FOR FCC RECORD ONLY
$// NOI, 1995 Competition Report, CS Dkt No. 95-61, FCC 95-186 //$
$/ Part 76 Cable Television Service /$



FCC 95-186

Before the
Federal Communications Commission
Washington, D.C.

CS Docket No. 95-61

In the matter of:

Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming

NOTICE OF INQUIRY

Adopted:
May 4, 1995
Released:
May 24, 1995

By the Commission:

Comment Date: June 30, 1995
Reply Comment Date: July 28, 1995






I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Summary of this Notice of Inquiry . . . . . . . . . . . . . . . . . . . . 5

III. Overview of the 1994 Competition Report  . . . . . . . . . . . . . . .  10

IV. Defining the Market for Delivered Video Programming

 A. The Market for Delivered Video Programming  . . . . . . . . . . . . . .  18

 B. Status of the Cable Industry and Its Competitors

  1.   Cable Industry . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
  2.   Cable Overbuilds . . . . . . . . . . . . . . . . . . . . . . . . . .  27
  3.   Wireless Cable Systems . . . . . . . . . . . . . . . . . . . . . . .  30
 4.   Satellite Master Antenna Systems  . . . . . . . . . . . . . . . . . .  35
  5.   Direct-to-Home Satellite Services  . . . . . . . . . . . . . . . . .  39
  6.   Local Exchange Carriers/Video Dialtone . . . . . . . . . . . . . . .  47
  7.   Broadcast Television Service . . . . . . . . . . . . . . . . . . . .  56
  8.   Other Distribution Technologies  . . . . . . . . . . . . . . . . . .  60
  9.   Other Distributors . . . . . . . . . . . . . . . . . . . . . . . . .  62
  10.  Technological Advances . . . . . . . . . . . . . . . . . . . . . . .  64

V. Market Structure and Competition . . . . . . . . . . . . . . . . . . . .  74

 A. Horizontal Concentration in the Cable Industry

  1.  Horizontal Concentration in Local Markets . . . . . . . . . . . . . .  75
  2.  Horizontal Concentration Nationally . . . . . . . . . . . . . . . . .  77

 B. Vertical Integration in the Cable Industry  . . . . . . . . . . . . . .  84

 C. Market Performance Indicators . . . . . . . . . . . . . . . . . . . . .  92

  D. Market Structure Characteristics that May Increase
Concentration
   or Pose Impediments to Competition . . . . . . . . . . . . . . . . . . .  93

 VI. Recommendations for Promoting Competition in the
 Market for Delivered Video Programming . . . . . . . . . . . . . . . . . .  96

VII. Procedural Matters . . . . . . . . . . . . . . . . . . . . . . . . . .  97



I. INTRODUCTION

1. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act").(n1) Section 19(g) of the 1992 Cable Act directs the Commission to report annually to Congress on the status of competition in the market for the delivery of video programming.(n2) The Commission issued its first report in compliance with this statutory requirement on September 28, 1994.(n3) This Notice of Inquiry ("NOI") is designed to assist the Commission in gathering the information necessary to prepare the second of these annual reports on competition in the market for the delivery of video programming.

2. The 1992 Cable Act clearly indicates Congress' preference for competition, rather than regulation.(n4) However, in 1992, Congress found that sufficient competition to cable television systems did not exist in most local markets, and as a result cable operators had "undue market power . . . as compared to that of consumers and video programmers."(n5) Accordingly, Congress established a regulatory scheme to promote competition and to ensure that consumer interests are protected in the absence of effective competition to cable.(n6) Thus, the 1992 Cable Act provides that where effective competition is present, cable television rates shall not be subject to regulation by government but shall be regulated by the market.(n7) Alternatively, where effective competition is absent, the Commission is to protect the interest of subscribers by ensuring that basic cable rates are reasonable and cable programming service rates are not unreasonable.(n8)

3. Congress also sought to foster the development of competition to cable operators by requiring, in the "program access" provisions, that programming be made available to all multichannel video programming distributors on fair terms and conditions.(n9) In addition, the 1992 Cable Act provides that a cable operator shall have a uniform rate structure throughout the area served by its cable system,(n10) and that a franchise authority may not grant an exclusive franchise or unreasonably refuse to award an additional competitivefranchise.(n11) A critical element of the regulatory framework mandated by Congress is to promote the emergence of competition over time by fostering the entry of alternative multichannel video programming distributors.

4. The Commission has also sought in a variety of proceedings to promote the growth of competition in the marketplace for the delivery of video programming. This NOI presents an opportunity to assess whether progress is being made in developing competition and to determine whether further actions are necessary.

II.SUMMARY OF THIS NOTICE OF INQUIRY

5. This NOI is intended to solicit information, data and public comment that will be used to prepare the Commission's second annual report, the 1995 Competition Report. The purpose of this report is to monitor and summarize the status of competition in the marketplace for video programming. We intend to gather sufficient information to prepare an analysis of the current status of competition for the delivery of video programming and to evaluate changes in the competitive environment since the 1994 Competition Report was submitted to Congress last September.

6. Accordingly, commenters are invited to submit data, information and analysis regarding the cable industry, existing and potential competitors to cable systems, and the prospects for increased competition in the market for the distribution of video programming. We ask specific questions to solicit current information and data regarding changes since the 1994 Competition Report and fact-based projections for the future development of competition in this market. Parties also are asked to provide any other information or analysis deemed relevant for this report.

7. The Commission recognizes that much of the information that we will need for the 1995 Competition Report can be obtained from publicly available sources. In addition, a considerable amount of relevant, and even necessary information, has been provided in filings with the Commission in connection with a variety of ongoing proceedings. The Commission also recognizes that parties that choose to file comments in response to this NOI have limited resources. Accordingly, we are not asking parties to provide the Commission with information that is otherwise publicly available. Nor are we asking parties to repeat here the substance of comments that have been filed in other proceedings. Nonetheless, while the Commission intends to look to publicly available sources and filings in other proceedings as sources of information, commenters should feel free to comment or provide information on any matter that they believe is relevant to the issues on which the Commission will report.

8. As stated in the 1994 Competition Report, we view this annual statutory requirement as a "work in progress in which certain parts are continually updated and revised" because the market for the delivery of video programming is "dynamic and evolving."(n12) We begin, in Section III of this NOI, with an overview of the 1994 Competition Report, including its findings regarding the status of competition as of September 1994 and a summary of the framework for analyzing competition in the market for delivered video programming.(n13) Section IV seeks information and comment regarding the relevant product and geographic markets for delivered video programming. We wish to examine distributors already in the market, entities that are potential entrants in this market and other technologies that might impact the nature of competition. The 1994 Competition Report analyzed the cable television industry and compiled statistics regarding the development of existing and potential competition for the provision of video programming by alternative delivery technologies. In this NOI, we seek data to update this information to assess the current state of such competition and to analyze evolving trends. In Section V, we ask for comment on the structure of the market for the delivery of video programming and the effect of market structure on competition. In Section VI, we seek recommendations, as appropriate, for promoting further competition in the market for delivered video programming.

9. In addition, throughout this NOI we ask that commenters consider the economic framework for analyzing competition in the market for the provision of video programming. Parties are invited to comment on the findings of the 1994 Competition Report regarding the relevant product and geographic markets, our evaluation of the market structure and our conclusions concerning the cable industry's market power. We also invite comment on the relevant economic methodologies for assessing the extent of competition and market performance in the market for the delivery of video programming. Finally, in addition to comments on specific issues raised in this NOI, we seek any information that commenters believe will assist the Commission in the preparation of this report.

III. OVERVIEW OF THE 1994 COMPETITION REPORT

10. The 1994 Competition Report's analytical framework can be summarized as follows: (a) definition of the market; (b) analysis of the status of current and potential future participants in the market; (c) examination of the conduct of the firms in the market; (d) analysis of market structure conditions that may affect competition, with particular emphasis on impediments to competition and regulatory efforts to promote competition; and (e) evaluation of the overall economic performance of the market.

11. Specifically, the Commission wrote that the relevant market consists of a relevant product and a relevant geographic area. In the 1994 Competition Report, the Commission used the 1992 Cable Act's definition of "multichannel video programming service"(n14) as a starting point for the definition of the relevant product.(n15) The Commission also analyzed the status of other multichannel video programming distributors ("MVPDs") that were not included in the statutory definition,(n16) and "discuss[ed] other video programming distribution media as potential substitutes for cable services."(n17) The Commission defined the relevant geographic market as the "area to which buyers will reasonably turn and from which competing suppliers sell their products," and wrote that "[g]iven the current state of competitive entry, it would seem reasonable to define, at least tentatively, the local franchise area as the geographic market relevant to an analysis of the cable industry."(n18)

12. The Commission observed that cable television was the only provider of multichannel video programming for most households.(n19) The Commission found that cable television was available to over 96% of all homes and almost 60% of all households subscribed to basic cable service in 1993.(n20) We observed that since 1990, when the Commission last provided Congress with an analysis of the cable industry and the state of competition,(n21) the cable industry had grown with respect to subscriber penetration, average system channel capacity, the number of programming services available, revenues, expenditures on programming, and capital investment.(n22)

13. In addition, the 1994 Competition Report analyzed the status of existing and potential competitors to local cable systems.(n23) The Commission stated that while competitors were emerging, alternative video programming distributors were not available to a sufficient number of subscribers to create a competitive environment in most video programming delivery markets. We reported the existence of approximately fifty "overbuilds" scattered across the country where more than one cable system has cable lines passing the same homes in direct competition for subscribers.(n24)

14. With respect to alternative distribution technologies, the Commission observed that some inroads had been made since the 1990 Cable Report on the status of competition in the cable industry. Direct broadcast satellite ("DBS") service, which the Commission first authorized in 1982, became available to consumers in 1994.(n25) Another four million households received multichannel video programming using home satellite dishes ("HSDs").(n26) The Commission found that multipoint multichannel distribution service ("MMDS"), or "wireless" cable systems, were increasing in number and obtaining the financial resources necessary for growth and expansion. The Commission indicated that, in June 1994, there were 143 systems serving 550,000 subscribers.(n27) Satellite master antenna television ("SMATV") systems, also known as "private cable systems," showed growth in terms of numbers of systems and subscribers. Industry sources indicated that there were between 3,000 and 4,000 such systems serving about one million subscribers in August 1994.(n28) In addition, at the time the 1994 Competition Report was issued, the Commission had begun to authorize local telephone companies to provide video dialtone ("VDT") service within their local telephone service areas. Five technical or market trials and one permanent VDT service were authorized and another twenty-three applications were pending which, if granted, would allow service to 8.5 million homes.(n29) The 1994 Competition Report also considered electric utilities as potential distributors of video programming.(n30)

15. The 1994 Competition Report also evaluated broadcast television and other technologies as competitors to multichannel video program distributors.(n31) We observed that, for the more than one-third of all households that do not subscribe to cable, broadcast television satisfies the demand for video programming. We also noted that even in the households that subscribe to cable, two-thirds of prime time viewing was of retransmitted broadcast stations. Despite the size of its audience, the Commission found that broadcast television does not constrain cable rates to reasonable levels. However, the Commission identified possible technological and regulatory advances that might allow broadcast television, low-power television and local multipoint distribution service ("LMDS") to become distributors of multichannel video programming.(n32)

16. Turning to market structure conditions, the Commission analyzed multiple system operator ("MSO") ownership of cable systems and programming services, including changes since the 1990 Report. We concluded that there had been a moderate increase in the horizontal concentration of cable MSOs nationwide and, if consummated, several proposed mergers would result in a further increase in concentration and increased "clustering," or regional concentration, of cable system ownership.(n33) Vertical integration in the industry (i.e., the ownership of programming services by MSOs) was approximately the same in 1994 as in 1990, with cable MSOs continuing to invest in video programming vendors. Since 1990, there had been growth in diversity and quality of programming services that were offered or whose launch was announced.(n34) The Commission stated that it appeared the program access rules adopted as a result of the 1992 Cable Act had been successful in ensuring the availability of programming to competing multichannel video program distributors.

