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This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).
COMMISSION ADOPTS FIFTH ANNUAL REPORT ON COMPETITION IN VIDEO MARKETS
The Commission has adopted its fifth annual report on competition in markets for the delivery of video programming. This Report will be submitted to Congress in accordance with Section 628(g) of the Communications Act. The Report provides updated information on the status of competition in markets for the delivery of video programming, discusses how the regulatory changes enacted in the 1996 Act have affected the competitive environment, and describes barriers to competition that continue to exist. This is the last annual report the Commission will publish on the state of cable competition prior to March 31, 1999, the date on which the Commission's authority to review increases in rates for cable programming service tiers sunsets.
The Report finds that competitive alternatives and consumer choices are still developing but that cable television continues to be the primary delivery technology for the distribution of multichannel video programming and continues to occupy a dominant position in the multichannel video programming delivery ("MVPD") marketplace. As of June 1998, 85% of all MVPD subscribers received video programming service from local franchised cable operators compared to 87% a year earlier. The cable industry has continued to grow in terms of subscriber penetration, channel capacity, the number of programming services available, revenues, audience ratings, and expenditures on programming.
There has been an increase in the total number of subscribers to noncable MVPDs, most of which is attributable to the continued growth of direct broadcast satellite ("DBS") services. Between June 1997 and June 1998, DBS grew from approximately 5 million subscribers to 7.2 million subscribers. However, there have been declines in the number of subscribers and market shares of home satellite delivery ("HSD"), multichannel multipoint distribution service ("MMDS"), and satellite master antenna television ("SMATV") and the one existing local multipoint distribution service ("LMDS") system recently terminated service. There also have been a number of additional cable overbuilds in the last year. In communities where the incumbent cable operators face such competition, they respond in a variety of ways, including lowering prices, adding channels at the same monthly rate, improving customer service, or adding new services such as interactive programming.
The report finds that significant competition from local telephone companies has not generally developed even though the Telecommunications Act of 1996 removed some barriers to LEC entry into the video marketplace. With the exception of Ameritech, local telephone entry into video markets has been slow to develop. The open video system ("OVS") framework, which Congress developed as another means to encourage telephone company entry into the video marketplace, has resulted in few local telephone companies seeking entry through OVS. The technological convergence that would permit use of the telephone facilities for provision of video service has not yet occurred.
During the period under review, cable rates continued to rise. Between June 1997 and June 1998, based on Bureau of Labor Statistics data, cable prices rose 7.3% compared to a 1.7% increase in the Consumer Price Index ("CPI"). A portion of these rate increases is attributable to capital expenditures for the upgrading of cable facilities (up 21% over 1996), an increase number of video and nonvideo services offered, and increased programming costs (license fees increased by 18.4% and programming expenses increased by 20.9%).
The report includes as an attachment the results of an inquiry undertaken by the Cable Service Bureau focusing on cable television programming costs and related issues. This inquiry was commenced to follow-up on issues raised in last year's annual competition report and involved a voluntary questionnaire distributed to six multiple system operators. The Bureau found that, other than inflation adjustments, programming cost increases were the most significant factor contributing to rate increases. The rate of increase in programming costs between July 1996 and July 1997 was 20.2%. Programming costs for the responding MSOs (for regulated services) were equal to approximately 24% of regulated revenues for that period. On average, about one-quarter of an operator's regulated revenues was used to pay for programming. Sports programming costs (for the period surveyed) did not increase at a disproportionally higher rate than other types of programming and played a fairly minor role (accounting for only 5.3%) in overall rate increases. The inquiry results do not reflect any license fee increases owing to sports distribution rights agreements announced in late 1997 and 1998.
Action by the Commission December 17, 1998, by Report (FCC 98-335). Chairman Kennard, Commissioners Ness, Powell and Tristani, with Commissioner Furchtgott-Roth dissenting and each Commissioner issuing a statement.
Key findings of the 1998 Report on Video Competition include:
A total of 76.6 million households subscribed to multichannel video programming services as of June 1998, up 4.1% over the 73.6 million households subscribing as of June 1997. This subscriber growth accompanied a 2.3% increase in multichannel video programming's penetration of television households from 75.9% to 78.2% in June 1998. Noncable's share of total MVPD subscribers continued to grow, constituting 15% of all multichannel video subscribers as of June 1998, up from 13% over the June 1997 figure reported last year.
The cable television industry has continued to grow in terms of subscribership (up to 65.4 million subscribers as of June 1998, a 2% increase from the 64.2 million cable subscribers in June 1997). The total number of noncable MVPD subscribers grew from 9.5 million as of June 1997 to 11.2 million as of June 1998, an increase of over 18% since the 1997 Report.
Convergence of Cable and Telephone Service:
At the time of the Telecommunications Act of 1996 ("1996 Act") 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. As a general matter however, significant competition from telephone companies has not developed even though the 1996 Act removed the barriers to LEC entry into the video marketplace. 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, it was expected that local exchange telephone carriers would begin to compete in video delivery markets, and cable television operators would begin providing local telephone exchange service. With the exception of Ameritech, which has acquired 87 cable franchises and reports that it serves 200,000 subscribers, telephone entry into video markets has been slow to develop. The Bell Atlantic video distribution system in Dover Township, New Jersey, which seemed likely at one time to be the prototype for telephone entry into the video business, will be terminated by the end of 1998 or very early in 1999. Pursuant to its joint marketing agreement with DirecTV, however, Bell Atlantic will give its Dover subscribers the opportunity to switch to DirecTV. In addition, Congress developed the Open Video System ("OVS") framework as another means to encourage telephone company entry into the video marketplace. Thus far, however, few telephone companies have sought certification to provide video through OVS. Further, the technological convergence that would permit use of the telephone facilities for provision of video service has not yet occurred.
