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Y2!!dddddH=dYHHHHHHHHHH!d2H282YdHdC2!2H,29HNAddHHHHHHHHHHddddd.dHHHHdddddddddddddddddddHHddddddSC=NdHddd+;HHHHddddddHHH2HHdHHdddHHH,HHHH,HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!HHH!HHH!HHH!HHHHHHHHHHHHHH=?8=8C,?'A,J2H,!F,C8[8J,C2H,H=92=22?,H,C=H8N===H?J!2HHH=,====I!!2222HJ222HHH=!92,!ddhrZz.lZrrvvnFFZ8 )#[X0< P7jU{P#86 86@ + #[X0< P7jU{P#92.9 92.9B-9"%#[X0< P7jU{P#17.65% 9"17.65%A ,'B*#[X0< P7jU{P#8.02% '8.02%k7V#[X0< P7jU{P#Basic Subscriptions at Year End ("subs") (mil.) 5/Basic Subscriptions at Year End ("subs") (mil.)@ + A#[X0< P7jU{P#42.6  42.6@ +#[X0< P7jU{P#51.7 51.7@ + #[X0< P7jU{P#57.4 57.4B-9"%#[X0< P7jU{P#21.36% 9"21.36%B-'V*#[X0< P7jU{P#11.03% '11.03%\(Gj #[X0< X7jU{X#National Saturation (HP/HHs) (%) & jNational Saturation (HP/HHs) (%)B-#[X0< X7jU{X#82.51% 82.51%B-]#[X0< X7jU{X#92.87% ]92.87%B--{ #[X0< X7jU{X#96.37% -96.37%B-!J%#[X0< X7jU{X#12.57% !12.57%A ,E'*#[X0< X7jU{X#3.77% E'3.77%g3R(h;#[X0< X7jU{X#Percentage of TV Households subscribing (%) 1+(;Percentage of TV Households subscribing (%)B-h;#[X0< X7jU{X#48.08% ;48.08%B-]h;#[X0< X7jU{X#55.83% ];55.83%B--h{ ;#[X0< X7jU{X#59.54% -;59.54%B-!hJ%;#[X0< X7jU{X#16.12% !;16.12%A ,E'h*;#[X0< X7jU{X#6.65% E';6.65%])H#[X0< X7jU{X#Mean US Penetration (subs/HP) (%) '!Mean US Penetration (subs/HP) (%)B-#[X0< X7jU{X#58.28% 58.28%B-]#[X0< X7jU{X#60.12% ]60.12%B--{ #[X0< X7jU{X#61.79% -61.79%A ,u"6%#[X0< X7jU{X#3.16% u"3.16%A ,E'*#[X0< X7jU{X#2.78% E'2.78%0*N= '3,,4?*+  5   '  ' -  !{ !{5B( RoUUn olUUIticUU ()UUmes New Roman (Ita- !] !- !< !{ !;5B( RoUUn olUUIticUU ()UUmes New Roman (Ita- !]- !5B( RoUUn olUUIticUU ()UUmes New Roman (Ita- !-'- "MS Sans SerifU--"System-'-- "MS Sans Serif[-CG Times (W1)T- 2 1987*2 S1990*2 1993*2 Number  2  Percent of2 !Number  2 R Percent of2 Number  2  Percent of2 $Channel Capacity  2 $ of systems 2 $ systems** 2 $ of systems 2 $S systems** 2 $ of systems 2 $ systems** CG Times (W1) U-2 =A 54 and over 2 =5652 =8.01% 2 =<8082 =k9.60% 2 =1,3062 =13.13% 2 NV30 to 532 N3,2722 N46.40% 2 N34,8462 Ne57.55% 2 N6,3642 N63.96% 2 _V20 to 292 _1,2982 _18.41% 2 _31,3702 _e16.27% 2 _1,1972 _12.03% 2 pV13 to 19 2 p3122 p4.42% 2 p<2832 pk3.36% 2 p3642 p3.66% 2 \6 to 122 1,5572 22.08% 2 31,0812 e12.84% 2 6972 7.01% 2 S 5 or less 2 482 0.68% 2 B322 k0.38% 2 222 0.22% 2 9 Not available  2 7842 31,1922 1,2102 cTotal2 7,8362 39,6122 11,160CG Times (W1)n-2 #Subtotal 30 plus2 3,8372 54.41% 2 -5,6542 _67.15% 2 7,6702 77.09% $2 Subtotal 29 or less2 3,2152 45.59% 2 -2,7662 _32.85% 2 2,2802 22.91% -'A%,Ak#X0B X7jUX#1987* P  A1987*A , #X0B X7jUX#1990* 1990*A ,%(#X0B X7jUX#1993* %1993*B-J #X0B X7jUX#Number J NumberF1-#X0B X7jUX#Percent of  -Percent ofB-#X0B X7jUX#Number NumberF1!!#X0B X7jUX#Percent of  Percent ofB-!W%#X0B X7jUX#Number !NumberF1m%+#X0B X7jUX#Percent of  m%Percent ofL7C -#X0B X7jUX#Channel Capacity -Channel CapacityF1 C-#X0B X7jUX#of systems   -of systemsE0AC-#X0B X7jUX#systems**  A-systems**F1Cs-#X0B X7jUX#of systems  -of systemsE0C -#X0B X7jUX#systems**  -systems**F1 C'-#X0B X7jUX#of systems  -of systemsE0%C4+-#X0B X7jUX#systems**  %-systems**G+2'G  1#X0B P7jUP#54 and over P   '154 and over? *nG T1#X0B P7jUP#565 n1565A ,(G R1#X0B P7jUP#8.01% (18.01%? *G 1#X0B P7jUP#808 1808A ,G 1#X0B P7jUP#9.60% 19.60%A ,"G "&1#X0B P7jUP#1,306 "11,306B-&G *1#X0B P7jUP#13.13% &113.13%D/ #X0B P7jUP#30 to 53  30 to 53A ,  #X0B P7jUP#3,272  3,272B- { #X0B P7jUP#46.40%  46.40%A ,X  #X0B P7jUP#4,846 X 4,846B-O  #X0B P7jUP#57.55% O 57.55%A ," "& #X0B P7jUP#6,364 " 6,364B-& * #X0B P7jUP#63.96% & 63.96%D/  #X0B P7jUP#20 to 29  20 to 29A ,  #X0B P7jUP#1,298   1,298B- { #X0B P7jUP#18.41%  18.41%A ,X  #X0B P7jUP#1,370 X 1,370B-O   #X0B P7jUP#16.27% O 16.27%A ," "& #X0B P7jUP#1,197 " 1,197B-& * #X0B P7jUP#12.03% & 12.03%D/< & #X0B P7jUP#13 to 19 & 13 to 19? *n< T& #X0B P7jUP#312 n& 312A ,(< R& #X0B P7jUP#4.42% (& 4.42%? *< & #X0B P7jUP#283 & 283A ,< & #X0B P7jUP#3.36% & 3.36%? *#< %& #X0B P7jUP#364 #& 364A ,i'< *& #X0B P7jUP#3.66% i'& 3.66%C.K #X0B P7jUP#6 to 12 K6 to 12A , #X0B P7jUP#1,557  1,557B-{#X0B P7jUP#22.08% 22.08%A ,X#X0B P7jUP#1,081 X1,081B-O #X0B P7jUP#12.84% O12.84%? *#%#X0B P7jUP#697 #697A ,i'*#X0B P7jUP#7.01% i'7.01%E0F t#X0B P7jUP#5 or less  t5 or less> ),t#X0B P7jUP#48 t48A ,(Rt#X0B P7jUP#0.68% (t0.68%> )t#X0B P7jUP#32 t32A ,t#X0B P7jUP#0.38% t0.38%> ))$m%t#X0B P7jUP#22 )$t22A ,i'*t#X0B P7jUP#0.22% i't0.22%I41 #X0B P7jUP#Not available  Not available? *n1T#X0B P7jUP#784 n784A ,X1#X0B P7jUP#1,192 X1,192A ,"1"&#X0B P7jUP#1,210 "1,210A , #X0B P7jUP#Total TotalA , #X0B P7jUP#7,836  7,836A ,X#X0B P7jUP#9,612 X9,612B-~"J&#X0B P7jUP#11,160 ~"11,160L07 #X0B x7jU#Subtotal 30 plus P  Subtotal 30 plusA ,> h#X0B x7jU#3,837 > 3,837B-5#X0B x7jU#54.41% 554.41%A ,#X0B x7jU#5,654 5,654B-#X0B x7jU#67.15% 67.15%A ,~"%#X0B x7jU#7,670 ~"7,670B-u&A*#X0B x7jU#77.09% u&77.09%O:o Y#X0B x7jU#Subtotal 29 or less YSubtotal 29 or lessA ,> ohY#X0B x7jU#3,215 > Y3,215B-5oY#X0B x7jU#45.59% 5Y45.59%A ,oY#X0B x7jU#2,766 Y2,766B-oY#X0B x7jU#32.85% Y32.85%A ,~"o%Y#X0B x7jU#2,280 ~"Y2,280B-u&oA*Y#X0B x7jU#22.91% u&Y22.91%0*N= '3,,4?R*22+8  5   2'  ' 2-  ! !5B( UUUUUUUU- !] !- !< ! !2;5B( UUUUUUUU- !]- !25B( UUUUUUUU- !-'- 2"MS Sans SerifKY--"System-'-- 2"MS Sans Serif#}-CG Times (W1)_J- 2 1987*2 c1990*2 1993*CG Times (W1)J--2 Number  2 Percent2 1Number  2 oPercent2 Number  2 Percent2 $ Channel Capacity  2 $of subs.2 $ of subs.**2 $4of subs.2 $c of subs.**2 $of subs.2 $ of subs.**-2 =5 54 and overTimes New Roman-2 = 5,752,221-2 =15.09% -2 =( 11,677,066-2 =u24.42% -2 = 20,909,256-2 = 38.37% 2 NJ30 to 53-2 N 24,099,718-2 N63.21% -2 N( 31,765,994-2 Nu66.44% -2 N 31,712,387-2 N 58.20% 2 _J20 to 29-2 _ 5,439,395-2 _14.27% -2 _. 3,540,389-2 _{7.41% -2 _ 1,482,527-2 _2.72% 2 pJ13 to 19-2 p501,109-2 p1.31% -2 p7180,199-2 p{0.38% -2 p117,713-2 p0.22% 2 P6 to 12-2 2,232,808-2 5.86% -2 7638,207-2 {1.33% -2 262,010-2 0.48% 2 G 5 or less-2 102,394-2 0.27% -2 C7,234-2 {0.02% -2 3,254-2 0.01% 2 - Not available -2 634,6012 7804,3502 636,731-2 WTotal2 38,762,2462 ( 48,613,4392  55,123,878CG Times (W1)n-2 Subtotal 30 plus2 29,851,9392 78.29% 2  43,443,0602 o90.87% 2  52,621,6432 96.58% $2 Subtotal 29 or less2 8,275,7062 21.71% 2 % 4,366,0292 v9.13% 2  1,865,5042 3.42% - 'A%,#yX0? X7jUX#1987* P  1987*A ,#yX0? X7jUX#1990* 1990*A ,%(#yX0? X7jUX#1993* %1993*B&- _#yX0? X7jUX#Number P   NumberC.p#yX0? X7jUX#Percent pPercentB-{#yX0? X7jUX#Number NumberC.#yX0? X7jUX#Percent PercentB-"%#yX0? X7jUX#Number "NumberC.&*#yX0? X7jUX#Percent &PercentL7r P#yX0? X7jUX#Channel Capacity PChannel CapacityD/ rP#yX0? X7jUX#of subs.  Pof subs.F1rP#yX0? X7jUX#of subs.**  Pof subs.**D/rP#yX0? X7jUX#of subs. Pof subs.F1r P#yX0? X7jUX#of subs.**  Pof subs.**D/:"r'P#yX0? X7jUX#of subs. :"Pof subs.F1%r+P#yX0? X7jUX#of subs.**  %Pof subs.**G2 o #yX0? P7jUP#54 and over  o 54 and overE)0 o #yX0? PT6UP#5,752,221 P   o 5,752,221B- yo #yX0? P7jUP#15.09% o 15.09%F18 2o #yX0? PT6UP#11,677,066  8o 11,677,066B- o #yX0? P7jUP#24.42% o 24.42%F1T! N'o #yX0? PT6UP#20,909,256  T!o 20,909,256B-' *o #yX0? P7jUP#38.37% 'o 38.37%D/K V ) #yX0? P7jUP#30 to 53 ) 30 to 53F1 K ) #yX0? PT6UP#24,099,718   ) 24,099,718B-K y) #yX0? P7jUP#63.21% ) 63.21%F18K 2) #yX0? PT6UP#31,765,994  8) 31,765,994B-K ) #yX0? P7jUP#66.44% ) 66.44%F1T!K N') #yX0? PT6UP#31,712,387  T!) 31,712,387B-'K *) #yX0? P7jUP#58.20% ') 58.20%D/ V #yX0? P7jUP#20 to 29  20 to 29E0   #yX0? PT6UP#5,439,395  5,439,395B- y #yX0? P7jUP#14.27%  14.27%E0  #yX0? PT6UP#3,540,389   3,540,389A ,s p #yX0? P7jUP#7.41% s 7.41%E0! (' #yX0? PT6UP#1,482,527  ! 1,482,527A ,' * #yX0? P7jUP#2.72% ' 2.72%D/V #yX0? P7jUP#13 to 19  13 to 19C.< k #yX0? PT6UP#501,109 < 501,109A ,WT #yX0? P7jUP#1.31% W 1.31%C.X #yX0? PT6UP#180,199 X 180,199A ,sp #yX0? P7jUP#0.38% s 0.38%C.t"& #yX0? PT6UP#117,713 t" 117,713A ,'* #yX0? P7jUP#0.22% ' 0.22%C.w0 U#yX0? P7jUP#6 to 12 U6 to 12E0 wU#yX0? PT6UP#2,232,808  U2,232,808A ,WwTU#yX0? P7jUP#5.86% WU5.86%C.XwU#yX0? PT6UP#638,207 XU638,207A ,swpU#yX0? P7jUP#1.33% sU1.33%C.t"w&U#yX0? PT6UP#262,010 t"U262,010A ,'w*U#yX0? P7jUP#0.48% 'U0.48%E0T0 #yX0? P7jUP#5 or less  T5 or lessC.< 0k#yX0? PT6UP#102,394 < 102,394A ,W0T#yX0? P7jUP#0.27% W0.27%A ,?0<#yX0? PT6UP#7,234 ?7,234A ,s0p#yX0? P7jUP#0.02% s0.02%A ,[#0X&#yX0? PT6UP#3,254 [#3,254A ,'0*#yX0? P7jUP#0.01% '0.01%I4`% #yX0? P7jUP#Not available  `Not availableC.< k#yX0? PT6UP#634,601 < 634,601C.X#yX0? PT6UP#804,350 X804,350C.t"&#yX0? PT6UP#636,731 t"636,731A , #yX0? P7jUP#Total TotalF1 #yX0? P7jUP#38,762,246   38,762,246F182#yX0? P7jUP#48,613,439  848,613,439F1T!N'#yX0? P7jUP#55,123,878  T!55,123,878L07I #yX0? x7jU#Subtotal 30 plus P  Subtotal 30 plusF1[ U#yX0? x7jU#29,851,939  [ 29,851,939B-p#yX0? x7jU#78.29% p78.29%F1xr#yX0? x7jU#43,443,060  x43,443,060B-"#yX0? x7jU#90.87% 90.87%F1 &#yX0? x7jU#52,621,643  52,621,643B-&>*#yX0? x7jU#96.58% &96.58%O:h. F#yX0? x7jU#Subtotal 29 or less FSubtotal 29 or lessE0 hCF#yX0? x7jU#8,275,706  F8,275,706B-phF#yX0? x7jU#21.71% pF21.71%E0h_F#yX0? x7jU#4,366,029  F4,366,029A ,hF#yX0? x7jU#9.13% F9.13%E0!h{&F#yX0? x7jU#1,865,504  !F1,865,504A ,/'h,*F#yX0? x7jU#3.42% /'F3.42%0* N= '3,,4? *DD+  5   D'  ' E-  !gy !c !cY5B( UUUU UUUU- !- !;5B( UUUU UUUU- !" !H5 !~- !m'y !7  !D4 !D}-'- E"MS Sans SerifS--"System-'-- D"MS Sans Serif-CG Times (W1)+R-  2 1987 2 -1990 2 19932 '87-'902 '90-'93--'-- 'D 2 no. of2 % of all 2 no. of2 % of all 2 fno. of2 % of all --'-- D--'-- 4D( 2 % Network Type  2 %netw'ks 2 %netw'ks 2 %netw'ks 2 % netw'ks 2 %[netw'ks 2 %netw'ks -  ! ( ! ( 2 %% change 2 % % change --'-- DCG Times (W1)R- 2 ;Basic/No-Charge  2 ;592 ;78.67% 2 ; 612 ;%79.22% 2 ;z722 ;72.73% 2 ;3.39% 2 ;18.03% 2 L>Premium  2 L92 L12.00% 2 L52 L+6.49% 2 L92 L9.09% 2 L-44.44% 2 L80.00% 2 ]& Pay Per View 2 ]62 ]8.00% 2 ]72 ]+9.09% 2 ]z132 ]13.13% 2 ]16.67% 2 ]85.71% 2 n' Combination  2 n12 n1.33% 2 n42 n+5.19% 2 n52 n5.05% 2 n300.00% 2 n25.00% -2 LTotal 2 75 2 77 2 v992 2.67% 2 28.57% -'00@$+  #dX0= X7jUX#1987 P   1987@ + 4 #dX0= X7jUX#1990  1990@ + 5 #dX0= X7jUX#1993  1993C.B" N& #dX0= X7jUX#'87-'90 B" '87-'90C.' + #dX0= X7jUX#'90-'93 ' '90-'93B&- .  #dX0= X7jUX#no. of P    no. ofD/ . #dX0= X7jUX#% of all   % of allB- . #dX0= X7jUX#no. of   no. ofD/. #dX0= X7jUX#% of all  % of allB- . #dX0= X7jUX#no. of   no. ofD/.! #dX0= X7jUX#% of all  % of allH,3< #dX0= X7jUX#Network Type P   Network TypeC.< <H #dX0= X7jUX#netw'ks < netw'ksC. <#dX0= X7jUX#netw'ks  netw'ksC.=<I#dX0= X7jUX#netw'ks =netw'ksC.<#dX0= X7jUX#netw'ks netw'ksC.=<I#dX0= X7jUX#netw'ks =netw'ksC.< #dX0= X7jUX#netw'ks netw'ksD(/!<%#dX0= X7jUX#% change P  !% changeD/%<*#dX0= X7jUX#% change %% changeK/6) x#dX0= P7jUP#Basic/No-Charge P  )xBasic/No-Charge> )~  x#dX0= P7jUP#59 ~ x59B-O x#dX0= P7jUP#78.67% O x78.67%> )~x#dX0= P7jUP#61 ~x61B-Ox#dX0= P7jUP#79.22% Ox79.22%> )~x#dX0= P7jUP#72 ~x72B-P x#dX0= P7jUP#72.73% Px72.73%A ,"%x#dX0= P7jUP#3.39% "x3.39%B-4'*x#dX0= P7jUP#18.03% 4'x18.03%C.f<#dX0= P7jUP#Premium <Premium= ( f <#dX0= P7jUP#9  <9B-O f<#dX0= P7jUP#12.00% O <12.00%= (f<#dX0= P7jUP#5 <5A ,f<#dX0= P7jUP#6.49% <6.49%= (f<#dX0= P7jUP#9 <9A ,f <#dX0= P7jUP#9.09% <9.09%C."f)&<#dX0= P7jUP#-44.44% "<-44.44%B-4'f*<#dX0= P7jUP#80.00% 4'<80.00%H3) #dX0= P7jUP#Pay Per View  Pay Per View= ( ) #dX0= P7jUP#6  6A , )#dX0= P7jUP#8.00%  8.00%= ()#dX0= P7jUP#7 7A ,)#dX0= P7jUP#9.09% 9.09%> )~)#dX0= P7jUP#13 ~13B-P) #dX0= P7jUP#13.13% P13.13%B-g")%#dX0= P7jUP#16.67% g"16.67%B-4')*#dX0= P7jUP#85.71% 4'85.71%G22 #dX0= P7jUP#Combination  Combination= (  #dX0= P7jUP#1  1A , #dX0= P7jUP#1.33%  1.33%= (#dX0= P7jUP#4 4A ,#dX0= P7jUP#5.19% 5.19%= (#dX0= P7jUP#5 5A , #dX0= P7jUP#5.05% 5.05%C.!&#dX0= P7jUP#300.00% !300.00%B-4'*#dX0= P7jUP#25.00% 4'25.00%A ,Sk)#dX0= X7jUX#Total )Total> )3 S[ )#dX0= X7jUX#75 3 )75> )3S[)#dX0= X7jUX#77 3)77> )4S\)#dX0= X7jUX#99 4)99A ,z"S^%)#dX0= X7jUX#2.67% z")2.67%B-&S<*)#dX0= X7jUX#28.57% &)28.57%0**N= '3,,4?*VV+  5   V'  ' W-  !_ !_ !_w5B( UUUUUUUUUUUUUUUUUUUUUUUU- !- !65B( UUUUUUUUUUUUUUUUUUUUUUUU- ! ! !/- ! !6  !V.5B( @@UU@@UUUUUU- !-'- WTimes New Roman&--"System-'-- VTimes New Roman-CG Times (W1)-  2 1987 2 @1990 2 19932 1987-902 #1990-93--'--  V  2 % of  2 P% of  2 % of 2 % chg 2 /% chg --'-- V--'-- .V! !2 =Source of Revenue2 $ mil. 2 total2 $ mil. 2 Ntotal2 $ mil. 2 total2 growth 2 *growth --'-- VCG Times (W1)t- .2 5 Basic Subscription Revenue2 56,0142 551.12% 2 510,1692 5D56.95% 2 513,5522 559.07% 2 569.09% 2 5-33.27% 2 Fa Pay revenue2 F4,1122 F34.95% 2 F 5,1052 FD28.59% 2 F4,6332 F20.19% 2 F24.15% 2 F/-9.25% (2 WExpanded Basic Revenue 2 W3772 W3.20% 2 W)4952 WJ2.77% 2 W1,6412 W7.15% 2 W31.30% 2 W'231.52% $2 h1Advertising Revenue  2 h2642 h2.24% 2 h)6282 hJ3.52% 2 h1,0642 h4.64% 2 h137.88% 2 h-69.43% %2 y5Installation Revenue 2 y2412 y2.05% 2 y)2892 yJ1.62% 2 y2892 y1.26% 2 y19.92% 2 y30.00% %2 +Pay-per-view Revenue  2 862 0.73% 2 )2532 J1.42% 2 5122 2.23% 2 194.19% 2 '102.37% '2 Home Shopping Revenue   2 572 0.48% 2 /722 J0.40% 2 1282 0.56% 2 26.32% 2 -77.78% '2 #Miscellaneous Revenue  2 6132 5.21% 2 )8452 J4.73% 2 1,1232 4.89% 2 37.85% 2 -32.90% CG Times (W1)f-2 Q Total Revenue 2 11,7642 17,8562 |22,9422 51.79% 2 '28.48% -'$$@$+*#j#RX0; X7jUqX#1987 P  *1987@ +##RX0; X7jUqX#1990 1990@ +#; #RX0; X7jUqX#1993 1993C."#&#RX0; X7jUqX#1987-90 "1987-90C.&#*#RX0; X7jUqX#1990-93 &1990-93@$+K'  #RX0; X7jUqX#% of P  K % of@ +'  #RX0; X7jUqX#% of  % of@ +' \! #RX0; X7jUqX#% of  % ofA ,"' % #RX0; X7jUqX#% chg " % chgA ,o'' ?* #RX0; X7jUqX#% chg o' % chgM18M* #RX0; X7jUqX#Source of Revenue P  M Source of RevenueB- *  #RX0; X7jUqX#$ mil.  $ mil.A ,'*  #RX0; X7jUqX#total ' totalB-* W #RX0; X7jUqX#$ mil.  $ mil.A ,* ` #RX0; X7jUqX#total  totalB-_*  #RX0; X7jUqX#$ mil. _ $ mil.A ,* ! #RX0; X7jUqX#total  totalB-"* % #RX0; X7jUqX#growth " growthB-'* u* #RX0; X7jUqX#growth ' growthV:A m #RX0; P7jUqP#Basic Subscription Revenue P  m Basic Subscription RevenueA , m #RX0; P7jUqP#6,014  m 6,014B-s m #RX0; P7jUqP#51.12% sm 51.12%B- Dm #RX0; P7jUqP#10,169 m 10,169B- ;m #RX0; P7jUqP#56.95% m 56.95%B-M m #RX0; P7jUqP#13,552 Mm 13,552B-C !m #RX0; P7jUqP#59.07% Cm 59.07%B-" '&m #RX0; P7jUqP#69.09% "m 69.09%B-K' *m #RX0; P7jUqP#33.27% K'm 33.27%G2j  : #RX0; P7jUqP#Pay revenue  : Pay revenueA , j : #RX0; P7jUqP#4,112  : 4,112B-sj : #RX0; P7jUqP#34.95% s: 34.95%A ,Qj !: #RX0; P7jUqP#5,105 Q: 5,105B-j ;: #RX0; P7jUqP#28.59% : 28.59%A ,j : #RX0; P7jUqP#4,633 : 4,633B-Cj !: #RX0; P7jUqP#20.19% C: 20.19%B-"j '&: #RX0; P7jUqP#24.15% ": 24.15%B-o'j *: #RX0; P7jUqP#-9.25% o': -9.25%R= 7k #RX0; P7jUqP#Expanded Basic Revenue   Expanded Basic Revenue? * 7; #RX0; P7jUqP#377   377A ,7 #RX0; P7jUqP#3.20%  3.20%? *7 #RX0; P7jUqP#495  495A ,G7 #RX0; P7jUqP#2.77% G 2.77%A ,7 #RX0; P7jUqP#1,641  1,641A ,7! #RX0; P7jUqP#7.15%  7.15%B-"7'& #RX0; P7jUqP#31.30% " 31.30%C.&7* #RX0; P7jUqP#231.52% & 231.52%O:t$#RX0; P7jUqP#Advertising Revenue tAdvertising Revenue? * ;#RX0; P7jUqP#264  264A ,#RX0; P7jUqP#2.24% 2.24%? *#RX0; P7jUqP#628 628A ,G#RX0; P7jUqP#3.52% G3.52%A ,#RX0; P7jUqP#1,064 1,064A ,!#RX0; P7jUqP#4.64% 4.64%C.["K&#RX0; P7jUqP#137.88% ["137.88%B-K'*#RX0; P7jUqP#69.43% K'69.43%P;#RX0; P7jUqP#Installation Revenue Installation Revenue? * ;#RX0; P7jUqP#241  241A ,#RX0; P7jUqP#2.05% 2.05%? *#RX0; P7jUqP#289 289A ,G#RX0; P7jUqP#1.62% G1.62%? *\ #RX0; P7jUqP#289 \289A ,!#RX0; P7jUqP#1.26% 1.26%B-"'&#RX0; P7jUqP#19.92% "19.92%A ,'*#RX0; P7jUqP#0.00% '0.00%P;Hn#RX0; P7jUqP#Pay-per-view Revenue nPay-per-view Revenue> ) n#RX0; P7jUqP#86  n86A ,n#RX0; P7jUqP#0.73% n0.73%? *n#RX0; P7jUqP#253 n253A ,Gn#RX0; P7jUqP#1.42% Gn1.42%? *\ n#RX0; P7jUqP#512 \n512A ,!n#RX0; P7jUqP#2.23% n2.23%C.["K&n#RX0; P7jUqP#194.19% ["n194.19%C.&*n#RX0; P7jUqP#102.37% &n102.37%Q<k ;#RX0; P7jUqP#Home Shopping Revenue ;Home Shopping Revenue> ) k;#RX0; P7jUqP#57  ;57A ,k;#RX0; P7jUqP#0.48% ;0.48%> )`k;#RX0; P7jUqP#72 `;72A ,Gk;#RX0; P7jUqP#0.40% G;0.40%? *\k ;#RX0; P7jUqP#128 \;128A ,k!;#RX0; P7jUqP#0.56% ;0.56%B-"k'&;#RX0; P7jUqP#26.32% ";26.32%B-K'k*;#RX0; P7jUqP#77.78% K';77.78%Q<x8H#RX0; P7jUqP#Miscellaneous Revenue xMiscellaneous Revenue? * 8;#RX0; P7jUqP#613  613A ,8#RX0; P7jUqP#5.21% 5.21%? *8#RX0; P7jUqP#845 845A ,G8#RX0; P7jUqP#4.73% G4.73%A ,8#RX0; P7jUqP#1,123 1,123A ,8!#RX0; P7jUqP#4.89% 4.89%B-"8'&#RX0; P7jUqP#37.85% "37.85%B-K'8*#RX0; P7jUqP#32.90% K'32.90%I-4b 2#RX0; x7jUq#Total Revenue P   2Total RevenueB- b^2#RX0; x7jUq#11,764  211,764B-fb2#RX0; x7jUq#17,856 f217,856B-b.2#RX0; x7jUq#22,942 222,942B-["b%2#RX0; x7jUq#51.79% ["251.79%B-&b?*2#RX0; x7jUq#28.48% &228.48%0*N= '3,,4?*[[+ h"   ['  ' \-  !" !I-'- \"MS Sans Serif{R--"System-'-- ["MS Sans Serif`-CG Times (W1)O-  2 1987 2 1990 2  19932 \87-902 90-932 Expenditure Type2  (millions) 2 (mil.) 2 (mil.) 2 F% change 2 % change CG Times (W1)n-"2 )*Basic Programming  2 )$5722 )$1,4102 )$2,1872 )R146.50% 2 )55.11% !2 :Other Programming  2 :$1,7172 :$1,7852 :$1,8132 :^3.96% 2 :1.57% -!2 K**All Programming 2 K$2,2892 K$3,1952 K$4,0002 KR39.58% 2 K25.20% -'@$+E[#X0O X7jUBX#1987 P  [1987@ + E [#X0O X7jUBX#1990  [1990@ +E[#X0O X7jUBX#1993 [1993A , Er$[#X0O X7jUBX#87-90  [87-90A ,&Ev*[#X0O X7jUBX#90-93 &[90-93L7#X0O X7jUBX#Expenditure Type Expenditure TypeF1 #X0O X7jUBX#(millions)  (millions)B-[#X0O X7jUBX#(mil.) (mil.)B-_#X0O X7jUBX#(mil.) (mil.)D/$#X0O X7jUBX#% change % changeD/$*#X0O X7jUBX#% change $% changeN29#X0O P7jUBP#*Basic Programming P  *Basic Programming@ +88#X0O P7jUBP#$572 8$572B-c#X0O P7jUBP#$1,410 c$1,410B-g#X0O P7jUBP#$2,187 g$2,187C.%#X0O P7jUBP#146.50% 146.50%B-U&*#X0O P7jUBP#55.11% U&55.11%M8)#X0O P7jUBP#Other Programming )Other ProgrammingB-`#X0O P7jUBP#$1,717 `$1,717B-c#X0O P7jUBP#$1,785 c$1,785B-g#X0O P7jUBP#$1,813 g$1,813A , $#X0O P7jUBP#3.96%  3.96%A ,&*#X0O P7jUBP#1.57% &1.57%M8j@#X0O X7jUBX#**All Programming **All ProgrammingB- j#X0O X7jUBX#$2,289  $2,289B-j##X0O X7jUBX#$3,195 $3,195B-j&#X0O X7jUBX#$4,000 $4,000B-jB$#X0O X7jUBX#39.58% 39.58%B-%jE*#X0O X7jUBX#25.20% %25.20%0*ZN= '3,,4? *}}+  C 3   }'  ' ~-  !H !HI !H !EJ !EJI !EJ ! !A !H-'- ~Times New Roman5--"System-'-- }Times New RomanL^-CG Times (W1)/1-  2 1987 2 1990 2 41993 2 cash 2 cash 2 "cash 2 Xcash 2 cash 2 cash 2 cash 2 5cash 2 lcash--'-- 3& 02 $Cable System Operators with    Times New Roman- 2 $flow 2 $flow 2 $#flow 2 $Yflow 2 $flow 2 $flow 2 $flow 2 $6flow 2 $mflow --'-- }---'-- A4 32 2 Publicly Available Figures*2 2(mil.) 2 2per sub.2 2margin 2 2V(mil.) 2 2per sub.2 2margin 2 2(mil.) 2 2,per sub.2 2emargin --'-- }CG Times (W1)Z- 32 KTele-Communications, Inc. (1)  2 K$7732 K$117.052 K!43.35% 2 KZ$1,2592 K$147.682 K42.79% 2 K$1,8582 K1$178.552 Kk44.74% *2 \Time Warner Cable (2)**   2 \$5272 \$103.232 \!38.16% 2 \c$7692 \$118.752 \43.92% 2 \$1,0352 \1$143.452 \k46.88% !2 mComcast Cable (4)  2 m$1172 m$107.832 m!40.77% 2 mc$2642 m$161.272 m44.59% 2 m$5522 m1$208.462 mk50.41% *2 ~Cablevision Systems (5)  2 ~$922 ~$117.952 ~!30.67% 2 ~c$2412 ~$154.982 ~42.81% 2 ~$2812 ~1$130.822 ~k44.39% .2 Cablevision Industries (8) 2 - 2 - 2 7-  2 c$1352 $130.562 45.15% 2 $1922 1$153.112 k48.36% (2 Times Mirror Cable (9)   2 $782 $84.872 !32.50% 2 c$1412 $130.682 38.01% 2 $2022 1$158.562 k42.98% '2 Jones Intercable (10) 2 $1032 $105.212 !46.40% 2 c$1832 $128.782 45.41% 2 $1872 1$148.062 k41.56% 12 Adelphia Communications (11)   2 $552 $94.662 !55.56% 2 c$1312 $126.822 56.96% 2 $1732 1$139.072 k56.72% 2  Viacom (12)  2 $1082 $102.082 !38.16% 2 c$1432 $135.162 43.33% 2 $1822 1$166.362 k43.75% *2 Falcon Cable TV (14)*** 2 $102 $111.112 !50.00% 2 i$202 $115.612 51.28% 2 $272 1$146.742 k50.00% 02 Century Communications (15)  2 $602 $85.112 !54.55% 2 c$1232 $142.202 56.16% 2 $1772 1$187.302 k49.03% '2 E.W. Scripps (19)****  2 -  2 -  2 :-  2 i$342 $129.77 2 -  2 $1052 1$149.572 k40.38% +2 Post-Newsweek Cable (25)    2 $402 $103.902 !40.40% 2 i$632 $144.502 43.45% 2 $822 1$170.122 k44.09% 2 (TCA Cable (26)  2 ($302 ($88.762 (!50.00% 2 (i$612 ($130.062 (53.51% 2 ($782 (1$164.902 (k51.32% 02 9Multimedia Cablevision (30)   2 9$422 9$137.702 9!46.15% 2 9i$602 9$171.432 950.00% 2 9$852 91$203.842 9k51.52% Times New Roman-!2 P Total for Group CG Times (W1)1- 2 P$2,0352 P$107.482 P40.90% 2 PS$3,6272 P$137.532 P44.19% 2 P$5,2162 P)$164.292 Pe46.14% *2 gTotal for Industry*****2 g$4,8122 gS$7,8902 g$10,549- '@$+L#X05 X7jU5X#1987 P  1987@ +L#X05 X7jU5X#1990 1990@ + $L&#X05 X7jU5X#1993  $1993@ + 6 #X05 X7jU5X#cash  cash@ +6 #X05 X7jU5X#cash cash@ +6#X05 X7jU5X#cash cash@ +6#X05 X7jU5X#cash cash@ +6#X05 X7jU5X#cash cash@ +6#X05 X7jU5X#cash cash@ + 6"#X05 X7jU5X#cash  cash@ +$6%&#X05 X7jU5X#cash $cash@ +'6)#X05 X7jU5X#cash 'cashW;B1P #X05 X7jU5X#Cable System Operators with P  !1 Cable System Operators with@$+ P #X05 XT6U5X#flow P   flow@ +P #X05 XT6U5X#flow  flow@ +P #X05 XT6U5X#flow  flow@ + P #X05 XT6U5X#flow   flow@ +P #X05 XT6U5X#flow  flow@ +%P- #X05 XT6U5X#flow % flow@ + P" #X05 XT6U5X#flow  flow@ +-$P5& #X05 XT6U5X#flow -$ flow@ +'P) #X05 XT6U5X#flow ' flowY=D1k'#X05 X7jU5X# Publicly Available Figures* P  #1' Publicly Available Figures*B-` kl'#X05 X7jU5X#(mil.) ` '(mil.)D/rk'#X05 X7jU5X#per sub. r'per sub.B-k"'#X05 X7jU5X#margin 'marginB-k'#X05 X7jU5X#(mil.) '(mil.)D/k'#X05 X7jU5X#per sub. 'per sub.B-k'#X05 X7jU5X#margin 'marginB-h kt#'#X05 X7jU5X#(mil.) h '(mil.)D/#k''#X05 X7jU5X#per sub. #'per sub.B-.'k:*'#X05 X7jU5X#margin .''marginY=D1#X05 P7jU5P#Tele-Communications, Inc. (1) P  #1Tele-Communications, Inc. (1)@ +% -#X05 P7jU5P#$773 % $773C.R#X05 P7jU5P#$117.05 $117.05B-y#X05 P7jU5P#43.35% y43.35%B-)#X05 P7jU5P#$1,259 $1,259C.P#X05 P7jU5P#$147.68 P$147.68B- #X05 P7jU5P#42.79% 42.79%B- ##X05 P7jU5P#$1,858  $1,858C.#j'#X05 P7jU5P#$178.55 #$178.55B-'*#X05 P7jU5P#44.74% '44.74%S>1 x#X05 P7jU5P#Time Warner Cable (2)** 1xTime Warner Cable (2)**@ +% -x#X05 P7jU5P#$527 % x$527C.Rx#X05 P7jU5P#$103.23 x$103.23B-yx#X05 P7jU5P#38.16% yx38.16%@ +x#X05 P7jU5P#$769 x$769C.Px#X05 P7jU5P#$118.75 Px$118.75B- x#X05 P7jU5P#43.92% x43.92%B- #x#X05 P7jU5P#$1,035  x$1,035C.#j'x#X05 P7jU5P#$143.45 #x$143.45B-'*x#X05 P7jU5P#46.88% 'x46.88%M81b#X05 P7jU5P#Comcast Cable (4) 1bComcast Cable (4)@ +% -b#X05 P7jU5P#$117 % b$117C.Rb#X05 P7jU5P#$107.83 b$107.83B-yb#X05 P7jU5P#40.77% yb40.77%@ +b#X05 P7jU5P#$264 b$264C.Pb#X05 P7jU5P#$161.27 Pb$161.27B- b#X05 P7jU5P#44.59% b44.59%@ +=!E#b#X05 P7jU5P#$552 =!b$552C.#j'b#X05 P7jU5P#$208.46 #b$208.46B-'*b#X05 P7jU5P#50.41% 'b50.41%S>1 L#X05 P7jU5P#Cablevision Systems (5) 1LCablevision Systems (5)? *  L#X05 P7jU5P#$92  L$92C.RL#X05 P7jU5P#$117.95 L$117.95B-yL#X05 P7jU5P#30.67% yL30.67%@ +L#X05 P7jU5P#$241 L$241C.PL#X05 P7jU5P#$154.98 PL$154.98B- L#X05 P7jU5P#42.81% L42.81%@ +=!E#L#X05 P7jU5P#$281 =!L$281C.#j'L#X05 P7jU5P#$130.82 #L$130.82B-'*L#X05 P7jU5P#44.39% 'L44.39%V"A1ze 6#X05 P7jU5P#Cablevision Industries (8) 16Cablevision Industries (8)? *K z6#X05 P7jU5P#- K 6- A ,}z6#X05 P7jU5P#- }6- A ,zk6#X05 P7jU5P#- 6- @ +z6#X05 P7jU5P#$135 6$135C.Pz6#X05 P7jU5P#$130.56 P6$130.56B-z 6#X05 P7jU5P#45.15% 645.15%@ +=!zE#6#X05 P7jU5P#$192 =!6$192C.#zj'6#X05 P7jU5P#$153.11 #6$153.11B-'z*6#X05 P7jU5P#48.36% '648.36%R=1d ] #X05 P7jU5P#Times Mirror Cable (9) 1 Times Mirror Cable (9)? * d  #X05 P7jU5P#$78  $78B-&d 2 #X05 P7jU5P#$84.87 & $84.87B-yd  #X05 P7jU5P#32.50% y 32.50%@ +d  #X05 P7jU5P#$141  $141C.Pd  #X05 P7jU5P#$130.68 P $130.68B-d  #X05 P7jU5P#38.01%  38.01%@ +=!d E# #X05 P7jU5P#$202 =! $202C.#d j' #X05 P7jU5P#$158.56 # $158.56B-'d * #X05 P7jU5P#42.98% ' 42.98%Q<1M #X05 P7jU5P#Jones Intercable (10) 1 Jones Intercable (10)@ +% M - #X05 P7jU5P#$103 % $103C.M R #X05 P7jU5P#$105.21  $105.21B-yM  #X05 P7jU5P#46.40% y 46.40%@ +M  #X05 P7jU5P#$183  $183C.PM  #X05 P7jU5P#$128.78 P $128.78B-M  #X05 P7jU5P#45.41%  45.41%@ +=!M E# #X05 P7jU5P#$187 =! $187C.#M j' #X05 P7jU5P#$148.06 # $148.06B-'M * #X05 P7jU5P#41.56% ' 41.56%X$C17 i #X05 P7jU5P#Adelphia Communications (11) "1 Adelphia Communications (11)? * 7  #X05 P7jU5P#$55  $55B-&7 2 #X05 P7jU5P#$94.66 & $94.66B-y7  #X05 P7jU5P#55.56% y 55.56%@ +7  #X05 P7jU5P#$131  $131C.P7  #X05 P7jU5P#$126.82 P $126.82B-7  #X05 P7jU5P#56.96%  56.96%@ +=!7 E# #X05 P7jU5P#$173 =! $173C.#7 j' #X05 P7jU5P#$139.07 # $139.07B-'7 * #X05 P7jU5P#56.72% ' 56.72%G21!  #X05 P7jU5P#Viacom (12)  1 Viacom (12)@ +% ! - #X05 P7jU5P#$108 % $108C.! R #X05 P7jU5P#$102.08  $102.08B-y!  #X05 P7jU5P#38.16% y 38.16%@ +!  #X05 P7jU5P#$143  $143C.P!  #X05 P7jU5P#$135.16 P $135.16B-!  #X05 P7jU5P#43.33%  43.33%@ +=!! E# #X05 P7jU5P#$182 =! $182C.