17. Finally, the Commission evaluated overall economic performance in local markets for the distribution of multichannel video programming services. We found that competitive rivalry in most such markets "is largely, often totally, insufficient to constrain the market power of incumbent cable systems."(n35) However, we also wrote that "entry of competitors to local cable systems over the coming months and years should exert a significant, favorable effect on market conduct and performance . . . ."(n36)

IV. DEFINING THE MARKET FOR DELIVERED VIDEO PROGRAMMING

A. The Market for Delivered Video Programming

18. The Commission intends to draw upon the relevant market concept to define the market for analysis in the 1995 Competition Report. As in the 1994 Competition Report, the Commission intends to define the relevant product market by analyzing the degree to which products or services are "reasonably interchangeable by consumers for the same purposes."(n37) The relevant geographic market is defined in a similar manner. The relevant geographic market is the area in which products compete with substantial parity. As with the definition of the relevant product market, its scope is defined by the geographic area to which buyers can reasonably turn or from which competing suppliers are likely to sell.(n38)

19. In the 1994 Competition Report, the Commission used the 1992 Cable Act's definition of "multichannel video programming service" as a starting point for the definition of the relevant product.(n39) The Commission also analyzed the status of other MVPDs that were not included in the statutory definition, and "discuss[ed] other video programming distribution media as potential substitutes for cable services."(n40) We invite comments about that definition of the relevant product market, and in particular, responses to the following questions:

(a)What changes (if any) have occurred, since the 1994 Competition Report, in the relevant product market relative to the delivery of video programming?

(b)Was the Commission's analysis of the relevant product market in the 1994 Competition Report correct? Or, was it too broad? Or, was it too narrow?

(c)In the 1990 Cable Report, the Commission noted that cable provided four services: (1) an "antenna service" delivering high quality retransmitted broadcast signals; (2) a "premium" service offering uninterrupted recent movies; (3) a "general interest basic" service consisting of imported distant broadcast channels; and (4) a "specialized basic" service with channels thatoffer either news, sports or entertainment.(n41) Should the Commission's analysis treat cable service as a single product or as a combination of these or other services comprising separate relevant products?

(d)What technologies are being used to provide services that should be included in the definition of the relevant product market? What technologies might be added to that list within the next two years?

(e)Can subscribers create their own service comparable to cable by combining over-the-air broadcast service with service from a non-cable MVPD and "premium" programming obtained from a non-cable MVPD or personal VCR?

(f)What approach should the Commission use to identify alternative video services that compete with cable services? Should the Commission attempt to assess how many cable subscribers would switch to alternative video service providers in response to a "small but significant non-transitory price increase"(n42) for a particular cable service? If the effect of such a price increase were to be assessed, should the current regulated cable rate be used as the base price for computing the price increase?

20. With regard to the relevant geographic market, the Commission wrote that "[g]iven the current state of competitive entry, it would seem reasonable to define, at least tentatively, the local franchise area as the geographic market relevant to an analysis of the cable industry, but that over time this definition may be broadened."(n43) We invite comments about that analysis and definition of the relevant geographic market and, in particular, responses to the following questions:

(a)What is the relevant geographic area within which customers can turn for alternative sources of delivered multichannel video programming? Are franchise areas relevant geographic areas? Or are they too broad? Or too narrow?

(b)As cable operators increasingly cluster their operations, are the relevant geographic areas going to become increasingly regional? On the other hand, will relevant areas remain local, and perhaps smaller than franchise areas, if it is likely that substantial numbers of potential subscribers in any given area will not be able to choose from the same range of service providers as otherpotential subscribers in the same area (e.g., because they do not live in multiple dwelling units ("MDUs") or do not have line-of-sight access to satellites)?

(c)How should the relevant geographic areas be defined in light of entry by firms that operate regionally (VDT) and nationally (DBS)?

B. Status of the Cable Industry and Its Competitors

1. Cable Industry

21. In order to evaluate fully the effect of existing and potential competitors in markets for multichannel video programming, we first seek information concerning cable industry performance. We intend to update and expand on the information that was provided in the 1994 Competition Report, including that presented in Appendix C.(n44) Among the issues that we intend to explore are the following: (a) the numbers of homes passed, including the numbers of subscribers, and penetration rates; (b) channel capacities, including the numbers and types of channels offered; (c) industry revenues, including the sources of those revenues; (d) cable industry expenditures and cash flows; (e) the industry's capital investments; and (f) cable system mergers and acquisitions, including the prices paid for systems. We note that the 1994 Competition Report's analysis of these issues was based largely on public information, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider. In addition to the foregoing, we seek comment on the following.

22. Cable Industry Output. (a) The percentage of cable households that subscribe to satellite programming services and the changes in such percentage since last year;
(b) the percentage of total subscribers that receive cable service from cable systems that offer "lifeline basic service," defined as a limited, low price package that includes only broadcast stations and public, educational and governmental ("PEG") channels and the changes in this percentage since last year; and (c) the percentage of subscribers receiving satellite programming on the basic tier and the number of such channels.

23. Attributes of Cable Services. The extent of customer satisfaction with cable services, including quantity and quality of programming, and other quality attributes of cable services such as service response times.

24. Cable Industry Advertising and Nonsubscription Revenue. The amount of industry revenue obtained from local advertising spots made available to cable operators by programming networks; the amount of national and regional advertising sold by programming networks; recent developments and trends concerning cable industry participation in advertising markets; and other potential sources of revenue.

25. Cable Industry Capital Investment. (a) Cable operators' access to loans from banks and other lenders, to equity capital from investors and recent developments in those markets; (b) the extent to which cable systems are upgrading their facilities by deploying conventional cable technology (e.g., bigger headends) versus advanced technologies such as fiber optics and signal compression; (c) the extent to which cable systems have deployed fiber optic plant, the combinations of fiber and coaxial cable that are proving to be the most efficient, the amount of fiber that was deployed over the past year and the percentage of that deployment that was replacement of existing coaxial wiring; (d) the extent to which cable systems and programmers have begun to deploy the facilities needed to take advantage of enhanced services that can be provided using digital compression, the current status of the manufacture and deployment of digital converters and the current status of, and activities associated with, the National Digital Television Center launched by Tele-Communications Inc. ("TCI").(n45)

26. Cable Industry Responses to Competition. The steps cable operators are taking to build subscribership in anticipation of the entry of competitive alternatives. In particular, cable industry responses to actual or potential competition in local markets, including, in particular, any pricing responses, changes in advertising and service quality, and changes in tiering or packaging of services.

2. Cable Overbuilds

27. The term "overbuild" describes the situation in which a second cable operator enters a local market in direct competition with an incumbent cable operator. In these markets, the second operator, or "overbuilder" lays wires in the same area as the incumbent, "overbuilding" the incumbent's plant.(n46) The 1994 Competition Report cited studies suggesting that overbuilding to date has been relatively limited.(n47) The Commission noted that "[f]actors such as local franchising requirements, entry-deterring strategic behavior by the incumbent operator, and the prospective effects of possible direct competition by local telephone companies, appear to be some of the considerations that currently limit the extentof overbuilding."(n48)

28. The Commission intends to analyze in the 1995 Competition Report the status of competition from cable overbuilds and the reasons for that level of competition. Among other things, we will be looking at the following issues: (a) the number of cable operators facing competition from cable overbuilds, the locations of those overbuilds, and changes in those figures over the past year; (b) the manner in which those overbuilders market their services to subscribers, and the numbers of subscribers choosing to subscribe to the services of the incumbent and the overbuilder, respectively; (c) the percentage of the franchise area served by the overbuilder and the percentage of the area served by the incumbent cable system that is also served by the overbuilder; (d) the effects of overbuild competition on cable rates, services and service quality; and (e) the nature and extent of current barriers to overbuild competition, such as the overbuilder's need to incur substantial sunk costs combined with the incumbent cable operator's ability to prevent recovery of those costs by lowering price, instituting litigation and bringing regulatory challenges. We invite any party with specific information on overbuild competition to comment on these issues and any other matters that they feel are relevant to the issue of overbuild competition.

29. We also note that Section 621(a) of the Communications Act prohibits the unreasonable denial of a competitive franchise.(n49) However, a split has developed in the federal circuit courts of appeal over the interpretation of the 1992 Cable Act's prohibition on exclusive franchises.(n50) The Commission stated in the 1994 Competition Report that it would recommend the revision of that section to clarify that it applies prospectively to all denials of franchises including those that would compete with existing franchises.(n51) In connection with these developments, we invite comments concerning the following questions:

(a)To what extent do cable systems have exclusive franchises?

(b)How many, if any, applications for competitive franchises have been filed since the enactment of the 1992 Cable Act? How many competitive franchises have been awarded? How many have been denied? Has Section 621(a) promoted the award of competitive franchises?

(c)To what extent have the activities of local franchising authorities been an impediment to overbuilding by additional cable systems? Have incumbent cable operators used local franchising processes to delay or prevent overbuilding?

3. Wireless Cable Systems

a. Multichannel Multipoint Distribution Service

30. The term "wireless cable" is often used to refer to multichannel multipoint distribution service ("MMDS") and multipoint distribution service ("MDS"), both of which use over-the-air microwave facilities to transmit video programming. The programming is transmitted from wireless cable towers to subscribers using rooftop antennas.(n52) There are eleven MMDS channels available to wireless cable system operators for full-time use, and either one or two single-channel MDS channels depending on the particular city. In addition, wireless cable system operators have access to the twenty channels allocated to instructional television fixed service ("ITFS")(n53) on a leased, part-time basis. Thus, wireless cable operators have access to a maximum of thirty-two or thirty-three channels, using traditional analog transmission technologies. Since release of the 1994 Competition Report, the Commission has taken actions designed to eliminate the backlog of MMDS license applications and to streamline the licensing process. On November 10, 1994, the Commission denied petitions for reconsideration of the return of over 4,000 applications to construct and operate MDS transmitter sites.(n54) On that date, the Commission also initiated a rulemaking proceeding looking towards streamlining the processing of MMDS applications, including electronic filing and the use of competitive bidding procedures.(n55) On February 7, 1995, the Commission adopted changes in the application process for ITFS licenses designedto make it more efficient and flow more smoothly.(n56)

31. We intend to update the information concerning the current status of competition from MMDS system operators that was presented in the 1994 Competition Report.(n57) Among the issues that we intend to explore are: (a) the number of wireless cable systems and subscribers, including the number of new systems that have begun operations and the number of systems that have ceased operations; (b) the average number of subscribers served by established systems, the penetration as a percentage of the number of homes seen, and the penetration as a percentage of homes passed by cable; (c) the marketing strategies and methods of competition employed by wireless cable operators (in terms of both price and product differentiation); (d) plans for development of new wireless cable systems; (e) the projected growth of the industry in terms of subscribers and revenue; and (f) the current status of consolidation in the wireless cable industry, including numbers of systems changing hands, the sales prices for those systems, and the relative share of MMDS subscribers served by the largest wireless MSOs. We note that the 1994 Competition Report's analysis of these issues was based largely on public information, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider.

32. We also request information on the following questions:

(a)Have MMDS systems achieved success by emphasizing price competition (offering comparable services, or the most desired services, at substantially lower rates), or has it proven to be a more successful strategy to emphasize product differentiation (offering services that are not available from principal competitors, or offering higher quality services)?

(b)How are MMDS system operators planning to deploy digital compression technology?(n58) To what extent will the use of digital compression technologyenable them to offer a range and quality of programming options that is comparable to, or better than, the range of services offered by competing cable system operators?

(c)What are the costs associated with the deployment of digital compression technology? Will MMDS system operators be able to employ digital compression technology at low enough costs to remain competitive with incumbent cable operators?

(d)Is there a trend towards increasing concentration of MMDS system ownership?(n59) If so, what are the competitive implications of this trend? Is it likely to lead to increased competition with cable systems?