Promotion of Entry and Competition:
Noncable MVPDs that provide competitive pressure on incumbent cable operators and provide consumers with real choice still find regulatory and other barriers to entry in to markets for the delivery of video programming. MVPDs with the potential to compete with incumbent cable operators continue to experience some difficulties in obtaining programming, both from vertically integrated satellite cable programmers and from unaffiliated program vendors who continue to make exclusive agreements with cable operators. In multiple dwelling unit ("MDU") markets, while landlords may have a choice of more than one distributor, potential entry may be discouraged or limited by incumbent video programming distributors that have negotiated long-term exclusive contracts. In addition, consumers report that the inability to provide local broadcast signals, pursuant to current copyright law, is a major drawback of DBS service, which affects their decisions to subscribe to this alternative MVPD.
The Commission has continued to take steps to eliminate obstacles to competition, including the adoption and enforcement of rules that prohibit governmental and private restrictions that unreasonably interfere with a consumer's right to install the dishes and other antennas to receive programming services from (direct-to-home) DBS, wireless cable, and television broadcast; establish procedures to use internal wiring installed in an MDU building by the incumbent provider, facilitating owners' and residents' choice among providers; and increase the amount of spectrum available for wireless uses and eliminate restrictions on use, for the benefit of wireless providers.
Additional findings include the following:
Cable Systems: The cable industry has continued to grow in terms of subscriber penetration, channel capacity, the number of programming services available, revenues, audience ratings, and expenditures on programming. The cable industry remains healthy financially, which has enabled it to invest in improved facilities, either through upgrades or rebuilding. As a result, there have been increases in channel capacity, the deployment of digital transmissions that provide better picture quality than can be offered through analog service, and the initiation of nonvideo services, such as Internet access. Cable operators also are beginning to offer telephony, although the use of integrated facilities remains primarily experimental with limited exceptions.
Since the 1997 Report, the cable television industry has continued to grow in terms of subscribership (up to 65.4 million subscribers as of June 1998, a 2% increase from June 1997), channel capacity (some systems, such as Comcast's Orange County, California system, now offer over 120 video channels), number of national satellite-delivered video programming services (up to 245 services by June 1998 from 172 in June 1997, a 41% increase, most of which can be attributed to new digital programming packages such as HBO, HBO 2, HBO 3, HBO Family), revenues (an approximate 8% increase between June 1997 and June 1998), audience ratings (non-premium cable viewership rose from a 38 share at the end of June 1997 to a 41 share at the end of June 1998), and expenditures on programming (an approximate 20% increase in program license fees paid by cable system operators).
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 7.2 million DBS (DirecTV/USSB and Echostar) and medium power (Primestar) subscribers, an increase of almost 43% since the 1997 Report. Industry reports state that 2.2 million of the 3.6 million net new MVPD subscribers in 1998, or almost two thirds, are choosing DBS. Between 3.8 and 4.0 million households are HSD users, although only about 2.0 million HSD subscribers actually purchase programming packages, a 7% decrease in the last year that is likely due to subscribers switching to DBS. DirecTV and Primestar (which is significantly owned by cable operators) have the largest number of DBS subscribers and are again among the 10 largest providers of multichannel video programming service. DBS represented a 9.4% share of the national MVPD market in June 1998 and HSD represented another 2.7% of that market.
Wireless Cable Systems: Currently, the wireless cable industry ("MMDS") provides competition to the cable industry in only limited areas. MMDS subscribership fell from 1.1 million subscribers to 1.0 million subscribers between June 1997 and June 1998, a decrease of 9%. This drop in subscribership may be the result of a reduction of marketing of analog MMDS service in anticipation of deployment of digital services. The advent of digital MMDS and the recent authorization of two-way MMDS service that will make high-speed Internet and telephony possible have the potential to foster renewed MMDS growth. Wireless cable represented a 1.3% share of the national MVPD market in June 1998.
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 has declined 19.1% since the last report, with the industry representing a 1.2% share of the national MVPD subscribership as of June 1998. Certain technological advances, such as upgraded facilities, implementation of digital transmission and microwave headend technologies, and expanded service offerings to include DBS programming, Internet access, telephone service, and security services, have the potential to foster SMATV growth.
Broadcast TV: Broadcast networks and stations are competitors to MVPDs in the advertising and program acquisition markets. Additionally, broadcast networks and stations are suppliers of content for distribution by MVPDs. Since the 1997 Report, the broadcast industry has continued to grow in the number of operating stations (from 1561 in 1997 to 1583 in 1998) and in advertising revenues ($32.5 billion in 1997, a 4% increase over 1996). While audience levels have declined in the last year, the four major television broadcast networks still account for a 55% share of prime time television viewing for all television households. In the last year, the Commission took several actions on digital television and the first DTV television stations started offering service in November 1998.
LEC Entry: The 1996 Act expands opportunities for LECs to enter markets for the delivery of multichannel video programming. As noted in previous reports, LECs do not yet represent a national presence in the MVPD market. The competitive presence of LECs in specific video markets, however, is growing. In certain areas, especially in the midwest, LECs are already or are becoming significant regional competitors. Particularly notable are the efforts of Ameritech as a cable overbuilder and BellSouth as an overbuilder and MMDS operator. Ameritech has acquired 87 cable franchises, potentially passing more than 1.5 million homes. Seventy-two of these cable franchises are operational, in whole or in part, and it is reported that they serve at least 200,000 subscribers. Bell South has acquired cable franchises in 18 areas, with the potential to pass 1.2 million homes, and is launching digital MMDS service in a number of areas. The growth of the LEC competitive presence in the MVPD market will probably continue in the same manner as it has until now: deliberately, and by a number of different delivery mechanisms. Whether LECs will become nation-wide competitors to the cable industry is less clear.
Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery of video programming -- OVS. Under these rules, a LEC or other entrant may provide 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 11 OVS operators to serve 17 areas. Most of the firms receiving OVS certification are not LECs. Bell Atlantic in Dover Township, New Jersey, and RCN in New York City and Boston are the only operating open video systems, no change over the last year. Bell Atlantic, however, is transitioning away from its Dover system and plan to ask customers to with to its joint venture with DirecTV. Starpower, a joint venture of RCN and Potomac Electric Power Company ("PEPCO") in Washington, D.C. is currently serving 20,000 subscribers with Internet access, local telephone or long distance telephone service, or all three. It expects to begin video service by the end of the year. Between June 1997 and June 1998, the number of OVS subscribers grew from 3,000 to 66,000.
