the competitiveness of the wireless cable industry, and to provide benefits to the educational community through the use of two-way services. Although the primary use of MDS and ITFS frequencies has historically been the provision of video services, through this rulemaking use of these frequencies could be made available for other services. 2.Local Multipoint Distribution Service 79. LMDS is a technology that uses microwave channels in the 28 GHz band to deliver multichannel video programming as well as two-way voice and data service. With the exception of CellularVision's LMDS system in Brooklyn and Queens, New York, LMDS frequencies are not currently used to distribute video programming in the United States. Industry observers note that the LMDS industry is moving towards the provision of numerous services, including video programming and two- way services like Internet access, high-speed data transmission and telephony. 80. In July 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 non-geostationary Mobile Satellite Service ("NGSO/MSS or Big LEO") systems to operate in the 28 GHz band. This action was intended to promote competition by permitting these various services to develop and offer consumer services such as video program distribution, two-way interactive video, teleconferencing, telemedicine, telecommuting and high- speed data services within the U.S. and internationally. 81. In the same order, the Commission proposed to allocate an additional 300 MHz of spectrum to LMDS at 31.0 - 31.3 GHz to provide greater technological flexibility for the industry. However, the Commission's order prohibits cable companies and LECs from acquiring in-region LMDS licenses for three years. The order is currently under appeal. The Commission plans to auction this LMDS spectrum block in February 1998. E.Satellite Master Antenna Television Systems 82. SMATV systems are MVPDs that primarily serve MDUs. SMATV systems do not use public rights-of-way and, thus, fall outside of the Communications Act's definition of a cable system, and can operate without being subject to franchise requirements. SMATV providers receive and process satellite signals directly at an MDU or other private property with an on-site headend facility consisting of receivers, processors and modulators, and distribute the programming to individual units through an internal hard-wire system in the building. SMATV operators often recover the relatively high fixed costs of operations (headend equipment, management, customer service, billing, installation and maintenance) through exclusive service contracts with the MDU owner. Under the 1996 Act, SMATV operators may use wires to connect separately-owned buildings so long as the wires do not use public rights-of-way. This statutory change may permit significant SMATV system growth in areas where different owners' respective residential buildings can be interconnected without crossing public streets. Some SMATV systems have begun to use microwave transmissions to serve multiple buildings that are not commonly- owned without using public rights-of-way. 83. SMATV systems have been the primary competitor to franchised cable systems for the MDU market. In 1991, regulatory changes made 18 GHz technology available for the point-to-point delivery of video programming services, thus permitting SMATV operators to enhance their systems and to become more efficient at the delivery of video programming to MDUs. Firms using 18 GHz technology are known as enhanced SMATV systems and do not require the large networks of coaxial or fiber optic cable and amplifiers that are used by traditional hard-wire cable television operators or the installation of a headend facility at each MDU as is required for earlier SMATV systems. Thus, SMATV operators using 18 GHz technology are able to provide services at attractive rates that make them competitive with franchised cable systems. 84. Growth. ICTA notes that the SMATV industry is composed of hundreds of small and medium size firms throughout the nation. The SMATV industry appears to have considerable growth potential and is becoming a more significant competitor to traditional cable service. There are approximately 28 million MDU units in the United States, housing more than one-fourth of the nation's total population. The number of SMATV residential subscribers as of June 30, 1997, was estimated to be 1,162,500. The number of SMATV subscribers in June 1997 represented a 3.2% increase over the 1,126,000 SMATV subscribers estimated in December 1996, while the December 1996 total represented a 17.1% increase over the 962,000 subcribers estimated in December 1995. Approximately 3,400 SMATV operators serve MDUs. According to industry sources the growth markets for SMATV firms are in Texas, Florida, California, and Arizona, and major urban centers with large numbers of MDUs, such as Atlanta, Chicago, New York, and San Francisco. Since our last report, system acquisitions have occurred in the SMATV industry. For example, OpTel, the largest SMATV operator, bought Phonoscope and TARA Systems, Inc., which raised OpTel's total subscribers from 121,100 to 147,500. 85. Technology. Many SMATV operators are upgrading existing systems to 750 MHz HFC broadband architecture. This architecture is capable of transmitting hundreds of channels using digital compression. In addition, several firms have technologies that permit SMATV systems to deliver DBS, local off-air television signals and security services. SMATV operators have employed enhanced microwave frequencies to link headends between widely separated MDUs. 86. Special Features. SMATV systems compete with the franchised cable operators to serve MDUs and MDU tenants. Increasingly, SMATV operators offer a comprehensive, "one-stop" video programming and telecommunications service for subscribers as a way of adding value to the video services. Video services may include expanded channel offerings, multiplexed premium and numerous pay-per-view channels, special sports and special events packages, and NVOD, which may be unavailable from the local cable system; telecommunications services may include high-tech security monitoring through closed circuit security cameras, interactive and Internet access, local and long-distance telephony along with voice mail, paging, calling cards, and other business services tailored to the particular needs of the building's tenants. 