(e)We note that Bell Atlantic, NYNEX and Pacific Telesis have recently announced plans to invest in wireless cable systems.(n60) We seek comment on the strategic issues underlying these investments, and whether commenters view these investments as part of a trend towards increased local telephone company ("LEC") investment in wireless cable facilities. Are such interests likely to lead to increased competition with cable systems? Are there competitive questions raised by these investments?

(f)What impediments are there to the development of wireless cable, and how have they changed since the 1994 Competition Report?

(g)Have MMDS operators been the targets of significant instances of alleged anticompetitive conduct since the issuance of the 1994 Competition Report?(n61)

b. Local Multipoint Distribution Service

33. Local multipoint distribution service ("LMDS") is a technology, similar to MMDS, in which multiple channels of video programming are transmitted using high-frequency microwave channels in the 28 GHz band. LMDS subscribers must have an antenna that is located with a line of sight to the transmitter. LMDS requires multiple transmitters in "cells" with radii of three to six miles in order to cover the same area that could be covered by a single MMDS transmitter.(n62)

34. In the 1994 Competition Report, the Commission identified one LMDS system authorized by the Commission and in commercial operation.(n63) As was the case then, we cannot now reach any conclusions on the feasibility of LMDS as a technology that could be used to offer competitive service in the video marketplace because the Commission has before it an open proceeding concerning the authorization of services for use of the 28 GHz band.(n64) We also recognize that considerable information concerning the competitive potential of this technology has been provided to the Commission in comments filed in that proceeding. We do not ask parties to repeat here the substance of comments that have been filed in other proceedings, except to the extent they wish to bring particular matters to our attention.

4. Satellite Master Antenna Systems

35. SMATV systems (also known as "private cable systems") are MVPDs that serve residential, multiple dwelling units, and various other buildings and complexes.(n65) A SMATV system offers generally the same type of programming as a cable system, and the operation of a SMATV system largely resembles that of a cable system -- a satellite dish receives the programming signals, equipment processes the signals, and wires distribute the programming to individual dwelling units. The primary difference between the two is that a SMATV system typically is an unfranchised, stand-alone system that serves a single building or complex, or a small number of buildings or complexes in relatively close proximity toeach other. This is because a SMATV system is different from a cable system only in that it does not use "closed transmission paths" to: (1) serve buildings that are not commonly owned, controlled, or managed; or (2) cross a public right-of-way.(n66)

36. We intend to update the information concerning the current status of competition between cable and SMATV system operators that was presented in the 1994 Competition Report.(n67) The issues that we expect to explore include: (a) the current and projected future numbers of SMATV systems and subscribers, and their locations; and (b) the channel capacities of SMATV systems, and the existing and projected future developments in channel capacities. We note that the 1994 Competition Report's analysis of these issues was based largely on public information, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider.

37. We also request comments concerning the following questions:

(a)To what extent is competition from SMATV systems characterized by competition for the exclusive right to serve all subscribers in an individual multiple dwelling unit, and to what extent by competition for individual subscribers within a multiple dwelling unit (where each subscriber may choose between two (or more) service providers)? What are the relative shares of multiple dwelling units served by the cable and SMATV industries?

(b)What effects, if any, have state mandatory access laws had on the economic viability of SMATV systems?

(c)To what extent is the SMATV industry becoming more concentrated? To what extent is the industry changing from one of small proprietor owned or developer owned systems, to one characterized by multiple system operators that serve entire metropolitan areas or regions? What are the sources of new investment in the industry? Are wireless cable system operators purchasing SMATV systems, and vice versa? Are any other MVPDs purchasing SMATVsystems in significant numbers?

(d)Are SMATV system operators engaging in marketing strategies designed to differentiate their services from cable services (particularly bundling with home security and intercom systems), and to what extent has price competition been a successful growth strategy for SMATV operators?

(e)Are there SMATV and other non-cable operators that specialize in serving hotels and motels? How does their share of this business compare to the cable industry's share? What are the types of services that are offered by these operators to hotels and motels?

(f)To what extent are SMATV operators using 18 GHz technology to interconnect SMATV systems?(n68) Have such developments facilitated increased competition from SMATV operators? Is the use of 18 GHz links leading to the creation of systems that serve wider geographic areas?

(g)Has the loosening of the SMATV-cable cross-ownership restriction had any effect on SMATV operators?(n69) In particular, is there likely to be a significant exodus of SMATV operators from the market or acquisition of SMATV operators by incumbent cable operators? Or will the eased exit policy induce the increased entry of SMATV systems?

(h)What is the competitive effect of the Communications Act definition of a cable system, which includes any system that interconnects separately owned buildings even where there is no use of public rights-of-way?(n70) Should that definition be modified, as recommended by the Commission in the 1994 Competition Report?

(i)Are there other barriers to increased competition by SMATV systems? In particular, what effect do perpetual exclusive contracts (or ones of greater than15 to 20 years in duration) between building owners and cable system operators have on competition by SMATV system operators? To what extent do SMATV systems typically enter into exclusive contracts? What is the typical duration of these contracts? What should public policy be regarding these contracts?

38. Finally, the Commission also has before it a proceeding concerning home wiring issues in which SMATV operators have extensively participated.(n71) We recognize that considerable information has been provided to the Commission in comments filed in that proceeding concerning the potential competitive effect of various potential outcomes. We do not ask parties to repeat the substance of comments that have been filed in that proceeding, except to the extent that they wish to bring to our attention particular matters that are relevant to the 1995 Competition Report.

5. Direct-to-Home ("DTH") Satellite Services

a. Direct Broadcast Satellite Services

39. The 1994 Competition Report examined two types of direct-to-home ("DTH") satellite services that offer video programming for subscription that is comparable to that provided by cable. One is Direct Broadcast Satellite ("DBS") services which transmit signals in the K-band "intended for reception by the general public."(n72) Hughes Communications Galaxy, Inc./DirecTV ("DirecTV") and United States Satellite Broadcasting ("USSB") offer high powered DBS service. Primestar Partners, L.P. ("Primestar"), a medium power
K---band service, is also analyzed as a DBS service, although it operates in the Fixed Satellite Service ("FSS").(n73) Using a relatively small dish, DBS subscribers receive programming that is comparable to cable programming. There are now over one million subscribers for the three DBS services combined.(n74) EchoStar Satellite Corporation and AlphaStar, a venture of Tee-Comm Electronics, Inc., expect to begin DBS service in 1995.(n75)

40. We intend to update the information concerning the current status of competition from DBS systems that was presented in the 1994 Competition Report(n76) and request comments concerning the following questions:

(a)To what extent do the subscribership of these DBS services overlap? What is the total estimated subscriber base for each individual service provider and for the industry as a whole?

(b)What is the projected subscribership of each DBS service and of the industry as a whole at the end of 1995? At the end of each subsequent year through the end of 1999? On what are these projections based?

(c)Where are most DBS subscribers located (i.e., urban versus rural areas)? How many subscribers are located in areas served by cable operators? What factors account for cable subscribers' choice to receive DBS services? What percentage of DBS subscribers also subscribe to cable services, and what cable services do they receive?

(d)What is the total estimated channel capacity of each operator? What are the plans of each operator to increase the digital compression ratio from the initial ratio used at the time of launch (so as to offer more channels at a later date)?

(e)How does each operator market its services? Are current marketing efforts targeted equally to potential subscribers in areas served by cable systems and potential subscribers in areas unserved by cable systems?

(f)Has the inability to offer local broadcast channels affected the competitive impact of DBS service? Have there been any developments that would permit DBS dish owners to use their systems to receive local broadcast channels?

(g)Are the prices for DBS services nationally uniform, or do they vary depending on the location of the subscriber? If they vary, what are the reasons for the price differentials?

(h)What is the availability of equipment for those who wish to subscribe to this service? If there is an equipment shortage, when is it projected to be eliminated? What is the basis for this projection?

(i) How are equipment prices projected to change over one year? Over three years? What is the basis for this projection? Do installation and equipmentcharges limit the extent to which DBS services serve as reasonable substitutes for cable services?

(j)What developments have there been concerning licensing and distribution arrangements for DBS equipment (such as plans for Sony to begin production and for other manufacturers to be licensed)?(n77)

41. We would like to update the information reported on existing permittees that were identified in the 1994 Competition Report.(n78) What are the projected launch dates for these systems and their anticipated service offerings? What type of arrangements have been made for licensing and distribution of the equipment and systems for services that are not yet launched? Is it anticipated that these services will use the same or different receiving equipment as DirecTV and USSB?

42. In addition to the issues addressed in the questions set forth above, the Commission observes that local zoning and other regulations may potentially serve as an impediment to the development and expansion of DBS service.(n79) In that regard, we note that the Commission recently adopted a Notice of Proposed Rulemaking concerning the issue.(n80) We seek comment on these issues.

b. Home Satellite Dishes

43. Home satellite dishes ("HSDs") are seven to ten feet in diameter and receive video programming transmitted in the C-band of frequencies. HSD owners can watch approximately 150 unscrambled signals without payment and over 100 scrambled channels purchased from program packagers. Comments cited in the 1994 Competition Report indicated that there were approximately four million HSD users, roughly half of whom subscribe to one or more programming services.

44. We intend to update the information concerning the current status of competition from HSD systems that was presented in the 1994 Competition Report.(n81) Amongthe issues that we intend to explore are: (a) the current and projected future numbers of HSD systems and subscribers, and their locations; (b) the channel capacities of HSD systems and the numbers of channels of programming offered in program packages; (c) prices for HSD systems and program packages; and (d) the extent to which HSD owners subscribe to cable services and the reasons given for such subscriptions. We note that the 1994 Competition Report's analysis of these issues was based largely on public information, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider.

45. We also request comments concerning the following questions:

(a)How are HSD services marketed to subscribers? What is the projected growth of HSD use in the next year? Three years? What is the basis for this projection?

(b)Has the inability to offer local broadcast channels affected the competitive impact of HSD services? Have there been any developments that would permit HSD owners to use their systems to receive local broadcast channels?

(c)The HSD industry reportedly had a record year in 1994 in terms of systems sold and subscriptions to packaged programming services.(n82) To what can that success be attributed?

(d)Sales of new HSD systems and new subscriptions to HSD package programming services grew at substantially slower rates in the last few months of 1994.(n83) To what can that decline be attributed? Is that decline related to the rollout and marketing of DBS?

46. In addition to the issues addressed in the questions set forth above, the Commission recognizes that local zoning and other regulations may potentially serve as impediments to the development and expansion of HSD services.(n84) We seek comment on these issues concerning zoning(n85) and other local regulations that affect competition from HSD services.

6. Local Exchange Carriers/Video Dialtone Services

47. The Communications Act and Commission rules generally prohibit local telephone companies ("LECs") from providing video programming directly to subscribers within their service areas.(n86) They are, however, permitted to provide video programming outside their service areas and in rural areas.(n87) In addition, the court ordered agreement under which AT&T divested its local exchange telephone service (the "Modification of Final Judgment" or "MFJ") restricts the ability of the Bell Operating Companies ("BOCs") to transmit communications between or beyond the local calling areas of their regions.(n88) Over the past few years, LECs have, however, been obtaining greater freedom to participate in the multichannel video marketplace.