Internet Video: At the end of 1997, 44% of all households owned a personal computer and 60 million adults and 20 million children were Internet users. Previously, we reported on the availability of software technologies that make real-time and downloadable audio and video from the Internet accessible through a personal computer. We also noted that there are technologies available for the provision of Internet video over a television using set-top box Internet access, and through the WebTV and Worldgate service packages. As of June 1998, investment and development of Internet video services was continuing, though video pictures offered by Internet video still remain of less than broadcast quality. Media companies, however, continue to offer increasing amounts of video over their websites in the expectation that the pictures will be acceptable for the intended use or eventually improve to broadcasting or VCR quality. However, the medium is not a direct competitor to providers of traditional video services at this time.
Home Video Sales and Rentals: Video cassettes and laser discs provide feature films similar to those distributed by cable operators on premium channels and others involved in the distribution of video programming. The most significant development in the home video market in the last year was the increased availability of Digital Versatile Discs ("DVDs") that were first introduced in 1997. DVD technology provides picture and audio quality that is superior to that of video cassettes. As of September 1998, 700,000 DVD players had been purchased, with over 1000 movies, documentaries and concerts available for sale or rental in the DVD format.
Electric Utilities: Utilities have the potential to become major competitors in the telecommunications industry generally, and in the video marketplace in particular, since they already possess fiber-optic networks throughout the public rights-of-way in the areas they serve. In the last year, several utilities have announced, commenced, or moved forward with ventures involving multichannel video programming distribution. In particular, Tacoma City Light began offering cable service in Tacoma, Washington. Starpower, a joint venture of PEPCO and RCN, is beginning to offer video, telephone, and Internet services in the Washington, D.C. area. PEPCO is mainly providing its fiber optic backbone to this joint venture. Other utilities, including Black Hills Corporation serving the Rapid City, North Dakota, area and the municipal utility in Coldwater, Michigan, have announced plans to offer video services.
The Commission also finds:
Nationally, concentration among the top MVPDs has declined since last year. DBS operators DirecTV and Primestar rank among the ten largest MVPDs in terms of nationwide subscribership along with eight cable multiple system operators ("MSOs"). As a result of acquisitions and trades, cable MSOs have continued to increase the extent to which their systems form regional clusters. The number of clusters of systems serving at least 100,000 subscribers is currently 117, down from the 139 reported last year. Although the number of clusters declined, the trend for clusters to increase in subscribership or size appears to be continuing, and these clustered systems now account for service to approximately 52% of the nation's cable subscribers. By clustering their systems, cable operators may be able to achieve efficiencies that facilitate the provision of cable and other services, such as telephony.
The number of satellite-delivered programming networks has increased from 172 in 1997 to 245 in 1998. Vertical integration of national programming services between cable operators and programmers, measured in terms of the total number services in operation, declined from last year's total of 44% to just 39% this year, the continuation of a four year trend. However, in 1998, cable MSOs, either individually or collectively, owned 50% or more of 78 national programming services. A year earlier, cable MSOs owned 50% or more of 50 national networks. Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs. The Report identifies 29 regional sports networks, many owned at least in part by MSOs. The number of regional and local news networks continue to grow, with 25 news services currently competing with local broadcast stations and national cable networks (e.g., CNN).
The program access rules adopted pursuant to the provisions of the 1992 Cable Act were designed to ensure that alternative MVPDs can acquire, on non-discriminatory terms, vertically-integrated satellite delivered programming. We recently strengthened our enforcement procedures for these rules. We observe that some former vertically integrated satellite-delivered programming service is now being distributed terrestrially. We recognize that the issue of terrestrial distribution of programming, including in particular regional sports programming, could eventually have a substantial impact on the ability of alternative MVPDs to compete in the video marketplace. We will continue to monitor this issue and the impact on the competitive marketplace.
Technological advances are occurring that will permit MVPDs to increase both quantity of service (i.e., an increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). In particular, cable operators and other MVPDs continue to develop and deploy advanced technologies, especially digital compression, in order to deliver additional video options and other services (e.g., data access, telephony) to their customers. To access these wide ranging services, consumers use "navigation devices." In the last year, the Commission adopted rules and policies to implement Section 629 of the Communications Act, which is intended to ensure commercial availability of these navigation devices. The cable industry, through CableLabs, is developing standards for the interoperability of digital set-top boxes and cable modems.
Cable Services Bureau News Media contact: Morgan Broman at (202) 416-0852.
Cable Services Bureau contacts: Marcia Glauberman and Nancy Stevenson at (202) 418-7200,
TTY (202) 418-7172.
Re: In the Matter of Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, CS Docket 98-102
When Congress passed the Telecommunications Act of 1996, it affirmed the principle that when it comes to innovation and consumer choice, competition is preferable to regulation. Congress envisioned that the removal of market entry barriers would produce robust competition offering a wide array of viewing choices at reasonable prices to millions of American families across the nation. Our annual report shows that, although competition is increasing, the level of competition that consumers are seeking has not yet arrived.
Eighty-five percent of all households subscribing to multi-channel video service receive that service from their local cable operator (a two percent decline from the 87 percent we reported a year ago). With this high market share, it is not surprising that cable prices rose more than four times the rate of inflation between June 1997 and June 1998.
The drop in local cable operators' dominance of this market is primarily due to the continued growth of DBS systems, and to a lesser degree, the launch of new open video systems and instances where incumbent cable operators have faced head-to-head competition from other cable operators. These cases are immensely important for they teach us an important lesson. That lesson is that competition brings consumer benefits. And, as we continue to move towards a more competitive market, it is my hope that consumers will benefit from lower prices, improved customer service, and additional services.
Over the past year, the Commission has taken a number of steps to foster vigorous competition in this field. We improved our program access rules. We pre-empted rules and regulations that prohibited renters and residents in multiple-dwelling units from setting up satellite dishes and antennae in areas under their exclusive control. We ensured that consumers soon will be able to choose to purchase set top boxes from their local retailer instead of leasing their boxes from their cable operator. And we sought updated information on the state of horizontal concentration in the cable industry and how it affects competitiveness.