#! j' #X05 P7jU5P#$166.36 # $166.36B-'! * #X05 P7jU5P#43.75% ' 43.75%S>1 #X05 P7jU5P#Falcon Cable TV (14)*** 1 Falcon Cable TV (14)***? *  #X05 P7jU5P#$10  $10C. R #X05 P7jU5P#$111.11  $111.11B-y  #X05 P7jU5P#50.00% y 50.00%? *  #X05 P7jU5P#$20  $20C.P  #X05 P7jU5P#$115.61 P $115.61B-  #X05 P7jU5P#51.28%  51.28%? *! %# #X05 P7jU5P#$27 ! $27C.# j' #X05 P7jU5P#$146.74 # $146.74B-' * #X05 P7jU5P#50.00% ' 50.00%W#B1 #X05 P7jU5P#Century Communications (15) !1Century Communications (15)? *  #X05 P7jU5P#$60  $60B-&2#X05 P7jU5P#$85.11 &$85.11B-y#X05 P7jU5P#54.55% y54.55%@ +#X05 P7jU5P#$123 $123C.P#X05 P7jU5P#$142.20 P$142.20B- #X05 P7jU5P#56.16% 56.16%@ +=!E##X05 P7jU5P#$177 =!$177C.#j'#X05 P7jU5P#$187.30 #$187.30B-'*#X05 P7jU5P#49.03% '49.03%Q<1 #X05 P7jU5P#E.W. Scripps (19)**** 1E.W. Scripps (19)****@ + "#X05 P7jU5P#-  - @ +#X05 P7jU5P#- - @ +#X05 P7jU5P#- - ? *#X05 P7jU5P#$34 $34C.P#X05 P7jU5P#$129.77 P$129.77@ + #X05 P7jU5P#- - @ +=!E##X05 P7jU5P#$105 =!$105C.#j'#X05 P7jU5P#$149.57 #$149.57B-'*#X05 P7jU5P#40.38% '40.38%T ?1a #X05 P7jU5P#Post-Newsweek Cable (25) 1Post-Newsweek Cable (25)? *  #X05 P7jU5P#$40  $40C.R#X05 P7jU5P#$103.90 $103.90B-y#X05 P7jU5P#40.40% y40.40%? *#X05 P7jU5P#$63 $63C.P#X05 P7jU5P#$144.50 P$144.50B- #X05 P7jU5P#43.45% 43.45%? *!%##X05 P7jU5P#$82 !$82C.#j'#X05 P7jU5P#$170.12 #$170.12B-'*#X05 P7jU5P#44.09% '44.09%J51Mn#X05 P7jU5P#TCA Cable (26) 1nTCA Cable (26)? *  n#X05 P7jU5P#$30  n$30B-&2n#X05 P7jU5P#$88.76 &n$88.76B-yn#X05 P7jU5P#50.00% yn50.00%? *n#X05 P7jU5P#$61 n$61C.Pn#X05 P7jU5P#$130.06 Pn$130.06B- n#X05 P7jU5P#53.51% n53.51%? *!%#n#X05 P7jU5P#$78 !n$78C.#j'n#X05 P7jU5P#$164.90 #n$164.90B-'*n#X05 P7jU5P#51.32% 'n51.32%W#B1 X#X05 P7jU5P#Multimedia Cablevision (30) !1XMultimedia Cablevision (30)? *  X#X05 P7jU5P#$42  X$42C.RX#X05 P7jU5P#$137.70 X$137.70B-yX#X05 P7jU5P#46.15% yX46.15%? *X#X05 P7jU5P#$60 X$60C.PX#X05 P7jU5P#$171.43 PX$171.43B- X#X05 P7jU5P#50.00% X50.00%? *!%#X#X05 P7jU5P#$85 !X$85C.#j'X#X05 P7jU5P#$203.84 #X$203.84B-'*X#X05 P7jU5P#51.52% 'X51.52%M181$#X05 xT6U5# Total for Group P  1 Total for GroupB&- $+#X05 x7jU5#$2,035 P   $2,035C.A$#X05 x7jU5#$107.48 A$107.48B-$"#X05 x7jU5#40.90% 40.90%B-$#X05 x7jU5#$3,627 $3,627C.$[#X05 x7jU5#$137.53 $137.53B-$#X05 x7jU5#44.19% 44.19%B-7 $C##X05 x7jU5#$5,216 7 $5,216C.Y#$&#X05 x7jU5#$164.29 Y#$164.29B-.'$:*#X05 x7jU5#46.14% .'46.14%S>1 g#X05 x7jU5#Total for Industry***** 1gTotal for Industry*****B- +g#X05 x7jU5#$4,812  g$4,812B-g#X05 x7jU5#$7,890 g$7,890C.R#g#X05 x7jU5#$10,549 g$10,549?$xN= '3,,4?*((+ v 4   ('  ' )-  !H !H# !H !VJ !VJ# !VJ !. !.# !. !z !(A !(H !(-'- )Times New Roman--"System-'-- (Times New Roman-CG Times (W1)cV-  2 1987 2 g1990 2 19932 basic2 cable2 Cbasic2 cable2 basic2 cable--'-- 3(& 02 $Cable System Operators with    Times New Roman-2 $subs.*2 $revenue2 $Esubs.2 $vrevenue2 $subs.2 $revenue--'-- (---'-- A(4 42 2 Publicly Available Figures**2 2(000)2 2(mil.) 2 2A(000)2 2(mil.) 2 2(000)2 2(mil.) --'-- (CG Times (W1)OX- 32 KTele-Communications, Inc. (1) 2 K6,6042 K$1,7832 KG8,5252 K~$2,9422 K10,4062 K$4,153+2 \Time Warner Cable (2)***  2 \5,1052 \$1,3812 \G6,4762 \~$1,7512 \7,2152 \$2,208!2 mComcast Cable (4) 2 m1,085 2 m$2872 mG1,637 2 m$5922 m2,6482 m$1,095*2 ~Cablevision Systems (5)  2 ~780 2 ~$3002 ~G1,555 2 ~$5632 ~2,148 2 ~ $633.2 Cablevision Industries (8) 2 - 2 - 2 G1,034 2 $2992 1,254 2 $397(2 Times Mirror Cable (9)   2 919 2 $2402 G1,079 2 $3712 1,274 2 $470'2 Jones Intercable (10) 2 979 2 $2222 G1,421 2 $4032 1,263 2 $45012 Adelphia Communications (11)   2 581 2 $992 G1,033 2 $2302 1,244 2 $3052  Viacom (12) 2 1,058 2 $2832 G1,058 2 $3302 1,094 2 $416+2 Falcon Cable TV (14)**** 2 90 2 $20 2 P173 2 $39 2 184 2 $5402 Century Communications (15)  2 705 2 $110 2 P865 2 $219 2 945 2 $361!2 E.W. Scripps (19)  2 -  2 -  2 P262 2 $90 2 702 2  $260+2 Post-Newsweek Cable (25)    2 385 2  $99 2 P436 2 $145 2 482 2  $1862 (TCA Cable (26)  2 (338 2 ( $60 2 (P469 2 ($114 2 (473 2 ( $15202 9Multimedia Cablevision (30)   2 9305 2 9 $91 2 9P350 2 9$120 2 9417 2 9 $165Times New Roman-!2 P Total for Group CG Times (W1)W- 2 P18,9342 P$4,9752 P:26,3732 Pw$8,2082 P31,7492 P$11,305-+2 ~Industry Totals (average2 ~42,6002 ~$11,7652 ~:51,7002 ~o$17,8552 ~57,4002 ~$22,8632  subscribers)- 12 Percentage of Industry Total-+2  Accounted for by Group  2 44.45% 2 42.29% 2 651.01% 2 w45.97% 2 55.31% 2 49.45% - '@$+ b!##(X07 X7jUEX#1987 P   #1987@ +b##(X07 X7jUEX#1990 #1990@ + b3"##(X07 X7jUEX#1993  #1993A , EJ#(X07 X7jUEX#basic  basicA ,E~#(X07 X7jUEX#cable cableA ,5E#(X07 X7jUEX#basic 5basicA ,iE#(X07 X7jUEX#cable icableA ,E\ #(X07 X7jUEX#basic basicA ,!E$#(X07 X7jUEX#cable !cableW;B2YT#(X07 X7jUEX#Cable System Operators with P  !2Cable System Operators withB&-X Y|#(X07 XT6UEX#subs.* P  X subs.*C.Y#(X07 XT6UEX#revenue revenueA ,WY#(X07 XT6UEX#subs. Wsubs.C.Y8#(X07 XT6UEX#revenue revenueA ,Y~ #(X07 XT6UEX#subs. subs.C.!Y$#(X07 XT6UEX#revenue !revenueZ>E2n/#(X07 X7jUEX# Publicly Available Figures** P  $2/ Publicly Available Figures**A , n(/#(X07 X7jUEX#(000)  /(000)B-n/#(X07 X7jUEX#(mil.) /(mil.)A ,n/#(X07 X7jUEX#(000) /(000)B-in/#(X07 X7jUEX#(mil.) i/(mil.)A ,n; /#(X07 X7jUEX#(000) /(000)B-!n%/#(X07 X7jUEX#(mil.) !/(mil.)Y=D2`#(X07 P7jUEP#Tele-Communications, Inc. (1) P  #2Tele-Communications, Inc. (1)A , #(X07 P7jUEP#6,604  6,604B-#(X07 P7jUEP#$1,783 $1,783A ,x#(X07 P7jUEP#8,525 x8,525B-9#(X07 P7jUEP#$2,942 $2,942B- #(X07 P7jUEP#10,406 10,406B-!$#(X07 P7jUEP#$4,153 !$4,153T ?2 m#(X07 P7jUEP#Time Warner Cable (2)*** 2mTime Warner Cable (2)***A , m#(X07 P7jUEP#5,105  m5,105B-m#(X07 P7jUEP#$1,381 m$1,381A ,xm#(X07 P7jUEP#6,476 xm6,476B-9m#(X07 P7jUEP#$1,751 m$1,751A , m#(X07 P7jUEP#7,215 m7,215B-!$m#(X07 P7jUEP#$2,208 !m$2,208M82 O#(X07 P7jUEP#Comcast Cable (4) 2OComcast Cable (4)A , O#(X07 P7jUEP#1,085  O1,085@ +#;O#(X07 P7jUEP#$287 #O$287A ,xO#(X07 P7jUEP#1,637 xO1,637@ +O#(X07 P7jUEP#$592 O$592A , O#(X07 P7jUEP#2,648 O2,648B-!$O#(X07 P7jUEP#$1,095 !O$1,095S>2p< 1#(X07 P7jUEP#Cablevision Systems (5) 21Cablevision Systems (5)? * p1#(X07 P7jUEP#780  1780@ +#p;1#(X07 P7jUEP#$300 #1$300A ,xp1#(X07 P7jUEP#1,555 x11,555@ +p1#(X07 P7jUEP#$563 1$563A ,p 1#(X07 P7jUEP#2,148 12,148@ +5"pM$1#(X07 P7jUEP#$633 5"1$633V"A2S #(X07 P7jUEP#Cablevision Industries (8) 2Cablevision Industries (8)? * S#(X07 P7jUEP#-  - A ,S#(X07 P7jUEP#- - A ,xS#(X07 P7jUEP#1,034 x1,034@ +S#(X07 P7jUEP#$299 $299A ,S #(X07 P7jUEP#1,254 1,254@ +5"SM$#(X07 P7jUEP#$397 5"$397R=25 #(X07 P7jUEP#Times Mirror Cable (9) 2Times Mirror Cable (9)? * 5#(X07 P7jUEP#919  919@ +#5;#(X07 P7jUEP#$240 #$240A ,x5#(X07 P7jUEP#1,079 x1,079@ +5#(X07 P7jUEP#$371 $371A ,5 #(X07 P7jUEP#1,274 1,274@ +5"5M$#(X07 P7jUEP#$470 5"$470Q<20 #(X07 P7jUEP#Jones Intercable (10) 2Jones Intercable (10)? * #(X07 P7jUEP#979  979@ +#;#(X07 P7jUEP#$222 #$222A ,x#(X07 P7jUEP#1,421 x1,421@ +#(X07 P7jUEP#$403 $403A , #(X07 P7jUEP#1,263 1,263@ +5"M$#(X07 P7jUEP#$450 5"$450X$C2#(X07 P7jUEP#Adelphia Communications (11) "2Adelphia Communications (11)? * #(X07 P7jUEP#581  581? *#(X07 P7jUEP#$99 $99A ,x#(X07 P7jUEP#1,033 x1,033@ +#(X07 P7jUEP#$230 $230A , #(X07 P7jUEP#1,244 1,244@ +5"M$#(X07 P7jUEP#$305 5"$305G22#(X07 P7jUEP#Viacom (12)  2Viacom (12)A , #(X07 P7jUEP#1,058  1,058@ +#;#(X07 P7jUEP#$283 #$283A ,x#(X07 P7jUEP#1,058 x1,058@ +#(X07 P7jUEP#$330 $330A , #(X07 P7jUEP#1,094 1,094@ +5"M$#(X07 P7jUEP#$416 5"$416T ?2 #(X07 P7jUEP#Falcon Cable TV (14)**** 2Falcon Cable TV (14)****> ) #(X07 P7jUEP#90  90? *#(X07 P7jUEP#$20 $20? *#(X07 P7jUEP#173 173? *#(X07 P7jUEP#$39 $39? *+ #(X07 P7jUEP#184 184? *",$#(X07 P7jUEP#$54 "$54W#B2 Ta#(X07 P7jUEP#Century Communications (15) !2aCentury Communications (15)? * a#(X07 P7jUEP#705  a705@ +# ;a#(X07 P7jUEP#$110 #a$110? * a#(X07 P7jUEP#865 a865@ + a#(X07 P7jUEP#$219 a$219? * + a#(X07 P7jUEP#945 a945@ +5" M$a#(X07 P7jUEP#$361 5"a$361M82  C #(X07 P7jUEP#E.W. Scripps (19) 2C E.W. Scripps (19)? *  C #(X07 P7jUEP#-  C - @ + 7C #(X07 P7jUEP#- C - ? * C #(X07 P7jUEP#262 C 262? * C #(X07 P7jUEP#$90 C $90? * + C #(X07 P7jUEP#702 C 702@ +5" M$C #(X07 P7jUEP#$260 5"C $260T ?2d % #(X07 P7jUEP#Post-Newsweek Cable (25) 2% Post-Newsweek Cable (25)? * d % #(X07 P7jUEP#385  % 385? *d % #(X07 P7jUEP#$99 % $99? *d % #(X07 P7jUEP#436 % 436@ +d % #(X07 P7jUEP#$145 % $145? *d + % #(X07 P7jUEP#482 % 482@ +5"d M$% #(X07 P7jUEP#$186 5"% $186J52G  #(X07 P7jUEP#TCA Cable (26) 2 TCA Cable (26)? * G  #(X07 P7jUEP#338   338? *G  #(X07 P7jUEP#$60  $60? *G  #(X07 P7jUEP#469  469@ +G  #(X07 P7jUEP#$114  $114? *G +  #(X07 P7jUEP#473  473@ +5"G M$ #(X07 P7jUEP#$152 5" $152W#B2) T #(X07 P7jUEP#Multimedia Cablevision (30) !2 Multimedia Cablevision (30)? * )  #(X07 P7jUEP#305  305? *)  #(X07 P7jUEP#$91  $91? *)  #(X07 P7jUEP#350  350@ +)  #(X07 P7jUEP#$120  $120? *) + #(X07 P7jUEP#417  417@ +5") M$ #(X07 P7jUEP#$165 5" $165M182 g#(X07 xT6UE# Total for Group P  2g Total for GroupB&- 9g#(X07 x7jUE#18,934 P   g18,934B-:g#(X07 x7jUE#$4,975 g$4,975B-g#(X07 x7jUE#26,373 g26,373B-g#(X07 x7jUE#$8,208 g$8,208B-'K g#(X07 x7jUE#31,749 'g31,749C. ]$g#(X07 x7jUE#$11,305  g$11,305T ?2 b#(X07 X7jUEX#Industry Totals (average 2bIndustry Totals (averageB- 9b#(X07 X7jUEX#42,600  b42,600C.9b#(X07 X7jUEX#$11,765 b$11,765B-b#(X07 X7jUEX#51,700 b51,700C.b#(X07 X7jUEX#$17,855 b$17,855B-'K b#(X07 X7jUEX#57,400 'b57,400C. L$b#(X07 X7jUEX#$22,863  b$22,863L72r3#(X07 X7jUEX# subscribers) 23 subscribers)X$C2#(X07 x7jUE#Percentage of Industry Total "2Percentage of Industry TotalT ?2 q#(X07 xT6UE# Accounted for by Group 2q Accounted for by GroupB- q#(X07 xT6UE#44.45%  q44.45%B-:q#(X07 xT6UE#42.29% q42.29%B-[q#(X07 xT6UE#51.01% [q51.01%B-q#(X07 xT6UE#45.97% q45.97%B- q#(X07 xT6UE#55.31% q55.31%B-(!L$q#(X07 xT6UE#49.45% (!q49.45%0*@N= '3,,4?X*  +>  7    '  ' 5B( ffUUUUffffUUUUffUUUUUUUU-  !KN5B( UU몪UUS/UUUUOr- !JNK5B( ff&&&ff&ffZY]UffSRWVv 33ҋؿ - !Kx5B( UU몪UUS/UUUUOr- !JxK5B( ff&&&ff&ffZY]UffSRWVv 33ҋؿ - !K5B( UUUUUUUU UU몪UUS- !JK- ! !V !b#5B( UUUUUUUU UU몪UUS- !N !x !- !-'- "MS Sans Serif/k--"System-'--  "MS Sans Serif z-CG Times (W1)j- 2  Pct. Chg.2  Pct. Chg.--'-- #  2 1987 2 01990 2 {19932 1987-902 1990-93--'--   (2 .Number of Systems Sold    2 .498 2 .6105 2 .962 .-78.92% 2 .-8.57% 02 ?Total Number of Subscribers  2 ? 6,506,4662 ?!531,2072 ?c 3,852,6682 ?-91.84% 2 ?625.27% CG Times (W1)sj-72 P Average Size of System (subs.) 2 P13,0652 P'5,0592 Pk40,132-2 P-61.28% 2 P693.26% (2 iNumber of Homes Passed    2 i 11,845,2272 i!870,5882 ic 6,628,2162 i-92.65% 2 i661.35% -+2 z Avg. # of Homes Passed  2 z23,7862 z'8,2912 zk69,044-2 z-65.14% 2 z732.73% 32 Total Dollar Value (billions) 2 $11.212 )$1.072 t$8.322 -90.41% 2 674.48% ---'--  72  Average Dollar Value (million)  --'--   2 $22.512 $10.232 f$86.69-2 -54.53% 2 747.09% -*2  Value Per Home Passed   2 $9462 $1,2772 f$1,256-2 34.95% 2 -1.67% CG Times (W1)j-02 Dollar Value Per Subscriber  2 $1,7232 $2,0492 g$2,160-2 18.92% 2 5.43% -"2 Cash Flow Multiple    62  (Ratio of Price to Cash Flow)    2 11.7 x 2 !11.7 x 2 o11.3 x2 0.00% 2 -3.00% -'5E)0!&#X0 P7jUP#Pct. Chg. P   !Pct. Chg.E0(&+#X0 P7jUP#Pct. Chg.  (&Pct. Chg.@$+#X0 P7jUP#1987 P  1987@ +#X0 P7jUP#1990 1990@ +u #X0 P7jUP#1993 1993C.!"&#X0 P7jUP#1987-90 !1987-90C.&1+#X0 P7jUP#1990-93 &1990-93R6=<#X0 P7jUP#Number of Systems Sold P  <Number of Systems Sold? *s#X0 P7jUP#498 498? *}`#X0 P7jUP#105 }105> )% #X0 P7jUP#96 96C.!%#X0 P7jUP#-78.92% !-78.92%B-'*#X0 P7jUP#-8.57% '-8.57%W#B<\7E#X0 P7jUP#Total Number of Subscribers !<ETotal Number of SubscribersE02\E#X0 P7jUP#6,506,466  2E6,506,466C.\;E#X0 P7jUP#531,207 E531,207E0 \!E#X0 P7jUP#3,852,668  E3,852,668C.!\%E#X0 P7jUP#-91.84% !E-91.84%C.y&\*E#X0 P7jUP#625.27% y&E625.27%\@G<\#X0B X7jUX# Average Size of System (subs.) P  & < Average Size of System (subs.)B-#X0B X7jUX#13,065 13,065A ,Ns#X0B X7jUX#5,059 N5,059B-s #X0B X7jUX#40,132 40,132C.!%#X0B P7jUP#-61.28% !-61.28%C.y&*#X0B P7jUP#693.26% y&693.26%R=<  #X0B P7jUP#Number of Homes Passed < Number of Homes PassedF1  #X0B P7jUP#11,845,227   11,845,227C. ; #X0B P7jUP#870,588  870,588E0  ! #X0B P7jUP#6,628,216   6,628,216C.! % #X0B P7jUP#-92.65% ! -92.65%C.y& * #X0B P7jUP#661.35% y& 661.35%T ?< T #X0B X7jUX# Avg. # of Homes Passed < Avg. # of Homes PassedB-  #X0B X7jUX#23,786  23,786A ,N s #X0B X7jUX#8,291 N 8,291B- s #X0B X7jUX#69,044  69,044C.! % #X0B P7jUP#-65.14% ! -65.14%C.y& * #X0B P7jUP#732.73% y& 732.73%Y%D<y #X0B P7jUP#Total Dollar Value (billions) #< Total Dollar Value (billions)B- #X0B P7jUP#$11.21  $11.21A ,v #X0B P7jUP#$1.07 v $1.07A ,c #X0B P7jUP#$8.32 c $8.32C.!% #X0B P7jUP#-90.41% ! -90.41%C.y&* #X0B P7jUP#674.48% y& 674.48%\@G<b\K#X0B X7jUX# Average Dollar Value (million) P  & <K Average Dollar Value (million)B&-nb4K#X0B X7jUX#$22.51 P  nK$22.51B-[b!K#X0B X7jUX#$10.23 [K$10.23B-Hb K#X0B X7jUX#$86.69 HK$86.69C.!b%K#X0B P7jUP#-54.53% !K-54.53%C.y&b*K#X0B P7jUP#747.09% y&K747.09%S><hQ#X0B X7jUX# Value Per Home Passed <Q Value Per Home Passed@ +8hQ#X0B X7jUX#$946 8Q$946B-[h!Q#X0B X7jUX#$1,277 [Q$1,277B-Hh Q#X0B X7jUX#$1,256 HQ$1,256B-!h%Q#X0B P7jUP#34.95% !Q34.95%B-'h*Q#X0B P7jUP#-1.67% 'Q-1.67%W;B<7#X0B x7jU#Dollar Value Per Subscriber P  !<Dollar Value Per SubscriberB-H#X0B x7jU#$1,723 $1,723B-o5#X0B x7jU#$2,049 o$2,049B-\" #X0B x7jU#$2,160 \$2,160B-!%#X0B P7jUP#18.92% !18.92%A ,l'*#X0B P7jUP#5.43% l'5.43%N9< #X0B x7jU#Cash Flow Multiple <Cash Flow Multiple['F<nW#X0B x7jU# (Ratio of Price to Cash Flow) %<W (Ratio of Price to Cash Flow)C.nOW#X0B x7jU#11.7 x W11.7 x C.n;W#X0B x7jU#11.7 x W11.7 x B-n W#X0B x7jU#11.3 x W11.3 xA ,!n%W#X0B x7jU#0.00% !W0.00%B-&n|*W#X0B x7jU#-3.00% &W-3.00%xN= '3,,4?\<*||+B< ! K   |'  ' |5B( UUUU(UU(UU+-  ! !  !V !# !# !" !# ! !% !#v !# !#  !#V- !5B( UUUU(UU(UU+- ! !  !V- !5B( UU UUUU(UU(UU+- ! ! !v- !|" !|-'- |"MS Sans Serif_q--"System-'-- |"MS Sans Serif-CG Times (W1)K- 2 Price2 Basic2 1Price/ 2 fCF - 2 #-2  Buyer2  Seller2  System(s)  2 yMo. 2 (mil.) 2 Subs.2 4Sub. 2 ZMult. CG Times (W1)[- 2 ) 1 2 )TCI$2 )Intermedia Partners 2 ) Tuscon, AZ  2 )yJan2 )$250.002 )105,0002 )/$2,381 2 )d11.9 2 : 22 : Triax Comm. 2 :Dowden Midwest    2 : Scaumberg, IL  2 :yJan2 :$0.90 2 : 8002 :/$1,125 2 :j8.6 2 K 32 KUS Cable Corp. 2 KPanther Valley2 K Allamuchy, NJ    2 KyJan2 K$2.502 K1,3002 K/$1,923 2 Kj9.1 2 \ 42 \ Charter Comm. --'-- k[ $2 \McDonald Invst. Co.  --'-- | 2 \AL, GA, LA sys.    2 \yFeb2 \$185.002 \100,0002 \/$1,850 2 \d10.3 2 m 52 mCablevision Ind.2 m Comm. Sys. (2 mLexington/Richland, KY  2 myFeb2 m$6.102 m3,0002 m/$2,033 2 md10.8 2 ~ 6"2 ~River Valley Cable2 ~ Time Warner  (2 ~Sedona & Flagstaff, AZ   2 ~yFeb2 ~$33.002 ~16,3002 ~/$2,025 2 ~j9.9 2 72 Friendship Cable2 Galaxy Cable"2 AR, LA, TX systems     2 yFeb2 $42.602 34,1002 /$1,249 2 j8.2 2 8"2 Marks Cablevision 2 Chambers "2 San Bernardino, CA 2 yFeb2 $22.502 14,0002 /$1,607 2 d10.4 2 9!2 Marks Cablevision 2 Simmons Comm.  %2 Ranch. Cucamonga, CA  2 yFeb2 $20.002 11,4002 /$1,754 2 d10.1 2 102 KBLCOM  !2 Countryside Cable2 Bloomington, MN  2 yMar 2 $87.002 47,6002 /$1,828 2 d11.2 2 112 Falcon Cable TV2 Netarts Cable 2 Netarts, OR   2 yMar 2 $1.502 1,3002 /$1,154 2 j7.8 2 12K2 -P. Bordes becomes 100% owner of Greater Media     2 yApr 2 $225.002 113,4002 /$1,984 2 j9.3 2 132  Lenfest Comm.  2 TCI'2 Red Lion/Mt. Wolf, PA   2 yApr 2 $17.502 10,5002 /$1,667 2 j9.7 2 142  Rogers Comm 2 Maclean Hunter  2  U.S. systems   2 yApr. 2  $1,082.702 494,0002 /$2,192 2 m11 2 152 Bresnan2 Jones2 Gaston Co., NC  2 yApr 2 $35.002 19,9002 /$1,759 2 j9.2 2 (16"2 (Multimedia Cblvsn.  2 (ML Media  2 (Williamston, NC    2 (yMay 2 ($4.302 (3,0002 (/$1,433 2 (d10.8 2 9172 9 Galaxy Mgmt.  2 9 Galaxy Cable2 9IL & KY Systems    2 9yMay 2 9$18.402 914,9002 9/$1,235 2 9d11.8 2 J182 JPrestige Cable2 JCblvsn/Iredell*2 JIredell & Alex. Cty, NC    2 JyMay 2 J$3.402 J2,4002 J/$1,417 2 Js8 2 [192 [Adelphia Comm.  2 [North Star Cable 2 [ Fluvanna, VA 2 [yMay 2 [$2.502 [1,4002 [/$1,786 2 [s9 2 l202 lAdelphia Comm.  2 lTele-Media Corp. 2 l U.S. systems   2 lyMay 2 l$345.002 l165,0002 l/$2,091 2 ls9 2 }212 }Cox Cable Comm. "2 }Times Mirror Cable  2 } U.S. Systems   2 }yJun2 } $2,296.002 } 1,292,2002 }/$1,777 2 }m11 2 222  Comcast Cable 2  Rogers Comm.  $2 Maclean Hunter sys.   2 yJun2  $1,270.002 547,0002 /$2,322 2 d10.5 2 232  TCI Cblvsn/GA 2 TCI/ Int. Res.2 Baton Rouge. LA 2 yJun2 $191.002 96,5002 /$1,979 2 d10.5 2 24"2 Marcus Ptrs. (14%)  2  Crown Media  2  Alabaster, AL   2 yJun2 $12.002 11,0002 /$1,091 2 j6.2 2 252  Marcus Ptrs. 2  Crown Media  2  WI systems   2 yJun2 $334.002 181,3002 /$1,842 2 d10.9 2 262  Charter Comm. 2  Crown Media  2 100% of owned &     2 yJun 2 # %2 various % of managed  2 $554.002 271,0002 /$2,044 2 j9.4 2 272 Cblvsn. Systems 2 Cblvsn. Boston2  Boston, MA 2 yJun2 $207.102 130,0002 /$1,593 2 j9.7 2 282 US West  "2 Robert Bass Group,"2 U.S. sys, incl. GA  2 yJul2  $1,200.002 480,0002 /$2,500 2 d10.832 including Wometco Cable Corp.   2 '292 'Cblvsn Systems 2 ' Nashoba Comm.  $2 'Boston, MA. suburbs  2 'yJul2 '$90.002 '34,8002 '/$2,586 2 'en/a  2 8302 8 Classic Cable2 8 Transwestern 2 8 U.S. Systems   2 8yJul2 8$24.502 820,0002 8/$1,225 2 8j9.1 2 I31 2 ITCI2 ITeleCable Corp.2 I U.S. Systems   2 IyAug 2 I $1,560.002 I740,9002 I/$2,106 2 Id10.3 2 Z322 Z Time Warner  2 ZGalaxy Cblvsn.!2 ZGranada Hills, TX  2 ZyAug 2 Z$8.002 Z5,4002 Z/$1,481 2 Zd11.1 2 k332 kComcast 2 k CableSouth2 k U.S. Systems   2 kyAug 2 k$54.802 k28,7002 k/$1,909 2 kj9.2 2 |342 |Galaxy Telecom. 2 |Vantage2 | U.S. Systems   2 |yAug 2 |$38.402 |30,9002 |/$1,243 2 |j7.5 2 352  Classic Cable2  De-Cal Cable 2 Karnes City, TX  2 yAug 2 $3.702 3,5002 /$1,057 2 j8.6 2 362  Multimedia   2 TCI2 Wichita, KS area   2 yAug 2 $90.002 50,0002 /$1,800 2 s9 2   2 TCI2  Multimedia  *2 Suburbs of Chicago, IL  2 yAug 2 $81.002 39,4002 /$2,056 2 j9.5 2 372 Cblvsn Systems 2 Sutton Capital2  Monmouth, NJ    2 yAug 2 $413.502 177,0002 /$2,336 2 hn/a 2 382  Time Warner*  2  Summit Comm.  !2 Winston-Salem, NC    2 ySep2 $300.002 160,0002 /$1,875 2 hn/aCG Times (W1)K-12 Totals & Weighted Averages**   2  $10,950.902  5,380,1002 ($2,035 2 _10.2-'77=A%,{c#PRX0! X7jUbX#Price RpP  cPriceA ,q c#PRX0! X7jUbX#Basic qcBasicB-}ic#PRX0! X7jUbX#Price/ }cPrice/> )Ac#PRX0! X7jUbX#CF cCF= (GI#PRX4!P 'UbP## G#C.?#PRX0! X7jUbX# Buyer  BuyerD/J?#PRX0! X7jUbX# Seller J SellerG2 ?b #PRX0! X7jUbX# System(s)   System(s)? *?#PRX0! X7jUbX#Mo. Mo.B-?#PRX0! X7jUbX#(mil.) (mil.)A ,|?#PRX0! X7jUbX#Subs. |Subs.B-?#PRX0! X7jUbX#Sub. Sub. A ,"?#PRX0! X7jUbX#Mult. "Mult.=!(p]#PRX0! P7jUbP#1 RpP  p1? *]#PRX0! P7jUbP#TCI TCIO:J]` #PRX0! P7jUbP#Intermedia Partners JIntermedia PartnersF1 ] #PRX0! P7jUbP#Tuscon, AZ  Tuscon, AZ? *]#PRX0! P7jUbP#Jan JanC.e]#PRX0! P7jUbP#$250.00 e$250.00C.*]h#PRX0! P7jUbP#105,000 *105,000B-h]T#PRX0! P7jUbP#$2,381 h$2,381@ +]#PRX0! P7jUbP#11.9 11.9= (p$#PRX0! P7jUbP#2 p$2G2g$#PRX0! P7jUbP#Triax Comm.  $Triax Comm.J5J $#PRX0! P7jUbP#Dowden Midwest J$Dowden MidwestI4 $#PRX0! P7jUbP#Scaumberg, IL  $Scaumberg, IL? *$#PRX0! P7jUbP#Jan $JanA ,{$#PRX0! P7jUbP#$0.90 $$0.90? *$#PRX0! P7jUbP#800 $800B-hT$#PRX0! P7jUbP#$1,125 h$$1,125? *$#PRX0! P7jUbP#8.6 $8.6= (pv#PRX0! P7jUbP#3 pv3J5]v#PRX0! P7jUbP#US Cable Corp. vUS Cable Corp.J5J v#PRX0! P7jUbP#Panther Valley JvPanther ValleyI4 v#PRX0! P7jUbP#Allamuchy, NJ  vAllamuchy, NJ? *v#PRX0! P7jUbP#Jan vJanA ,{v#PRX0! P7jUbP#$2.50 v$2.50A ,?v#PRX0! P7jUbP#1,300 v1,300B-hTv#PRX0! P7jUbP#$1,923 hv$1,923? *v#PRX0! P7jUbP#9.1 v9.1= (pQ#PRX0! P7jUbP#4 p4I4Q #PRX0! P7jUbP#Charter Comm.  Charter Comm.O3:JQ` #PRX0! P7jUbP#McDonald Invst. Co. RpP  JMcDonald Invst. Co.K/6 Q#PRX0! P7jUbP#AL, GA, LA sys. RpP   AL, GA, LA sys.? *Q#PRX0! P7jUbP#Feb FebC.eQ#PRX0! P7jUbP#$185.00 e$185.00C.*Qh#PRX0! P7jUbP#100,000 *100,000B-hQT#PRX0! P7jUbP#$1,850 h$1,850@ +Q#PRX0! P7jUbP#10.3 10.3= (p#PRX0! P7jUbP#5 p5L7#PRX0! P7jUbP#Cablevision Ind. Cablevision Ind.F1J~#PRX0! P7jUbP#Comm. Sys.  JComm. Sys.R= #PRX0! P7jUbP#Lexington/Richland, KY  Lexington/Richland, KY? *#PRX0! P7jUbP#Feb FebA ,{#PRX0! P7jUbP#$6.10 $6.10A ,?#PRX0! P7jUbP#3,000 3,000B-hT#PRX0! P7jUbP#$2,033 h$2,033@ +#PRX0! P7jUbP#10.8 10.8= (pj#PRX0! P7jUbP#6 pj6N9j#PRX0! P7jUbP#River Valley Cable jRiver Valley CableG2Jj#PRX0! P7jUbP#Time Warner  JjTime WarnerR= j#PRX0! P7jUbP#Sedona & Flagstaff, AZ  jSedona & Flagstaff, AZ? *j#PRX0! P7jUbP#Feb jFebB-j#PRX0! P7jUbP#$33.00 j$33.00B-gSj#PRX0! P7jUbP#16,300 gj16,300B-hTj#PRX0! P7jUbP#$2,025 hj$2,025? *j#PRX0! P7jUbP#9.9 j9.9= (pF#PRX0! P7jUbP#7 p7L7F#PRX0! P7jUbP#Friendship Cable Friendship CableH3JF" #PRX0! P7jUbP#Galaxy Cable  JGalaxy CableN9 F#PRX0! P7jUbP#AR, LA, TX systems  AR, LA, TX systems? *F#PRX0! P7jUbP#Feb FebB-F#PRX0! P7jUbP#$42.60 $42.60B-gFS#PRX0! P7jUbP#34,100 g34,100B-hFT#PRX0! P7jUbP#$1,249 h$1,249? *F#PRX0! P7jUbP#8.2 8.2= (p #PRX0! P7jUbP#8 p 8N9 #PRX0! P7jUbP#Marks Cablevision  Marks CablevisionD/J #PRX0! P7jUbP#Chambers J ChambersN9  #PRX0! P7jUbP#San Bernardino, CA  San Bernardino, CA? * #PRX0! P7jUbP#Feb  FebB- #PRX0! P7jUbP#$22.50  $22.50B-gS #PRX0! P7jUbP#14,000 g 14,000B-hT #PRX0! P7jUbP#$1,607 h $1,607@ + #PRX0! P7jUbP#10.4  10.4= (p_#PRX0! P7jUbP#9 p_9M8S_#PRX0! P7jUbP#Marks Cablevision _Marks CablevisionI4Jt _#PRX0! P7jUbP#Simmons Comm.  J_Simmons Comm.P; D_#PRX0! P7jUbP#Ranch. Cucamonga, CA  _Ranch. Cucamonga, CA? *_#PRX0! P7jUbP#Feb _FebB-_#PRX0! P7jUbP#$20.00 _$20.00B-gS_#PRX0! P7jUbP#11,400 g_11,400B-hT_#PRX0! P7jUbP#$1,754 h_$1,754@ +_#PRX0! P7jUbP#10.1 _10.1> )3:#PRX0! P7jUbP#10 310B-:#PRX0! P7jUbP#KBLCOM KBLCOMM8J: #PRX0! P7jUbP#Countryside Cable JCountryside CableK6 :#PRX0! P7jUbP#Bloomington, MN  Bloomington, MN? *:#PRX0! P7jUbP#Mar MarB-:#PRX0! P7jUbP#$87.00 $87.00B-g:S#PRX0! P7jUbP#47,600 g47,600B-h:T#PRX0! P7jUbP#$1,828 h$1,828@ +:#PRX0! P7jUbP#11.2 11.2> )3#PRX0! P7jUbP#11 311K6#PRX0! P7jUbP#Falcon Cable TV Falcon Cable TVI4Jt #PRX0! P7jUbP#Netarts Cable  JNetarts CableG2 b #PRX0! P7jUbP#Netarts, OR  Netarts, OR? *#PRX0! P7jUbP#Mar MarA ,{#PRX0! P7jUbP#$1.50 $1.50A ,?#PRX0! P7jUbP#1,300 1,300B-hT#PRX0! P7jUbP#$1,154 h$1,154? *#PRX0! P7jUbP#7.8 7.8> )3T#PRX0! P7jUbP#12 3T12i5TKT#PRX0! P7jUbP#P. Bordes becomes 100% owner of Greater Media 3-TP. Bordes becomes 100% owner of Greater Media? *T#PRX0! P7jUbP#Apr TAprC.eT#PRX0! P7jUbP#$225.00 eT$225.00C.*hT#PRX0! P7jUbP#113,400 *T113,400B-hTT#PRX0! P7jUbP#$1,984 hT$1,984? *T#PRX0! P7jUbP#9.3 T9.3> )3/#PRX0! P7jUbP#13 313I4/ #PRX0! P7jUbP#Lenfest Comm.  Lenfest Comm.? *J/@#PRX0! P7jUbP#TCI JTCIQ< /#PRX0! P7jUbP#Red Lion/Mt. Wolf, PA  Red Lion/Mt. Wolf, PA? */#PRX0! P7jUbP#Apr AprB-/#PRX0! P7jUbP#$17.50 $17.50B-g/S#PRX0! P7jUbP#10,500 g10,500B-h/T#PRX0! P7jUbP#$1,667 h$1,667? */#PRX0! P7jUbP#9.7 9.7> )3#PRX0! P7jUbP#14 314G2g#PRX0! P7jUbP#Rogers Comm  Rogers CommJ5J #PRX0! P7jUbP#Maclean Hunter JMaclean HunterH3  #PRX0! P7jUbP#U.S. systems  U.S. systems@ +d#PRX0! P7jUbP#Apr. Apr.E0 #PRX0! P7jUbP#$1,082.70  $1,082.70C.*h#PRX0! P7jUbP#494,000 *494,000B-hT#PRX0! P7jUbP#$2,192 h$2,192> )#PRX0! P7jUbP#11 11> )3H#PRX0! P7jUbP#15 3H15C.H#PRX0! P7jUbP#Bresnan HBresnanA ,JH#PRX0! 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P7jUbP#Iredell & Alex. Cty, NC  =Iredell & Alex. Cty, NC? *=#PRX0! P7jUbP#May =MayA ,{=#PRX0! P7jUbP#$3.40 =$3.40A ,?=#PRX0! P7jUbP#2,400 =2,400B-hT=#PRX0! P7jUbP#$1,417 h=$1,417= ("t=#PRX0! P7jUbP#8 "=8> )3#PRX0! P7jUbP#19 319J5]#PRX0! P7jUbP#Adelphia Comm. Adelphia Comm.L7Jj #PRX0! P7jUbP#North Star Cable JNorth Star CableH3  #PRX0! P7jUbP#Fluvanna, VA  Fluvanna, VA? *#PRX0! P7jUbP#May MayA ,{#PRX0! P7jUbP#$2.50 $2.50A ,?#PRX0! P7jUbP#1,400 1,400B-hT#PRX0! P7jUbP#$1,786 h$1,786= ("t#PRX0! P7jUbP#9 "9> )3j#PRX0! P7jUbP#20 320J5j]#PRX0! P7jUbP#Adelphia Comm. Adelphia Comm.L7Jjj #PRX0! P7jUbP#Tele-Media Corp. JTele-Media Corp.H3 j #PRX0! P7jUbP#U.S. systems  U.S. systems? *j#PRX0! P7jUbP#May MayC.ej#PRX0! P7jUbP#$345.00 e$345.00C.*jh#PRX0! P7jUbP#165,000 *165,000B-hjT#PRX0! P7jUbP#$2,091 h$2,091= ("jt#PRX0! P7jUbP#9 "9> )31#PRX0! P7jUbP#21 3121K61#PRX0! P7jUbP#Cox Cable Comm. 1Cox Cable Comm.N9J 1#PRX0! P7jUbP#Times Mirror Cable J1Times Mirror CableH3  1#PRX0! P7jUbP#U.S. Systems  1U.S. Systems? *1#PRX0! P7jUbP#Jun 1JunE0 1#PRX0! P7jUbP#$2,296.00  1$2,296.00E01#PRX0! P7jUbP#1,292,200  11,292,200B-hT1#PRX0! P7jUbP#$1,777 h1$1,777> )1#PRX0! P7jUbP#11 111> )3 #PRX0! P7jUbP#22 322I4  #PRX0! P7jUbP#Comcast Cable  Comcast CableI4J t #PRX0! P7jUbP#Rogers Comm.  JRogers Comm. O: #PRX0! P7jUbP#Maclean Hunter sys.  Maclean Hunter sys.? * #PRX0! P7jUbP#Jun JunE0  #PRX0! P7jUbP#$1,270.00  $1,270.00C.