48. In 1992, the Commission established a video dialtone ("VDT") framework which allows LECs, consistent with the Communications Act, to make available on a nondiscriminatory common carrier basis, a platform capable of transmitting video programming supplied by an unaffiliated entity.(n89) Since that time, the Commission has authorized technical and market trials as well as permanent VDT service.(n90) In addition, in 1993, the U.S. District Court for the Eastern District of Virginia held the cross-ownership prohibition unconstitutional as applied to Bell Atlantic in its service areas; in 1994 US Westobtained a similar ruling in the U.S. District Court for the Western District of Washington.(n91) Since the Commission issued the 1994 Competition Report, several other courts have struck down the cross-ownership prohibition.(n92)

49. In light of these decisions, the Cable Services Bureau, Common Carrier Bureau and the Office of the General Counsel announced that they will no longer enforce the cross-ownership restriction against: (1) any telephone companies that are parties to cases in which the Commission is enjoined from enforcing Section 613(b), including NYNEX, Ameritech, BellSouth, Bell Atlantic, US WEST, GTE, and most members of the United States Telephone Association, Organization for the Protection and Advancement of Small Telephone Companies and National Telephone Cooperative Association; and (2) any other telephone companies, to the extent they operate in the Fourth and Ninth Circuits, regardless of their status as parties to any suit.(n93)

50. The Commission has several ongoing proceedings regarding video dialtone services. The Commission issued a Fourth Further Notice of Proposed Rulemaking to consider changes in its video dialtone rules in light of court decisions such as those described above, and to consider the extent to which Title II and Title VI of the Communications Act apply to telephone companies providing video programming directly to subscribers in their telephone service areas over video dialtone facilities.(n94) The Commission also issued a Third Further Notice of Proposed Rulemaking which sought information and comment on a number of issues including (1) channel capacity issues, (2) criteria for evaluating the viability of additional wire-based video competition in particular markets in the context of a proposal to use these criteria to modify the Commission's ban on the acquisition by telephone companies of cable facilities in their telephone service areas for use in the provision of video dialtone, (3) whether the Commission should require or permit LECs to provide preferential access or discounted rates to commercial broadcasters and/or certain types of not-for-profit programmers; and (4) whether we should adopt additional rules with respect to poleattachments and conduit rights.(n95) The Commission is also processing a series of Section 214 applications for video dialtone facilities and services.(n96)

51. We intend to update the information concerning the current status of the deployment of VDT technology that was presented in the 1994 Competition Report.(n97) Among the issues that we intend to explore are: (a) the current projections for competition from VDT networks that are the subject of pending applications for Section 214 authorization; and (b) the results obtained in various market trials for which reports have been filed with the Commission (including information on channel capacity and digital versus analog, system architecture, pricing, penetration rates, subscriber interface equipment, programmer customers). We note that the 1994 Competition Report's analysis of these issues was based largely on public information and filings with the Commission, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider.

52. We also recognize that considerable information has been provided to the Commission in filings in the VDT proceedings described above concerning various issues relevant to the 1995 Competition Report. While we do not ask parties to repeat their comments that have been filed in other proceedings, we request any supplemental information parties choose to submit on these issues.

53. In addition to the foregoing, the Commission seeks comments concerning the following questions:

(a) How will the prices and services offered over VDT networks compare to the prices and services charged by cable operators? How will this comparison change over time? What is the basis for this prediction?

(b) What are the technological impediments and advantages to the deployment of VDT platforms as competitive alternatives to cable systems?

(c)What is the status of the build-out of systems for which Section 214 authorizations have been granted?

(d)Have the plans for deployment of VDT networks for which Section 214 authorizations have been granted, or the plans for deployment of VDT networks that are the subject of applications currently pending before the Commission, been affected by events since the 1994 Competition Report?

(e)What are the current plans for deployment of VDT systems that are not currently the subject of applications before the Commission?

(f)Are there particular market characteristics, such as relatively high population density, that are necessary to support competition between VDT and cable systems? Will this limit competition to certain types of geographic areas, such as large metropolitan areas?

54. We also note that in January 1995, Rochester Telephone and its Vancouver, Canada based partner USA Video Corporation reportedly ended their video-on-demand trial due to lack of customer demand for the services.(n98) Commenters are asked to discuss any implications of this development.

55. Finally, we note that in October 1994, Bell Atlantic, NYNEX, and Pacific Telesis Group announced the formation of a joint venture in the area of interactive video networks. One part of the venture reportedly will produce content for the networks and the other will develop technical systems. Another company, named Interactive Digital Solutions, was formed by Silicon Graphics and AT&T in October 1994 to develop network infrastructure and related services.(n99) Finally, Ameritech, BellSouth and SBC Communications announced a definitive agreement with Disney Corporation to develop and package video programming and interactive services.(n100) We seek comment on the competitive implications of these developments.

7. Broadcast Television Service

56. In the 1994 Competition Report, we stated that broadcast television stations continue to be significant distributors of video programming. We indicated that broadcast television is an important source of entertainment, news, public affairs and sports programming. Between 1984 and 1994, the number of broadcast stations, commercial andnoncommercial, grew from 1149 to 1518, and a fourth national network, Fox, emerged. In addition, in recent months, two new networks -- United Paramount and Warner -- have started program distribution. Broadcast stations, whether received over-the-air or through the facilities of an MVPD, still attract a large portion of the viewing audience. For example, as noted in the 1994 Competition Report, two-thirds of all cable television viewers watching television in the 1992 to 1993 season were viewing a retransmitted broadcast signal. In addition, approximately one-third of all television households choose not to subscribe to cable service. Over-the-air television seems to satisfy their demand for video programming. Nevertheless, we concluded, in the 1994 Competition Report, that broadcast stations alone cannot currently provide the full range of specialized services offered by cable and other MVPDs.(n101)

57. The Commission intends to explore in the 1995 Competition Report the implications of the developments mentioned in the preceding paragraph for competition from broadcast television and requests comments concerning the following questions:

(a)Has the role of broadcast networks changed with the entry of new networks (United Paramount and Warner) in the last year? What is the effect of the fact that at least one of these networks (Warner) is relying on cable carriage of a superstation to provide access to households in areas where they have been unable to enter into affiliation agreements with local broadcast stations?(n102)

(b)To what extent is any constraining effect of broadcast networks on the conduct of cable systems affected by the fact that they provide programming that is an important component of the services offered by cable systems? How is any constraining effect limited by the fact that a substantial percentage of broadcast network audiences are viewing the programming through distribution over cable systems?

(c)What is the competitive effect of broadcast television in conjunction with multichannel distribution services such as DBS, which is prohibited from offering network-affiliated broadcast television stations except in limited areas,(n103) on the program delivery market?

58. In addition to the issues addressed in the questions set forth above, advances in broadcast technology, such as digital compression and advanced television, could (a) permit multiple programs to be broadcast over a single channel, and (b) expand greatly the overall number of broadcast video signals available in a particular geographic market.(n104) We ask for comment on the extent to which such changes would strengthen over-the-air broadcast as a competitor to cable.

59. In addition to full-power broadcast television stations, the Commission licenses low-power television ("LPTV"). These stations, assigned to the same VHF and UHF broadcast spectrum as full-power stations, operate at lower power, reach more limited geographic areas and are afforded secondary status to full-power stations.(n105) Under existing Commission rules, an entity could use LPTV stations to offer multichannel video programming service that could be a competitor, especially to premium channels or packages of such channels.(n106) The Commission's rules permit LPTV stations to offer "subscription television," whereby the broadcaster charges a fee for the provision of one or more scrambled channels and the equipment to decode the signal.(n107) Furthermore, the rules permit an LPTV operator to own more than one such station in a market, unlike the restriction of one station to a market for full-power stations.(n108) Thus, multiple LPTV stations in a market could be combined to provide multichannel video service. On the other hand, the allocation of spectrum for LPTV use has been frozen in the largest markets in the United States.(n109) In light of these developments, the Commission invites comment concerning the extent to which LPTV technology might be deployed to provide a competitive alternative to cable services if the spectrum is made available for this purpose.

8. Other Distribution Technologies

60. The Commission intends to explore in the 1995 Competition Report the effect of the widespread ownership and use of video cassette recorders ("VCRs") on competition in the market for video programming. Although VCRs are not multichannel videoprogramming distributors, the Commission has previously observed that the widespread use of VCRs to view over-the-air television programs at times other than when they are broadcast and to view pre-recorded programming provides competition, at least in part, to traditional cable service offerings.(n110) A Commission staff study determined that VCRs are best considered a competitor to the premium and pay-per-view services provided by cable operators because both offer commercial-free movies.(n111) We invite comment concerning the extent to which the widespread ownership and use of VCR technology might constrain cable system operators' conduct in markets for the distribution of video programming.

61. We also want to examine in the 1995 Competition Report whether the deployment of interactive video and data service (IVDS) will affect competition in the MVPD market. Among the issues regarding IVDS that the Commission may explore in the 1995 Competition Report are: (a) the identities of the licensees, and the locations in which they are authorized to provide service; (b) the types of services that licensees currently envision offering, and the schedule for deploying those services; and (c) the extent to which these services could be substitutes or complements for services offered by cable system operators, and what those services are. Accordingly, we invite comments on the proposed issues, method of developing information, or any additional information that the Commission should consider. We recognize that information may have been provided to the Commission in filings in IVDS proceedings which may be relevant to the 1995 Competition Report. We do not ask parties to repeat here the substance of comments that have been filed in that proceeding except to the extent that they wish to bring particular matters to our attention.

9. Other Distributors

62. The Commission intends to explore in the 1995 Competition Report the possible entry of other types of firms into the market for the delivery of multichannel video
programming, such as electric utilities.(n112) The 1994 Competition Report stated that some municipal electric utility companies are actively engaged in or contemplating overbuilding.(n113) The Commission also learned that plans to use electric power lines to provide multichannel video services are not well-developed. Nonetheless, the possibility of entry by electric utilities cannot be ignored due to the fact that those companies have already incurred substantial costs to deploy a network that reaches nearly every household in the country.

63. A number of electric companies are considering the development of broadband networks that are capable of distributing video programming and telephone services.(n114) One reason for this activity has been the need for two-way communications capabilities in order to implement energy management solutions. A number of power companies have also formed alliances with cable companies or telephone companies,(n115) which could limit the competitive threat posed by the video transmission potential of these networks. Nonetheless, there remains significant interest in developing this potential "third line" into homes. In connection with these developments, we invite comments concerning the following questions:

(a)What is the likelihood that a significant number of power companies might enter the market for the delivery of video services? Which are the existing, emerging or potential providers of video programming service among these companies?

(b)Is it more likely that power companies might choose to serve as "pipeline" companies, and offer the use of their facilities to other video programming providers?

(c) What are the joint ventures, existing or planned, between cable or other communications companies (e.g., LECs, long distance telephone companies) and utilities to implement energy management programs or to provide video services. Should the Commission be concerned about those ventures because they may result in the elimination of a potential source of entry into the market for the delivery of multichannel video programming? To what extent do these joint ventures yield increased efficiency due to economies of scale and scope or for other reasons?

10. Technological Advances

64. There are technological changes and developments that may directly affect the competitive structure of the market for the delivery of video programming. As we observed in the 1994 Competition Report, these issues may have a significant effect on how competition develops and the manner in which consumers have access to the services thesetechnologies may provide.(n116)

65. One significant technological development that may have profound effects on the future of competition in markets for the delivery of video programming is the development of digital compression technology. Digital compression is a technology that reduces the amount of information needed to transmit digitally recorded video, audio and text. This reduction in size or "compression" of digital information can increase the capacity of MVPDs' distribution systems by as much as eight times. It seems likely that such technology will be gradually integrated into information distribution systems, paralleling the transition from analog programming to digitally formatted programming and the introduction of high definition television ("HDTV"). The more quickly programmers and distributors transition to a digital format the sooner they will realize the benefits of compression technology.

66. A number of barriers stand in the way of the transition to digital compression. The first barrier is the determination of a standard digital encoding scheme. Without a standard scheme it is conceivable that not all digital programming would be compatible with all distribution systems. A number of different coding schemes have been developed, but the front runner seems to be MPEG-2, developed under the guidance of the Motion Picture Experts Group.(n117) General Instrument, a leading supplier of set-top boxes, is including an MPEG-2 option on its soon to be shipped DigiCipher digital set-top boxes. Other equipment suppliers, including Hewlett Packard and Scientific Atlanta, are similarly proceeding in the development of their own boxes.