The Commission will continue to take aggressive actions to promote competition. I believe that we could do even more if we were given additional statutory tools. Congress has done much to promote competition in this marketplace, and I believe it would be beneficial for Congress to consider taking additional actions to promote competition. Specifically, I believe that Congress should continue to consider whether to amend the Satellite Home Viewer Act to allow DBS providers to carry local broadcast signals. In my view, it is difficult for DBS to develop as a head-to-head competitor to cable if DBS can't carry many of the channels at the heart of our TV experience. In other words, it's more than a little frustrating to be able to watch a football game a 1,000 miles away, but not be able to tune in to your local news to see if it is going to rain tomorrow. Many consumers have reported this type of frustration with DBS. I believe that removing this prohibition would help promote the further growth of DBS.
I would like to work with Congress as they evaluate other statutory proposals to promote competition. For example, the Commission's current impact on competition in MDUs is limited because our authority to allow use of the inside wiring by competitors extends only to circumstances where the incumbent video service provider no longer has a legal right to remain in the building. And, as I said only a month ago when we adopted new OTARD rules, I would like to open a dialogue with Congress regarding the possible extension of the OTARD provisions for renters and others who do not have exclusive use or control of suitable areas for antenna placement. Finally, I would welcome a debate as to whether it would be beneficial to expand the coverage of the program access provisions of the Act.
Finally, I share Commissioner Tristani's vision of a competitive marketplace governed by variety and consumer choice on all levels -- a marketplace in which different firms "vie for consumers with different mixes of price, quality and service." And, I join in Commissioner Tristani's praise of efforts to create additional tiers of cable services. As she so eloquently states, "[o]nly when all consumers have the opportunity to meaningfully express their preferences in the marketplace can we declare victory and go home." I couldn't agree more.
December 17, 1998
Re: In the Matter of Annual Assessment of the Status of Competition in Markets for the Delivery of Video Program
This, our fifth annual report on the status of competition in the market for the delivery of video programming, finds that competition to cable is slowly but steadily growing. The record evidences a consistent trend showing that more people each year perceive that they have more than one multichannel video provider ("MVPD") from which to choose.
As is often the case, readers can interpret the data in this comprehensive report in various ways. In my view, the data tell a positive story about the development of multichannel video competition, particularly from Direct Broadcast Satellite service ("DBS"). From July 1994 to June 1998, DBS subscribership has grown from 70,000 to 7.2 million, which, as of June 1998 represented 9.4% of all MVPD subscribers. In each of the last four years, DBS has experienced impressive growth. Indeed, Paul Kagan reports that 2.2 million of the 3.6 million net new MVPD subscribers in 1998 (or almost two-thirds) are choosing DBS.
Last year, our report identified at least three reasons why potential DBS subscribers declined to sign up: high installation costs, significant costs to hook up additional TV sets, and the lack of broadcast television service. Since last year, the cost of installation has plummeted, although it remains expensive to hook up additional sets. Notably, efforts have been made in the last year to address the legislative and technological prerequisites to enable DBS providers to offer local broadcast signals in their respective local markets. Whether it is 'local into local' or consumer education and assistance with installation of rooftop antennas, the key is cooperation between terrestrial broadcasters and DBS providers. Success on this front could make DBS an even better substitute to cable for many Americans.
The level of competition in the multichannel video market should not be measured solely by whether cable continues to lose market share. If cable operators use competitive responses to retain customers, so much the better. We should not fault the cable industry for beefing up its service quality, for example, in light of growing competition. Some of the data in this report show that the "pie" is getting slightly larger, as the number of total TV households grows and the numbers of multichannel video subscribers grows. For example, the total number of television homes increased from 97 million in 1996 to 98 million today. The total number of households subscribing to MVPDs increased 4.1% from 73.6 million in 1997 to 76.6 million in 1998. The number of cable subscribers also continued to grow, rising about 2% from 64.2 million in 1997 to 65.4 million in 1998. Some subscribers have chosen to retain basic cable for local service while adding DBS for its national programming and picture clarity. Thus, both the number of cable subscribers and non-cable subscribers have grown and may continue to grow.
While I am heartened by the progress made in the development of new competition to cable, some concerns remain. Local cable franchise areas served by a wireline competitor, while growing, are limited. The widespread entry by local exchange carriers (LECs) envisioned by the Congress has not yet developed. Not everyone has access to DBS (it is currently available only throughout the Continental United States), and even with our extension, last fall, of the over-the-air reception device accessibility provisions, many, if not most, residents in multiple dwelling units may not be able to subscribe to DBS. DBS offerings also do not, in general, compete on the basis of price with what is marketed as "basic" cable. For those cable subscribers looking for lower prices, I am hopeful more cable operators will follow the lead of Comcast by offering channel packages at various price points, to the extent such offerings do not impair the launch of new program networks.
The next year or two will be especially dynamic as cable operators enter the voice and data market and broadband data offerings are introduced by cable, DBS, local exchange carriers, and potentially MMDS and others. In addition, as a result of our implementation of statutory provisions enabling the retail market for set top devices to develop, new digital products and services are likely to be offered. The state of competition in the video marketplace could be substantially affected by how these related services are offered, and how they are accepted by consumers.
Practically speaking, competitive markets are evidenced by the availability of choice -- in other words, do people perceive that they have a realistic choice between providers of multichannel video programming? Choices should be available at various prices, should be available to people in various living environments, must be realistic, and must not be transitory.
When markets are fully competitive -- when people have meaningful choices -- the need for government regulation abates and the benefits of competition are manifest: lower prices, new and different service offerings, and better customer service. I am encouraged by the level of competition that has been achieved thus far, and I support efforts by industry and government to attain a fully competitive market for video programming distribution.
December 17, 1998
SEPARATE STATEMENT OF
Re: Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, CS Docket No. 98-102
Today we transmit the Fifth Annual Report of the FCC to Congress regarding the state of competition in video programming. I wish to offer my view on how to interpret some of the most noteworthy facts contained within this report.