87. Programming Options. SMATV operators have two options for purchasing programming. Many SMATV operators purchase programming through retail program packagers/distributors, such as World Satellite Network ("WSNET"), Showtime Networks, Inc., 4 Com and others, that assemble packages of satellite transmitted programming and resell them to the SMATV operators. Other SMATV operators are contracting directly with satellite providers such as DIRECTV, Primestar, and Echostar to purchase video programming. 88. Combination Services. DBS and SMATV operators are beginning to use combined technology to create a DBS/SMATV delivery system. Satellite providers such as DIRECTV/USSB, Primestar, and Echostar offer SMATV operators a low-cost, technically-advanced, digital programming service that significantly increases channel capacity and adds special programming that is otherwise unavailable from cable systems or MMDS operators. Because of these features, even program packagers such as WSNET are contracting with DBS providers and then reselling these services to their SMATV subscribers. SMATV providers may realize significant savings by avoiding plant and equipment investment. In particular, this arrangement makes serving smaller MDUs with fewer than 100 units profitable. However, despite its advantages, some SMATV operators have expressed concerns that using a DBS provider may limit their programming choices and the flexibility to customize programming and other services for their tenants. 89. Real Estate Owners and Property Managers. In the last two years, Real Estate Investment Trusts ("REITS") and other national property management companies and ownership groups, with numerous interstate property holdings, have begun to negotiate programming and other MVPD services on a national basis. This recent trend has "nationalized" a traditionally community-oriented and often individualistic business environment. National bargaining for video programming services may permit real estate companies to negotiate advantageous programming arrangements and services for their properties. F.Broadcast Television Service 90. Broadcast networks and stations are competitors to other MVPDs in the advertising and program acquisition markets. Additionally, broadcast networks and stations are suppliers of content for distribution by MVPDs. During 1997, the broadcast industry experienced important changes, especially in the area of technological developments. 91. Since the 1996 Report, the broadcast industry has seen continued growth in the number of operating stations and in advertising revenues. The number of commercial and noncommercial television stations increased to 1561 as of July 31, 1997, from 1550 as of August 31, 1996. Broadcast total advertising revenues reached $31.3 billion in 1996, a 12% increase over 1995. Advertising revenues for the six broadcast networks alone reached $14.7 billion in 1996. In comparison, cable programming networks received an estimated $4.9 billion in advertising revenue in 1996, an increase of 21% over 1995. 92. Broadcast station share of total television viewing declined, however, as a result of cable and other MVPD competition, but it still attracts a large majority of the television audience. During the 1996-1997 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 59% share of prime time viewing among all television households (compared to 62% in the previous year); UPN and WB, the two newest networks, achieved a combined 9% share of prime time viewing, the same as last year. The most recent data available for households subscribing to cable service indicates that, even in cable homes, programming originating on local broadcast television stations accounted for a combined 60% share of all day viewing in the 1995-96 television season, while non- premium cable networks and pay cable services achieved a combined 51% share of all day viewing. 93. The 1996 Act directed the Commission to eliminate the restrictions on the number of television stations a person or entity may own or operate nationwide, and to increase the national audience reach limitations to 35%. The Commission did this in March 1996. Acquisitions subsequent to these rules resulted in consolidation of television station ownership. An initial wave of consolidation mainly involved stations in the top media markets. More recently, consolidations have occurred in small and mid-sized markets. Overall, the number of television station owners dropped 21% to 475 in 1996 from 600 in 1995. 94. Significant developments in the broadcast field concerning Digital Television ("DTV") also occurred during the past year. In December 1996, the Commission adopted a DTV standard, and, in 1997, issued two decisions concerning implementation of DTV service: (a) the Fifth Report and Order establishing service rules for DTV and limits on broadcasters' conversion to DTV; and (b) the Sixth Report and Order setting out a table of allotments for DTV channels and assignments of spectrum for DTV for each broadcast station. Under the DTV construction schedule set out in the Fifth Report and Order, which is intended to ensure the preservation of a universally available local television broadcasting service and the swift recovery of analog broadcast spectrum, affiliates of the top four networks in the top ten markets are required to be on the air with digital signals by May 1, 1999. Certain volunteer stations in the top ten markets will be on the air by November 1998. Affiliates of the top four networks in markets 11 through 30 must be on the air by November 1, 1999. This schedule provides that more than half of all television households could have access to DTV signals provided by multiple local stations by November 1, 1999. All other commercial stations are required to construct their DTV facilities by May 1, 2002, and all noncommercial stations must construct their DTV facilities by May 1, 2003. Subject to biennial review as required by Section 202(h) of the 1996 Act and Section 11 of the Communications Act, as amended, and to certain statutory exceptions, the current target date for all stations' return of their analog spectrum is 2006. 