67. Another potential barrier to the implementation of digital conversion is the cost of set-top boxes. If MPEG-2 does in fact become the industry standard, consumers must be provided hardware and software needed to process digital signals. Right now, the most basic of digital set-top boxes costs in the range of $600.(n118) Some observers believe that MSOs will not begin to invest substantially in digital boxes until prices fall beneath $400.(n119)

68. A third potential barrier may be the supply of digitally encoded programming. The process of converting analog programming to a digital format has gone through many refinements, but it still imposes additional costs.(n120) As digital distribution channels begin toemerge, the amount of digital programming will grow, but it may be a number of years before digitally encoded programming displaces analog programming. We ask for comment on the amount of digital programming that is available.

69. In connection with these developments, we invite comments concerning the following questions:

(a)How will competitors using different technologies take advantage of digital compression to enhance their services? Are some competitors likely to derive a greater benefit than others by the use of digital compression?

(b)Is it more likely that digital compression will result in convergence of costs and services among competitors using different technologies, or is it more likely that it will lead to greater divergence among competitors?

(c)What will be the likely barriers, if any, to the deployment of digital compression technology? How can the Commission remove barriers to deployment of this technology?

70. The Commission also expects to explore in the 1995 Competition Report the different transmission media used for distribution of multichannel video programming, such as copper wire, coaxial cable, optical fiber, broadcast and other terrestrial radio frequency communications, terrestrial microwave and satellites, and how they affect, and will affect, industry structure and competition for the provision of video services. We will also explore the hybridization of different transmission media as well as system configurations and designs which may also affect competition. In connection with these issues, we intend to develop information concerning the competitive effects of the various compression, modulation, digitization, multiplexing, data storage and switching techniques that are designed to increase network capacity, efficiency and functionality, and to enhance available services.

71. In connection with these issues, we invite comments concerning the following questions:

(a)What are the capabilities of each technology and the types of services for which each may be applicable?

(b)How will the new technologies be combined with existing technologies?

(c)When will these technological advances be deployed and what is the potential competitive impact of the deployment of these advances?

(d)What changes can be expected from the widespread availability of such technologies? Will technological advances principally affect distribution in local or national markets, or will it affect both equally?

(e)Should the Commission's regulatory framework be modified in any way to eliminate impediments to the competitive deployment of these new technologies?

(f)Should the Commission adopt standards for any or all of these transmission media?

72. The Commission is also interested in technologies that will facilitate consumer access to the various distribution media and services they are expected to provide. To facilitate consumer needs in the video services area, the Commission established new cable-consumer equipment compatibility regulations, which include measures that assure improved compatibility between existing cable system equipment and consumer television equipment. They also include provisions for achieving more effective compatibility through new cable and consumer equipment.(n121)

73. The Commission is aware that future cable services may require additional functionality for set-top boxes/terminals. In connection with these set-top boxes/terminals we invite comments concerning the following questions:

(a)What are the advantages and disadvantages of having subscribers own set-top boxes?

(b)What functionalities are included in current set-top boxes?

(c)To what extent can set-top boxes be purchased or leased from sources other than cable operators?

(d)To what extent do current market conditions, including Commission rules and regulations, inhibit the development of a competitive market for set-top boxes?
(e)Could a competitive retail market develop for consumer-owned set-top boxes? What is the potential size and structure of such a market? Should the Commission take steps to promote the development of a competitive retail market for set-top boxes that is separate from markets for the provision of video services?

(f)We also seek comment about future cable and broadband services that are projected to require additional functionality for set-top boxes, and what steps, if any, the Commission might take to ensure development of a competitive market for such equipment.

V. MARKET STRUCTURE AND COMPETITION

74. The Commission intends to explore in the 1995 Competition Report the status of horizontal concentration and vertical integration in the cable television industry and market structure conditions, such as economies of scale and scope and extensive sunk cost investments, which may affect competition in markets for the delivery of video programming. The information that the Commission develops, both from publicly available sources and comments filed in response to this NOI, will be used to assess the performance of the market for delivered video programming and to analyze developments that have the potential to change that performance.

A. Horizontal Concentration in the Cable Industry

1. Horizontal Concentration in Local Markets

75. Horizontal concentration refers to the number and market shares of sellers in the video marketplace. Since the 1994 Competition Report, DBS has become available nationwide. In most franchise areas, DBS and HSD are the only alternatives to the single cable operator as sources of multichannel video programming that are available to cable subscribers. Where other alternative multichannel video distributors exist, their market share is generally small. In the 1995 Competition Report, the Commission would like to identify as many markets as possible where cable operators face competition from MVPDs other than DBS operators or HSD package programmers, and develop a picture of what that competition is like. In particular, the Commission would like to obtain information concerning: (a) the identity and type of competitor; (b) when it entered; (c) the location of the market, including whether it is predominantly urban or rural; (d) an estimate of the subscribership and market share for the services of the competitor(s); (e) a description of competitive service offerings; (f) the prices charged for these offerings; and (g) the incumbent's competitive responses. In this regard, we invite comments on these issues from any parties with specific information on competition in local markets and any other matters that they feel are relevant to the issue of local competition.

76. The Commission also recognizes that the use of the franchise area as the relevant geographic area is subject to question. Some viewers within a franchise area may have access and subscribe to competitive alternatives such as services from SMATV, MMDS or DBS operators, but subscribing viewers may not be sufficient in number to meet the "effective competition" definition of the 1992 Cable Act. Nonetheless, cable serviceproviders may be competitively constrained by the availability of these services.(n122) Competitors in local markets may also forego price competition, and instead focus their energies on differentiating their services from those of competitors, particularly in terms of the amount and types of programming offered or their responsiveness to customer needs and complaints. We seek comment on the foregoing.

2. Horizontal Concentration Nationally

77. Concentration at the industry level is also significant because the market for the delivery of video programming may be evolving toward a national market. In addition, the market for programming, in which producers supply their programming to distributors, appears to be national in scope. When it enacted Section 11 of the 1992 Cable Act, Congress recognized that there are beneficial and harmful effects from increased horizontal concentration.(n123) In light of these effects, we seek to identify the share of cable subscribers nationwide served by each company or MSO. Large MSOs may be able to operate more efficiently in a variety of areas, including administration, distribution and procurement of programming. However, large MSOs also may be able to obtain concessions from cable programmers in exchange for carriage, which could discourage the entry of new programming services and adversely impact the diversity of programming available to consumers. In this NOI, we seek information that will allow us to continue to monitor industry concentration and to assess its effects on the video marketplace.(n124)

78. In the 1994 Competition Report, the Commission reported that there has been a moderate increase in the nationwide horizontal concentration of the cable industry since the issuance of the 1990 Cable Report, as measured by the Herfindahl-Hirschman Index ("HHI"),(n125) which is a standard measure of horizontal concentration.(n126) Whether an HHI measurement, or any measure of concentration at the national level, is meaningful depends on the existence of a national cable market. As we discussed,(n127) the relevant market for the purpose of analyzing competition in the cable industry is generally local, although there may be larger markets in the future, should other technologies become competitive. When examining issues involving cable programming, however, the relevant geographic market may well be national, and in that context, the national HHI provides more useful information.

79. The Commission found in the 1994 Competition Report that the national market for the distribution of cable services was unconcentrated as of the end of the first quarter of 1994. The HHI for the industry as of March 31, 1994, was 898, which represented a modest increase since 1990.(n128) Based on industry reports, TCI had the largest market share, 24.8%,(n129) an increase of less than one percentage point since 1990. The top four companies still had 47% of the market, and the top ten 63%.

80. By the middle of September 1994, however, transactions had been announced that would significantly alter the market shares of those ten companies. We found that, if those transactions were consummated, the HHI would rise to approximately 1051.(n130) Standard antitrust analysis considers a market with an HHI between 1000 and 1800 to be "moderately concentrated."(n131) As expected, those transactions were consummated. Moreover, several additional mergers have been announced that will result in further national concentration.(n132)

81. In order to evaluate fully the effects of horizontal concentration nationally, we intend to update and expand on the information that was provided in the 1994 Competition Report, including that which was presented in Appendix G.(n133) We note that the 1994 Competition Report's analysis of these issues was based largely on public information, and we intend to use such information to the extent possible in the 1995 Competition Report. Commenters should nevertheless feel free to comment or provide any information on the foregoing that they wish to bring to our attention. In addition, we invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider. In addition, we seek comment on the following:

(a)What are the reasons for the recent transactions that have resulted in the substantial increases in horizontal concentration nationally?

(b)What are the potential procompetitive and anticompetitive effects of horizontal concentration nationally?

(c)To what extent does national concentration actually affect competition in markets for the delivery of video programming? Should the Commission be concerned about the increases in such concentration?

82. In addition to analyzing the concentration of the cable industry at the national level, we believe it is appropriate to evaluate the concentration of ownership on a regional basis. In the 1994 Competition Report, the Commission wrote, "[c]oncentration in regional, or locally clustered, marketing areas may also be pro-competitive or anti-competitive."(n134) We noted that "regional concentration may result in significant efficiencies," and "may also reflect the desire of cable operators to enter the telephone business, or it may reflect strategic decisions by cable operators to position themselves to compete against LECs that are poised to enter the market for the distribution of multichannel video programming."(n135) These efficiencies from clustering were recognized by the Cable Services Bureau in its decision approving license transfers associated with Cox Cable Communications, Inc.'s acquisition of the cable systems of Times Mirror Company.(n136) We invite comments concerning these and other possible procompetitive reasons for clustering.

83. On the other hand, we also noted that there may be "competitive risks associated with increased regional clustering of commonly owned cable systems."(n137) In particular, we wrote that "[a] possible consequence of the accumulation of large regional clusters of interconnected cable systems is that such systems may send an entry-deterring signal to potential rivals."(n138) The Commission did not resolve the issue, however, concluding instead that even this possible effect of clustering was not unambiguously anticompetitive because "there may exist complex tradeoffs between the potential consumer benefits that are provided by the sunk cost investments of incumbent cable systems and the potential consumer benefits that new entrants may offer consumers if not deterred by incumbent cable systems." We also invite comments concerning these and other possible competitive effects of clustering.

B. Vertical Integration in the Cable Industry

84. A cable company is vertically integrated if it is affiliated with an owner of an interest in any video programming that is carried by cable systems and other MVPDs. Sections 11, 12 and 19 of the 1992 Cable Act were enacted to limit the ability of vertically integrated cable operators and other satellite programming vendors to inhibit competitive entry into the programming supply and distribution markets. These sections were enacted to ensure that vertically integrated cable operators do not engage in anticompetitive practices that limit the ability of unaffiliated video programming vendors to secure carriage on their cable systems. In addition, these provisions are intended to prevent MSOs from limiting competing multichannel video program distributors' access to the programming sources owned by those MSOs and to ensure that such programming is available on fair, nondiscriminatory terms.

85. Specifically, Section 11 of the 1992 Cable Act, in part, required the Commission to establish limits on the number of channels on a cable system that can be occupied by programming services in which the operator has an attributable interest.(n139) To implement this provision, the Commission adopted "channel occupancy limits," under which a vertically integrated cable system may devote no more than 40% of its activated channels to national video programming services in which the system operator has an "attributable interest."(n140)

86. Section 12 required that the Commission adopt rules governing program carriage agreements and related practices between cable operators and other MVPDs and video programming vendors.(n141) We adopted rules that prohibit cable operators from coercing programming vendors into granting them exclusive distribution rights and from discriminating against program suppliers on the basis of the operator's ownership interests ("program carriage" rules).(n142)

87. Section 19 prohibits unfair competitive practices by vertically integrated satellite cable programming vendors, satellite broadcast cable programming vendors, andcable operators, including certain limits on exclusivity provisions in cable carriage agreements.(n143) To implement this section of the 1992 Cable Act, the Commission adopted rules to prevent discriminatory behavior and restrict the types of exclusive contracts that may be entered into between cable operators and vertically integrated program vendors ("program access rules").(n144)

88. In the 1995 Competition Report, the Commission intends to update the information presented in the 1994 Competition Report relating to vertically integrated and unaffiliated programming services, and in particular the information in Appendix G. In last year's report, a significant amount of information concerning vertical integration was provided in comments filed by parties to the proceeding. Nonetheless, it appears that the Commission can rely to a certain extent on publicly available information. We invite comments on any problems with the information presented last year, the method used to develop the information, or any additional information that the Commission should consider. We also request comments and information concerning:

(a) The existing national programming services, and the extent to which they are affiliated with cable operators. In particular, the Commission would like to provide a description of the amount and type of interest, the date such interest was acquired, any changes since last year, and the percentage of ownership represented by each MSO's holdings for each programming service that is affiliated with cable interests;

(b)The national programming service launches that have occurred over the past year, and the extent to which those services are affiliated with cable system operators;

(c)The national programming services that have been announced for launch since last year, and to what extent they are affiliated with cable operators;

(d)The number of subscribers and number of cable systems served by individual programming networks;

(e)The audience ratings, primetime or all day parts, of national cable programming services;

(f)The ownership of national cable programming services by entities that are existing or potential competitors (e.g., broadcast networks) to cable systems.