First, a word about concentration in the multi-channel video market. I take issue with some of the analysis in this report designed to quantify the extent of concentration in this market. I am not convinced that the product markets are properly defined and I question the value of hypothetical concentration analysis to produce an HHI index. But it really does not matter. By any measure, cable commands the lion's share of the multi-channel video market, though that share continues to steadily decline. Indeed, having started from a position of near total monopoly, it would be surprising if it did not control a large market share only three years since the passage of the 1996 Act. What must be understood is that market share alone does not support the conclusion that a given cable operator is exercising market power to the detriment of consumers.
As antitrust scholars well know, monopoly (or near monopoly) is not per se illegal, nor does the presence of a monopolist necessarily mean that there are anti-competitive effects flowing from its dominant position. A multitude of competitive alternatives certainly is always preferred, but the existence of only a few is not sufficient to pronounce anti-competitive harms to consumers. What must be examined is (1) the ability of the monopolist to raise prices substantially in excess of marginal costs, (2) whether a monopolist can restrict output, and (3) whether the lack of competition results in a lack of innovation. When one examines the state of the cable industry, I do not believe one can fairly conclude that consumers are suffering from cable's dominant position.
Price Increases: Many of cable's critics quickly point to the increases in cable prices as evidence that there is a lack of competition. Perhaps, but one cannot proclaim that prices are increasing faster than the consumer price index and rest the case. Price increases, of course, are not anti-competitive unless they substantially exceed the private firm's costs. If price increases are largely a consequence of increases in cost, it is incorrect to cite price increases as evidence of competitive harm. In the case of video programming, it is indisputable that programming licensing fees MSO's must pay have increased dramatically (18.4% last year) as have programming costs (20.9% last year). This report squarely acknowledges these facts. Moreover, it is not monopolistic behavior to increase prices to upgrade infrastructure and facilities that will ultimately benefit consumers in the market. In this report, we find that capital expenditures to upgrade cable facilities were up 21% last year. It is particularly dubious to cite price increases to demonstrate lack of competitive discipline when prices have been regulated.
Undoubtedly, in areas where there is direct competition to cable, the prices have been lower than non-competitive systems, but not by that much. In 1997, the price difference between competitive and non-competitive systems was $1.57, down from $1.69 the previous year. In short, most competitors are entering the market at similar price points.
Output and Value: With a medium such as multi-channel video that is sold in different pricing combinations in different systems across the country, it is risky to examine aggregate price increases across the industry and the full range of pricing packages. It is my understanding that, while aggregate prices have increased, the price per channel has not increased. Cable operators have steadily increased the number of channels and programs available to consumers. In economic terms, they have increased output. They have not restricted output, which is the hallmark of monopolistic behavior. Price per channel measures also more fully incorporate the concept of value. Consumers do not care solely about price. They want a good value - the ratio of price to product. More channels, more original programming, higher quality programs are consumer benefits for which many may be willing to pay more. In fact, with this expansion has come continued growth in subscribership suggesting that consumers do value the product.
Many respond to this point by rightly pointing out that many consumers do not wish to pay for 500 channels, or greater (more expensive) sports programming, or premium movies. This is true enough. But, there appear to be many low cost alternatives available to those customers and those basic packages have not increased significantly in price. Many cable providers offer a relatively low priced ($12 or less) basic tier of service. One operator, Cox, reported that it offers a 20-channel basic service tier to its customers for $11 per month and that 5% of its subscriber choose to use only this service. Another provider, Comcast, reported that it offers a basic service consisting of local broadcast signals and C-Span for about $9-12 per month. All reports that I have seen indicate that these basic tier prices will remain relatively low. Moreover, they will continue to be regulated even after the March 31, 1999 sunset of upper tier rate regulation.
Innovation: Finally, when looking at monopoly behavior to determine if one sees signs of anti-competitive effects, one looks to see if the firms are innovating. Here, it is clear that cable is doing so. Not only have there been steady increases in the quality of programming as discussed above, but also this industry has been investing significant sums to upgrade plant for high speed, two-way capability. This is allowing the industry to begin to offer residential phone service in direct competition with incumbent phone companies--a development Congress clearly hoped for in the 1996 Act. Moreover, the rapid innovation of cable plant is accelerating the universally shared desire to bring broadband internet services to homes and residences.
Competitors and Barriers to Entry: All this said, I too would love to see greater competition to cable. I believe it will provide some price discipline, but just as importantly, competition will accelerate product innovation. While there are many ways to skin the cat, DBS clearly is shaping up as the singularly most significant competitive alternative to cable. And, it is coming on strong. DBS subscribers increased by 40% last year. Two out of three new subscribers of multi-channel video chose DBS over cable. And, DBS is now very competitively priced, having slashed equipment costs and developed comparable or superior packages of programming. With the flurry of acquisition activity we have seen by the leading DBS providers in recent weeks, DBS's future looks bright.
There are clearly many barriers to breaking into this market. The inability to offer local signals, the challenge of getting dishes set up in some areas, and access to programming are just a few of them. But, it is worthy to note that many of the "barriers to entry" are regulatory, rather than a consequence of a monopolist's market power or control of essential facilities. I sincerely hope the Commission, the States and Congress work to lower some of these barriers over the coming year.
Overall, I believe that the factual story this report tells is a positive one. The report indicates that there are promising trends in the video programming industry. Despite some entry barriers, we continue to see forays by telephone companies and other utilities, satellite companies and wireless providers into this market. Investment in this arena is strong. I believe this is so not just because the video business is a good one, but also because of the promise of the coming broadband market. Broadband offers the potential for new revenue streams for MVPD providers and, in turn, will provide consumers with new products and new choices. We should be careful not to take actions that would threaten further growth.
December 17, 1998
In the Matter of Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, CS Docket No. 98-102
Debates about the status of cable competition often seem a rote exercise. One side asserts that competition has arrived and that market forces now can be relied upon to protect consumers; the other side claims that cable's dominant market power remains intact. One side argues that DBS has emerged as a substitutable, if not superior, video product to cable; the other side dismisses DBS as a high-end option. One side states that consumers are receiving more value (i.e., more and better programming services) for their money; the other side stresses the fact that rates continue to rise at more than four times the rate of inflation.