* h#PRX0! P7jUbP#547,000 *547,000B-h T#PRX0! P7jUbP#$2,322 h$2,322@ + #PRX0! P7jUbP#10.5 10.5> )3^ #PRX0! P7jUbP#23 3 23I4^  #PRX0! P7jUbP#TCI Cblvsn/GA  TCI Cblvsn/GAJ5J^ #PRX0! P7jUbP#TCI/ Int. Res. J TCI/ Int. Res.K6 ^  #PRX0! P7jUbP#Baton Rouge. LA  Baton Rouge. LA? *^  #PRX0! P7jUbP#Jun  JunC.e^  #PRX0! P7jUbP#$191.00 e $191.00B-g^ S #PRX0! P7jUbP#96,500 g 96,500B-h^ T #PRX0! P7jUbP#$1,979 h $1,979@ +^  #PRX0! P7jUbP#10.5  10.5> )3 & #PRX0! P7jUbP#24 3& 24N9 & #PRX0! P7jUbP#Marcus Ptrs. (14%) & Marcus Ptrs. (14%)G2J & #PRX0! 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P7jUbP#9.4  9.4> )3 l #PRX0! P7jUbP#27 3l 27K6 l #PRX0! P7jUbP#Cblvsn. Systems l Cblvsn. SystemsJ5J l #PRX0! P7jUbP#Cblvsn. Boston Jl Cblvsn. BostonF1  l #PRX0! P7jUbP#Boston, MA  l Boston, MA? * l #PRX0! P7jUbP#Jun l JunC.e l #PRX0! P7jUbP#$207.10 el $207.10C.* hl #PRX0! P7jUbP#130,000 *l 130,000B-h Tl #PRX0! P7jUbP#$1,593 hl $1,593? * l #PRX0! P7jUbP#9.7 l 9.7> )3G #PRX0! P7jUbP#28 3 28C.G  #PRX0! P7jUbP#US West  US WestN9JG  #PRX0! P7jUbP#Robert Bass Group, J Robert Bass Group,N9 G  #PRX0! P7jUbP#U.S. sys, incl. GA  U.S. sys, incl. GA? *G  #PRX0! P7jUbP#Jul  JulE0 G  #PRX0! P7jUbP#$1,200.00   $1,200.00C.*G h #PRX0! P7jUbP#480,000 * 480,000B-hG T #PRX0! P7jUbP#$2,500 h $2,500@ +G  #PRX0! P7jUbP#10.8  10.8Y%DJ #PRX0! P7jUbP#including Wometco Cable Corp. #J including Wometco Cable Corp.> )3a#PRX0! P7jUbP#29 3a29J5]a#PRX0! P7jUbP#Cblvsn Systems aCblvsn SystemsI4Jt a#PRX0! P7jUbP#Nashoba Comm.  JaNashoba Comm.O: a#PRX0! P7jUbP#Boston, MA. suburbs  aBoston, MA. suburbs? *a#PRX0! P7jUbP#Jul aJulB-a#PRX0! P7jUbP#$90.00 a$90.00B-gSa#PRX0! P7jUbP#34,800 ga34,800B-hTa#PRX0! P7jUbP#$2,586 ha$2,586@ +a#PRX0! P7jUbP#n/a an/a > )3<#PRX0! P7jUbP#30 330I4< #PRX0! P7jUbP#Classic Cable  Classic CableH3J<" #PRX0! P7jUbP#Transwestern  JTranswesternH3 < #PRX0! P7jUbP#U.S. Systems  U.S. Systems? *<#PRX0! P7jUbP#Jul JulB-<#PRX0! P7jUbP#$24.50 $24.50B-g<S#PRX0! P7jUbP#20,000 g20,000B-h<T#PRX0! P7jUbP#$1,225 h$1,225? *<#PRX0! P7jUbP#9.1 9.1> )3#PRX0! P7jUbP#31 331? *#PRX0! P7jUbP#TCI TCIK6J #PRX0! P7jUbP#TeleCable Corp. JTeleCable Corp.H3  #PRX0! P7jUbP#U.S. Systems  U.S. Systems? *#PRX0! P7jUbP#Aug AugE0 #PRX0! P7jUbP#$1,560.00  $1,560.00C.*h#PRX0! P7jUbP#740,900 *740,900B-hT#PRX0! P7jUbP#$2,106 h$2,106@ +#PRX0! P7jUbP#10.3 10.3> )3U#PRX0! P7jUbP#32 3U32G2gU#PRX0! P7jUbP#Time Warner  UTime WarnerJ5J U#PRX0! P7jUbP#Galaxy Cblvsn. JUGalaxy Cblvsn.M8 NU#PRX0! P7jUbP#Granada Hills, TX  UGranada Hills, TX? *U#PRX0! P7jUbP#Aug UAugA ,{U#PRX0! P7jUbP#$8.00 U$8.00A ,?U#PRX0! P7jUbP#5,400 U5,400B-hTU#PRX0! P7jUbP#$1,481 hU$1,481@ +U#PRX0! P7jUbP#11.1 U11.1> )31#PRX0! P7jUbP#33 333C.1#PRX0! P7jUbP#Comcast ComcastF1J1~#PRX0! P7jUbP#CableSouth  JCableSouthH3 1 #PRX0! P7jUbP#U.S. Systems  U.S. Systems? *1#PRX0! P7jUbP#Aug AugB-1#PRX0! P7jUbP#$54.80 $54.80B-g1S#PRX0! P7jUbP#28,700 g28,700B-h1T#PRX0! P7jUbP#$1,909 h$1,909? *1#PRX0! P7jUbP#9.2 9.2> )3#PRX0! P7jUbP#34 334K6#PRX0! P7jUbP#Galaxy Telecom. Galaxy Telecom.C.J#PRX0! P7jUbP#Vantage JVantageH3  #PRX0! P7jUbP#U.S. Systems  U.S. Systems? *#PRX0! P7jUbP#Aug AugB-#PRX0! P7jUbP#$38.40 $38.40B-gS#PRX0! P7jUbP#30,900 g30,900B-hT#PRX0! P7jUbP#$1,243 h$1,243? *#PRX0! P7jUbP#7.5 7.5> )3J#PRX0! P7jUbP#35 3J35I4 J#PRX0! P7jUbP#Classic Cable  JClassic CableH3J" J#PRX0! P7jUbP#De-Cal Cable  JJDe-Cal CableK6 J#PRX0! P7jUbP#Karnes City, TX  JKarnes City, TX? *J#PRX0! P7jUbP#Aug JAugA ,{J#PRX0! P7jUbP#$3.70 J$3.70A ,?J#PRX0! P7jUbP#3,500 J3,500B-hTJ#PRX0! P7jUbP#$1,057 hJ$1,057? *J#PRX0! P7jUbP#8.6 J8.6> )3%#PRX0! P7jUbP#36 336F1%#PRX0! P7jUbP#Multimedia  Multimedia? *J%@#PRX0! P7jUbP#TCI JTCIL7 %#PRX0! P7jUbP#Wichita, KS area  Wichita, KS area? *%#PRX0! P7jUbP#Aug AugB-%#PRX0! P7jUbP#$90.00 $90.00B-g%S#PRX0! P7jUbP#50,000 g50,000B-h%T#PRX0! P7jUbP#$1,800 h$1,800= ("%t#PRX0! P7jUbP#9 "9= (wp#PRX0! P7jUbP#  ? *w#PRX0! P7jUbP#TCI TCIF1Jw~#PRX0! P7jUbP#Multimedia  JMultimediaS> w:#PRX0! P7jUbP#Suburbs of Chicago, IL  Suburbs of Chicago, IL ? *w#PRX0! P7jUbP#Aug AugB-w#PRX0! P7jUbP#$81.00 $81.00B-gwS#PRX0! P7jUbP#39,400 g39,400B-hwT#PRX0! P7jUbP#$2,056 h$2,056? *w#PRX0! P7jUbP#9.5 9.5> )3>#PRX0! P7jUbP#37 3>37J5]>#PRX0! P7jUbP#Cblvsn Systems >Cblvsn SystemsJ5J >#PRX0! P7jUbP#Sutton Capital J>Sutton CapitalH3  >#PRX0! P7jUbP#Monmouth, NJ  >Monmouth, NJ? *>#PRX0! P7jUbP#Aug >AugC.e>#PRX0! P7jUbP#$413.50 e>$413.50C.*h>#PRX0! P7jUbP#177,000 *>177,000B-hT>#PRX0! P7jUbP#$2,336 h>$2,336? *>#PRX0! P7jUbP#n/a >n/a> )3#PRX0! P7jUbP#38 338H3#PRX0! P7jUbP#Time Warner*  Time Warner*H3J" #PRX0! P7jUbP#Summit Comm.  JSummit Comm.M8 N#PRX0! P7jUbP#Winston-Salem, NC  Winston-Salem, NC? *#PRX0! P7jUbP#Sep SepC.e#PRX0! P7jUbP#$300.00 e$300.00C.*h#PRX0! P7jUbP#160,000 *160,000B-hT#PRX0! P7jUbP#$1,875 h$1,875? *#PRX0! P7jUbP#n/a n/aX<C8 #PRX0! x7jUb#Totals & Weighted Averages** RpP  "Totals & Weighted Averages**F1e8#PRX0! x7jUb#$10,950.90  e$10,950.90E0q8S#PRX0! x7jUb#5,380,100  q5,380,100B- 8 #PRX0! x7jUb#$2,035  $2,035@ +U8#PRX0! x7jUb#10.2 U10.2  @-  -@  Њ  @-  --  -@  `&(#cFCC 94-235  Y4(a Before the W FEDERAL COMMUNICATIONS COMMISSION 'Washington, D.C. 20554  Yw4 In the Matter of hhCq)pp  *xxX  ` `  hhCq)  YI4Implementation of Section 19 of theq)  Y24Cable Television Consumer Protectionq)  Y 4and Competition Act of 1992hhCq)ppCS Docket No. 9448 ` `  hhCq)  Y 4Annual Assessment of the Status of q)  Y 4Competition in the Market for thehhCq)  Y 4Delivery of Video ProgramminghhCq)  Yz4J FIRST REPORT ă  XM4 Adopted: September 19, 1994qReleased: September 28, 1994 By the Commission:  Y4  Y4E Table of Contents ă  Y4`(#rParagraphă  Y4I.XIntroduction(#p"(# 1  Y4A.` ` Evolving View of Competition in the Market ` ` for the Delivery of Video Programmingp"(#2  Yh4B.` ` Scope of the Report p"(#7  YQ4C.` ` Summary of Findings p`"(#11  Y#4II.XCable Industry Performance Since 1990(#p"(# 17  Y 4A.` ` Performance from 1990 to 1993 p`"(#18  Y4B.` ` Recent Developmentsp`"(#28  Y 4III.XStatus of Existing and Potential Competitors to Franchised Cable Systems(#p`"(#37  Y!4A.` ` Market Definition(#` p`"(#37  Y"4` ` 1. The Relevant Market Conceptp`"(#38  Y#4` ` 2. The Commission's Evolving Approach to ` `  Market Definition for Cable Servicesp"(# 41  YT%4` ` 3. The 1992 Cable Actp"(# 46  Y=&4` ` 4. Implications of Market Definition for ` `  This and Future Reportsp"(# 49ك"&'\+\+\+})"Ԍ Y4B.` ` The Status of Existing Competitors(#` ` ` to Franchised Cable Systems p"(# 54ك  Y4` ` 1. Overbuildersp"(# 54  Y4` ` 2. DirecttoHome Satellite Services (# p"(# 61  Y4` ` a.` Direct Broadcast Satellite (DBS) (#p"(# 62  Y4` `  b.` Home Satellite Dishes (HSDs)(#p"(# 71ك  Yv4` ` 3. Terrestrial "Wireless" Cable Multipoint (# ` `  Multichannel Distribution Service (MMDS) p"(# 78  YH4` ` 4. Satellite Master Antenna Television Systems (SMATV) (# p"(# 91  Y14` ` 5. Broadcast Television Service(# p"(# 97  Y 4C.` ` Other Actual or Potential Competitors(#` p!(# 103  Y 4` ` 1. Local Exchange Carrier (LEC) Entry(# p!(# 103  Y 4` ` 2. Local Multipoint Distribution Service (LMDS)(# p!(# 121  Y 4` ` 3. Low Power Television (LPTV)(# p!(# 126  Y 4` ` 4. Electric Utilities (# p!(# 131  Y 4` ` 5. Video Cassette Recorders (VCRs)(# p!(# 134  Yy4IV.XMarket Structure Conditions Affecting Competition(#p!(# 136  Yb4A.` ` Horizontal Concentration in the Cable Industry(#` p!(# 137  YK4` ` 1. Status of Concentration in the Cable Industryp!(# 141  Y44` ` 2. Competitive Effects of Horizontal Concentrationp!(# 148  Y4` ` 3. Conclusionp!(# 156  Y4B.` ` Vertical Integration in the Cable Industry p!(# 157  Y4` ` 1. Status of Vertical Integration in 1994p!(# 161  Y4` ` 2. Competitive Effects of Vertical Integration p!(# 173  Y4` `  a.Competitive Access to Programmingp!(# 173  Y4` `  b.` Commission Rules Promulgated to(# ` `  X Assure Diversity in Programming(#p!(# 187  Y|4` ` 3. Conclusions p!(# 191  Ye4C.` ` Nature of Technical Changes Affecting Cable Systems(#` p!(# 194  Y74V. XStatus of Competition in the Market (#  for the Delivery of Video Programmingp!(# 201  Y 4A.` ` Extent of Competition and Assessment of Market Performance(#` p!(# 201  Y4` ` 1. Overviewp!(# 201  Y4` ` 2. Market Performance Indicatorsp!(# 204  Y 4` `  a.Pricing Above Competitive Levels ` `   Indicates Market Powerp!(# 205  Y"4` `  b.Other Indicia of Market Performancep!(# 220  Y#4` `  c.Conclusionp!(# 227  Yh$4` ` 3. Existing and Potential Impediments to Competitionp!(#228  YQ%4` `  a.Strategic Behavior to Deter Competitive Entryp!(#229  Y:&4` `  b.Regulatory Impedimentsp!(#239  Y#'4` `  c.Potential Technological Bottlenecksp!(#242ك"#'\+))})"Ԍ Y4` ` 4. Extent of Competition in the Multichannel ` `  Video Programming Distribution Marketp!(#246  Y4B.` ` Future Considerations and Recommendations for (#` ` ` Promoting Competition to Cable Systemsp!(#247  Y4VI.Administrative Mattersp!(# 260 Appendices  YH4A. ` ` List of Commenters  Y14B.` ` Glossary of Technical Terms and Acronyms  Y 4C.` ` Cable Industry Performance  Y 4D.` ` Local Exchange Carrier Proposals  Y 4E.` ` Market and Technical Trials, Grants and Pending ` ` Applications for Video Dialtone  Y 4F.` ` Description of Program Access Cases ` ` Resolved (as of September 19, 1994)  Y4G.` ` Horizontal Concentration, Vertical Integration ` ` and Program Access (Successor to Appendix G ` ` of the 1990 Report)  YK4H.` ` Economic Concepts for Assessing the Extent of ` ` Competition in Video Programming Distribution Markets  Y4I.` ` Evaluating Market Power by the q Ratio "\+)):"  Y4    в I. DINTRODUCTION  Y4   Y4 1.` ` Pursuant to the Cable Television Consumer Protection and Competition Act of  Y41992 (the "1992 Cable Act" or "the Act"), Y4ԍPub. L. No. 102385, 106 Stat. 1460 (amending the Communications Act of 1934  Y4(the "Communications Act") and codified at 47 U.S.C.  151, et seq.). the Commission is required to report to Congress  Y4annually "on the status of competition in the market for the delivery of video programming."gd Y 4ԍCommunications Act 628(g), 47 U.S.C. 548(g) (requiring the Commission to report to Congress "beginning not later than 18 months after promulgation of the regulations required by [Section 19(c) of the 1992 Cable Act]"). Those regulations were adopted on  YJ 4April 1, 1993. Implementation of Sections12 & 19 of the 1992 Cable Act Dev. of  Y5 4Competition & Diversity in Video Programming Dist. & Carriage, First Report & Order  Y 4("Program Access Report & Order"), 8 FCC Rcd 3359 (1993), recon. pending MM Docket  Y 4No.92265. Consequently, the Report is due on October 1, 1994.  Yw4This report (the "Report" or the "Competition Report") is the first of these annual  Yb4competition studies.9b  Y~4ԍThe Commission began this study with a notice of inquiry, which it released May 19,  Yg41994. Implementation of Section 19 of the 1992 Cable Act Annual Assessment of the Status  YR4of Competition in the Market for the Delivery of Video Programming, Notice of Inquiry, 9  Y=4FCC Rcd 2896 (1994) ("NOI"). In response to the NOI, the Commission received comments and reply comments, some of which were not timely filed. In the interest of compiling as complete a record as possible, those latefiled pleadings are accepted and have been  Y4considered in this Report. The Commission also received numerous ex parte submissions, copies of which have been placed in the record. A list of those comments, reply comments and other submissions is set forth in Appendix A.  X44 A.Evolving View of Competition in the Market for the Delivery of Video Programming  Y 4  Y 4 2.` ` In the ten years since Congress enacted the first major statute addressing the  Y 4cable industry the Cable Communications Policy Act of 1984 l Y 4ԍCable Communications Policy Act of 1984, Pub. L. No. 98549, 98 Stat. 2779  Y!4(codified as amended by 1992 Cable Act at 47 U.S.C. 151, et seq.) (1984) ("1984 Cable Act" or "1984 Act"). the view of competition in the market for the delivery of video programming has evolved, both in Congress and at the Commission. As the Commission recognized in the report on competition in the cable  Y4television industry that it issued in 1990, Y '4ԍRate Deregulation & the Commission's Policies Relating to the Provision of Cable  Y'4Television Serv., Report on Competition, 5 FCC Rcd 4962 (1990) ("1990 Cable Report"). Congress enacted the 1984 Cable Act to encourage the growth of cable systems, the development of cable services and the provision of diverse"|g0*0*0*"  Y4  sources of information.`*  Yy4ԍId. 15, 5 FCC Rcd at 496468. ` Accordingly, one of the primary purposes of the 1984 Cable Act was to "promote competition in cable communications and minimize unnecessary regulation  Y4that would impose an undue economic burden on cable systems."g{*  Y4ԍCommunications Act 601(g), 47 U.S.C. 521(6).g  Y4 3.` ` To fulfill this Congressional purpose, the 1984 Act imposed various limitations on the authority of local government entities to regulate cable services and, in particular, permitted regulation of basic cable rates only where, pursuant to Commissionestablished  Y_4criteria, "a cable system is not subject to effective competition."Z_*  Y 4ԍ1992 Cable Act sec. 2, 106 Stat. at 1460.Z The Commission later determined that "effective competition" existed when at least three unduplicated broadcast  Y14television signals were "available" to the cable community.] 1*  Y4ԍ47 C.F.R. 76.33(a) (1985) (superseded).] In essence, that determination  Y 4deregulated the rates of approximately ninetyseven percent of all cable franchises.a  R*  Y 4ԍ1992 Cable Act, sec. 2(a)(1), 106 Stat. at 1460.a  Y 4 4.` ` The 1984 Cable Act was a success in many ways. The number of communities and homes served by cable grew dramatically, channel capacity increased, and  Y 4new programming was created.q  *  YJ4ԍH.R. Rep. No. 862, 102d Cong., 2d Sess. 56 (1992), reprinted in 1992  Y54U.S.C.C.A.N. 1231, 1238; S. Rep. No. 92, 102d Cong., 1st Sess. 3 (1991), reprinted in  Y 41992 U.S.C.C.A.N. 1133, 113536; 1990 Cable Report  3, 5 FCC Rcd at 4966.q However, as the Commission found in its 1990 Cable  Y 4Report, there was little competitive constraint on cable market power after passage of the 1984 Act, and cable system operators were able to collect monopoly profits through the  Y}4imposition of significant rate increases on subscribers.g }d *  Y~4ԍ1990 Cable Report 13, 5 FCC Rcd at 497273.g  YO4 5.` ` In response to those trends, Congress passed the 1992 Cable Act, which in essence, re-regulated the cable industry. In enacting the 1992 Cable Act, Congress found that "[t]he average monthly cable rate has increased almost 3 times as much as the Consumer  Y 4Price Index ["CPI"] since rate deregulation [under the 1984 Cable Act]."a *  Y#4ԍ1992 Cable Act, sec. 2(a)(1), 106 Stat. at 1460.a Congress also found that without competition, there was "undue market power for the cable operator as compared to that of consumers and video programmers," and that "the cable television  Y4industry has become a dominant nationwide video medium."c*  Y(4ԍ1992 Cable Act secs. 2(a)(2-3), 106 Stat. at 1460.c However, Congress"=\+))" specifically articulated as a central and critical goal of the legislation a "[p]reference for  Y4competition," as opposed to rate regulation of cable systems.m*  Yb4ԍCommunications Act 623(a)(2), 47 U.S.C. 543(a)(2).m Accordingly, the 1992 Act generally provides that where a cable system is subject to effective competition, its rates shall  Y4not be subject to governmental regulation.:y*  Y4ԍId.:  Y4 6.` ` As the Commission recognized in the NOI, the 1992 Cable Act's regulatory scheme serves as a "transitional mechanism until competition develops and consumers have  Ya4adequate multichannel video programming alternatives."da*  Y 4ԍNOI 2, 9 FCC Rcd at 2896.qd Moreover, promotion of the emergence of effective competition through the entry of alternative distribution technologies  Y34is a critical element of the regulatory framework mandated by Congress.a3*  Y4ԍSee 1992 Cable Act, secs. 2(b)(12) (articulating Congressional policy to "promote the availability to the public of a diversity of views and information through cable television and other video distribution media" and to "rely on the marketplace, to the maximum extent feasible, to achieve that availability"); Communications Act 623(a), 47 U.S.C. 543(a) (prohibiting rate regulation if the Commission "finds that a cable system is subject to effective competition" and defining "effective competition" with specific regard to competition to cable from other "multichannel video programming distributors"). The Commission has adopted rules implementing this mandate; in particular, regulations requiring that programming be made available to competing distributors on nondiscriminatory terms, and prohibiting cable operators from discriminating against unaffiliated programmers on the terms  Y 4and conditions of carriage. *  Y@4ԍSee generally Program Access Report & Order, 8 FCC Rcd 3359; Implementation of Sections 12 & 19 of the 1992 Cable Act Dev. of Competition & Diversity in Video  Y4Programming & Carriage, Second Report & Order ("Program Carriage Report & Order"),  Y49FCC Rcd 2642 (1993), recon. granted, Memorandum Opinion & Order, FCC 94-203 (MM Docket No.92-265 Aug. 5, 1994). In this manner, the Commission has sought to inhibit anticompetitive abuses and to foster the emergence of a competitive market for the delivery of video programming to consumers.   X{4 B.Scope of the Report  Yg4  YP4 7.` ` Through this Report and future reports, the Commission intends to provide Congress with information regarding the state of competition in the market for the delivery of video programming, with a particular emphasis on the cable television industry.  Y 4Accordingly, this Report provides data and information on: cable industry performance (Section II); the status of entry by Multichannel Video Program Distributors ("MVPDs"), including those that use technologies other than cable (Section III); and structural issues"\+))i" affecting entry, such as vertical integration, horizontal concentration, and technological advances (Section IV). Also included in Section IV are preliminary assessments of the impact of the 1992 Act and of the Commission's regulations on access to video programming services by competing MVPDs.  Y4 8.` ` Section V of the Report contains the Commission's analysis of the extent of competition in the market for the delivery of video programming, and an assessment of  Ya4market performance. A discussion of future action by the Commission to study the cable industry and to prepare for future reports is also included in Section V.  Y 4 9.` ` In preparing this Report, the Commission has been mindful of the rate regulation provisions of the 1992 Act, which exempt from rate regulation cable systems  Y 4subject to "effective competition."s *  Yi 4ԍCommunications Act 623(a)(2), 47 U.S.C. 543(a)(2).s As described more fully below, the 1992 Cable Act defines "effective competition" to exist when: (a) a franchise area is served by at least two unaffiliated MVPDs, each of which offers comparable video programming to at least 50% of the households in the franchise area; and (b) at least 15% of the households in the franchise  Y4area subscribe to service from MVPDs other than the largest one.my*  Y4ԍCommunications Act 623(l)(1), 47 U.S.C. 543(l)(1).m The statute also defines effective competition to exist when fewer than 30% of the households in the franchise area subscribe to the cable system, or when an MVPD operated by the franchising authority offers  YO4service to at least 50% of the households in the franchise area.:O*  Y4ԍId.: The term "MVPD" is defined in the 1992 Act as "a person, such as, but not limited to, a cable operator, a multichannel multipoint distribution service ["MMDS"], a direct broadcast satellite ["DBS"] service, or a television receiveonly ["TVRO"] satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video  Y4programming."i*  Y.4ԍCommunications Act 602(12), 47 U.S.C. 522(12).i  Y4 10.` ` As explained in Section III.A.4, infra, the competitive status of MVPDs is an  Y4appropriate starting point for this Report. However, Congress charged the Commission with annually reporting on the "status of competition in the market for the delivery of video  Ym4programming."gmR*  Y\#4ԍCommunications Act 628(g), 47 U.S.C. 548(g).g In the Commission's view, obtaining a complete picture of the status of competition requires the Commission to look beyond MVPDs to other technologies not explicitly included within the statutory definition that may have a constraining effect on cable  Y(4system practices.V(*  Y'4ԍSee infra 4653.V Moreover, to fulfill its statutory mandate, the Commission believes it should also look beyond the "effective competition" standard of the 1992 Cable Act, which is" \+))% " a brightline test used to determine when a particular cable system's rates may be  Y4deregulated. Accordingly, in this Report and future reports, the Commission intends to provide a fuller economic analysis of the industry, rather than simply report on the status of "effective competition" in each franchise area in the country.   X4 C.Summary of Findings  Ya4  11.` ` In this Report, the Commission makes the following findings:  Y54 12.` ` Industry Growth. Between the end of 1990 and the end of 1993, cable industry subscriber penetration, average system channel capacity, the number of programming services available, cable industry revenues, expenditures on programming, and capital investment all increased. Data for the first half of 1994 that is available from companies that file reports with the Securities and Exchange Commission ("SEC"), while incomplete, suggest that subscribership and capital investment have increased for those companies from 1993 levels. In addition, ten of the fifteen largest cable system operators for which information is publiclyavailable, including the two largest such companies, have reported increases in cable service revenue for the first half of 1994, while the other five have reported decreased cable service revenues.  Y84 13.` ` Cable Market Power. The market for the distribution of multichannel video programming remains heavily concentrated at the local level, and for most households, cable television is the only provider of multichannel video programming. Cable systems continue to have substantial market power at the local distribution level.  Y4 14.` ` Horizontal Concentration. Since 1990, there has been a moderate increase in the horizontal concentration of cable multiple system operators ("MSOs") nationwide and, if consummated, several recent proposed mergers will result in increased "clustering" or regional concentration of cable system ownership.  YR4 15.` ` Competitive Entry. There are presently only a few scattered areas of the  Y;4country in which local cable systems face direct competition via "overbuilding" (where more than one cable system has cable lines passing the same homes). Providers using alternative video programming distribution media have not yet reached the subscribership levels necessary for the Commission to conclude that vigorous rivalry currently exists in the market for multichannel video programming distribution. However, alternative distribution media  Y 4have made substantial strides since the 1990 Cable Report. In particular:  Y"4X` hp x (#%'0*,.8135@8:  Y;$4ԍTCI Communications, Inc., Form 10Q I21 (June 30, 1994).p  Y|4XX` ` , Time Warner Cable ("Time Warner") reported slightly increased revenues for the first six months of 1994, stating that, "the"e >\+))<" unfavorable effects of rate regulation were offset in part by an  Y4increase in subscribers and unregulated revenues;"e? Yb4ԍTime Warner Inc., Form 10Q 7 (June 30, 1994).e  Y4XX` ` , Cablevision reported a 13% increase in its net revenues for the first six months of 1994, compared to 1993, most of which it attributed to a ninepercent internal growth in its number of basic  Yv4subscribers;n@vy Y 4ԍCablevision Systems Inc., Form 10Q 14 (June 30, 1994).n and  YH4XX` ` , Adelphia reported that "[r]evenues increased approximately 5.5% for the three months ended June 30, 1994, compared to the same period in the prior year. Approximately 86% of such increases were attributable to basic subscriber growth, with the remainder primarily attributable to the expansion of advertising sales and other  Y 4services."rA  Y4ԍAdelphia Communications Corp., Form 10Q 7 (June 30, 1994).r CVI, Century, Falcon Classic, Multimedia, TCA and Times Mirror also reported increased  Y4revenues.B  Y4ԍCablevision Industries Corp., Form 10Q 3, 11 (June 30, 1994) (revenues in first half of 1994 up 1.9% over first half of 1993, "attributable principally to internal subscriber  Y4growth" and other sources); Century Communications Corp., Form 10K 31 (May 31, 1994) (cable television operation revenues increased 5.4% in fiscal year ended May 31, 1994, attributed to "increases in the number of cable television subscriptions and in the subscriber  Ym4revenues for cable television services"); Falcon Classic Cable Income Properties, L.P., Form  YV410Q 4, 7 (June 30, 1994) (revenues in first half of 1994 up 6.8% over first half of 1993;  Y?452% due to increase in the number of subscribers); Multimedia Inc., Form 10Q 2 (June 30,  Y(41994) (revenues up 1%); TCA Cable TV, Inc., Form 10Q 9 (July 31, 1994) (third quarter  Y4revenues up 7% over last year, "mostly attributable to internal growth"); Times Mirror Co.,  Y4Form 10Q 11 (May 27, 1994) (cable revenues up 8.6% over last year due to continued subscriber growth and other revenues).  