89. The channel occupancy rules were intended to ensure that unaffiliated programmers have sufficient opportunity to distribute their programming through cable carriage by limiting the number of channels that can be dedicated to MSO-affiliated programming services.

(a)Has the ability of program vendors, both affiliated and unaffiliated, to secure carriage been affected by the channel occupancy rules? Have these rules led to greater channel availability so that unaffiliated programmers can reach the desired number of subscribers?

(b)What effect have the occupancy limits had on the ability of programmers, affiliated and unaffiliated, to launch new programming services? What is the market penetration needed to launch a new programming service? Do the channel occupancy rules allow sufficient channel capacity for an unaffiliated programmer to receive carriage by enough cable systems to successfully launch a new service?

(c)Has MSO investment in programming services been affected by these rules?

90. The 1992 Cable Act attempted to address difficulties that non-cable MVPDs faced in acquiring programming services on nondiscriminatory terms.(n145) We request comment on whether the program access rules and our decisions in response to program access complaints have served their intended purpose to alleviate this problem.(n146) The Commission requests comments concerning the following questions:

(a)How have the program access rules affected the number of and competition among MVPDs?

(b)Are MVPDs now able to get programming that was previously unavailable?

(c)Is this programming available on nondiscriminatory terms? Have the program access rules had an effect on the price and terms offered to alternative MVPDs?

(d)Are there differences in the treatment of the various distribution technologies with respect to access? For example, are there differences between wireless cable, DBS and HSDs? Do differences exist in rural versus urban areas?

(e)Has our complaint process worked to ensure that programming is available to alternative MVPDs?

(f)Has investment in, and the development of, new programming ventures been adversely affected by the program access rules?

(g)Should the program access rules apply to LEC access to cable programming when a LEC is offering multichannel video programming service in competition with a franchised cable system, whether through the VDT framework or a franchised overbuilt cable system? Should the program access rules apply to LECs' programming in such situations?

(h)Should the program access rules be extended to non-vertically integrated program providers?

(i)Have the nondiscriminatory rate provisions (e.g., the volume discount provision) of the program access rules affected the competitive viability of small systems and small system operators?

91. Furthermore, we seek comment on whether the program carriage rules adopted to implement Section 12 of the 1992 Cable Act have served to diminish anticompetitive practices. Are the rules working to ensure that cable operators do not take unfair advantage of programming vendors as a condition of carriage agreements? Have negotiations for carriage agreements changed? Are there other practices of which the Commission should be aware regarding program supply?

C. Market Performance Indicators

92. In the 1994 Competition Report, the Commission looked at several market performance indicators.(n147) Those indicators included: (a) q ratio measurements; (b) evidence concerning price changes in local markets following the entry of overbuilders; (c) competitive price differentials that had been calculated in prior Commission orders; (d) changes in industry-wide demand; (e) changes in industry-wide revenue; (f) increases in availability of programming; and (g) increases in industry-wide capital investment. We invite comment concerning the use of these market performance indicators, any updates of these indicators, the conclusions that were drawn in the 1994 Competition Report, and theappropriate method or methods for assessing market performance.

D. Market Structure Characteristics that May Increase Concentration
or Pose Impediments to Competition

93. The 1994 Competition Report considered economies of scale and scope in cable.(n148) Economies of scale exist when the average cost of production decreases as the quantity of output produced by a firm increases. For example, economies of scale exist in cable if a single operator can produce cable services at lower cost than two operators could in the same market. In that case, higher concentration might result from the lower costs of production that would be achieved. Economies of scope exist when two products can be jointly produced at lower cost than if they were produced separately. Thus, economies of scope may exist in video distribution and telephony if it is more efficient to simultaneously provide telephone and multichannel video programming services over the same distribution plant than it is to provide them separately. We invite comments concerning economies of scale and economies of scope in the cable industry.

94. The presence of barriers to entry is one of the most important obstacles to the development of a competitive market.(n149) In the 1994 Competition Report, the Commission looked at regulatory and technological impediments to entry in markets for the delivery of multichannel video programming, including the Communications Act's definition of a cable system, state laws impeding competitive entry, pole attachment issues, and the introduction of digital compression and other technologies.(n150) We invite comments concerning these and any other impediments to competitive entry into markets for the delivery of multichannel video programming. We also invite comments on the overall magnitude of barriers to entry into these markets, and actions the Commission should take to reduce or eliminate barriers to entry.

95. In the 1994 Competition Report, the Commission considered the presence of substantial sunk cost investments in the cable industry, and their effect on incentives for incumbent MVPDs to engage in strategic behavior designed to protect those investments.(n151) Among the kinds of strategic behavior that could deter entry are controlling access to program supply, using litigation to delay or prevent entry, pricing services below incremental costs, and foreclosing access to customers through anticompetitive exclusive dealing. We invite comments concerning that analysis and the implications of sunk costs for competitiveentry into markets for the delivery of multichannel video programming.

VI.RECOMMENDATIONS FOR PROMOTING COMPETITION IN THE MARKET FOR DELIVERED VIDEO PROGRAMMING

96. The legislative history of Section 19 of the 1992 Cable Act states that Congress expected the Commission to address and resolve problems regarding "unreasonable cable industry practices, including restricting the availability of programming and charging discriminatory prices to non-cable technologies."(n152) Congress also mandated that the Commission encourage arrangements which promote new technologies and extend programming to areas not served by cable.(n153) Thus, commenters are asked to consider whether there are any actions that the Commission should take to foster competition in the market for video programming delivery. In light of the current state of competition and our desire to promote additional competition, we request that parties recommend rules or policies, if any, that should be adopted, amended or eliminated to accomplish this goal. Parties submitting recommendations should explain how their proposals would increase competition in the provision of video programming to consumers or enhance the program distribution market. We also want to consider any other effects of such proposals on the cable industry.

VII. PROCEDURAL MATTERS

97. This NOI is issued pursuant to authority contained in Sections 4(i), 4(j), 403 and 628(g) of the Communications Act of 1934, as amended. Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of the Commission's Rules, 47 C.F.R.
1.415 and 1.419, interested parties may file comments on or before June 30, 1995, and reply comments on or before July 28, 1995. To file formally in this proceeding, participants must file an original and four copies of all comments, reply comments and supporting comments. If participants want each Commissioner to receive a personal copy of their comments, an original plus ten copies must be filed. Comments and reply comments should be sent to the Office of the Secretary, Federal Communications Commission, Washington, D.C. 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center (Room 239) of the Federal Communications Commission, 1919 M Street, N.W., Washington, D.C. 20554.

98. There are no ex parte or disclosure requirements applicable to this proceeding pursuant to 47 C.F.R. 1.1204(a)(4).

99. Further information on this proceeding may be obtained by contacting Marcia Glauberman, Jonathan Ogur or Edward Hearst in the Cable Services Bureau at
(202) 416-0800 or Martin L. Stern or Jeffrey Lanning in the Office of the General Counsel at (202) 416-0865.

FEDERAL COMMUNICATIONS COMMISSION

William F. Caton
Acting Secretary


I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.SUMMARY OF THIS NOTICE OF INQUIRY  . . . . . . . . . . . . . . . . . . . . 5
III. OVERVIEW OF THE 1994 COMPETITION REPORT. . . . . . . . . . . . . . . .  10
IV. DEFINING THE MARKET FOR DELIVERED VIDEO PROGRAMMING
   A. The Market for Delivered Video Programming. . . . . . . . . . . . . .  18
   B. Status of the Cable Industry and Its Competitors
      1. Cable Industry . . . . . . . . . . . . . . . . . . . . . . . . . .  21
      2. Cable Overbuilds . . . . . . . . . . . . . . . . . . . . . . . . .  27
      3. Wireless Cable Systems
         a. Multichannel Multipoint Distribution Service
            . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
         b. Local Multipoint Distribution Service . . . . . . . . . . . . .  33
      4. Satellite Master Antenna Systems . . . . . . . . . . . . . . . . .  35
      5. Direct-to-Home ("DTH") Satellite Services
         a. Direct Broadcast Satellite Services . . . . . . . . . . . . . .  39
         b. Home Satellite Dishes . . . . . . . . . . . . . . . . . . . . .  43
      6. Local Exchange Carriers/Video Dialtone Services. . . . . . . . . .  47
      7. Broadcast Television Service . . . . . . . . . . . . . . . . . . .  56
      8. Other Distribution Technologies. . . . . . . . . . . . . . . . . .  60
      9. Other Distributors . . . . . . . . . . . . . . . . . . . . . . . .  62
      10. Technological Advances. . . . . . . . . . . . . . . . . . . . . .  64
V. MARKET STRUCTURE AND COMPETITION . . . . . . . . . . . . . . . . . . . .  74
   A. Horizontal Concentration in the Cable Industry
      1. Horizontal Concentration in Local Markets. . . . . . . . . . . . .  75
      2. Horizontal Concentration Nationally. . . . . . . . . . . . . . . .  77
   B. Vertical Integration in the Cable Industry. . . . . . . . . . . . . .  84
   C. Market Performance Indicators . . . . . . . . . . . . . . . . . . . .  92
   D. Market Structure Characteristics that May Increase
     Concentration 
VI.RECOMMENDATIONS FOR PROMOTING COMPETITION IN THE MARKET
  FOR DELIVERED VIDEO PROGRAMMING . . . . . . . . . . . . . . . . . . . . .  96
VII. PROCEDURAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . .  97

Footnote 1 Cable Television Consumer Protection and Competition Act of 1992, Pub. L.
No. 102-385, 106 Stat. 1460 (1992), codified at 47 U.S.C. 521, et seq.

Footnote 2 Communications Act of 1934, as amended ("Communications Act") 628(g),
47 U.S.C. 548(g).

Footnote 3 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, First Report, CS Docket No. 94-48, 9 FCC Rcd 7442 (1994) ("1994 Competition Report" or "1994 Report").

Footnote 4 Communications Act 623(a)(2), 47 U.S.C. 543(a)(2).

Footnote 5 1992 Cable Act, sec. 2, 106 Stat. at 1460.

Footnote 6 Id.

Footnote 7 Communications Act 623(a), 47 U.S.C. 543(a).

Footnote 8 Communications Act 623 (b)-(c), 47 U.S.C. 543 (b)-(c).

Footnote 9 1992 Cable Act, 19, Communications Act 628, 47 U.S.C. 548. Congress also passed the "program carriage" provision, 1992 Cable Act, 12, Communications Act 616, 47 U.S.C. 536, and the "channel occupancy" provision, 1992 Cable Act, 11, Communications Act 613(f)(1)(B), 47 U.S.C. 533(f)(1)(B). The latter two provisions help ensure that vertically integrated cable operators do not, through anticompetitive means, limit the ability of unaffiliated video programming vendors to secure carriage on multichannel distribution systems. In addition, we have held that under the program carriage provision, injured multichannel video program distributors have standing to complain of exclusive programming arrangements that are the result of cable operator coercion. See Implementation of the 1992 Cable Act -- Development of Competition and Diversity in Video Programming Distribution and Carriage, Memorandum Opinion and Order, MM Docket
No. 92-265, 9 FCC Rcd 4415 (1994).