If few minds are ever changed during these debates, it may be because both sides are partly right. They are just focused on different consumers. Those who assert that competition has arrived are focused on a particular category of video consumers: those who want and can afford large programming packages. The cable industry has invested billions of dollars in capacity upgrades -- and plans to invest billions more -- in order to keep these consumers from defecting to DBS and, more importantly, to be able to exploit new revenue opportunitites like high-speed Internet access. As it happens, both reasons underlying cable's expanding capacity (i.e., increased channels and new services) are aimed at similar consumers, who tend to be younger and more well-off than the nation as a whole.(1) Although the cost of upgrades and new services may have caused rates to climb four times faster than the rate of inflation, these consumers may very well feel that the higher prices are justified by the increased value of the delivered product.
These consumers can look forward to even better times ahead. On the video side, if the up front costs of DBS continue to decline (and especially if DBS providers are able to provide local broadcast signals), an increasing number of consumers of large programming packages will find DBS and cable to be complete substitutes for each other.(2) On the data side, several entities, including telephone companies and wireless operators, are moving to enter the high-speed data business. It thus appears that these consumers can expect to have multiple service providers competing to serve both their video and data needs.
But there is another group of consumers who are not doing so well. These consumers do not want, cannot use or cannot afford large programming packages or high-speed data services. They are happy with plain-old cable service and would have kept a more modest level of service if they had been given that option. But by and large they were not. Instead, they were confronted with a take-it-or-leave-it proposition: pay big rate increases for additional services they do not want and did not ask for, or lose all the cable channels that they have come to rely upon for news and entertainment.(3) And unlike consumers of large programming packages, there was no DBS or DBS-equivalent giving them any real alternative.(4) Not surprisingly, these consumers are unimpressed with the argument that they are actually better off with the additional services because their per channel cost may have gone down. That argument assumes that all channels have equal value when, to these customers, the value added by the new channels is zero.
In a truly competitive market, things would be different. In a competitive market, different firms would vie for consumers with different mixes of price, quality and service. The market would sort out what particular combinations of those factors succeed. Some consumers would be willing to put up with poor service in exchange for bargain-basement prices; others would opt for better service at higher prices. Only consumer choice freely expressed -- and not industry or government edict about what consumers "should" value -- can be counted on to reach the right result. It shows how starved we are for competition that anyone could look at the competitive choice provided by DBS and declare victory.
I am aware of all the reasons why some say additional choice for consumers will not work -- subscribers would need addressable set-top boxes, new channels would never survive in an a la carte world, and so on. I make just a few observations. First, most of the technical and other objections to more choice for consumers apply to a purely a la carte world. But we should not allow the perfect to become the enemy of the good. Even some choice (e.g., two or three tiers in place of the current take-it-or-leave approach) is better than none. Second, I reject the notion that consumers should be forced to buy additional services that they do not want until they can be made to realize how valuable these services are. We do not do that with magazines, toothpaste or soda pop. For other products, companies use marketing techniques find a way to entice consumers to affirmatively select their product. Cable programming services should be no different. In a market economy, consumers can and must be counted on to determine which products should succeed and which should fail.
In the end, it all comes down to trusting the consumer. I am constantly amazed in Washington at the number of people who express complete faith in markets but little faith in living, breathing consumers. I trust consumers to make the right choices about the mix of price, services and quality that is appropriate. Whether or not those choices match the industry's business plans or the expectations of Silicon Valley investors is secondary. Only when all consumers have the opportunity to meaningfully express their preferences in the marketplace can we declare victory and go home.
For the reasons that follow, I must respectfully dissent from the 1998 "Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming."
As an initial matter, I do not believe that the issuance of this Competition Report fulfills our duties under the Communications Act. Instead of examining the state of competition "in the market for the delivery of video programming," 47 USC section 628(g), as the statute prescribes, the Report artificially limits its analysis to the delivery of "multichannel video programming."(1) There are, of course, many forms of video programming that do not come bundled in channels but that are still part of the general video distribution market. Unfortunately, the Report does not take full account of these very real forces in its investigation of competition.
For instance, the report considers broadcast service only as a competitor to multichannel video programming distributors ("MVPDs") in advertising, programming acquisition, and programming production, see supra at paras. 95-101, but not as an independent delivery source of video programming. Yet the statutory definition of "video programming" specifically includes broadcast programming. See 47 USC section 602(20) (providing that "the term 'video programming' means programming provided by, or generally comparable to programming provided by, a television broadcast station"). In focusing primarily on what is a submarket of video programming -- the "multichannel" distribution market -- rather than the entire market, the report does not fully meet the requirements of the statute.
The language of the statute also makes clear that Congress considered the delivery of video programming to constitute a single "market," see id. section 628(g) (referring to "the market" for video programming delivery), not a conglomeration of "markets," as the very title of this Report suggests in speaking of "[m]arkets" for the delivery of video programming. We should, as a plain statutory matter, have considered the delivery of video programming a single market in this Report.
In addition to the above-described statutory reasons to view the relevant market participants as more than just MVPDs, economic theory supports that conclusion.
A product market is not comprised of perfectly substitutable products. Cf. supra at para. 63 (discussing whether DBS "represents a substitute" for cable). Rather, "[a] product market is a group of goods or services whose availability and prices discipline one another." Crandall & Furchtgott-Roth, Cable TV: Regulation or Competition? at 26 (1996) (emphasis added). For its part, cable television provides a variety of entertainment, information, and even home shopping programming. Similar services may be obtained from local television stations, satellite retransmissions, local sports teams, movie theaters, video rentals, newspapers, magazines, radio stations, and retail shops.
Id. In my opinion, monopoly power, where it exists, can be limited -- or "disciplined" -- where "theaters, a large number of broadcast stations, video rentals, live events, and other diversions are readily available." Id. at 105.
Thus, in economic terms, the sources that I believe should be considered in analyzing the amount of competition to cable include, at least, broadcast televisions stations, DBS, videotape rentals, motion pictures, even theatrical productions and, at some point in the not too distant future, internet streaming video.(2) From this perspective on the relevant product market, it would not, for instance, appear "unlikely that broadcast television will offer consumers a . . . service in competition with cable," supra at para. 100, but that they already do so.