Yb4 31.` ` On the other hand, several MSOs reported decreases in revenues during the first six months of 1994. Comcast's service income for its cable division was down nearly  Y44$24 million in the first half of 1994, as compared to the first half of 1993.bC4S Y$%4ԍComcast Corp., Form 10Q 9 (June 30, 1994).b E.W. Scripps reported that its revenues from basic service in the second quarter of 1994 were down 6.3%"C\+))"  Y4from the same period of 1993, despite a 5.1% increase in basic subscribers.D Yy4ԍE.W. Scripps Co., Form 10Q F21 (June 30, 1994). E.W. Scripps also reported that  Yb4its cable operating income was down 36.6% in the same period. Id. Viacom's cable revenues decreased 4% in the second quarter of 1994, including $6 million in revenue  Y4losses from the mandated rate decreases.aEd Y4ԍViacom Inc., Form 10Q 18 (June 30, 1994).a Falcon Cable and The Washington Post Company  Y4each reported cable revenue decreases of approximately 1%.F YY 4ԍFalcon Cable Systems Co., Form 10Q 34 (June 30, 1994); The Washington Post  YB 4Co., Form 10Q 8 (June 30, 1994).  Y4X` hp x (#%'0*,.8135@8:4ԍ47 C.F.R.  76.33(a) (1988) (superseded). Those rules were upheld in ACLU v.  Y)4FCC, 823 F.2d 1554, 156470 (D.C. Cir. 1987), cert. denied sub nom., Connecticut v. FCC, 485 U.S. 959 (1988). The Commission thus concluded that three broadcast stations were sufficient to constrain monopolistic pricing of basic cable services, and defined a relevant market that included (though was not necessarily limited to)  Y 4those two media.]c   Yl4ԍThe Commission based this rule on evidence that cable systems would be able to exercise market power when the share of viewership of all "cableonly" programming was as large or larger than the viewership of an overtheair broadcast station. The Commission found that this occurred when less than three overtheair broadcast stations were available.  W4Amendment of Parts 1, 63 & 76 of the Commission's Rules to Implement the Provisions of the  Y4Cable Communications Policy Act of 1984, Report & Order ("1985 Effective Competition  Y4Report & Order") 100, 50 Fed. Reg. 18,637, 18,650 (1985).  Y4 )42.` ` The Commission's view of the relevant market in which cable operators  Yy4compete has evolved considerably since the 1985 Effective Competition Report & Order. The Commission initiated a rulemaking in 1990 regarding the effective competition standard it  YM4had adopted five years earlier, ^M( Y$4ԍReexamination of the Effective Competition Standard for the Regulation of Cable  Y$4Television Basic Service Rates, Notice of Proposed Rule Making, ("1990 Notice"), 5 FCC Rcd 259 (1990).  and later issued the 1990 Cable Report.Y_M Y'4ԍ1990 Cable Report, 5 FCC Rcd 4962.Y In the 1990 Cable  Y84Report, the Commission examined the services cable systems provided to consumers in a"8:_\+))" detailed manner. The Commission concluded that cable systems provide four distinct services: "antenna service" (retransmission of broadcast signals), "premium" programming  Y4(e.g., HBO, Cinemax), "general interest basic channels similar to independent television  Y4stations" (e.g., USA, TNT), and "specialized basic services" (e.g., ESPN, CNN, MTV,  Y4BET).V` Y!4ԍId. 50, 5 FCC Rcd at 4995.V Examining the "substitutability" of other media for each of these services, the Commission found that video cassette recorders ("VCRs") and video cassettes were good substitutes for premium services, and that local broadcast stations were good substitutes for  Yc4the "antenna service.":ac{ Y{ 4ԍId.: The Commission then proceeded to find evidence of market power  YL4in the remaining services._bL Y 4ԍId. 6970, 5 FCC Rcd at 5003. _  Y 4 *43.` ` The Commission recognized in the 1990 Cable Report that broadcasters offer some competition to cable systems, and "can be a significant constraint on basic cable  Y 4rates."Vc  YH4ԍId. 66, 5 FCC Rcd at 5002.V The Commission found, however, that "there is no close substitute for that steadilyexpanding complement of specialized program services offered by the typical cable system at  Y 4this time."Yd X Y4ԍId. 13(2), 5 FCC Rcd at 4972.Y The Commission also expressly rejected defining the market as "information and leisure entertainment services" (which would include radio, print media, movie,  Y4legitimate theater and live events as alternatives).Ye Y*4ԍId. 53, 5 FCC Rcd at 499697.Y As to the geographic market, the Commission concluded that the relevant market was essentially local in scope, noting that "because most cable systems operate under a local franchise, that describes the area within  YQ4which they are entitled to distribute video services."VfQ  Y4ԍId. 48, 5 FCC Rcd at 4994.V   Y#4 +44.` ` In a concurrent rulemaking proceeding, the Commission reexamined the "three  Y 4overtheair signals" test for effective competition adopted in 1985._g 5  Y!4ԍReexamination of the Effective Competition Standard for the Regulation of Cable  Y"4Television Basic Service Rates, Report & Order & Second Further Notice of Proposed Rule  Y#4Making ("1991 Effective Competition Report & Order"), 6 FCC Rcd 4545 (1991)._ When it sought comments in that proceeding, the Commission stated that it had replicated its prior research (which concluded that threeovertheair broadcast signals could constrain basic cable rates),"g\+))"  Y4and found that its conclusions were no longer applicable to consumer demand in 1990.0h Yy4ԍReexamination of the Effective Competition Standard for the Regulation of Cable  Yd4Television Basic Service Rates, Further Notice of Proposed Rule Making ("1990 Further  YO4Notice"), 6 FCC Rcd 208 (1990).0 The Commission noted that "a small number of broadcast signals alone generally cannot  Y4deliver comparable service" to basic cable.viQ Y4ԍ1990 Further Notice 5, 6 FCC Rcd at 20809.ppv On the other hand, in the 1991 Effective  Y4Competition Report & Order, the Commission found that if enough signals were available,  Y4broadcast television could have some constraining effect on basic cable pricing. Utilizing  Y4new econometric data, the Commission determined that six unduplicated overtheair broadcast television stations were needed to constrain monopolistic pricing or conduct in  Yc4basic services.\jc Y 4ԍ1991 Effective Competition Report & Order 929, 6 FCC Rcd at 454751. As  Y4discussed infra at 191, in connection with its 1994 Rate proceeding, the Commission found evidence consistent with a finding that broadcast stations do not constrain cable rates.\  Y54 ,45.` ` In 1991, the Commission also adopted a "multichannel competitor test" that recognized competition from alternative suppliers of delivered multichannel video services by creating a "50/10" test (50% availability of alternative sources with 10% total subscribership  Y 4to those alternative sources).Yk c  Y4ԍId. 37, 6 FCC Rcd at 455253.Y The Commission reasoned that even though alternative suppliers might offer different channel packages, "these alternatives should be considered substitutes for basic cable service since they provide a variety of programming  Y 4services....":l   YJ4ԍId.:   U}4 3.` ` The 1992 Cable Act  YO4 -46.` ` The 1992 Cable Act, in part, uses a conceptual view of the relevant market  Y84similar to that outlined in the 1990 Cable Report to define the circumstances when cable rates will be exempt from rate regulation. It provides that a cable system will be subject to rate regulation unless the cable system is subject to "effective competition," a determination  Y4which is to be made through the use of a twopart test.sm  Y3#4ԍCommunications Act 623(a)(2), 47 U.S.C. 543(a)(2).s  Y4 .47.` ` First, the 1992 Cable Act identifies the types of services that are capable of constraining cable system pricing. Each such service is referred to as a "multichannel video programming distributor" ("MVPD"), and is defined as "a person . . . who makes available">m\+))["  Y4for purchase, by subscribers or customers, multiple channels of video programming."in Yy4ԍCommunications Act 602(12), 47 U.S.C. 522(12).i Thus, the 1992 Cable Act explicitly contemplates a relevant product market comprised of distributors that offer multichannel video programming on a subscription basis.  Y4 /48.` ` Second, the 1992 Cable Act requires determination, on a franchisearea by franchisearea basis, of when "effective competition" is deemed to exist by reference to the  Yv4actual presence of MVPDs providing service in a particular locale.o vy Y 4ԍBefore a local franchising authority ("franchisor") may regulate basic cable rates, it must be certified by the Commission under Section 623(a) of the Communications Act. 47 U.S.C. 543(a); 47 C.F.R.  76.906. The Commission's standards for such certification are set forth in Section 543(a)(3) of the Communications Act, 47 U.S.C. 543(a)(3), and concern the franchisor's legal authority to regulate, the consistency of its regulations with those of the Commission, and whether its procedures are reasonable and open to all interested parties. In certification proceedings, "effective competition" is presumed not to exist in the jurisdiction in question. 47 C.F.R. 76.906. An intervenor (typically, the local  Y4cable operator) may, however, establish that effective competition does exist and thus defeat rate regulation by the franchisor. 47 C.F.R. 76.911(b). Specifically, effective competition exists under the 1992 Act where the franchise area is served by at least two MVPDs, each of which "offers comparable video programming" to at least 50% of the  Y14households, and at least 15% of the households "subscrib[e]" to the smaller MVPD.p" 1I  Y4ԍCommunications Act 623(l)(1)(B), 47 U.S.C.  543(l)(1)(B). The Commission has adopted a twopart test for determining whether consumers are "served" by two MVPDs: each MVPD's service must both be both technically available and actually available to cable  Y4subscribers. Implementation of Sections of the 1992 Cable Act Rate Regulation, Report &  Y4Order Further Notice of Proposed Rulemaking ("1993 Rate Report & Order") 38, 8 FCC Rcd 5631, 5666 (1993). An MVPD's service is considered comparable if it provides at least  Y412 channels "including at least one channel of nonbroadcast service programming."  Id. For purposes of determining when the 15% threshold is reached, the subscriberships of all alternative MVPDs serving at least 50% of the households in the franchise area are  YN4aggregated. Id. at 566265. The 1992 Act provides for consideration of only those firms that have actually entered the market and are providing service in determining whether cable rates in a particular franchise area should be deregulated. The 1992 Act also contains a penetration test, whereby effective competition is deemed to exist if "fewer than 30 percent of the households in the franchise  Y 4area subscribe to cable service of the cable system."uq  Yz$4ԍCommunications Act 623(l)(1)(A), 47 U.S.C. 543(l)(1)(A). u In addition, effective competition is" q\+)) " deemed to exist if a municipal cable system offers service to at least fifty percent of the  Y4households in the franchise area.crx Yb4ԍId. at 543(l)(1)(C), 47 U.S.C. 543(l)(1)(C). As of September 16, 1994, a total of 135 claims raising the existence of "effective competition" in certification proceedings before the Commission have been made by cable system operators. Of these, 11 (all of which are pending), are based on the 50/15 standard of the 1992 Cable Act. The other 124 of those "effective competition" claims are based on the 30% penetration standard A total of 13 of these 124 cases have been resolved (eight have been denied, while five have been dismissed).c  U4 4.` ` Implications of Market Definition for This and Future Reports  Y4  Y4 049.` ` Product Market. For purposes of this Report, the relevant product market contemplated in the 1992 Act multichannel video programming service is the appropriate starting point for assessing the status of competition in the market for the  YJ4delivery of video programming. A primary focus of this Report, and a central concern of the 1992 Cable Act, is the extent to which MVPDs that use alternative technologies are emerging as significant competitors to cable operators. In addition to cable operators (which include direct competitors known as "overbuilders"), MMDS, DBS, and TVRO providers are  Y 4specifically included within the statutory definition of an MVPD,is  Y4ԍCommunications Act 602(12), 47 U.S.C. 522(12).i and the Commission has subsequently determined that VDT and SMATV systems should be considered MVPDs, as  Y 4well.t  Y4ԍ1993 Rate Report & Order 2122, 8 FCC Rcd at 565051. The Commission reserved judgment as to whether LMDS systems or digitallycompressed broadcast signals would fit within the statutory definition, and the Commission expressly held that leased access providers offering compressed or multiplexed multichannel video programming were  Y4not MVPDs because they used the same facilities as the cable system operator. Id. Consequently, this Report will evaluate the status of providers utilizing each of these technologies.  Y4 150.` ` In addition, the Commission will discuss other video programming distribution media as potential substitutes for cable services. While the use of current broadcast technology is expressly excluded from the statutory definition of an MVPD (because a broadcast station does not offer "multiple" channels of video programming and is not offered on a subscription basis), the Commission nonetheless includes a discussion of broadcast  Y 4television in this Report, given broadcasting's potential constraining effect on cable industry conduct. Finally, the Commission discusses in this section other delivery media that arguably may have a competitive impact in the market, including low power television, programming distribution by electric utilities and VCRs.  Y4 251.` ` Geographic Market. The proper definition of the geographic market in which cable operators compete has relevance both to the assessment of cable operators' market power, and to the administration of the "effective competition" standard of the 1992 Act, a"m t\+))""  Y4topic which will be addressed in future reports. As discussed above, the scope of the geographic market is defined by the geographic area to which buyers will reasonably turn  Y4and from which competing suppliers sell their products.Xu YK4ԍ See Tampa Electric, 365 U.S. at 33033; See also United States Dep't of Justice &  Y64Federal Trade Comm'n, 1992 Horizontal Merger Guidelines ("Horizontal Merger  Y4Guidelines") 1.21, 4 Trade Reg. Rep. (CCH) 13,104 at20,5734.X Given 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.  Yv4 352.` ` On the other hand, it is not entirely clear that cable operators view the  Y_4franchise area as the "area of effective competition."v_M YI 4ԍSee Standard Oil, 337 U.S. at 299 n.5; Competitive Common Carrier Report & Order 25, 95 FCC 2d at 563. While at the system level, competition may be viewed on a franchise by franchise basis, MSO operations at the firm  Y14level may be national in scope, and are often comprised of a series of regional clusters.Rw1 Y4ԍSee infra 15155. R  Y 4 453.` ` Moreover, over time, it is likely that consumers will be able to purchase services from MVPDs located outside their franchise areas. For example, wireless cable and  Y 4SMATV systems may serve entire metropolitan areas.Tx t Y4ԍSee infra III.B.34.T A LEC providing VDT service  Y 4may serve an entire region of the country.Xy   Yn4ԍSee, e.g., GTE Comments at 56. X Finally, DBS service providers may  Y 4contemplate a national market.Yz  Y4ԍSee, e.g., DirecTV Comments at 14.Y Therefore, as competitive entry increases, the definition of the geographic market for purposes of economic analysis may be broadened beyond the franchise area to account for the impact of these alternative suppliers.   XK4 B.The Status of Existing Competitors to Franchised Cable Systems  U41.` ` Overbuilders   Y4  554.` ` 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, thereby giving consumers a choice between cable service providers.  Ye4 655.` ` In the 1990 Cable Report, the Commission found that the number of overbuilders was "relatively small," noting reports of forty to fortynine directly competitive"PQ z\+))@"  Y4systems in operation at the time of that Report.d{ Yy4ԍ1990 Cable Report 98, 5 FCC Rcd at 5013.d The Commission found, however, that  Y4"direct competition has resulted in reduced per channel rates for cable service.":|{ Y4ԍId.:  Y4Therefore, in order to stimulate further competition from cable overbuilders, the 1990 Cable  Y4Report contained the recommendation that Congress: "(a) forbid local franchise authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service; (b)prohibit franchising rules whose intent or effect is to create unreasonable barriers to the entry of potential competing multichannel video providers; (c)limit local  Ye4franchising requirements to appropriate governmental interests (e.g., public health and safety, repair and good condition of public rightsofway, and the posting of an appropriate construction bond); and (d)permit competitors to enter a market pursuant to an initial, time Y" 4limited suspension of any 'universal service' obligation."Y}"  Y4ԍId. 14(1), 5 FCC Rcd at 4974.Y  Y 4 756.` ` Congress incorporated the Commission's recommendations in the 1992 Cable  Y 4Act by amending 621(a)(1) of the Communications Act to provide that: XX` ` [a franchising authority may award . . . 1 or more franchises within its jurisdiction]; except that a franchising authority may not grant an exclusive franchise and may not unreasonably refuse to award an  Yn4additional competitive franchise.~ n Y4ԍTwo courts have rendered divergent interpretations of the 1992 Cable Act's exclusive  Y4franchise provisions. In Jones Cable Partners v. City of Jamestown, 822 F.Supp. 476, 478-79 (M.D.Tenn.1993), the court held that an exclusive franchise remained "valid, effective and enforceable," after passage of the 1992 Cable Act on the basis that Congress had not indicated an intent to apply the 1992 Cable Act retroactively, and enjoined the City  YS4of Jamestown from creating its own competing system. In Cox Cable Communications, Inc.  Y>4v. United States, 992 F.2d 1178, 1181 (11thCir.1993), however, the court refused to enjoin a cable operator from overbuilding the operations of the incumbent operator which had an exclusive franchise. The court held that the 1992 Cable Act "does not automatically invalidate existing exclusive franchises; rather it invalidates the exclusivity of such franchises when a qualified applicant requests access to the market serviced by those franchises. The 1992 Act overrules the exclusivity of government franchises by imposing a reasonableness requirement on a franchising authority's refusal to award an additional franchise."  Any applicant whose application for a second franchise has been denied by a final decision of the franchising authority may appeal such final decision pursuant to the  Y)4provisions of section 635 for failure to comply with this subsection.Hx)H Y'4ԍ1992 Cable Act, sec.7(a)(1) (codified at 47 U.S.C.546(a)(1)). A concern has"'~\+))'"  Yy4been raised that the provision of Section 621 that allows an appeal only from a final decision of denial by a franchising authority potentially could be used by a franchising authority to delay or preclude a potential entrant from availing itself of the remedies in the Act. The Commission would be interested in hearing of any such alleged frustration of the purpose of Section 621.H ` ")\+))w"ԌIn addition, Congress amended the Communications Act to require a franchising authority to "allow the applicant's cable system a reasonable period of time to become capable of  Y4providing cable service to all households in the franchise area."u Yw 4ԍ1992 Cable Act, sec.7(b) (codified at 47 U.S.C. 541(a)(4)(A)).u   Y4 857.` ` In connection with its March 30, 1994 Report and Order regarding rate regulation, the Commission examined the competitive differential between markets that were overbuilt and those that were not. That competitive differential was defined as the difference in monthly average revenue per subscriber between two cable systems, otherwise identical, one of which is subject to duopolistic competition from the overbuilder, and one of which is not. The Commission's statistical analysis refined the measure of the strength of overbuild competition by taking account of the amount of overlap between competing providers. Under that analysis, the Commission determined that the rates in markets that were overbuilt  Y 4were an average of sixteen percent lower than the rates in markets that were not overbuilt.B  Y.4ԍ1994 Rate Report & Order 97. Appendix C of the 1994 Rate Report & Order contains a detailed and technical discussion of the variables and economic assumptions underlying the Commission's calculation. The Commission studied 51 overbuilds (including  Y4those by municipal providers) in connection with that order. Id. 96. The National Cable Television Association ("NCTA") takes exception to the methodology used by the Commission to determine the competitive differential in overbuilt markets, and submitted in this proceeding a study prepared by Arthur D. Little, Inc., which  Yz4purports to evaluate the Commission's methodology used in the 1994 Rate Report and Order. NCTA asserts that the competitive differential found by the Commission only existed in cases of systems serving fewer than 5,000 subscribers, and that such systems are not representative of the industry. According to NCTA, when system size is taken into account, the  Y 4competitive differential for overbuilt systems is reduced to almost zero. See NCTA Comments at 45, Attachment D (Arthur D. Little, Inc., Evaluation of FCC Methodology for 1994 Rate Order, Report to NCTA (June 1994)).  Y#4The Commission notes that NCTA and others have appealed the 1994 Rate Report &  Y$4Order. See Time Warner Entertainment Co. v. FCC, No. 93-1723 (and consolidated cases) (D.C. Cir., filed Oct. 29, 1993). Accordingly, it would be inappropriate to comment on  Y&4NCTA's criticisms of the Commission's rate setting methodology in this Report.  " \+)) "Ԍ Y4 958.` ` Several economic studies of direct competition in the cable industry also show  Y4that competition from overbuilding lowers cable rates.  Yb4ԍSee John W. Merline, How to Get Better Cable TV at Lower Prices, Consumers'  YM4Research, May 1990, at 1017 (duopolistically competitive cable systems have rates that average 18% lower than their monopoly counterparts, and carry an average of 21% more  Y4channels than monopoly systems); Stanford Levin & John Meisel, Cable Television and  Y 4Competition: Theory, Evidence, and Policy, Telecomm. Policy (1991) (monthly rates for competitive systems are approximately $2.94 to $3.33 lower than for monopoly systems); Richard O. Beil, P. Thomas Dazzio, Robert B. Ekelund, Jr., and John D. Jackson,  Y 4Competition and the Price of Municipal Cable Services: An Empirical Study, 6 J. Reg.  