Footnote 10 Communications Act 623(d), 47 U.S.C. 543(d).

Footnote 11 Communications Act 621(a)(1), 47 U.S.C. 541(a)(1).

Footnote 12 1994 Competition Report, 9 FCC Rcd at 7558, 253.

Footnote 13 In the market for "delivered video programming," cable operators or alternative distributors supply programming to viewers. By contrast, in the "programming market," producers supply their programming to cable operators or to alternative distributors.

Footnote 14 See Communications Act 602(12), 47 U.S.C. 522(12).

Footnote 15 1994 Competition Report, 9 FCC Rcd at 7467, 49.

Footnote 16 See Communications Act 602(12), 47 U.S.C. 522(12).

Footnote 17 1994 Competition Report, 9 FCC Rcd at 7467, 50.

Footnote 18 Id. at 7468, 51.

Footnote 19 Broadcast television is not an MVPD under the definition in the 1992 Cable Act. See Communications Act 602(12), 47 U.S.C. 522(12).

Footnote 20 1994 Competition Report, 9 FCC Rcd at 7451, 18-19.

Footnote 21 Competition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television Service, Report, MM Docket No. 89-600, 5 FCC Rcd 4962 (1990) ("1990 Report" or "1990 Cable Report").

Footnote 22 1994 Competition Report, 9 FCC Rcd at 7451-61, 17-36.

Footnote 23 We describe each of these competitors more fully below.

Footnote 24 1994 Competition Report, 9 FCC Rcd at 7468-72, 55-60.

Footnote 25 Id. at 7473-78, 62-70.

Footnote 26 Id. at 7478-82, 171-177.

Footnote 27 Id. at 7482-88, 78-90.

Footnote 28 Id. at 7488-92, 91-96.

Footnote 29 Id. at 7495-505, 103-20.

Footnote 30 Id. at 7508-09, 131-33.

Footnote 31 Id. at 7492-95, 97-102.

Footnote 32 Id. at 7505-08, 121-130.

Footnote 33 Id. at 7511-20, 137-56.

Footnote 34 Id. at 7520-36, 157-93.

Footnote 35 Id. at 7556, 246.

Footnote 36 Id.

Footnote 37 1994 Competition Report, 9 FCC Rcd at 7463, 40 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 394 (1956)).

Footnote 38 Id. (citing Tampa Elec. Co. v. Nashville Coal Co. ("Tampa Electric"), 365 U.S. 320, 330-33 (1961).

Footnote 39 1994 Competition Report, 9 FCC Rcd at 7468, 49.

Footnote 40 Id. at 7468, 50.

Footnote 41 1990 Cable Report, 5 FCC Rcd at 4995-6, 50-52.

Footnote 42 See Department of Justice and Federal Trade Commission, 1992 Horizontal Merger Guidelines 1.51, 4 Trade Reg. Rep. (CCH) 13,104, at 20,573-5 to 20,573-6.

Footnote 43 1994 Competition Report, 9 FCC Rcd at 7468, 51.

Footnote 44 1994 Competition Report, 9 FCC Rcd at 7451-61, 17-36; 9 FCC Rcd at 7566-74, App. C.

Footnote 45 Id. at 7555-56, 244.

Footnote 46 Id. at 7468, 54.

Footnote 47 Id. at 7468-72, 55-60.

Footnote 48 Id. at 7472, 60 n.136.

Footnote 49 Communications Act 621(a), 47 U.S.C. 541(a).

Footnote 50 Compare Cox Cable Communications, Inc. v. United States, 992 F.2d 1178 (11th Cir. 1993) (applies prospectively to all denials of franchises including those that would compete with existing franchises) with James Cable Partners v. City of Jamestown, 43 F.3d 277 (6th Cir. 1995) (all existing exclusive franchises shall remain in force, and only new grants of exclusives are prohibited).

Footnote 51 1994 Competition Report, 9 FCC Rcd at 7558, 251.

Footnote 52 Id. at 7482, 78.

Footnote 53 ITFS channels are used by educational institutions to interconnect scattered campus locations.

Footnote 54 In the Matter of 101 Applications for Authority to Construct and Operate Multipoint Distribution Stations, Memorandum Opinion and Order on Reconsideration, 9 FCC Rcd 7886 (1994); In the Matter of 4,330 Applications for Authority to Construct and Operate Multipoint Distribution Service Stations at 62 Transmitter Sites, Memorandum Opinion and Order on Reconsideration, 10 FCC Rcd 1335 (1994), joint notice of appeal filed, A/B Financial, Inc., et al. v FCC, Docket No. 95-1027 (D.C. Cir. Jan. 9, 1995).

Footnote 55 Amendment of Parts 21 and 74 of the Commission's Rules With Regard to Filing Procedures in the Multipoint Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(g) of the Communications Act (Competitive Bidding), Notice of Proposed Rulemaking, MM Docket No. 94-131, 9 FCC Rcd 7665 (1994).

Footnote 56 Amendment of Part 74 of the Commission's Rules with Regard to the Instructional Television Fixed Service, Memorandum Opinion and Order, MM Docket No. 93-24 (FCC 95-51 Feb. 7, 1995).

Footnote 57 1994 Competition Report, 9 FCC Rcd at 7482-88, 78-90.

Footnote 58 The Wireless Cable Digital Alliance has commenced the testing of digital technology to be used in wireless systems. The Alliance has shown that the use of a digital signal combined with compression algorithms has the potential to increase the channel capacity of wireless systems from the current maximum of 33 channels to at least 200 and perhaps evenas many as 300. See Comm. Daily, Mar. 7, 1995, at 2. At least one MMDS operator, Cross-Country Wireless, which has indicated that it would be purchased by Pacific Telesis, announced its intention to use digital compression to offer more than 100 channels by the end of 1996. See Comm. Daily, Apr. 18, 1995, at 8. See also Rich Brown, MMDS (Wireless Cable): A Capital Idea, Broadcasting & Cable, May 1, 1995, at 16.

Footnote 59 For example, we note that it has been reported that during 1994 and early 1995, American Telecommunications Inc. became the first wireless company to have over 100,000 subscribers by purchasing over 40,000 subscribers from existing systems. Paul Kagan Associates, Inc., Wireless Cable Investor News Analysis, Dec. 9, 1994, at 1.

Footnote 60 See Kent Gibbons, Wireless Op Receives $100M from Baby Bells, Multichannel News, Apr. 3, 1995, at 58; Gautam Naik, PacTel to Buy Tiny Wireless Cable Firm for $120 Million to Speed Video Project, The Wall St. J., Apr. 18, 1995, at A4.

Footnote 61 1994 Competition Report, 9 FCC Rcd at 7487, 89.

Footnote 62 Id. at 7505, 121.

Footnote 63 The LMDS system identified in the 1994 Competition Report is CellularVision of New York, operating in Brooklyn, New York. Id. at 7505-6, 122.

Footnote 64 Rulemaking to Amend Parts 2 and 21 of the Rules to Redesignate the 27.5-29.5 GHz Frequency Band and to Establish Rules and Policies for Local Multipoint Distribution Services, MM Docket No. 92-297, 8 FCC Rcd 557 (1993).

Footnote 65 In the 1994 Competition Report, the Commission wrote that there appeared to be approximately 3000 to 4000 SMATV systems operating nationwide (9 FCC Rcd at 7488-89, 92). As of August 15, 1994, approximately one million subscribers were served by SMATV systems.

Footnote 66 Implementation of Sections 11 and 13 of the 1992 Cable Act (Horizontal and Vertical Ownership Limits, Cross-Ownership Limitations and Anti-Trafficking Provisions), Memorandum Opinion and Order on Reconsideration of the First Report and Order,
MM Docket No. 92-264 (FCC 95-21 Jan. 12, 1995) ("SMATV-Cable Cross-Ownership Recon.").

Footnote 67 1994 Competition Report, 9 FCC Rcd at 7488-92, 91-96.

Footnote 68 See Amendment of Part 94 of the Commission's Rules to Permit Private Video Entertainment Distribution Systems Access to the 18 GHz Band, Report and Order,
PR Docket No. 90-5, 6 FCC Rcd 1270 (1991).

Footnote 69 The Commission recently released an order on reconsideration concerning, among other things, cable operators' acquisition of SMATV systems. In that decision, we eliminated the prior prohibition on such purchases. The Commission noted that one benefit of the decision was to provide an exit strategy for SMATV operators. The absence of this exit strategy caused by the prior prohibition was claimed to have been a barrier to entry. SMATV-Cable Cross-Ownership Recon.

Footnote 70 Communications Act 602(7), 47 U.S.C. 522(7).

Footnote 71 Implementation of the 1992 Cable Act (Home Wiring), Report and Order, MM Docket No. 92-260, 7 FCC Rcd 7349 (1993), recon. pending.

Footnote 72 47 C.F.R. 100.3.

Footnote 73 1994 Competition Report, 9 FCC Rcd at 7473, 61.

Footnote 74 DBS Digest, Mar. 5, 1995, at 1.

Footnote 75 See Nikhil Hutheesing, Kamikaze Satellites? Forbes, Jul. 4, 1994, at 126. See also AlphaStar Television Network, Tee-Comm Launches AlphaStar, America's New High-Powered Digital DTH Service, Mar. 14, 1995 (News Release).

Footnote 76 1994 Competition Report, 9 FCC Rcd at 7474-79, 62-70.

Footnote 77 Space Business Update, Aerospace Daily, Mar. 22, 1995 (three additional suppliers of DBS equipment have been licensed -- Hughes Network Systems, Toshiba American Consumer Products and Uniden America Corp.).

Footnote 78 1994 Competition Report, 9 FCC Rcd at 7476, 67.

Footnote 79 See 47 C.F.R. 25.104.

Footnote 80 Preemption of Local Zoning Regulation of Satellite Earth Stations, Notice of Proposed Rulemaking, IB Docket 95-59 (FCC 95-180, Apr. 27, 1995) ("Zoning Notice").

Footnote 81 1994 Competition Report, 9 FCC Rcd at 7478-82, 71-77.

Footnote 82 Media Business Corp., DTH Nears $2.5 Billion Retail, Sky Report, Feb. 1995, at 5-9.

Footnote 83 Id.

Footnote 84 See 47 C.F.R. 25.104.

Footnote 85 See Zoning Notice, IB Docket 95-59.

Footnote 86 Communications Act 613(b), 47 U.S.C. 533(b). See also 47 C.F.R. 63.54, 63.58. The cross-ownership restriction was instituted by the Commission in 1970, following a series of proceedings in which the Commission found that telephone companies denied access or provided discriminatory access to cable systems to utility poles necessary for cable distribution. Certain aspects of the regulatory restriction were codified by Congress in the 1984 Cable Act. Communications Act 613(b), 47 U.S.C. 533(b) (1984).

Footnote 87 47 C.F.R. 63.08, 63.09, 63.88.

Footnote 88 United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983).

Footnote 89 Telephone Co.-Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Second Report and Order, Recommendation to Congress and Second Further Notice of Proposed Rulemaking, CC Docket No. 87-266, 7 FCC Rcd 5781 (1992).

Footnote 90 1994 Competition Report, 9 FCC Rcd at 7499-500, 109-11. As of May 4, 1995, the Commission had granted twelve permanent and ten trial VDT authorizations and eleven applications were pending. In addition, two applications filed by Bell Atlantic were suspended at its request.

Footnote 91 Chesapeake & Potomac Tel. Co. v. United States, 830 F. Supp. 909 (E.D. Va. 1993), aff'd, 42 F.3d 181 (4th Cir. 1994) (Section 533(b) held unconstitutional as applied to Bell Atlantic within its service areas); US West, Inc. v. United States, 855 F. Supp. 1184 (W.D. Wa. June 15, 1994), aff'd, 48 F.3d 1092 (9th Cir. 1995) (Section 533(b) held unconstitutional as applied to US West within its service areas).