95. DTV has the potential to allow the broadcasters to become more effective competitors with cable companies in the MVPD market. Unlike the other delivery technologies discussed in this report, broadcast television stations currently provide one channel of video programming. Once broadcast television stations convert from analog to digital television, however, they will have an option to offer multiple channels of video service during all or part of the broadcast day. The Commission requires provision of one free, over-the-air broadcast signal of at least comparable resolution to today's service. Under the Commission's rules for DTV, digital encoding and transmission technology will permit stations to broadcast: one or perhaps two High Definition Television ("HDTV") signals; multiple streams of Standard Definition Television ("SDTV") signals; or a combination of the two. Some broadcasters have proposed that they combine the digital spectrum of all stations in a local television market to create a 40 to 50 channel service that could compete with MVPDs. At this time, however, it is unclear how DTV will develop as a broadcast service for consumers. Thus, at least for the near term, it appears unlikely that broadcast television will offer consumers a multichannel video programming service in competition with cable. 96. We reported on two experimental HDTV stations in the 1996 Report. These stations continue their tests. One station, KITV in Honolulu, announced that it planned to begin commercial DTV broadcasts on December 1, 1997, if all permits were received. These permits were received, but KITV has not announced that it has begun these broadcasts. KITV and its satellite stations in Hawaii will offer an as-yet undetermined mix of HDTV and multicast SDTV. WBTV in Charlotte, North Carolina, received a construction permit on October 2, 1997. As of December 31, 1997, seven DTV construction permits have been granted, including the four listed above. No station, however, has begun commercial DTV broadcasts. In previous reports, we also noted that low power television ("LPTV") stations can offer multichannel video programming services on a subscription basis and that such service exists in two areas. We also noted that such service remains extremely limited and does not appear to have a significant impact on competition in the video market. No further applications for LPTV multichannel video programming services construction permits or requests to begin service have been filed in the last year. G.Other Entrants 1.Internet Video 97. In the past two reports, we noted that software is currently available that makes real-time and downloadable audio and video from the Internet available to a personal computer. We also reported another mechanism for PC-based video delivery for Java-enabled browsers. Over the past year, additional technologies for Internet video have emerged. WebTV recently announced plans to provide television/Internet interactivity or "hyperlinking" and video viewing over the Internet through WebTV-specific technologies, and WorldGate has announced similar plans based on different technologies. Video over the Internet, however, is not comparable in quality to broadcast video provided by MVPDs, and it is unclear whether the needed improvements will be made to make video service over the Internet a viable competitor. 98. Last year we reported that delivery of video programming over the Internet was inhibited by the limited bandwidth and transmission delays of the Internet. This continues to be the case. While computer and Internet related hardware and software continue to improve, transmission rates vary depending on a number of factors, including bandwidth, speed of various servers on the Internet, number of users, and capacity of the equipment receiving the data. 99. Despite the relative weakness of PC-based video provision over the Internet, many companies are upgrading and marketing software that renders video delivery to a computer through an Internet connection. The primary purpose of most of these software packages is for business use (e.g., video conferencing and business promotion), although video programming use of the Internet is starting to emerge. The two primary modes of PC-based delivery are: (a) downloading a video file for later playback; and (b) streaming. 100. Downloading for future playback is one of the most widely used methods of providing video to the Internet user. While compression techniques used in this process significantly reduce the size of the video file, a typical consumer will expend considerably more time downloading the file than it will take to "play" it. The time to download a file depends on a number of factors, including: (a) the speed of the Internet connection; (b) how busy the server sending the video file is; and (c) the size of the video file. 101. "Streaming" is the other primary mode of receiving video from the Internet. Streaming eliminates both the wait time associated with downloading a video file and the storage of that file on the consumer's hard disk. Video using a streaming format can be viewed in real time by a consumer using a 28.8 Kbps telephone modem (or faster) connection; however, the quality of the video is not as good or as reliable as MVPD service. Currently there are 20,000 hours of audio and video streaming available on the Internet each week. 102. WebTV and WorldGate. WebTV and WorldGate are developing technologies for combining the use of Internet data and traditional video programming delivery service. In September 1997, WebTV announced plans to improve its current delivery of conventional Web pages to television sets to include a tuner that enables television shows to be viewed from within Web pages and circuitry and allows the tuner to receive digital data over cable or broadcast television signals. Until now, WebTV's digital data was transmitted over telephone lines, but the announced improvements will permit users to download digital data through existing cable or broadcast technology, though users must use phone lines to send messages. The RCA division of Thomson, SA has launched a product similar to WebTV which merges television, the World Wide Web, and e-mail features. Also, WorldGate has announced plans for a similar product which, instead of an upstream telephone connection, will use advanced analog or digital set-top boxes to provide full, two-way Internet and Web access over cable television networks using the television as a display device. 2.Home Video Sales