Y 4Econ. 41015 (1993) (competitive market prices are, on average, $3.85 less than the rates charged in monopoly markets); George Ford, Competition in the Cable Television Industry: An Economic Analysis of Overlap Variations and Cable Prices (1994) (unpublished Ph.D dissertation, Auburn University) (monopoly prices are 21% higher than overbuild prices). Anecdotal evidence shows positive service and rate effects from overbuilds. For example, in Glasgow, Kentucky, consumers can choose between two cable systems one of which is operated by the Glasgow Electric  Y4Plant Board ("GEPB"), the municipal electric utility.  Y4ԍEntry by electric utilities into the video distribution market, generally, is discussed in  Y4Section III.C.4, infra.Ľ In anticipation of overbuild entry by  Y4GEPB in June 1989,a  Y64ԍSee Warren Publishing, Inc., 1994 Television and Cable Factbook ("1994 Factbook")  Y!4at D651; see also Leland L. Johnson, Toward Competition In Cable Television ("Toward  Y 4Competition") 20 (1994).a the incumbent operator initially dropped its basic rate for twentyfour channel service from $23.00 to $5.95. As of September 1993, after more than four years of direct competition, the municipal operator entrant offered fortyeight channels for $13.50 a  YH4month; the incumbent charged $8.95 for thirtyseven channels.H Yd4ԍAudrey Davidson & George Ford, Competition Will Decrease Cable Rates, Business  YO4First, Sept. 6, 1993; Kate Maddox, Cable Overbuilds Struggle with Retransmission,  Y:4E#D  P7jQ ApP#LECTRONIC# XR  P7jQXP# M#D  P7jQ ApP#EDIA# XR  P7jQXP#, June 7, 1993, at S4.   Y 4 :59.` ` In a 1990 article, Thomas Hazlett reported on four instances of 1987 overbuild  Y 4entry, three of which were in Florida.  Y!4ԍ Thomas W. Hazlett, Duopolistic Competition in Cable Television, 7 Yale J. Reg.65 (Winter 1990). In Orange County, an overbuilder secured a countywide franchise permitting competition in all unincorporated areas. In response, two different incumbents each reduced their basic prices by half, from the $13.00permonth range to the $6.50permonth range. In Riviera Beach, the incumbent operator responded to the entry of an overbuilder in 1987 by expanding its twelvechannel basic service priced at $8.40 to a package competitive with the overbuilder's twentysixchannel, $5.75 offering. In Dade County, Florida, the incumbent operator reduced its basic service price by onethird to"yz\+))" match a new overbuild entrant. Finally, an overbuilder entering the market in Sacramento, California in late 1987 offered thirtysix to fortytwo channels at $10.00 a month, and a $10.00 installation charge, compared with the incumbent's fortychannel, $14.50 offering. However, while the incumbent initially repriced to meet the entrant's prices, it purchased the  Y4competitor six months later.< Y4ԍId. < X` hp x (#%'0*,.8135@8:63.` ` Since 1990, DBS has advanced as a potential longterm viable competitor to cable. In December, 1993, the first highpower DBS satellite ("DBS1"), owned by DirecTV and operated jointly with USSB, was launched. DirecTV owns eleven transponders  Yx4on DBS-1, and USSB owns the other five.x{*  Y 4ԍA transponder receives the signal from a transmitting earth station on one frequency and retransmits the signal on another frequency for distribution to one or more receiving earth stations. On June 17, 1994, DirecTV and USSB began providing highpower DBS service via DBS-1, and DirecTV currently is transmitting over  YJ4fifty channels of subscription and payperview programming.IJ*  Y4ԍDirecTV Comments at 12.I On August3, 1994, DBS2, also owned by DirecTV, was launched; DirecTV owns all sixteen of the transponders on  Y 4DBS2.< *  Y@4ԍDirecTV, Inc., DirecTV Successfully Launches Second Direct Broadcast Satellite,  Y+4(News Release, Aug. 3, 1994); Demand for DirecTV/USSB Systems Exceeds Supply in First  Y4Month, Comm. Daily, July 19, 1994, at 23. < When DBS-2 becomes operational, which is projected to occur on September19, 1994, DirecTV's digital broadcast facility will purportedly be able to process and transmit as  Y 4many as 216 video and audio channels simultaneously.: *  Y4ԍChris McConnell, DirecTV's AllDigital Domain, Broadcasting & Cable, Mar. 28,  Yr41994, at 52. See also, Christopher Stern, DirecTV Aims for Cable Viewers, Broadcasting &  Y]4Cable, Dec. 6, 1993, at 42.:  Y 4 ?64.` ` DirecTV states that it will be able to increase channel capacity by increasing power and introducing a new signal compression standard, which will allow it to provide an  Y4additional fifteen to twenty channels by 1995.Ko*  Y4ԍDirecTV Comments at 1415.K DirecTV has also filed an application to  Y{4operate a third satellite, which is scheduled to be launched in early 1995.9{ *  Y$!4ԍDirecTV Comments at 15. DirecTV reportedly intends to use this third satellite to  Y "4increase payperview service. See Mary Hillebrand, DBS Services Look Ahead, Satellite  Y"4Bus. News, July 13, 1994, at 1, 25.9 USSB, with five transponders, currently offers twenty channels, and stated in comments in this docket that improvements in encoder equipment and software will make it possible to expand its service  Y64to offer twentyfive to twentyeight channels over the next few months.D6}*  YP'4ԍUSSB Comments at 5.D "!\+))"Ԍ Y4 @65.` ` As of September 9, 1994, DBS equipment was available in twentythree states,  Y4and approximately 40,000 households were receiving programming via DBS.*  Yb4ԍLetter dated September 13, 1994 from Marvin Rosenberg, Esq., counsel for USSB, Inc., to William F. Caton, Acting Secretary, Federal Communications Commission, filed in this proceeding on September 13, 1994. DirecTV expects that DBS equipment will be available throughout the continental United States by  Y4early November 1994.K*  Y4ԍLetter dated September 12, 1994 from Gary M. Epstein, Esq., counsel for DirecTV, to William F. Caton, Acting Secretary, Federal Communications Commission, filed in this proceeding on September 12, 1994 ("DirecTV Letter"). Subscribers receive video programming directly from the satellite through small reception dishes that are approximately eighteen inches in diameter. The home receiving equipment that is required to receive the service costs $699, and subscribers can either pay $150200 for professional installation or purchase the installation equipment for  Y_4$69.95._*  Y4ԍDirecTV Comments at 17; USSB Comments at 10; Mary Hillebrand, DBS Hits  Y4Thomson's Backyard, Satellite Bus. News, July 27, 1994, at 1, 25. The $699 Digital Satellite System ("DSS") unit allows a subscribing household to watch one channel at a time. In order to view two different channels on different television sets, a person must purchase an $899 DSS unit and then also purchase a $649 decoder for  Y 4the second television set. D *  Y4ԍThomson, DBS Shine at CES, Satellite Bus. News, June 16, 1993, at 1, 21; Comments of USSB at 9. Thomson Consumer Electronics ("Thomson"), under the brand name RCA, produces the DSS equipment which includes the receiving dish, digital receiver and remote control. Thomson/RCA has an exclusive contract to produce DSS units for the  Y 4first eighteen months or one million units, whichever occurs first.P *  Y>4ԍSee DirecTV Letter.P After that, Sony and  Y 4Thomson will both produce the DSS equipment for the next six months.: k*  Y4ԍId.: Thereafter, other manufacturers may be licensed to produce DSS equipment.  Yy4 A66.` ` DirecTV states that despite the relatively significant initial cost, 400,000 to 500,000 DSS units will be shipped by Thomson/RCA this year, and that equipment costs will  YK4decline over time.oK *  Y"4ԍDirecTV Comments at 1617. See also USSB Comments at 8.o Retailers in the first five markets in which DBS service has been  Y44introduced have reported that the demand for the dishes has exceeded the supply.4*  Yz%4ԍUSSB Comments at 7; Demand for DirecTV/USSB Systems, supra note 147, at 2. Those five markets are Albuquerque, New Mexico; Jackson, Mississippi; Little Rock, Arkansas; Shreveport, Louisiana; and Tulsa, Oklahoma.  By the end of 1994, according to USSB, approximately 10,000 locations nationwide will be carrying""\+))"  Y4DSS equipment and offering both USSB and DirecTV programming.D*  Yy4ԍUSSB Comments at 6.D As part of its marketing effort, Hughes has also entered into an agreement with the National Rural Telecommunications Cooperative ("NRTC") to provide DirecTV services to subscribers  Y4through its membership across the country.Dy*  Y4ԍNRTC Comments at 5.D   Y4 B67.` ` In addition to DirecTV and USSB, several other ventures are attempting to enter the highpower DBS field. EchoStar Communications Corporation ("EchoStar"), which has reportedly raised $332 million dollars in a debt offering, is required by the terms of its  YH4construction permit to have its system in operation by August 15, 1995.H*  Y 4ԍEying Charlie Ergen's World, Satellite Bus. News, May 18, 1994, at 6. Cf. Dinah  Y 4Zeiger, EchoStar Moves into SatelliteTV Spotlight, D#D  P7jQ ApP#ENVER# XR  P7jQXP# P#D  P7jQ ApP#OST# XR  P7jQXP#, Mar. 29, 1994, atC1 (EchoStar filed with the SEC documents describing a $335 million debt offering).  Directsat Corporation and Direct Broadcast Satellite Corporation, which are each authorized to provide  Y 4eleven channels of service,U *  Y@4ԍEchoStar and SSE Telecom Inc. have filed an application seeking Commission consent for transfer of control of Directsat from SSE to EchoStar which would combine the  Y4allocation of channels of both EchoStar and Directsat. See FCC File No. DBS8801\8802\9408 TCP\M.U are required by their construction permits to be operational by  Y 4August 15, 1995. *  Y4ԍApplication of Continental Satellite Corp. for Assignment of DBS Channels,  Yn4Memorandum Opinion & Order, 4 FCC Rcd 6292 (1989) (applying 47 C.F.R. 100.19). Tempo Satellite, Inc. (a whollyowned subsidiary of TCI), is authorized  Y 4to provide eleven channels of service and is required to be operational by May 1, 1998. m*  Y4ԍApplication of Tempo Satellite, Inc. for Assignment of DBS Channels, Memorandum  Y4Opinion & Order, 7 FCC Rcd 2728 (1992) (applying 47 C.F.R. 100.19). The other parties, which have received conditional construction permits, but have not yet been assigned specific orbital positions and channels, are Continental Satellite Corporation, and Dominion Video Satellite, Inc. According to the terms of its construction permit,  Y4Continental's DBS system is to be operational by December 4, 1996.:*  Y$!4ԍId.: Finally, Advanced Communications Corporation, which has been assigned orbital positions and channels, is  Yb4required to have its system operational by December, 1994.b*  Y$4ԍApplication of Advanced Communications Corp. for Assignment of DBS Channels,  Y%4Memorandum Opinion & Order, 6 FCC Rcd 2269 (1992) (applying 47 C.F.R. 100.19). Advanced Communications Corporation's application for an extension of time to construct its  YT'4system is currently pending before the Commission. See FCC File No. DBS8401\9411 EXT."b#\+))"Ԍ Y4ٙ C68.` ` In addition to the highpower DBS services listed above, Primestar is a joint venture owned by six MSOs, and GE American Communications, Inc., which owns the  Y4satellite used by Primestar.*  YK4ԍThe cable companies are Comcast, Continental Cablevision, Cox Enterprises,  Y44Newhouse Broadcasting Corporation, TCI and Time Warner. United States v. Primestar  Y4Partners, 19941 Trade Cas. (CCH) 70,562 (S.D.N.Y. 1994); State of New York ex rel.  Y 4Abrams v. Primestar Partners, 19932 Trade Cas. (CCH) 70,403, 404 (S.D.N.Y. 1993)  Y4(collectively the "Primestar Consent Decrees ").  Primestar has been operational as a mediumpower Kuband  Y4service provider since 1991,_%*  Y} 4ԍImplementation of Section 25 of the Cable Television Consumer Protection and  Yh 4Competition Act of 1992, Direct Broadcast Satellite Public Service Obligations, Notice of  YS 4Proposed Rule Making 11, 8 FCC Rcd 1589, 1591 (1993) ("DBS NPRM")._ and its service is available toconsumers using thirtysixinch  Y4and fortyinch dishes. *  Y4ԍDBS Duelers Cross Swords in New York, Broadcasting & Cable, Mar. 21, 1994,  Y4at40; Arietta, New York to Be the Nation's First Digital Town, P#XR  P7jQXP#R#XR  P7jQXP# N#D  P7jQ ApP#EWSWIRE# XR  P7jQXP#, Sept. 8, 1994 (available in LEXIS, Nexis Library). As of June4, 1994, Primestar served 70,383 subscribers, and it began to use digital technology to provide service to its subscribers by digital technology on  Yv4July31, 1994.5v *  Y 4ԍPrimestar Comments at 4. It was reported on September 16, 1994 that Primestar was  Y 4serving more than 100,000 subscribers in fortyeight states. Satellite and International,  Y4Comm. Daily, Sept. 16, 1994, at 5.5 Primestar is currently conducting a $55 million advertising campaign, and  Y_4now offers seventyone video channels.S_~*  Yz4ԍSee Primestar Comments at 4.S Ultimately, after it makes a planned transition to a new generation of satellites in 1996, Primestar plans to offer more than 150 channels of  Y14programming.:1*  Y4ԍId.:   Y 4 D69.` ` By its very nature, DBS is a national video programming distribution  Y 4service.M *  YE 4ԍUSSB Emergency Motion at 3. M DirecTV considers its potential subscriber base to be all 94 million television  Y 4households. Y*  Y"4ԍDirecTV Comments at 14 ("Since DirecTV's reach is essentially ubiquitous, all United States households are potential DirecTV subscribers"). However, DirecTV points out that local zoning ordinances or similar household access restrictions regarding residential  Y%4purchase and placement of the dishes can limit DirecTV's eventual reach. Id. at n.21. However, DBS service does not offer local broadcast signals, a fact which some commenters argue inhibits the ability of DBS service to become an effective competitor" $\+)) "  Y4to cable service.x*  Yy4ԍSee Primestar Comments at 8; Bell Atlantic Reply Comments at 23.x On the other hand, DBS service might provide consumers with service attributes that are not generally available on cable systems at this time. For example, USSB  Y4states that DBS subscribers will have digital video and compact disc ("CD") quality sound,E{*  Y4ԍUSSB Comments at 11.E and DirecTV states that its DBS system, which has a modem in the DSS receiver, will have  Y4interactive capabilities via telephone lines.K*  YY 4ԍDirecTV Letter at 2.K  Yv4 E70.` ` DBS service providers and equipment manufacturers are highly optimistic about the potential for subscribership growth. USSB predicts that between one and two million dishes will be sold within a year, and five to ten million will be sold within three  Y14years.D1*  Y4ԍUSSB Comments at 8.D DirecTV projects that it will have over three million subscribing households within  Y 4three years.H R*  Y 4ԍDirecTV Comments at 16.H USSB estimates that in seven years, almost forty percent of all television  Y 4households may receive programming via DSS equipment.D *  Y4ԍUSSB Comments at 8.D Thomson Consumer Electronics/RCA, the current manufacturer of the DBS dishes, anticipates sales of ten million  Y 4units in the next six years.E *  Y4ԍUSSB Comments at 13.E Finally, although Primestar has concentrated its early efforts  Y 4on areas unserved by cable or wireless cable,N ) *  Y4ԍPrimestar Comments at 45, 8.N it projects that it will serve in excess of  Y 4200,000 subscribers by the end of 1994, and twotofive million by the end of the decade.K *  Y 4ԍPrimestar Comments at 45.K   Yy4` ` b. Home Satellite Dishes (HSDs)  YM4 F71.` ` HSD technology was first developed in 1976, and commercialized in 1980.Mc*  YM"4ԍSatellite Broadcasting and Communications Association of America ("SBCA") Comments at 3. HSDs are approximately 710 feet in diameter and receive video programming transmitted in  Y4the C-band of frequencies.*  Y&4ԍBecause signals in this band are transmitted at lower power than signals in other bands used for directtohome service, the receiving antenna must be larger to receive the signal. HSD owners can watch without payment approximately 150"%X\+))" unscrambled signals, and another 103 scrambled channels can be ordered through program  Y4packagers.E*  Yb4ԍ SBCA Comments at 3.E Generally, HSD owners have access to the same programming services that are  Y4available on cable, although the most popular cable programming services are scrambled.ny*  Y4ԍToward Competition, supra note 132, at 115.n In order to receive one or more scrambled channels, an HSD owner must purchase an integrated receiverdecoder ("IRD") from an equipment dealer and then pay a monthly or  Y4annual subscription fee to one of the thirty or so national packagers of HSD programming.*  YB 4ԍSBCA Comments at 8. A number of programmers and cable operators have established HSD packager units or subsidiaries. In addition, a number of unaffiliated thirdparties serve as program packagers.  Y_4 G72.` ` In the 1990 Cable Report, the Commission observed that HSD use in the United States had grown to roughly 2.8 million units from approximately 900,000 in 1984,  Y34and that this growth stalled in 1986 with the advent of satellite signal scrambling. j3*  YW4ԍ1990 Cable Report at 103, 5 FCC Rcd at 5016. As noted in the 1990 Cable  YB4Report, the market for HSD service changed significantly in 1986, when HBO first began scrambling its satellite signal and then selling it to HSD owners who had purchased a decoder. Other program services followed HBO's example and began scrambling their satellite signals. The introduction of signal scrambling in 1986 resulted in the advent of significant pirating of scrambled signals through the illegal use of decoding systems. Indeed, the first decoder used by the HSD industry, the VideoCipher II, manufactured by General Instrument, Inc., was itself susceptible to signal pirating. According to one report, by 1990  Y4more than 50% of the users of this decoder were not paying for programming. Toward  Y4Competition, supra note 132, at 116 (citing Karen J.P. Hawes, Encryption in the '90s, Via  Yw4Satellite, June 1990, at 29). According to another estimate, of the approximately 3.5 million reception systems in the United States in 1991, close to 1.2 million consumers had modified their systems so as to be able to receive scrambled programming without having to pay a fee. SBCA Comments at 7. As a result of this pirating, a second decoder was developed, the  Y4VideoCipher II Plus, which offered greater security and replaced the earlier units. Toward  Y4Competition, supra note 132, at 116. SBCA indicates that VideoCipher II Plus "has held for three years now, and many of the consumers who previously owned 'chipped' units have now converted to being legitimate subscribers." SBCA Comments at 7.  In  Y 4addition, the Report noted that zoning regulations could restrict many viewers' ability to  Y 4install an HSD system.: *  YI$4ԍId.: " &D\+)) "Ԍ Y4 H73.` ` Today, there are approximately four million HSD users, roughly half of  Y4whom, according to SBCA estimates, subscribe to one or more programming services.*  Yb4ԍSBCA Comments at 12; Satellite System Sales, Satellite Bus. News, Aug. 10, 1994 at1 (citing General Instrument Corp. statement). Ithas also been reported that almost all recent buyers of HSD systems are choosing to  Y4subscribe to a programming service.d*  Y4ԍWhy Do People Buy? SkyREPORT (Newsletter of SBCA), First quarter 1994, at10,11. Consumers pay an average of $2,500 for a complete  Y4HSD system,D*  Y- 4ԍSBCA Comments at 5.D although one commenter states that a C-band system can be purchased and  Y4installed for as little as $1,000.*  Y 4ԍConsumer Satellite Systems, Inc., Programmers Clearing House, Inc., and Satellite  Y4Receivers, Inc. (hereinafter collectively referred to as "CSS") Comments at 2. There are indications that HSD use might be increasing SBCA reports that 55,000 Cband systems were shipped in April 1994 and another 61,000  Y_4were shipped in May 1994.D_ *  Y 4ԍSBCA Comments at 4.D Those are the two highest monthly totals of C-band shipments  YH4since 1986, the year programmers began scrambling their signals.:H *  Y4ԍId.:  Y 4 I74.` ` A survey by the SBCA indicates that HSDs and cable systems may be either complementary video programming services or substitutes for each other, depending on viewer preferences and other circumstances. That survey found that 61% of HSD systems were purchased by persons who did not have access to cable at the time they purchased the  Y 4HSD.Q K *  Y4ԍSBCA Comments, Appendix B, at 7.Q However, the survey also found that 37% of HSD owners with access to cable subscribe to cable services, and that 18% of HSD owners who subscribe to satellite Y4programming packages also subscribe to cable.:*  Y4ԍId.: Among HSD owners who subscribe to both cable and one or more satelliteprogramming packages, 41% did so for the purpose of  Yb4receiving local television stations.:b*  Y"4ԍId.:  Y44 J75.` ` The HSD industry's primary competitive strength visavis cable is programming variety and flexibility. An HSD owner may choose from a variety of program  Y4packages offered by the approximately thirty program packagers nationwide.@&*  Y'4ԍId. at 8.@ Those program packagers compete with each other to offer owners the most desirable combinations"'\+))"  Y4of programming services at attractive prices.M*  Yy4ԍNetlink Reply Comments at 3.M One commenter states that the average HSD  Y4subscriber purchases programming from 2.5 different outlets.Cy*  Y4ԍCSS Comments at 5.C The survey commissioned by the SBCA found that the most common reason for purchasing an HSD was to gain access  Y4to an increased variety of programming.P*  Yn4ԍSBCA Comments, Appendix B at 3.P  Y4 K76.` ` Although HSD services offer more programming options than any other video delivery system, the cost of a system entails a large upfront expenditure by the consumer. Another drawback for HSD services comes from the fact that many localities have enacted  YH4zoning ordinances that restrict the deployment of HSDs.DH*  Y4ԍId. at 1718.D Although the Commission has preempted zoning ordinances that either discriminate against HSDs without "a reasonable and clearly defined health, safety or aesthetic objective," or impose "unreasonable limitations"  Y 4on the use of satellite dishes,G R*  Y4ԍ47 C.F.R.  25.104.G the SBCA reports that local authorities continue to enact  Y 4ordinances that violate these rules.E *  Yx4ԍSBCA Comments at 18.E It also notes that the Commission's ability to enforce  Y 4its zoning preemption rules recently has been limited by a federal court decision.* *  Y4ԍTown of Deerfield v. FCC, 992 F.2d 420 (2d Cir. 1993) (where Commission rules contemplated court review of municipal zoning ordinances under limited Commission preemption, Commission may not subsequently review finding made by district court).* Therefore, the SBCA requests that the Commission clarify its rules preempting zoning ordinances that unreasonably differentiate between satellite dishes and other types of  Y4antennas. *  YA4ԍSBCA Comments at 18. SBCA and Hughes Network Systems, Inc. have each filed a petition for declaratory ruling concerning the Commission's preemption of local zoning regulation of satellite antennas. Related to the zoning problem is the SBCA's contention that homeowners' associations, through covenants and other restrictions, prohibit homeowners from deploying  Yb4HSDs.Eb*  Y!4ԍSBCA Comments at 19.E Although the SBCA estimates that eighty percent of all new homes in the United States are part of homeowners' associations, there is no indication of how widespread this  Y44practice may be.:47*  Y%4ԍId.:  Y4 L77.` ` A third factor that may affect the ability of HSD systems to compete with cable systems is presented by claims that HSD program packagers are charged prices for"(\+))"  Y4video programming that cannot be justified under the Commission's program access rules.m*  Yy4ԍSee, e.g., CSS Comments at 35; NRTC Comments at 920.m  Y4Those claims are addressed in the Commission's discussion of the program access rules in  Y4SectionIV.B.2.a of the Report.   Y4 3.` ` Terrestrial "Wireless" Cable é Multichannel (#`  U4` ` Multipoint Distribution Service (MMDS)  Ye4 M78.` ` The term "wireless cable" refers to the Multipoint Distribution Service ("MDS") and MMDS (Multichannel Multipoint Distribution Service), both of which transmit  Y74video programming using overtheair microwave radio channels.7{*  YO 4ԍLocal Multipoint Distribution Service ("LMDS") also transmits multichannel video  Y8 4using microwave frequencies.  