More broadly, when considering the entire video programming market, not just segments of it, one finds that American consumers have more options for the receipt of video programming than ever before. At any time of day, any day of the year, consumers can choose from a wide and ever-widening array of video programming for their entertainment, information, and education. Among other things, they can watch free broadcast television, rent a film, go to the theatre, enjoy DBS sports programming, watch cable news, or order a pay-per-view movie. It takes some impressive intellectual gymnastics to try and find a lack of competition among the providers of these choices in video programming for the American consumer.
This general analytical problem of the proper product market manifests itself in the Report in more specific ways too. Section III looks at market share but considers only cable and non-cable MVPDs, not video programming distributors generally. These market share numbers are distorted by the use of what is, in my opinion, an inappropriate denominator. Similarly, in the discussion of concentration levels based on the Herfindahl-Hirschman Index ("HHI"), the Report measures only MVPDs. HHI numbers can be useful in considering concentration levels in product markets but they are rendered meaningless when applied to market segments instead of markets.
Likewise, Section IV, in considering instances of competition, assumes that competition only exists when there is more than one (usually facilities-based) MVPD in an area -- which of leads to the conclusion that these instances are more "limited" than if one considered the presence of other video programming deliverers. In my opinion, case studies about "competitive responses" should include, for instance, the relationship between cable and DBS systems.(3)
In sum, because the Report slices the relevant product market too thin and thereby paints many actual competitors out of the picture, its conclusions about the state of competition are skewed ab initio. I thus cannot endorse those conclusions.
The objective facts in the Report -- which, as opposed to the conclusions about competition, I have no quarrel with -- indicate that even in the multichannel-only product market cable today faces a significant amount of competition and that this competition is likely to grow.
The percentage of MVPD subscribers that purchase cable (85%) is not, in itself, cause for concern. This market share statistic provides no direct evidence of the availability, or lack thereof, of alternatives to cable, although it is often cited as such. On its face, it only tells us that many people have opted -- perhaps for reasons entirely apart from lack of choice -- for cable companies over other video distributors. The reasons that consumers choose certain video products over others are complicated, based on personal cost-benefit determinations, and cannot be adduced from this number.
In short, it simply does not follow from the fact that cable has a preponderance of MVPD customers that cable has an unlawful or inefficient hold on the market. The FCC should not be in the business of trying to drive down the percentage of MVPD subscribers who take cable. Instead, we should create an environment that allows alternative providers to meet market demand for these services by removing regulatory impediments like rate regulation.
The fact that cable price increases outpaced the general rate of inflation is not necessarily cause for concern either. The inflation rate measures the average increase in prices of consumer goods and services. Producers of goods and services in various industries of course face widely divergent circumstances in terms of production, labor, overhead costs, etc.; simply put, not all industries face average costs. Given that cable has invested heavily in systems upgrades, see supra at para. 9 (increase of 21% since 1996), that its programming and licensing costs have increased far faster than inflation, see id. (increase of 18.4% and 20.9%, respectively), and that cable is providing more video and non-video services to its customers than ever before, see id., a 7.3% price increase, as compared to a national average of 1.7%, is not particularly strong evidence of anticompetitive behavior.
Cable subscribership increased last year. I believe that consumers are not irrational. If they felt that cable, at the price it was offered, did not provide a service that they believed was worth the cost, they would not pay for it. They would migrate to other sources of video programming -- including, most obviously, free over-the-air broadcast programming. But cable subscribership grew by almost 2 million since the end of 1996. See id. at para. 17; App. B, Table B-1.
This evidence casts substantial doubt upon the notion that cable is somehow "overpriced," given the presence of choices for other video programming services. Either the consumers who subscribed to cable last year did not know of the availability of these services at lower prices in 1996, or the value they placed on the increased quality in cable service outweighed the intervening price increases. I find the latter more plausible.
DBS is making dramatic gains, presenting mounting competition to cable. The Report blinks reality in suggesting that DBS is not having a real competitive effect in the multichannel video programming market. DBS subscribership has jumped by 2.2 million since June of 1997, an increase of 43%. See id. at para. 62. According to Paul Kagan Associates, "DBS is on course to capture nearly two-thirds of all new multichannel subscriptions sold in the U.S. Of the 3.6 mil. projected new broadband subs in 1998, some 2.2 mil. will be sold by the three main DBS providers." Marketing New Media, Oct. 19, 1998. For these reasons, market analysts have called DBS "'the fastest-growing consumer electronics product in history.'" Antennae Attract Viewers to Satellite TV, Wall Street Journal at B-1, Dec. 1, 1998 (quoting Jimmy Schaeffler, chairman, Carmel Group).
While the Report stresses that DBS and cable are not perfectly substitutable, that is not the point; what matters is whether they are sufficiently similar such that DBS they can have a disciplining effect on each other, as explained above.(4) I submit that the evidence in this report shows that DBS does just that.
The Report itself states that "to meet competition and customer demands for more video channels and advanced services, MSOs must continue to improve their systems through increased channel capacity," supra at para. 38, and documents large infrastructure investments, id. at paras. 37-41 (noting, among other things, that the largest MSOs have "spent as much as half a billion dollars each on capital expenditures"). These facts are reflective of a market in which, increasingly, cable will play catch-up with DBS. See, e.g, Satellite TV rivals to merge services, Washington Times at B-7, Dec. 15, 1998 (noting that Hughes Electronics' purchase of USSB would "expand DirecTV's 185-channel programming lineup to more than 210 channels" and that Echostar Communication's purchase of News Corp. satellites "will mean more channels and services for Echostar subscribers, including 500 channels, Internet access and other date services"). Sounding not at all like monopolists, cable companies are now asserting, in response to actions taken by DBS, that they can still compete in the MVPD market. Antennae Attract Viewers to Satellite TV, Wall Street Journal at B-1 ("'Any cable system with an upgraded technical platform can be fully competitive with any DBS company'") (quoting Julian A. Brodsky, vice chairman of Comcast Corp.).