Footnote 92 See, e.g., Ameritech Corp. v. U.S., 867 F. Supp. 721 (N.D. Ill. Oct. 28, 1994); NYNEX Corp. v. U.S., No. 93-323-P-C (D. Me. Dec. 8, 1994).

Footnote 93 Public Notice, DA 95-520, Mar. 17, 1995, corrected, DA 95-722, Apr. 3, 1995.

Footnote 94 Telephone Co.-Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Fourth Further Notice of Proposed Rulemaking, CC Docket No. 87-266, (FCC 95-20 Jan. 20, 1995).

Footnote 95 Telephone Co.-Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Memorandum Opinion and Order on Reconsideration and Third Further Notice of Proposed Rulemaking, CC Docket No. 87-266, 10 FCC Rcd 244 (1994).

Footnote 96 See Communications Act 214, 47 U.S.C. 214.

Footnote 97 1994 Competition Report, 9 FCC Rcd at 7495-505, 103-20.

Footnote 98 Richard Karpinski, No Demand for Video-on-Demand - Rochester Quits its Trial, Interactive Age, Jan. 30, 1995, at 5.

Footnote 99 Heather Clancy, Telcos Step Up Integration Activities -- Baby Bells Team Up on Information Superhighway Effort, Computer Reseller News, Nov. 7, 1994, at 283.

Footnote 100 Three RHCs Join Disney in $500-Million Project to Develop Video Service, Comm. Daily, Apr. 19, 1995, at 1-2.

Footnote 101 1994 Competition Report, 9 FCC Rcd at 7492-95, 97-102.

Footnote 102 Warner indicates that 18% of its coverage will come from cable carriage of superstation WGN. David Tobenkin, New Players Get Ready to Roll, Broadcasting & Cable, Jan. 2, 1995, at 30-31.

Footnote 103 17 U.S.C. 119, Satellite Home Viewer Act of 1988, Pub. L. 100-667, 102 Stat. 3949 (1988), extended by the Satellite Home Viewer Act of 1994, Pub. L. 103-369,
108 Stat. 3477 (1994)

Footnote 104 Advanced Television Systems and Their Impact upon the Existing Television Broadcast Service, Memorandum Opinion and Order/Third Report and Order/Third Further Notice of Proposed Rule Making, MM Docket No. 87-268, 7 FCC Rcd 6924 (1992).

Footnote 105 See 47 C.F.R. Part 74.

Footnote 106 1994 Competition Report, 9 FCC Rcd at 7507-08, 126-30.

Footnote 107 47 C.F.R. 73.642(a)(2).

Footnote 108 47 C.F.R. 74.732(b).

Footnote 109 See Public Notice, Notice of Limited Low Power Television/Television Translator Filing Window from April 11, 1994 Through April 15, 1995, released Mar. 3, 1994.

Footnote 110 1990 Report, 5 FCC Rcd at 5019-5020, 109-110.

Footnote 111 See Florence Setzer & Jonathan Levy, Broadcast Television in a Multichannel Marketplace 108 (Federal Communications Commission, Office of Plans and Policy, OPP Working Paper 26, June 1991).

Footnote 112 We define electric utilities to include investor-owned utilities, municipal utility systems, and exempt public utility holding companies. 15 U.S.C. 79c.

Footnote 113 See 1994 Competition Report, 9 FCC Rcd at 7508-09, 131-33.

Footnote 114 See, e.g., Clark Gellings and Karl Stahlkoph, Positioning Strategies: Utility Information Superhighway 5-11 (1994) (presentation prepared for Electric Power Research Institute); Power Companies Outline Plans, Current Projects at Conference on Utility Telecom Involvement, Telco Competition Report, Feb. 28, 1995; Vincente Pasdeloup, Utilities Buzz About Telecoms, Cable World, Feb. 20, 1995, at 86; Harry A. Jessell, Utilities Getting into Telecommunications, Broadcasting & Cable, Nov. 7, 1994, at 54.

Footnote 115 See, e.g., Industry Giants Push Into Energy Management Market, Comm. Daily,
Feb. 28, 1995, at 8.

Footnote 116 1994 Competition Report, 9 FCC Rcd at 7539, 200.

Footnote 117 Leslie Ellis, Set-Top Wars Won't Brew 'Til '96, Multichannel News, Feb. 13, 1995, at 3.

Footnote 118 Paul Kagan Associates, Inc., Marketing New Media, Feb. 20, 1995, at 1.

Footnote 119 Id.

Footnote 120 Interactive Age, What Does Encoding Cost?, Nov. 14, 1994, at 36.

Footnote 121 Implementation of Section 17 of the 1992 Cable Act (Compatibility Between Cable Systems and Consumer Electronics Equipment), First Report and Order, ET Docket No.
93-7, 9 FCC Rcd 1981 (1994), recon. pending.

Footnote 122 TEL-COM, INC. (Petition for Reconsideration of Certification of West Virginia Cable Television Advisory Board to regulate basic cable rates (WV0630 & WV0628)), Memorandum Opinion and Order, 10 FCC Rcd 2114 (1995).

Footnote 123 See House Committee on Energy and Commerce, H.R. Rep. 623 ("House Report"), 102d Cong., 2nd Sess. at 42-43 (1992).

Footnote 124 In the 1992 Cable Act, Congress required the Commission to establish limits on the number of cable subscribers that an entity is authorized to reach through cable systems it owns, controls or in which it holds an attributable interest. Communications Act 613(f)(1)(A), 47 U.S.C. 533(f)(1)(A). To implement this requirement, the Commission established a 30% limit on the number of homes passed nationwide, or 35% if the additional systems are "minority-controlled," that any one entity can reach through its cable systems. See Implementation of Sections 11 and 13 of the 1992 Cable Act, Second Report and Order, MM Docket No. 92-264, 8 FCC Rcd 8565 (1993) ("Subscriber and Channel Occupancy Limits Order"), recon. denied, Memorandum Opinion and Order on Reconsideration of the Second Report and Order, FCC 95-147 (Apr. 5, 1995). Following a federal district court ruling that Section 11(c) of the 1992 Cable Act is unconstitutional, the Commission stayed enforcement of its horizontal ownership rules. See Daniels Cablevision, Inc. v. United States, 835 F. Supp. 1, 10 (D.D.C.), appeal docketed and pending, Civ. Act. No. 93-5290 (D.C. Cir. 1993).

Footnote 125 See 1994 Competition Report, 9 FCC Rcd at 7586-88, App. G, Tbls. 1 & 2.

Footnote 126 The HHI is calculated by summing the squares of the firms' percentage shares of the market. 1992 Horizontal Merger Guidelines, 1.5, 4 Trade Reg Rep. (CCH) 13,104, at 20,573-4 to 20,573-6.

Footnote 127 1994 Competition Report, 9 FCC Rcd at 7467-68, 49-53.

Footnote 128 Id. at 7586, App. G, Tbl. 7.

Footnote 129 Compare Subscriber and Channel Occupancy Limits Order, 8 FCC Rcd at 8578, 27 n.40, which includes all systems in which TCI has an attributable interest.

Footnote 130 1994 Competition Report, 9 FCC Rcd at 7586, App. G, Tbl. 1A. These transactions were (1) TCI's acquisition of TeleCable (which had been the 18th largest MSO), which added over 700,000 subscribers to TCI's total; (2) Comcast's acquisition from Rogers Communications ("Rogers") of those systems in the United States that Rogers acquired from Maclean Hunter (which had been the 28th largest MSO) earlier this year; (3) Cox Cable Communications, Inc.'s acquisition of the cable systems of Times Mirror Company (which had been the 10th largest MSO); and
(4) Time Warner's consolidation in a joint venture of certain of its systems with those operated by Newhouse Broadcasting Corp. and Advanced Publications, Inc. (which were together the 7th largest MSO), and its purchase of Summit Communications Corporation (which had 160,000 subscribers). Id. at 7515, 145.

Footnote 131 1992 Horizontal Merger Guidelines, 1.51, 4 Trade Reg. Rep. (CCH) 13,104,
at 20,573-5 to 20,573-6.

Footnote 132 For example, Time Warner has announced agreements to acquire Cablevision Industries (which is the 8th largest MSO), and the KBLCOM systems from Houston Industries (which is the 22nd largest MSO). See Rich Brown, Time Warner Eyes 2.5 Million Subs for $5 Billion, Broadcasting & Cable, Jan. 23, 1995, at 4. Continental Cablevision has agreed to buy the cable systems of the Providence Journal (which is the 17th largest MSO). See Cable Clustering Makes for Active Market, Broadcasting and Cable, Mar. 6, 1995,
at 53-54. Sammons Communications, Inc (which is the 14th largest MSO), has agreed to sell approximately two-thirds of its cable systems to Marcus Cable, and its remaining systems to Lenfest Group and TKR Cable, entities in which TCI has an ownership interest. See Rich Brown, Sammons Bags $1 Billion, Broadcasting & Cable, Mar. 13, 1995, at 11; TCI Picks Up Cable Systems in N.J., Pa., Broadcasting & Cable, Mar. 27, 1995, at 14.

Footnote 133 1994 Competition Report, 9 FCC Rcd at 7586-603, App. G.

Footnote 134 Id. at 7518, 151.

Footnote 135 Id. at 7518-19, 152-53.

Footnote 136 Cox Cable Communications Inc and Times Mirror Company (Transfer of Control), Memorandum Opinion and Order, File No. CAR-44842-10, 10 FCC Rcd 1559 (CSB 1994).

Footnote 137 1994 Competition Report, 9 FCC Rcd at 7519, 154.

Footnote 138 Id. at 7519-20, 155.

Footnote 139 Communications Act 613(f)(1)(B), 47 U.S.C. 533(f)(1)(B).

Footnote 140 See Subscriber and Channel Occupancy Order. See also 47 C.F.R. 76.501, 76.504. A cable operator may devote two additional channels or up to 45% of its channel capacity, whichever is greater, to the carriage of video programming owned by the cable operator or in which the operator has an attributable interest provided such video programming services are minority controlled.

Footnote 141 A video program vendor is defined as anyone engaged in the production, creation or wholesale distribution of video programming for sale. Communications Act 616,
47 U.S.C. 536.

Footnote 142 See Implementation of Sections 12 and 19 of the 1992 Cable Act (Development of Competition and Diversity in Video Programming Distribution and Carriage), Second Report and Order, MM Docket No. 92-265, 9 FCC Rcd 2642 (1993), recon. granted, Memorandum Opinion and Order, 9 FCC Rcd 4415. See also 47 C.F.R. 76.1300-1302.

Footnote 143 Communications Act 628, 47 U.S.C. 548.

Footnote 144 See Implementation of Sections 12 and 19 of the 1992 Cable Act (Development of Competition and Diversity in Video Programming and Carriage), First Report and Order, MM Docket No. 92-265, 8 FCC Rcd 3359 (1993) recon. denied in part, 10 FCC Rcd 1902 (1994). See also 47 C.F.R. 76.1000-76.1003.

Footnote 145 1992 Cable Act, sec. 2(a)(5). House Report at 40. Senate Committee on Commerce, Science, and Transportation, S. Rep. No. 92 ("Senate Report"), 102d Cong., 1st Sess. at 26 (1991).

Footnote 146 As of May 4, 1995, the Commission had resolved 12 program access cases and 7 program access cases were pending.

Footnote 147 1994 Competition Report, 9 FCC Rcd at 7542-50, 204-27; 9 FCC Rcd at 7604-31, App. H.

Footnote 148 Id. at 7616-27, App. H., 20-44.

Footnote 149 See, e.g., McGahee v. Northern Propane Gas Co., 858 F.2nd 1487 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989).

Footnote 150 1994 Competition Report, 9 FCC Rcd at 7554-6, 239-245.

Footnote 151 Id. at 7550-54, 229-238.

Footnote 152 House Committee on Energy and Commerce, H.R. Rep. No. 862 ("Conference Report"), 102d Cong., 2d Sess. at 93 (1992).

Footnote 153 Id.