See infra LMDS discussion in section III.C.2. Subscribers use rooftop antennas to receive the programming transmitted from the wireless cable tower. The signals received are then sent through electronics equipment to the subscriber's television set. There are eleven MMDS channels available to wireless cable system operators for fulltime use, and either two or three singlechannel MDS channels depending on the particular city. In addition, wireless cable system operators have access to the twenty channels allocated to  Y 4Instructional Television Fixed Service ("ITFS") *  YM4ԍITFS channels are used by educational institutions to interconnect scattered campus locations. on a leased, parttime basis. Thus, wireless cable operators have access to a maximum of thirtytwo or thirtythree channels.  Yh4 N79.` ` The wireless cable industry has increased its subscribership from 50 systems serving 300,000 subscribers in 1990, to 143 systems serving 550,000 subscribers by June  Y:41994.v:*  Y`4ԍWireless Cable Association International, Inc. ("WCA") Comments at 2.v In addition, analysts have projected the number of wireless cable subscribers to  Y#4grow through the end of the decade.#& *  Y4ԍCritical Mass for Critical Funding, Wireless Cable Investor, June 30, 1994, at1-2. Although wireless cable has not achieved significant penetration nationwide, there are a number of markets in which wireless cable has gained a foothold in competition with wired cable systems. In Riverside, California for example, Cross Country Wireless Cable TV has attracted 42,000 subscribers out of a total of 400,000  Y4homes that can receive its services. *  Y)#4ԍGerard Klauer Mattison Conference, Wireless Cable Investor, Mar. 30, 1994, at5. People's Choice TV in Tucson, Arizona had 22,000 subscribers as of June 1994, and projects that it will add another 18,000 subscribers over the  Y4next two years.Od *  Y&4ԍPeople's Choice Comments at 7.O CableMaxx currently has 14,000 subscribers in Austin, Texas and is")\+))["  Y4adding subscribers at the rate of 1000 per month.{*  Yy4ԍGerard Klauer Mattison Conference, supra note 217, at 4.{ ACS Enterprises, which operates in the  Y4Philadelphia, Pennsylvania area, has approximately 30,000 subscribers.{*  Y4ԍCharles Reidstetter, Trendsetter Grows A Business, Private Cable & Wireless Cable,  Y4June 1994, at7; John M. Higgins, Wireless Operators Receive Money, but Find It Scarce;  Y4Wireless Cable Operators Financing, M#D  P7jQ ApP#ULTICHANNEL# XR  P7jQXP# N#D  P7jQ ApP#EWS# XR  P7jQXP#, Jan. 25, 1993, at 3. Finally, after just over two years of operation, Coastal Wireless Cable Television provides service to 10.5% of  Y4the homes in Ft. Pierce, Florida that are capable of receiving its signal.*  YH 4ԍAs of August 18, 1994, Coastal had 12,966 customers out of 129,000 households that could receive its services ("homes seen"). A recent article indicates that Coastal's subscribership may exceed 15% percent in one of the cable franchise areas where it provides  Y 4wireless cable service. Tom Kerver, Attack of the Wireless Entrepreneurs, Cablevision, July 25, 1994, at 30.  Y4 O80.` ` Wireless cable operators recently have gained access to financing from public debt and equity markets. Since December 1992, wireless operators have raised almost $600  Y_4million from the public markets.g_3 *  Y/4ԍCritical Mass, supra note 216, at 1.g Those funds permit wireless operators to acquire multiple systems, and thereby to begin laying the foundation for the economies of scale now enjoyed  Y14by MSOs.!L1 *  Y4ԍFor example, the doortodoor marketing now employed by many wireless cable operators will eventually give way to large scale mass media advertising. Also, wireless cable operators will qualify for bulk discount programming rates when they reach a certain  Y[4level of subscribership.  Mary L. Kukowski, The Wireless Cable Industry Phoenix  YD4RisingĠ8, Aug. 22, 1994 (Dillon Read Equity Research Aug. 22, 1994); See also Paul Read,  Y/4Skyline Goes After Cable Subscribers, J#D  P7jQ ApP#OURNAL# XR  P7jQXP# O#D  P7jQ ApP#F# XR  P7jQXP# B#D  P7jQ ApP#USINESS# XR  P7jQXP# S#D  P7jQ ApP#POKANE# XR  P7jQXP#, June 10, 1993 (wireless cable operator who relied on doortodoor marketing began advertising via television and radio).! Access to public financing also permits wireless operators to expand their  Y 4systems more rapidly. *  Y4ԍSee, e.g., WCA Comments at 34; Annette K. Hugh, NCTA Invites Competitors To  Yt 4Enter Lion's Den, Private Cable Plus Wireless Cable, July 1994, at 17. For example, after People's Choice TV issued stock to the public on July 8, 1993, it increased its subscriber base in Tucson, Arizona from 13,000 to 22,000,  Y 4and now expects to add a total of 125,000 subscribers to its five systems by March, 1995.O \*  Y#4ԍPeople's Choice Comments at 7.O Accordingly, it appears that access to public financing, as well as increasing credibility with  Y 4banks,u *  YT'4ԍGerard Klauer Mattison Conference, supra note 217, at 1.u may have helped to alleviate one of the major problems that has confronted the wireless industry." *\+))"Ԍ Y4ٙ P81.` ` The wireless cable industry has a number of strengths visavis cable. First, wireless cable system operators appear to incur lower costs for the initial construction of  Y4their systems.*  YM4ԍToward Competition, supra note 132, at 128. Johnson believes this is particularly true in cases where the owner of the cable system paid significantly more than the replacement cost of the system. One analyst estimates that wireless cable systems have capital costs that are  Y4onethird lower than the capital costs of cable systems.mM*  Y4ԍR.S. Salomon, Jr., Can Wireless Compete? Forbes, Oct. 11, 1993, at 182. Another observer estimates that the total persubscriber investment for wireless operators is $400 Y{ 4$500 compared with $700 per subscriber for cable. Toward Competition, supra note 132, at128.m The lower initial construction cost  Y4allows wireless operators to provide comparable service at lower prices than cable.x*  Y 4ԍWCA Comments at 1012. It has been reported that wireless cable rates are 25%  Y4lower than cable rates for comparable service. G. Robert Berzins, Wireless Cable: A  Y4Strong Competitive Threat to Cable 3 (Kidder, Peabody & Co. Research, July 20, 1994). In addition, the president of Cross Country Wireless Cable TV, Inc. recently stated that 77% of the subscribers in its Riverside, California system subscribe to Cross Country because of its  Yy4lower prices. Attack of the Wireless Entrepreneurs, supra note 221, at 29. Indeed, it has been argued that those lower prices are the basis for the growth of wireless  Yx4cable up to this point.{x*  Y4ԍAttack of the Wireless Entrepreneurs, supra note 221, at 29. See also Toward  Y4Competition, supra note 132, at 129 (stating that wireless cable systems' success depends on their ability to undercut their competitors' prices while offering comparable programming).{  YJ4 Q82.` ` Second, it appears wireless operators may be able to upgrade their systems to employ digital compression and interactive applications at a lower cost per subscriber than  Y 4cable system operators. H*  Y4ԍGerard Klauer Mattison Conference, supra note 217, at 13; Berzins, supra note229,  Y4at 3. A study undertaken by People's Choice TV estimated that upgrading to digital compression and interactive applications would cost cable operators  Y 4almost twice as much as wireless operators. *  Y[!4ԍGerard Klauer Mattison Conference, supra note 217, at 13.ĉ   Y 4 R83.` ` Third, in contrast to cable system operators, wireless cable operators are not  Y 4required to obtain franchises in order to provide service. o*  Y%4ԍSee Definition of a Cable Television System, Report & Order ("Definition of a Cable  Y&4System Report & Order"), 5 FCC Rcd 7638 (1990); see also Toward Competition, supra note 132, at 157: ("Franchising requirements and public service obligations imposed by local governments are a major impediment to full and fair competition . . . .") However, at least one state now" +\+))" regulates various aspects of the customer service provided by wireless cable operators and  Y4other MVPDs.`*  Yb4ԍ5 Cal. Gov. Code 1(a)  53088.153088.2.`  Y4 S84.` ` Finally, wireless systems may have technological advantages. Because radio frequencies rather than wires are used to deliver signals to subscribers, it has been suggested that there is both less signal degradation, which results in higher picture quality, and fewer  Yv4outages than with cable systems.`vy*  Y 4ԍNordberg Capital, Inc., Third Generation Television 4 (Industry Study Oct.21, 1993) Wireless cable's possible advantage in the area of signal quality may disappear as cable  Y^ 4operators begin transmitting their signals digitally. Berzins, supra note229, at 4.`  YH4 T85.` ` However, WCA has pointed to several remaining obstacles which it claims could hamper the growth of wireless cable. First, wireless cable operators have difficulty in  Y 4gaining access to a sufficient number of channels to provide a competitive service.E *  Y4ԍWCA Comments at 67.E As previously noted, wireless cable operators may assemble a maximum of thirtythree channels to transmit programming in any one market. Moreover, while some operators have accumulated thirty or more channels, others have encountered difficulty in obtaining licenses. That difficulty results in part from the opportunities for "warehousing" of licenses that both  Y 4the MMDS and ITFS licensing methods have presented. *  Y4ԍSee Amendment of Part 74 of the Commission's Rules With Regard to the Instructional  Y4Television Fixed Service, Order & Further Notice of Proposed Rulemaking, 9 FCC Rcd 3348  Y4(1994) (addressing ITFS filing abuses and application processing issues); Amendment of Parts1, 2, & 21 of the Commission's Rules Governing Use of Frequencies in the 2.1 &  Yu42.5GHz Bands, Notice of Proposed Rulemaking, 7 FCC Rcd 3266 (1992) (noting the volume of MMDS applications received by the Commission and instituting a freeze on these applications). Pursuant to the Omnibus Budget Reconciliation Act of 1993, the Commission now has authority to issue certain licenses by competitive bidding. Communications Act 309(j)(1), 47 U.S.C.  309(j)(1). The Commission has determined that mutually exclusive applications for MDS and MMDS licenses filed after July 26, 1993 shall be resolved by using  Y!4competitive bidding. Implementation of Section 309(j) of the Communications Act  Y"4Competitive Bidding, Second Report & Order 62, 9 FCC Rcd 2348, 2353 (1994).  Yy4 U86.` ` In order to bring the application process under control, and to prevent further speculative filings, the Commission instituted application freezes both for new MDS"b,\+))"  Y4stations,*  Yy4ԍAmendment of Parts 1, 2, and 21 of the Commission's Rules Governing Use of  Yd4Frequencies in the 2.1 and 2.5 GHz Bands, Notice of Proposed Rulemaking, 7 FCC Rcd 3266 (1992). and for new ITFS stations or major modifications to ITFS applications or  Y4facilities.O*  Y4ԍAmendment of Part 74 of the Commission's Rules With Regard to the Instructional  Y4Television Fixed Service, Notice of Proposed Rulemaking, 8 FCC Rcd 1275 (1993). WCA states that these application freezes, along with extensive use of ITFS channels by educational institutions in certain markets, have slowed the accumulation of  Y4channels by wireless operators.E*  Y1 4ԍWCA Comments at 67.E On June 9, 1994, the Commission undertook several steps aimed at eliminating regulatory delays for wireless cable licensing, one of which was to lift  Y4the application freeze for major modifications to ITFS licenses.= v*  Y4ԍAt its June 9, 1994 meeting, the Commission adopted three orders pertaining to wireless cable. One rule change permitted more streamlined ITFS application processing.  Wr4Amendment of Part 74 of the Commission's Rules With Regard to the Instructional Television  Y[4Fixed Serv., Order & Further Notice of Proposed Rulemaking, 9 FCC Rcd 3348. The second allowed all educational programming to be "loaded" onto a single ITFS channel, thus  Y/4allowing the other three channels to be leased to the wireless operator on a fulltime basis.  Amendment of Part 74 of the Commission's Rules Governing Use of the Frequencies in the  Y4Instructional Television Fixed Serv., Report & Order, 9 FCC Rcd 3360. The third centralized the processing and regulatory jurisdiction over wireless cable in the Mass Media  Y4Bureau. Amendment of Parts 0 and 1 of the Commission's Rules to Reflect a Reorganization  Y4of Multipoint & Multichannel Multipoint Dist. Serv. Regulation, Order, 9 FCC Rcd 3661. As part of this administrative reorganization, the Commission has assembled a team of 20 engineers, attorneys and analysts to process the pending wireless cable applications and petitions.= The WCA believes that the Commission's substantive and administrative improvements in wireless cable licensing will improve the Commission's ability to process the pending legal and application  YH4backlogs.CH*  Y4ԍWCA Comments at 7.C  Y 4 V87.` ` Second, wireless cable transmitters must have lineofsight access to a home in order for that home to be capable of receiving wireless cable service. Consequently, many homes are unable to receive service from this technology because they are blocked by trees or buildings. It has been estimated by one analyst that the average wireless cable operator  Y 4has lineofsight access to seventyfive percent of the homes in its service area.] *  Y%4ԍBerzins, supra note 229, at 45.] That percentage varies depending on the strength of the wireless cable transmitter and the topography of the service area. WCA reports that a lowcost signal booster, which allows"-,\+))"  Y4homes without lineofsight to receive service, recently has been developed.*  Yy4ԍAndrew Kreig, Major Digital Initiatives, New Products Announced, Spectrum  Yd4(Newsletter of WCA) (July 1994) at 3; See also John Ramsey, MMDS: The Advent of Latin  YO4American Pay TV; Method of Delivering Pay Television Programs, S#D  P7jQ ApP#ATELLITE# XR  P7jQXP# C#D  P7jQ ApP#OMM., # XR  P7jQXP#Aug. 1993, at 17. If effective, this technology would increase the number of "homes seen" by wireless systems. It is unclear, however, whether signal boosting can be accomplished in most wireless systems on  Y4a costeffective basis.h:*  Y 4ԍToward Competition, supra note 132, at 133.h   Y4 W88.` ` Third, wireless operators complain that their operations are hampered by the fact that they cannot interconnect separatelyowned buildings by wire, even if the wire only  Y_4crosses private property._*  Y4ԍIn its Definition of a Cable System, Report & Order ("Definition of a Cable System"),  Y45 FCC Rcd 7638, aff'd sub nom., FCC v. Beach Communications, Inc., ___ U.S. ___, 113 S.Ct. 2096 (1993), the Commission reversed its earlier position and concluded that a private cable system that interconnects by wire separatelyowned or controlled buildings on private property is a "cable system," and therefore must obtain a franchise prior to offering service. WCA states that the interconnection of subdivisions, townhomes and trailer parks by wire is more efficient than interconnection by microwave, which requires  Y14the purchase of expensive equipment.G1 *  Y4ԍWCA Comments at 1819.G Accordingly, WCA contends that Congress's failure  Y 4to extend the "private cable" exemption of the Communications ActZ *  Yr4ԍSection 602 of the Communications Act exempts from the definition of a cable system "a facility that serves only subscribers in 1 or more multiple dwellings under common ownership, control or management, unless such facility or facilities us[e] any public rightofway." 47 U.S.C.  522(7)(B).Z to interconnection of  Y 4separatelyĩowned buildings on private property is "one of the greatest impediments to  Y 4competition.": *  Y4ԍId.:  Y 4 X89.` ` Finally, WCA has suggested that a potential impediment to the growth of  Y 4wireless cable services is alleged anticompetitive behavior by cable operators.f *  Y"4ԍWCA Comments at 2226; People's Choice Comments at 3.f For example, WCA described situations in which franchised cable operators may have induced  Y{4local ITFS licensees to not lease their excess capacities to wireless cable operators.G{O*  Yg&4ԍWCA Comments at 2226.G The record does not contain the necessary evidence to determine how widespread those allegedly anticompetitive practices might be. However, to the extent that aggrieved parties believe that"M.\+))" such conduct violates Commission rules, their concerns may more properly be addressed in  Y4an appropriate complaint before the Commission, rather than in this Report.  Y4 Y90.` ` Overall, it appears that two of the wireless cable industry's most significant problems, lack of capital and insufficient channel capacity, are being addressed. First, the program access provisions of the 1992 Cable Act appear to have given wireless operators the credibility to raise money in the public debt and equity markets, thereby easing the financial  Ya4difficulties experienced by many wireless systems.Ba*  Y4ԍId. at 23.B Second, the combination of improved Commission licensing and the use of digital compression is expected to alleviate wireless cable's channel capacity problem in the near future. The progress in these two areas has led some analysts to forecast continued growth for this industry. One industry analyst predicts that the wireless industry will serve 800,000 subscribers by the end of 1994, and 3.2 million  Y 4subscribers by the year 2000. {*  Y4ԍCritical Mass, supra note 216, at 1.  Another analyst believes that wireless cable will  Y4serve four million customers by 2000. Berzins, supra note 229, at 1. That report also contained an estimate that the subscriber total will be drawn from approximately thirtyseven million homes capable of receiving  Y 4wireless cable, *  Yb4ԍA total of 37 million homes would represent approximately 40% of all homes in the  YK4United States. Toward Competition, supra note 132, at 150. which would mean that wireless cable services would be subscribed to by 8.7% of the households to which it is available.   U{4 4.` `  Satellite Master Antenna Television Systems (SMATV)   YM4 Z91.` ` SMATV system operators (also known as "private cable systems") are MVPDs that serve residential, multipledwelling units ("MDUs"), and various other buildings and complexes. A SMATV system offers, in general, the same type of programming as a cable system, and the operation of a SMATV system, in large part, 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 SMATV systems typically are unfranchised, standalone systems that serve a single building or complex, or a small number of buildings or complexes in relatively close proximity to each other. However, SMATV operators are increasingly using microwave facilities to interconnect properties spread over a metropolitan area.  YP4 [92.` ` Currently, one industry source estimates that there are approximately 3000 to  Y944000 SMATV systems operating nationwide.9*  Yc%4ԍLetter dated Aug. 12, 1994 from Deborah C. Costlow, Esq., counsel to various private and wireless cable operators, to Cable Services Bureau staff ("Costlow Letter"). As of August 15, 1994, approximately one"9/ \+))"  Y4million subscribers were served by SMATV systems.*  Yy4ԍCable & Pay TV Census August, Marketing New Media, Aug. 15, 1994. It is projected that by the end of 1994 there will be approximately 1.03 million subscribers to SMATV systems in MDUs, and  Y4over 1.10 million such subscribers by the end of 1995.@{*  Y4ԍId. at 4.@  Y4 \93.` ` Instances of SMATV service to MDUs and other buildings and complexes include the following:  Y_4` ` X Liberty Cable Corporation ("Liberty Cable") operates private cable systems in Manhattan, New York, competing headtohead with the incumbent franchised cable systems operated by Time Warner. According to its comments, Liberty Cable serves approximately 20,000 subscribers, and currently is adding approximately 1000 new  Y 4subscribers each month.V *  Y4ԍLiberty Cable Comments at 2, nn.2, 7.V Liberty Cable claims that it offers its  Y 4services at approximately onehalf the price of Time Warner.B *  Y)4ԍId. at 78.B Liberty Cable also comments that it has expanded the scope of its operations through use of an 18 GHz microwave network, which links  Y4its facilities without the need to use public rightsofway.V*  Y4ԍSee Amendment of Part94 of the Commission's Rules to Permit Private Video  Yn4Distribution Systems of Video Entertainment Access to the 18 GHz Band, Report and Order, 6 FCC Rcd 1270 (1991). (#  Yb4` ` X MSE Cable Systems, Inc. ("MSE") provides SMATV service to MDUs and mobilehome parks in Southeast Michigan. MSE reportedly has grown from four systems passing approximately 2000 homes to thirty systems passing approximately 16,000 homes. It is suggested that MSE began serving its mobilehome park subscribers at a time when no franchised cable operators offered service to those locations, and thus developed its business by filling the need for video programming  Y4service in those locations.b *  Y'#4ԍCostlow Letter, supra note 255, at 2.b(#  Y4` ` X Cable Plus, headquartered in Bellevue, Washington, operates SMATV systems in nine states, mostly in the west. In five years, it has grown"|0h \+))R" from 8 systems passing approximately 2500 homes, to approximately  Y4200 systems passing approximately 50,000 homes.:*  Yb4ԍId.:(#  Y4` ` X OpTel, Inc. has been operating SMATV systems since November, 1993. OpTel provides SMATV service to more than 330 properties, passing more than 105,000 households and serving more than 41,000 subscribers, in the Los Angeles, San Diego, Houston, Phoenix and the DallasFt. Worth metropolitan areas. OpTel reportedly makes extensive use of 18 GHz microwave links to connect the facilities it serves, and also uses other delivery technologies, including coaxial and fiber optic cable. It is reported that 25% of OpTel's customers receive at least fiftyfour channels, and the company expects to upgrade most  Y 4of its remaining systems to provide similar channel capacity.B {*  Y4ԍId. at 23.B(#  Y 4` ` X MaxTel Cablevision has SMATV operations in twentyfive states. Originally formed as a subsidiary of a real estate development company, MaxTel now serves approximately 280 properties. Its  Yy4systems pass nearly 85,000 households and have 42,000 subscribers.@y*  Y04ԍId. at 3.@(#   YK4 ]94.` ` SMATV operators may have the ability to offer lower prices than can wired cable operators for substantially the same services. Indeed, it is suggested that some SMATV operators may set their rates by looking to the rates charged by cable incumbents as  Y4guidelines and offering certain discounts from the cable rates.@ *  Y\4ԍId. at 2.@ It has also been reported that SMATV systems charge lower rates than franchised cable operators for premium services, with such price differences ranging from $1.00 per channel to an overall sixty  Y4percent discount.: X*  Y4ԍId.: One commenter suggests that SMATV operators are able to offer lower prices because cable systems are prohibited by Commission rules from engaging in price  Y4competition for a particular MDU where a SMATV system operates. ez*  Y'#4ԍSee Time Warner Comments at 2526. Section 623(d) of the Communications Act requires a cable operator to have a uniform rate structure throughout the area served by its  Y$4cable system. 47 U.S.C. 543(d). In its 1993 Rate Report & Order, the Commission observed that cable systems often offer bulk discounts to subscribers in MDUs, and expressed a desire that bulk discounts not be used as a means of displacing competition from  Y'4alternative MVPDs, such as SMATV operators. 1993 Rate Report & Order 424, 8 FCC"( \+))(" Rcd at 5898. To prevent cable operator abuse, the Commission's regulations require that all similarly sized MDUs in a franchise area receive "the same bulk discount rate structure," and that the cable operator be able to demonstrate that it receives some economic benefit from  Y44offering the discount. Id. See also Implementation of the 1992 Cable Act: Rate Regulation  Y4& BuyThrough Prohibition, Third Order on Reconsideration, 9 FCC Rcd 4316 (1994)."1  \+))N"Ԍ Y4ԙ ^95.