Moreover, DBS has recently made serious inroads on the "competitive disadvantages" of its service. To deal with the issue of local broadcast signals, DBS companies are now "simply adding a separate advanced antenna to their satellite package" to "give customers the local channels they want." Id. These "powerful new antennae [are] capable of tapping local to channels with the mere zap of a remote control." Id.
Prices on equipment are still falling, from about $150 to as low as zero in some circumstances. As the Report explains, some DBS companies are providing customers with free dishes. See supra at para. 73; see also Dish Network Advertisement, Philadelphia Inquirer at A-33, Dec. 6, 1998 (offering free digital satellite tv system, after rebate, with guarantee of no rate increases until 2000 with one-year subscription). Also, consumers can decide to pay for professional installation at relatively low prices, or they can choose free do-it-yourself packages. See id. (offering $49 installation or free self-installation kit)
Almost two years ago, based in part on research conducted by economists Leland Johnson and Deborah Castleman, I concluded that "[o]nce the cost of receivers, including installation, falls to about $500, DBS should render traditional cable service contestable, assuming that it and cable deliver a similar array of services with equivalent reception quality." Crandall & Furchtgott-Roth at 92. Today, the cost of receivers and installation is well below $500; cable and DBS provide similar programming (even without local broadcast, which they now, in any event, facilitate with antennae sales, as described above); and DBS is considered by many to have not just similar but superior reception, as well as sound, quality. In my view, the day has already come when DBS creates a market disciplining and thus pro-competitive effect.
New entrants are on the scene. The Report chronicles well but, unfortunately, then downplays the many innovative providers now on, or waiting in the wings of, the video scene.
For example, electric and gas utilities, either on their own or in partnership with others, are providing facilities-based video, telephony, and internet. See supra at paras. 120-121. So are local exchange carriers, who are doing overbuilds in many areas. See id. at paras. 112-117. New, aggressive SMATV operators are making their presence felt too, sometimes in combination with DBS providers, see id. at paras. 90-93, and new technologies are expected to further boost SMATV systems, see id. at para. 92.
Internet video, while admittedly not currently comparable to broadcast programming, is around the corner. With digital television, broadcasters, already providing an alternative to cable for the delivery of video programming, will become stronger competitors. Wireless has had its difficulties, but the Commission recently loosened regulatory restrictions on two-way transmissions, see supra at para. 85, which the wireless industry now plans to put to use in the market. The wireless industry also plans to take advantage of digital technology. See id. at para. 84.
These are just a few of the new kinds of companies that have entered the video programming delivery market. Others are described in the factual sections of the Report. Suffice it to say that many new and improved services are now here and more are coming into being.
Perhaps it is a question of seeing the glass as half empty or half full, but I believe that we have a significant amount of competition in video programming delivery and that, moreover, the imminent future holds a great deal of promise for even more video competition.
1. 1See Yankee Group Presentation -- Satellite TV: Research Overview, April 15, 1998 (stating that average new DBS household income is 51% greater than average household, and that average new DBS subscriber is 50% more likely than average to be between age 18 and 34); Falling Through The Net II: New Data on the Digital Divide, NTIA Study July 1998 (finding that 49.2% of U.S. households with income above $75,000 had an online service, compared to only 9% of U.S. households with income between $20,000-24,999, and that only 8.8% of households over 55 years old had an online service, compared to 18.6% of the population as a whole).
2. 2The major exception remains the 28% of American households in multiple dwelling unit buildings. Although the Commission has interpreted Section 207 of the 1996 Telecommunications Act to the limit of our stautory authority, an MDU resident can still be denied the right to install and use a DBS dish unless he or she has a balcony or other outdoor exclusive use area on which a dish can be placed and that faces the right direction to "see" the satellite.
3. 3I note that some operators like Comcast, to their credit, appear to have added new programming as optional tiers rather than simply adding to the size of existing tiers.
4. 4I do not believe that relegating these consumers to the Basic Service Tier ("BST") is the
answer. As an initial matter, many cable systems only offer one tier of service. Further, even on
those systems that offer more than one service tier, many consumers want more from cable than
simply a broadcast reception service. And my understanding is (and I welcome evidence to the
contrary) that few BSTs, if any, give consumers a choice of receiving, say, their local broadcast
channels and the most popular cable programming services.
1. It is true that the general "purpose" provision of section 628 refers to "increasing competition
and diversity in the multichannel video programming market." 47 USC section 628(a). That
(hortatory) provision, however, is not the section pursuant to which we issue this Report.
Section 628(g), the section specifically requiring this Report, contains the more directly relevant
and thus trumping language.
2. While the Report includes some of these sources, such as video rentals, in its descriptive
sections, see supra at paras. 106-109, it regrettably leaves out this kind of video programming in
its subsequent substantive analysis, using "MVPD-only" denominators instead.
3. The "effective competition" framework of section 623 may preclude consideration of video
programming distributors such as DBS in adjudicating effective competition petitions, see supra
at para. 206 & n. 798, but we are not obliged to use that framework in performing case studies of
new entrants in geographic video programming markets for this Report.
4. Even if substitutability were the point, the Report's suggestion of non-substitutability
conflicts with the judgment of the Department of Justice, which has concluded that "[w]hile the
programming services are delivered via different technologies, consumers view the services as
similar and to a large degree substitutable." United States v. Primestar, Inc., No. 1:98CV01193,
Complaint at para. 63 (D.D.C. May 12, 1998).
2. While the Report includes some of these sources, such as video rentals, in its descriptive sections, see supra at paras. 106-109, it regrettably leaves out this kind of video programming in its subsequent substantive analysis, using "MVPD-only" denominators instead.
3. The "effective competition" framework of section 623 may preclude consideration of video programming distributors such as DBS in adjudicating effective competition petitions, see supra at para. 206 & n. 798, but we are not obliged to use that framework in performing case studies of new entrants in geographic video programming markets for this Report.
4. Even if substitutability were the point, the Report's suggestion of non-substitutability conflicts with the judgment of the Department of Justice, which has concluded that "[w]hile the programming services are delivered via different technologies, consumers view the services as similar and to a large degree substitutable." United States v. Primestar, Inc., No. 1:98CV01193, Complaint at para. 63 (D.D.C. May 12, 1998).