` ` On the other hand, regulatory barriers may artificially raise the cost of operating SMATV systems. First, where a SMATV system uses wires to connect separatelyowned buildings, even though no public rightsofway are crossed, a SMATV system is considered to be a "cable system" under the Communications Act, thereby requiring the  Y4operator to obtain a local franchise.  *  YK 4ԍSee Definition of a Cable System, 5 FCC Rcd 7638; Communications Act, 602(5-7), 621(b)(1), 47 U.S.C. 522(5-7), 541(b)(1). As is the case with wireless cable operators,I  *  Y4ԍSee supra 88.I the statutory definition of "cable system" may thus have the unintended effect of raising the costs of SMATV operators, thereby having a negative effect on competition.  YH4 _96.` ` Moreover, SMATV operators contend that cable operator conduct under the  Y14Commission's cable home wiring rules has a chilling effect on competition.b11 *  Y4ԍSee, e.g., Liberty Cable Comments at 1618.b Those rules,  Y 4require, inter alia, that cable operators provide subscribers with the opportunity to acquire  Y 4cable home wiring before the cable operator removes it from the premises after termination  Y 4of service.u9 *  Y[4ԍ47 C.F.R.  76.802. The purpose of the cable home wiring rules is to avoid the disruption from having the wire removed after service is terminated and to allow subscribers to utilize the wires with competing MVPDs, thereby facilitating competition from these  Y4entities. Implementation of the 1992 Cable Act, Cable Home Wiring, Report & Order,  Y48FCC Rcd 1435 (1993), recon. pending., MM Docket No.92260. The Commission currently has before it a petition to initiate a rulemaking to determine how cable subscribers may have access to existing cable home wiring for the delivery of competing and  Y4complementary services. Joint Petition for Rulemaking on Cable Television Wiring, Public  Y 4Notice, 8 FCC Rcd 8184 (1993).u One SMATV operator argues that under these rules, it is unable to connect a subscriber that switched from the cable operator's services until after the cable operator  Y 4disconnects and removes its equipment.Q *  Y$4ԍLiberty Cable Comments at 1617.Q As a result, this SMATV operator contends that potential subscribers are dissuaded from switching to SMATV from their existing cable  Y4company.:Z*  Y'4ԍId.: However, it is unclear from this record whether these types of concerns reflect anticompetitive abuses, which can be remedied by changing the Commission's home wiring"{2\+))"  Y4rules, or merely reflect the competitive nature of the marketplace.e*  Yy4ԍ See Time Warner's Reply Comments at 25 (arguing that there is nothing illegal about removing its own property from an MDU or terminating its own lines). Some of Liberty Cable's other concerns in its comments can be characterized more appropriately as common  Y64law claims for unfair competition rather than violations of the Communications Act. See,  Y!4e.g., Liberty Cable Comments at 18 (allegation that Time Warner has engaged in false and disparaging advertising against it). Such allegations should not be addressed to the Commission; perhaps they might be brought before a court of competent jurisdiction. The Commission will address home wiring issues when it rules on the petitions for reconsideration that are now pending.   U4 5.` ` Broadcast Television Service  Yv4 `97.` ` Broadcast television stations are, and always have been, significant suppliers in the market for delivered video programming. In the 199394 season, ABC, CBS, NBC and  YH4Fox maintained a combined 72% share of primetime viewers.GH*  Y4ԍNCTA Comments at 19. G Even among those households subscribing to cable, retransmitted broadcast channels had a 46% prime time viewing share in the 199293 season, while retransmitted independent broadcast and public  Y 4television stations maintained 17% and 3% shares respectively. *  Y24ԍViewing Shares Broadcast Years 1983/1984 1992/1993, Cable Television  Y4Developments (National Cable Television Assoc.), Apr. 1994, at 5A (citing A.C. Nielsen Co. statistics). Therefore, twothirds of all cable households watching television delivered by cable in the 199293 season were watching a retransmitted broadcast channel. Moreover, more than onethird of all  Y 4households that could subscribe to cable service elected not to do so.  *  Y^4ԍOf the 92.9 million homes passed by cable at the end of 1993, 57.4 million  YG4subscribed to basic cable services. See Appendix C, Table 1. Accordingly, it would appear that for at least some viewers, broadcast television service satisfies their  Y4demand for video programming.*  Y4ԍ On the other hand, there are various reasons why some households might prefer not to subscribe to cable service, including financial ones.  Yb4 a98.` ` Moreover, broadcast television remains an important outlet for the distribution of local news, public affairs, and sports programming. As the Commission found earlier this year, high profile sporting events like the Super Bowl, the World Series, the NBA  Y4Championships, and the NCAA basketball championships remain on broadcast television.*  Y&4ԍImplementation of Section 26 of the 1992 Cable Act Inquiry into Sports  Y'4Programming Migration, Final Report 167, 9 FCC Rcd 3440, 3501 (1994). "3\+))"Ԍ Y4 b99.` ` Finally, it has recently been reported that "[d]emand for television stations is  Y4at one of its highest levels in years."*  Yb4ԍJulie A. Zier, TV Buyers Agree: It's a Seller's Market, Broadcasting & Cable, Apr.25, 1994, at 22. Firstquarter 1994 profits of broadcast television  Y4station group owners rose by at least 30%, fueled by increased advertising revenues.d*  Y4ԍGeoffrey Foisie, Good Revenue Gains Spark Dazzling Profit Growth, Broadcasting &  Y4Cable, Apr. 25, 1994, at 18. In addition, Fox has successfully launched what has been termed an "emerging" fourth  Y4broadcast network,*  Y- 4ԍEvaluation of the Syndication & Fin. Interest Rules, Memorandum Opinion & Order,  Y 48 FCC Rcd 3282, 333135 (1993); Memorandum Opinion and Order on Reconsideration, 8  Y 4FCC Rcd 8270, 8303 (1993), appeal denied, Capital Cities/ABC, Inc. v. FCC, 29 F.3d 309  Y 4(7th Cir. 1994).  and it is widely reported that Time Warner and Paramount, companies  Y4with cable television affiliations, are also seeking to create broadcast networks.EJ *  Yt4ԍJoe Flint, Clash of the Titans, FifthNetwork Style, Broadcasting & Cable,  Y_4Dec. 20, 1993, at 3839; Tim Jones, TV Merger Talks Just A Start; OffCamera Maneuverings in the TV and Movie Industries Could Amount to a Fundamental Reordering of  Y34the Entertainment Power Structure, C#D  P7jQ ApP#HI.# XR  P7jQXP# T#D  P7jQ ApP#RIB.# XR  P7jQXP#, Sept. 2, 1994, at 1 (Business).E There are also more broadcast stations today than ten years ago, when the 1984 Act was passed. Between 1984 and 1994, the number of television stations operating in the United States grew from 1149 to 1518, which represents a 32% increase in the number of broadcast signals  Y14available to the public.1*  Yv4ԍBroadcasting & Cable Yearbook 1994 ("1994 Yearbook") C218 (R.R. Bowker, pub. 1994).   Y 4 c100.` ` Despite the increases in broadcast television output noted above, the number of broadcasting outlets available to consumers has not kept pace with the virtual explosion of programming alternatives available on cable television. In the last decade, the number of national cable video networks increased from fortyseven to ninetynine, an increase of  Y 4110%. .*  Yr 4ԍNational Cable Video Networks by Type of Servs. 19761993, Cable Television  Y]!4Developments, (National Cable Television Assoc.), Apr. 1994, at 7A. The channel capacity of cable systems has also grown dramatically.T *  Y"4ԍSee Appendix C, Tables 2 & 3.T Cable systems have responded successfully to consumer demand in the last decade, as the market  Yy4penetration of the cable industry has increased from 43.7% in 1984, to 62.5% in 1994.yU*  Yk&4ԍBasic Cable 19751983, Cable Television Developments (National Cable Television Assoc.), Apr. 1994, at 2A. "b4\+))"Ԍ Y4 d101.` ` The Commission found in 1991, that the availability of overtheair broadcast signals, can, under certain circumstances, have some constraining effect on cable system  Y4conduct. J*  YK4ԍ1991 Effective Competition Report & Order 22, 6 FCC Rcd at 4549. The competitive relationship between broadcast stations and cable systems is complicated by the fact that the signals of most local broadcast stations are retransmitted by cable systems. On the one hand, cable operators and broadcasters are direct competitors in certain markets, such as the market for local spot advertising. On the other hand, the programming of local broadcast stations is an important input for cable systems, which enhances the value of cable services offered to subscribers. Cable systems also provide an additional mode of distribution for broadcasters, which supplements overtheair transmission. However, cable systems offer a "steadilyexpanding complement of specialized program services," which can increasingly meet consumer demand for more video  Y4programming choices.0!*  Y4ԍ1990 Cable Report 69, 5 FCC Rcd at 497172. In Section III.A of this Report, the Commission reviews its prior findings regarding the constraining effect broadcast availability  Y4might have on cable system pricing.0 Accordingly, any constraining effect appears to decrease to the point where the menu of available broadcast signals is insufficient to constrain cable market power. Most recently, the Commission examined the competitive effect of broadcast stations  Y_4on cable rates in connection with the 1994 Rate Report & Order. There, the Commission's statistical analysis was consistent with a finding that the availability of six or more local  Y34broadcast stations does not constrain cable rates.~"3K *  Y4ԍ1994 Rate Report & Order, supra note 50, Appendix C at 21 & n.54.~  Y 4 e102.` ` Advances in broadcast technology and regulatory policy might allow for  Y 4multichannel broadcasting of digitallycompressed signals.{# *  Yu4ԍSee Toward Competition, supra note 132, at 14147.{ The Commission has recognized that multiplexed, multichannel broadcast signals could provide a competitive  Y 4check on the exercise of market power by cable systems in the future. In its 1993 Rate  Y 4Report & Order, the Commission stated that "should digital compression or other technology advance to the point that a single broadcaster in a community were able to offer programming comparable to that offered by a cable system, such a broadcaster might well be"5#\+))"  Y4deemed an MVPD effectively competing with the cable operator."$ *  Yy4ԍ1993 Rate Report & Order 24, 8 FCC Rcd at 565253 (footnotes omitted); see also NCTA Comments at 18. There are, however, indications that television broadcasters, if permitted to provide multiple channels of programming over the same 6MHz signal, might seek to provide services other than the multichannel video services typically associated with  Y4cable television operators and their competitors.  See, e.g., John D. Abel, Next Generation  Y 4Media Convergence and Multimedia Broadcasting 67 (Exec. V.P. National Association of  Y4Broadcasters May 1994) (stating that applications of digitalized broadcast signals could include: (1)a single high definition television ("HDTV") signal of extremely high quality; (2) an HDTV signal of lower quality and data about that signal that explains more about the program, provides additional camera angles and other program information; (3) multiple full motion video signals (threetofive per 6 MHz broadcast channel); and(4) a video signal and separate bit streams devoted to receivers connected to telecopiers, computers, personal digital  Yk 4assistants, special audio receivers, pagers, separate non-video bit streams for email, paging, PDAs, utility load management, data transmissions and telecopiers.) The Commission reaffirms that possibility here.   X4 C.Other Actual or Potential Competitors  U4   1.` ` Local Exchange Carrier (LEC) Entry   Y_4 f103.` ` As noted in the NOI, the participation of local exchange carriers ("local telephone companies" or "LECs") in the multichannel video marketplace was not included in  Y34the competition analysis of the 1990 Cable Report because it was deemed unlikely to occur in  Y 4the near term.e% T*  Y4ԍ1990 Cable Report 108, 5 FCC Rcd at 5019.e At that time, local telephone companies were prohibited by statute and federal regulation from providing video programming directly to subscribers within their  Y 4service areas.&  *  Y4ԍSection 613(b) of the Communications Act, 47 U.S.C.  533(b), prohibits a common carrier from providing video programming directly to subscribers in its telephone service area, either directly, or indirectly through an affiliate owned by, operated by, controlled by, or under common control with the common carrier. That statutory provision is referred to as the crossownership ban. In 1990, the Commission further restricted LECs to strict carrieruser relationships with cable operators, except in rural areas where telephone companies  Y!4were permitted to provide video programming to subscribers within their service areas. See 47 C.F.R.  63.54, 63.58 (1990). In addition to the restrictions contained in the Commission's rules, the courtordered divestiture agreement under which AT&T divested its local exchange service business (the Modified Final Judgement or "MFJ") restricts the Bell Operating Companies' ("BOCs") ability to provide video programming services because its terms prohibit BOCs from"W(%\+))!(" providing interlocal access and transport area ("interLATA") services, and from  Yb4manufacturing telecommunications equipment. United States v. AT&T, 552 F.Supp. 131  YM4(D.D.C. 1982), aff'd sub nom. Maryland v. United States 460 U.S. 1001 (1983).  While LECs were permitted to provide video programming outside their" 68&\+)) " telephone service areas, and channel service to unaffiliated cable operators within their  Y4service areas, few LECs participated in such ventures. 'k8*  Y4ԍCf. Pacific Bell, 60 RR2d 1175 (CCB 1986), recon. granted in part, 2 FCC Rcd 265  Y4(1987), aff'd, Century Fed., Inc. v. FCC, 846 F.2d 1479 (D.C. Cir. 1988) (channel service);  Y 4General Tel. Co., 4 FCC Rcd 5693, rev'd sub nom., National Cable Television Assoc., Inc.  Y 4v. FCC, 914 F.2d 285 (D.C. Cir. 1990), on remand, General Tel. Co., 8 FCC Rcd 8178,  Yj 4admin. stay denied, 8 FCC Rcd 8753 (1993), petition for review pending, GTE Cal. v. FCC  YU 4No.93-70924 (9th Cir.), and judicial stay granted (9th Cir. Jan. 5, 1994) ("good cause" waiver of crossownership ban).   Y4 g104.` ` Since 1990, the Commission has adopted orders easing the regulatory restrictions and creating a "video dialtone" ("VDT") framework for LEC participation in the  Y4multichannel video distribution marketplace consistent with the statutory prohibition.a(W *  Y4ԍThe Commission began its reexamination of the telephonecable company cross Yj4ownership restrictions with a notice of inquiry in 1987. Telephone Co.Cable Television  YU4CrossOwnership Rules, Sections 63.5463.58, Notice of Inquiry, 2 FCC Rcd 5092 (1987).a That VDT framework, along with technological advances, has spurred increased videorelated activity by LECs, including several market and technical trials and twentyfour applications  YH4for permanent authority covering over 8.5 million homes.P)H*  Y4ԍAppendix D of the Report contains a list of LEC applications for trial and permanent  Y4service, and Appendix E of the Report contains detailed information about the trials, and descriptions of the services proposed in the applications for permanent service.P These applications, taken together, constitute a promising source of competition to cable operators for the multichannel distribution of video programming.  Y 4 h105.` ` In this section of the Report, the Commission reviews: (1) the regulatory and statutory framework for LEC participation in the provision of video programming to subscribers; (2) the technology involved in deployment of a VDT system; (3) the status of the authorized market and technical trials; and (4) the applications for permanent VDT authorizations. The Commission also discusses the technology and architecture of the systems, and the regulatory and reporting issues that may affect the potential of this technology to provide competition to cable.  Y64 i106.` ` Regulatory Framework for LEC Participation in Video Transport Services. Under the VDT regulatory framework adopted by the Commission in 1992, a LEC may make available, on a nondiscriminatory common carrier basis, a platform capable of providing nondiscriminatory access to multiple video programmers and of delivering video"7=)\+))X"  Y4programming and other services to end users within its local telephone service area.*P*  Yy4ԍTelephone Co.Cable Television CrossOwnership Rules, Sections 63.54 63.58,  Wd4Further Notice of Proposed Rulemaking, Second Report & Order, Recommendation to  YM4Congress, & Second Further Notice of Proposed Rulemaking ("TelcoCable Second Report &  Y84Order") 2, 7 FCC Rcd 5781, 5783 (1992), recon. pending, and appeal pending sub nom.,  Y#4Mankato Citizens Tel. Co. v. FCC, No. 921404 (D.C. Cir. Aug. 26, 1994). Under the VDT framework, multiple service providers, or programmercustomers, acquire capacity from the LEC on a tariffed basis to provide video programming and other services to end users. The LEC may also provide additional enhanced and noncommon carrier services to customers of  Y4the common carrier platform.:+*  YO 4ԍId.: In fashioning the VDT scheme, the Commission determined that the statutory crossownership restriction applies only to LECs within their local exchange  Y4service areas, and not to interexchange carriers.@, *  Y4ԍTelephone Co.Cable Television CrossOwnership Rules, Sections 63.54 63.58,  W4Further Notice of Proposed Rulemaking, First Report & Order & Second Further Notice of  Y4Inquiry ("TelcoCable First Report & Order"), 46, 7 FCC Rcd 300, 323 (1991), recon.  Y4granted in part, 7 FCC Rcd 5069 (1992), appeal denied sub nom. National Cable Television  Yj4Assoc. v. FCC, ___ F.3d ___, No.91-1649 (D.C. Cir. Aug. 26, 1994). @ In addition, neither a LEC offering VDT service, nor its programmercustomers, is required to obtain a local cable television  Yv4franchise.-v*  Y4ԍTelcoCable First Report & Order, on reconsideration, 7 FCC Rcd 5069. Bell Atlantic reportedly recently announced its intention to contribute funds to municipal  Y4governments in areas where it constructs and operates VDT service.  See Telcos Approach  Y4Locals on Video Dialtone, Broadcasting & Cable, Aug. 8, 1994, at 12. A LEC may own up to five percent of a video programmer, and participate in  Y_4certain nonownership affiliations with video programmers that use the basic platform.`._&*  Y"4ԍTelcoCable Second Report & Order, 7 FCC Rcd 5781. In adopting relaxed ownership and nonownership rules, the Commission determined that the statutory restriction of 47 U.S.C. 533(b) was meant to be less restrictive than the Commission's prior rules.  Y4Id. 66. ` Authorization pursuant to Section 214 of the Communications Act ("Section214 authorization") is required for LEC provision of VDT service, and the Commission has  Y 4established safeguards to prevent discrimination and crosssubsidization.:/ *  Y9#4ԍId.:  Y 4 j107.` ` As noted above, a LEC may also participate in video transport service through the provision of traditional channel service within its telephone service area to unaffiliated" 8!/\+)) "  Y4cable systems.M0*  Yy4ԍSee, e.g., Pacific Bell, 60 RR2d 1175 (CCB 1986), recon. granted in part, 2 FCC  Yd4Rcd 265 (1987), aff'd sub nom. Century Fed., Inc. v. FCC, 846 F.2d 1479 (D.C. Cir.  YO41988); Pacific Bell II, 6 FCC Rcd 688 (1991).M The VDT framework does not affect this traditional service offering. Consistent with the statutory restriction, a LEC is also permitted to own and operate cable  Y4facilities outside its service area, and to own video programming.1" Q*  Y4ԍFor example, within the past year: Southwestern Bell acquired two operating cable systems in the Washington D.C. metropolitan area from Hauser Communications; US West purchased several cable systems in the Atlanta, Georgia area; and BellSouth entered into an  Y{ 4agreement to acquire a 22.5% interest in Prime Cable, a Texasbased MSO. See Telco  Yf 4Television Update, Broadcasting & Cable, Aug. 15, 1994, at 7. With regard to LEC ownership of video programming, it is noted that US West holds an interest in Time Warner  Y: 4Entertainment, and NYNEX owns part of Viacom Inc. Id.; see also Time Warner  Y%4Entertainment Company, L.P. & US West Communications, Inc., 8 FCC Rcd 7106 (1993) (temporary waiver of the crossownership rules granted to Time Warner for 18 months to divest cable systems within US West's service areas).   Y4 k108.` ` The Commission has recommended that Congress repeal the telephone companycable company crossownership prohibition and permit LECs to provide video  Yv4programming directly to subscribers within their service areas.i2v'*  Y:4ԍTelcoCable Second Report & Order, 7 FCC Rcd 5781.i The crossownership 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  Y14discriminatory access to cable systems to utility poles necessary for cable distribution.b31*  Y4ԍApplications of Tel. Cos. for Section 214 Certificates for Channel Facilities Furnished  Y4to Affiliated Community Antenna Television Sys., 21 FCC 2d 307 (1970), appeal denied,  Yj4General Telephone of the Southwest v. U.S., 449 F.2d 846 (5th Cir. 1971).b Certain aspects of the regulatory restriction were codified by Congress in the 1984 Cable  Y 4Act.l4 ;*  Y4ԍCommunications Act 613(b), 47 U.S.C. 533(b)(1984).l In 1993 the U.S. District Court for the Eastern District of Virginia held the crossownership prohibition unconstitutional as applied to Bell Atlantic in its service areas; in 1994 US West obtained a similar ruling in the U.S. District Court for the Western District of  Y 4Washington.F5g| *  Y3#4ԍChesapeake & Potomac Tel. Co. v. United States, 830 F. Supp. 909 (E.D. Va.  Y$41993), Amended Final Order, No. 9217511 (Oct. 7, 1993), appeal docketed, Nos. 932340, 932341 (4th Cir., Oct. 15, 1993) (Section 533(b) held unconstitutional as applied to Bell  Y&4Atlantic within its service areas); US West, Inc. v. United States, No. C931523R (W.D.  Y'4Wa. June 14, 1994), appeal docketed, No. 9435775 (9th Cir., August 3, 1994) (Section"(4\+))("  Yy4533(b) held unconstitutional as applied to US West within its service areas). But see Marsh  Yd4Media, Ltd. v. FCC, 798 F.2d 772 (5th Cir. 1986) (First amendment challenge to televisioncable crossownership restriction of Section 533(b) held foreclosed by Supreme Court  Y84decision in FCC v. National Citizens Committee for Broadcasting, 436 U.S. 775 (1978), upholding televisionnewspaper crossownership rule).F The other Regional Bell Operating Companies ("RBOCs") have each filed" 9 5\+)) " similar challenges to the constitutionality of the crossownership ban in federal district courts in their service areas, as has the United States Telephone Association on behalf of its  Y4members.6 *  Y{ 4ԍUnited States Tel. Assoc. v. United States, Case No. 1:94CV01961 (D.D.C., filed Sept. 12, 1994).  Y4 l109.` ` Overview of LEC Applications for VDT trials and for Permanent Services. Since adoption of the VDT regulatory framework, the Commission has granted applications  Yv4by five different LECs for technical and market trials.F7v *  Y4ԍSee Appendix E.F Five additional applications for new or expanded trials are pending before the Commission. The cost estimates for the various trials range from $2.5 million to $11 million and cover between 250 to 2000 households per  Y14trial.813 *  Y4ԍSee Application of US West Communications, Inc. for Section 214 Auth. to Provide  Y4VDT Servs. in Omaha, Neb. ("US West VDT Application") 24 n.59, 9 FCC Rcd 184, 188 n.59. Twentyfour applications for permanent commercial VDT service have also been filed with the Commission, including applications by six of the seven RBOCs, as well as  Y 4GTE.F9 *  YF4ԍSee Appendix E.F These applications propose VDT platforms using various distribution technologies which, if granted, would provide service to over 8.5 million homes.  Y 4 m110.` ` In July 1994, the first permanent Section 214 authorization was granted to  Y 4New Jersey Bell for Dover Township.: E*  Y4ԍSee Application of New Jersey Bell Tel. Co. for Section 214 Auth. to Provide VDT  Yt 4Servs. in Dover, N.J. ("New Jersey Bell VDT Application"), 9 FCC Rcd 3677 (1994). Pursuant to that grant, New Jersey Bell is authorized to construct and operate a system to provide VDT service to approximately 38,000 homes using a FTTC architecture, with coaxial cable and copper wire for the final link to the home and providing initial digital capacity of 64 channels, conditioned upon  YK4expanding capacity to 384 digital channels by January 3, 1995.;K*  Y%4ԍNew Jersey Bell predicts that 35% of the homes passed will become enduser  Y&4subscribers. New Jersey Bell VDT Application 3, 9 FCC Rcd 3678. FutureVision of America, Corp., the initial programmercustomer, is limited to a maximum of 32 channels (half the"4:W;\+))" initial channel capacity) during the sixmonth interim transition period from a 64 channel  Y4system to a 384 channel system.I<*  Yb4ԍAccording to a recent trade press report, Cablevision Systems, Inc., the fifth largest MSO, has requested access to channel capacity on the Dover VDT platform. Kent Gibbons,  Y44Cablevision Wants Piece of VDT Network, Multichannel News, Aug. 29, 1994, at 1; Bell  Y4Atlantic VDT Plan Hit, T#D  P7jQ ApP#ELEVISION # XR  P7jQXP#D#D  P7jQ ApP#IGEST# XR  P7jQXP#, Aug. 29, 1994.I  Y4 n111.` ` Reports on the status of the trials have been submitted by Bell Atlantic and NYNEX, and a tariff has been filed by Rochester Telephone. In other filings and comments in this proceeding, various LECs have proffered their views on the status of VDT and  Yv4current technology.=v8*  YK 4ԍThe Bell Atlantic, Rochester Telephone and other reports and filings are summarized in Appendix E.  YH4 o112.` ` Technology and Architecture Issues. In addition to regulatory and legal constraints discussed above, technology has also played a role in restraining the entry of LECs into the multichannel video programming distribution marketplace. While an infrastructure owned by telephone companies currently exists for delivery of narrowband voice communications to most homes and businesses in the nation, that infrastructure is unable to transport and deliver multichannel video programming to multiple end users. Various techniques, technologies and architectures for delivering broadband video signals are currently being tested. Some of these include: optical digital loop carrier systems, fiber to the node ("FTTN"), fiber to the curb ("FTTC"), fiber to the home, hybrid fibercoax networks ("HFC"), asynchronous digital subscriber line ("ADSL"), and various broadband switches. For a brief description of these technologies, see AppendixB.   Y44 p113.` ` Initially, US West asserts that analogbased transmission appears to be  Y4preferable to digital from the perspective of end user access and program availability./>*  Yx4ԍUS West VDT Application 78 nn. 1819, 9 FCC Rcd at 188 nn. 18, 19. That preference is likely attributable to the fact that nearly all television programming has been created in an analog format, and cableready television sets can display such programming  Y54without a set top converter box. It should be noted, however, that analog systems cannot  Y 4economically be carried on fiber. Cf. Jack L. Dempsey, Telecom Basics 47 (1988)./ However, analog channels impose capacity requirements that limit the expandability of VDT  Y4offerings.? *  Y#4ԍFor example, the first phase of the NYNEX VDT trial utilizes an analog system: the platform, with 750 MHz of transport spectrum, can deliver 110 6MHz NTSC format analog channels or a combination of 80 analog channels and more than 300 3.5Mb/s MPEG format  YJ&4channels. See Rob Rockefeller, Putting Video Dialtone to the Test in Manhattan, Telephony,  Y5'4June 13, 1994, at 46. See Appendix B for definitions of terms. NYNEX's report on the status of its VDT trial indicates that its trial platform provided sufficient analog channel capacity to accommodate all parties requesting direct";H?\+))\"  Y4access to such channels, but was unable to provide sufficient stored access capacity.R@|*  Yy4ԍSix Month Compliance Report of NYNEX ("NYNEX Six Month Report"),  Yd4Attachment2, at 5-6, Attachment 3, Application of NYNEX for Section 214 Auth. to Provide  YO4VDT Servs. In New York City, File No.W-P-C6836 (filed July 15, 1994). With direct access, a VDT programmercustomer continually transmits programming over a particular channel. With stored access, the programmercustomer provides a data base of programming that the subscriber can access, similar to selecting a song from a juke box. R GTE  Y4believes that compression capabilities will have a competitive impact beginning in 1995.FA *  Y 4ԍ GTE Comments at 13. F Other commenters assert that the limitations of analog may cease to be a constraint when the price of analogtodigital conversion declines significantly and more programming is digitally  Y4encoded.uB*  Y 4ԍ US West VDT Application, 27 n.66, 9 FCC Rcd at 189 n.66.u GTE predicts that digital compression will be readily available during 1995, and  Y4broadband switching sometime during 1996.FCH *  Yr4ԍ GTE Comments at 13. F  Y_4 q114.` ` The ability of LECs to use their existing infrastructure to offer video services may also play a role in the deployment of VDT as an effective competitor to cable. Just a few years ago, industry projections for upgrading the telephone infrastructure by installation  Y 4of fiber optics suggested that VDT deployment could only be slated for the next century. D *  Y4 "ЍSee, e.g., Henry Geller, Fiber Optics: An Opportunity for a New Policy (1991). Such projections generally assumed fiber to the home was necessary to effectively transport video.  However, with new technologies and architectures, those projections have changed significantly. For example, ADSL technology and integrated HFC networks are both  Y 4expected to speed deployment of VDT.gE_ m*  Y4ԍ Most of the applications for permanent VDT authorizations propose some type of HFC architecture. According to a recent FCC report, it is estimated that the interexchange carriers deployed 2.5 million fiber miles as of the end of 1993; the BOCs have deployed 6.3 million fiber miles; and all local operating companies have deployed over 7.2 million fiber miles. Jonathan M. Kraushaar, Fiber Deployment Update End of Year 1993 (May 1994) (available in reference room at the Federal Communications Commission, Common Carrier Bureau, Industry Analysis Division). g Bell Atlantic's report on the status of its technical trial notes that while technical difficulties were experienced with some of the prototype video decoders, ADSL is "proving to be a successful medium for delivery of voice, video and data  Y4services."1Fv*  Y%4ԍSix Month Compliance Report of Bell Atl. Co. ("Bell Atl. Six Month Report"),  Y&4Application of Bell Atl. for Section 214 Auth. to Provide VDT Servs. in No. Va., File No.W-P-C6834 (filed Sep. 27, 1993). ADSL is a form of signal compression that enables"l(E\+))'" existing copper twisted pairs to carry one or more television signals, along with telephone service, to the subscriber. Bell Atlantic reported that distance ranges on the decoders 11,000 feet when used with 26 gauge wire were less than expected and that subscribers experienced problems with nonsynched voice and video and video freeze frames with some decoders. It reports that the problems are with the decoders, not the ADSL system.1 Rochester Telephone, however, notes that current ADSL technology is capable"<F\+))"  Y4of delivering only one retransmitted broadcast signal to a customer, i.e., end users are able to select only one programmercustomer at a time from the available service providers using  Y4the ADSL system.G*  Yw 4ԍApplication of Rochester Tel. Co. to Conduct a Market Test of VDT Servs. in  Yb 4Rochester, N.Y. 78, DA Docket No. 94275 (1994) (File No. W-P-C6867 1994). GTE notes that information about customer satisfaction and the  Y4migration path for ADSL technology (e.g., to accommodate High Definition Television  Y4("HDTV")) are not known.H *  Y4ԍ GTE Comments at 12. GTE also contends that the competitiveness of ADSL systems cannot be validly compared to cable systems because cable operators are rapidly  Y4deploying hybrid fiber coax systems.  Id. Bell Atlantic projects that recent innovations in encoding, compression and multiplexing technology are expected to permit delivery of "live" broadcast programming over copper loops beginning in 1995, and that digital pointcast capability using  Yc4broadband switching technology will become generally available beginning in 1996.Ic *  Y4ԍBell Atlantic expects to begin testing digital pointcast capability in the Washington  Y4D.C. metropolitan area in 1995. Bell Atlantic Comments at 12.    Y54 r115.` ` With respect to enduser concerns, NYNEX notes that tests of the hybrid fibercoax architecture demonstrate that if two customers are served by the same drop, it is  Y 4not possible for both customers to choose different programmers.J *  Y-4ԍSee, e.g., NYNEX Six Month Report, Attachment 6, at 4, WPC6836. Providing separate subscriber drops to each customer solves this problem. Nevertheless, NYNEX reports that the hybrid fibercoax network is successfully delivering direct and stored access analog VDT services, and that the baseband analog switch is effectively delivering menu service and video and audio signals from multiple video information providers to the end users, who have access to interactive services. Switched access has not yet been introduced on the NYNEX analog platform because the analog format is not capable of managing  Y}4sessions for videoondemand applications.LK}*  Y+#4ԍNYNEX Six Month Report, Attachment 6, WPC6836. Rather, NYNEX employs a "video juke box" to deliver stored and timeshifted video information provider programming  Y$4to the limited base of interactive trial endusers, with VCRlike functionalities. Id. L In other contexts, however, GTE asserts that technology is currently available to provide enhanced video services packaging for  YO4consumers.DLO*  Yp(4ԍGTE Comments at 12.D"O=!L\+))"Ԍ Y4ԙ s116.` ` Regulatory and Statutory Issues. LECs commenting in this proceeding assert that there are two reasons why VDT service has not yet proven itself as a viable competitor to cable service: (1) the statutory ban on the provision of video programming by LECs to subscribers in their own service area; and (2) the fact that the Commission has not yet granted most of the Section 214 VDT applications. The LEC commenters recommend:  Y4(1)repeal of the 1984 Cable Act's ban on LEC provision of video programming;fM*  Y4ԍBell Atlantic Comments at 7; GTE Reply Comments at 3.f  Yv4(2)expedition, streamlining or elimination of the Section 214 application process;Nvy*  Y 4ԍBell Atlantic Comments at 78; NYNEX Comments at 24; GTE Comments at 3 n.5, 11, Reply Comments at 3; US West Comments at 3; Ameritech Reply Comments at 3.  Y_4(3)continued resistance to the imposition of local franchise requirements on LECs;fO_*  Y 4ԍBell Atlantic Comments at 8; GTE Reply Comments at 3.f and  YH4(4)regulatory parity with cable.{PH*  Y4ԍBell Atlantic Comments at 89; GTE Comments at 3; GTE Reply Comments at 3.{ GTE asserts thatadjustments in the rate regulation framework for the cable industry should correspond with relaxation of LEC price caps, such  Y 4that both industries are provided incentives to compete on the basis of price and service.JQ 9*  Y4ԍGTE Reply Comments at 5. J As noted above, the Commission has recommended to Congress the repeal of the cabletelephone company crossownership ban, and is processing Section214 applications to provide VDT service.   Y 4 t117.` ` In addition to the hurdles to providing VDT service facing all LECs, the BOCs  Y4also must comply with the Modified Final Judgment ("MFJ"). As noted above,FR *  Y4ԍSupra note 294.F the MFJ ban on BOC provision of interLATA services prohibits BOCs from receiving satellite or overtheair video signals which is how cable systems typically receive most of their programming without obtaining a waiver of the MFJ. The interLATA ban could also  Y44prevent interLATA offering of enhanced gateway services.8ST4u *  YF4ԍUnited States v. AT&T, 552 F.Supp. 131.  The MFJ prohibition on BOC provision  Y1 4of information services was lifted in 1993. United States v. Western Elec. Co. 767 F.Supp.  Y!4308 (D.D.C. 1991), aff'd, 993 F.2d 1572 (D.C. Cir. 1993), cert. denied sub nom. Consumer  Y"4Fed. of Am. v. United States, ___ U.S. ___, 114 S.Ct. 487 (1993). However, BOCs are still currently prohibited from providing interLATA services and designing and  Y#4manufacturing equipment. See United States v. Western Elec. Co,, 1989-1 Trade Cas.  Y$4(CCH) 68,400 (D.D.C. 1990), cert. denied sub nom., Bell Atl. Corp. v. United States, 488 U.S. 1109 (1991).8  Y4 u118.` ` GTE asserts that the length of time it will take for video dialtone to become an alternative to cable will depend on the LECs' respective market entry rates. Most LECs">}S\+))"  Y4have announced deployment schedules of five to tenyear periods.T*  Yy4ԍ For example, GTE states that it plans to expand VDT to 66 markets and 7 million homes within the next 10 years. GTE Comments at 12. Trade press reports suggest that the BOCs hope to make videocapable networks available to over twenty million  Y4homes by the turn of the century.Ub*  Y4ԍ See, e.g., Telco Television Update, Broadcasting & Cable, Aug. 15, 1994, at 7.  Y4 v119.` ` Reporting Issues. In response to the questions posed in the NOI regarding appropriate means for assessing the future competitive impact of VDT, nearly all of the commenters argue that data gathered in the technical and marketing trials is highly confidential and proprietary and should not be disclosed to potential competitors; (2) that sufficient information pertaining to system location, subscriber base, channel capacity and pricing will be provided in tariff filings; and (3) that customer proprietary information should  Y 4not be required to be publicly disclosed in the future.V *  Y4ԍBell Atlantic Comments at 11; GTE Comments at 7; BellSouth Comments at 23; Ameritech Reply Comments at 4. Disclosure of the total number of homes passed by VDT systems is deemed appropriate by the commenters, however, so long as such data is provided on a zip code, or Metropolitan Statistical Area, or statewide  Y 4basis.W *  Y4ԍGTE Comments at 56. GTE asserts that a requirement that data be collected and reported on the basis of cable franchise areas would be burdensome. The LECs also assert that subscribership, program offering, and price information should be gathered from programmercustomers who lease transmission capacity on the VDT  Y 4platforms.X *  YS4ԍBell Atlantic Comments at 11; GTE Comments at 35; GTE Reply Comments at 34; BellSouth Comments at 34; Ameritech Reply Comments at 4. GTE asserts that if the statutory prohibition is lifted, LECs should still not be required to provide such information because it would be tantamount to collecting and reporting the data to competing programmers. GTE Comments at 89.  Y{4 w120.` ` Conclusion. A number of issues remain unresolved with respect to the participation of LECs in the delivery of video programming. The regulatory framework for permitting LECs to construct and operate a common carrier VDT platform for the transmission of video programming and other services to endusers is under review by the  Y4Commission.{YN*  Y $4ԍThe Commission's decision that neither LECs nor their programmercustomers are required to obtain a local franchise in order to provide video programming to endusers was  Y%4recently affirmed by the D.C. Circuit. National Cable Television Assoc. v. FCC, ___F.3d___, No.91-1649 (D.C. Cir. Aug. 26, 1994).{ Moreover, legislation proposing, among other things, to eliminate the"?Y\+))"  Y4telephone companycable company crossownership ban is pending before Congress.Z*  Yy4ԍ S. 1822, 103d Cong., 2d Sess. (1994); H.R. 3626, 103d Cong., 2d Sess. (1994). As noted above, the VDT industry is in its initial planning and construction phases. In future reports, the Commission will further review the development of LEC provision of video  Y4programming and its status as a competitive alternative to cable.K[ay*  Y4ԍSee, e.g., GTE Comments at 12. US West suggests that the Commission should exclude VDT from its annual report to Congress until it is commercially available. US West Comments at 3. Ameritech states that comparisons of the 55 million cable subscribers with the recently granted permanent VDT authorization for 38 thousand homes passed make it patently clear that there currently is no basis to gather meaningful information on the impact of VDT on the market for the delivery of video programming. Ameritech Reply Comments at 3. K    X4 2.` ` Local Multipoint Distribution Service (LMDS)  Yy4  Yb4 x121.` ` LMDS is a new technology, similar to MMDS, in which multiple channels of video programming are transmitted using highfrequency microwave channels in the 28 GHz band. Like MMDS, LMDS subscribers must have a special antenna that is located with a line of sight to the transmitter. Because of the propagation characteristics in this frequency band, LMDS requires multiple transmitters in "cells" with radii of three to six miles in order  Y 4to cover a metropolitan area that could be covered by a single wireless cable transmitter.n\ *  Y4ԍToward Competition, supra note 132, at 135.n   Y 4 y122.` ` In 1991, the Commission authorized the Suite 12 Group to provide LMDS.] - *  Y4ԍApplication of Hye Crest Management, Inc. for License Authorization in the PointtoPoint Microwave Radio Serv. in the 27.5 29.5 GHz Band & Request for Waiver of the  Y_4Rules, 6 FCC Rcd 332 (1991). After granting that authorization, the Commission received over 900 applications accompanied by petitions for waivers from entities seeking to provide similar services. The Commission instituted a formal rulemaking proceeding to determine whether the 27.5 29.5 Ghz band ("28 GHz band") should be redesignated in order to  Y4accommodate multichannel video service, among other proposed uses. See Rulemaking to Amend Part 1 & Part 21 of the Commission's Rules to Redesignate the 27.5 29.5 GHz  Y 4Frequency Band & to Establish Rules & Policies for Local Multipoint Distribution Service,  Y!4Notice of Proposed Rulemaking, Order, Tentative Decision & Order on Reconsideration, 8FCC Rcd 557 (1993). Operating as CellularVision of New York ("CVNY"), it operates its LMDS system in Brooklyn, New York, and provides fortynine video channels, including two premium movie channels for $29.95 per month. CVNY states that a comparable package from local cable operators would cost $1020 more per month. CVNY also claims that LMDS provides higher picture quality than is available with cable, and that LMDS could be used as a"N@]\+))"  Y4platform for telephony as well as video programming.F^*  Yy4ԍCVNY Comments at 34.F Moreover, CVNY predicts that LMDS will be capable of using digital compression technology whenever it becomes  Y4commercially available._y*  Y4ԍFred Dawson, CellularVision Fights Off New LMDS Challenges, Multichannel News, July 11, 1994, at 47. CVNY reportedly has "a few hundred" subscribers.P`*  Yp4ԍTeledesic Reply Comments at 5. P  Y4 z123.` ` In 1991, the Commission stated that while "it is still too early in the development of LMDS to reach firm conclusions on the treatment of LMDS providers as multichannel video programming distributors," the Commission will analyze LMDS providers "for purposes of the effective competition determination in a manner appropriate to  YH4the degree of video distribution services they provide."naH*  Y4ԍ1993 Rate Report & Order 25, 8 FCC Rcd at 565354.n   Y 4 {124.` ` In response to proposals from parties who wish to provide services other than LMDS in the 28 GHz band, the Commission sought and received approval to conduct a  Y 4negotiated rulemaking among interested parties.<b =*  Y4ԍRulemaking to Amend Part 1 & Part 21 of the Commission's Rules to Redesignate the 27.5 29.5 Frequency Band & to Establish Rules & Policies for Local Multipoint Dist. Serv.,  Y4Second Notice of Proposed Rulemaking, 9 FCC Rcd 1391 (1994).< One of these parties, Teledesic Corporation ("Teledesic"), which has filed an application with the Commission to provide FSS (fixed satellite service) in the 28 GHz band, submitted comments in this proceeding stating that LMDS would merely duplicate the video entertainment being provided by cable,  Y4MMDS, DBS and video dialtone offerings.Oc *  Y4ԍTeledesic Reply Comments at 2.O Teledesic also contends that LMDS has not yet proven its feasibility on a large scale, and therefore, that the Commission should not assume  Yb4that LMDS could provide competition to cable.:dbM *  YL4ԍId.:  Y44 |125.` ` Because the Commission has not yet determined whether the 28 GHz band will  Y4be designated for use by LMDS operators, it is premature for the Commission to draw any  Y4conclusions in this Report regarding the feasibility of LMDS or the desirability of a particular outcome of the negotiated rulemaking. If the Commission ultimately concludes that LMDS is to be licensed in the 28 GHz band, LMDS will be included in future reports to Congress. "Ad\+))m"Ԍ U4 3.` ` Low Power Television (LPTV)  Y4  Y4 }126.` ` Low power television ("LPTV") refers to use of the VHF and UHF spectra pursuant to the regulatory scheme that was established by the Commission in 1982 as a  Y4means of increasing diversity in television programming and station ownership.e*  Y4ԍAn Inquiry into the Future Role of Low Power Television Broadcasting & Television  Y4Translators in the Nat'l Telecommunications Sys., 51 RR2d 476 (1982). Although this service has been highly successful in meeting that objective, there is now interest in using LPTV channels to provide multichannel video service.   YH4 ~127.` ` The Commission's rules specifically permit LPTV channels to be used for  Y14"subscription television,"Mf1f*  Y4 4ԍ47 C.F.R.  73.642(a)(2).M whereby a licensee charges subscribers a fee for the provision of one or more scrambled channels and the equipment needed to descramble the signal. Unlike a fullservice television station, an entity may hold more than one LPTV license in a  Y 4particular market.Jg *  Y4ԍ47 C.F.R.  74.732(b).J Therefore, an LPTV operator can accumulate a number of channels in a single market to provide multichannel video service. However, the Commission is presently not accepting applications for new LPTV stations for service within 100 miles of the top thirtysix United States cities in order to preserve spectrum availability for the  Y4implementation of HDTV systems by fullservice stations.%h& *  Y4ԍSee Notice of Limited Low Power Television/Television Translator Filing Window,  Y4FCC Public Notice No. 41954 at 1, n.1 (March 3, 1994) ("LPTV Public Notice"). The  Y4Commission has recognized that LPTV stations have "secondary service status," and as such, must yield to new fullpower station assignments for the provision of advanced television  Yu4services, such as HDTV. Advanced Television Systems & Their Impact on the Existing  Y`4Television Broadcast Serv., Memorandum Opinion & Order, Third Report & Order, & Third  YK4Further Notice of Proposed Rulemaking  3539, 7 FCC Rcd 6924, 69516955 (1992) . The application freeze was imposed so as to avoid displacing new LPTV stations and minimize the extent to which LPTV service to the public is disrupted as advanced television  Y4systems come on line. LPTV Public Notice at 12, n.1. %  Yb4 128.` ` Despite that partial application freeze, the Commission received a significant number of LPTV construction permit applications in April 1994. According to an industry report, the interest in obtaining LPTV licenses is the result of a growing interest in providing multichannel LPTV service, and may also have been enhanced by the fact that signal  Y4scrambling methods have become more economical and advanced.iz*  Y&4ԍScrambled LPTV Service Expected To Grow, Offer CableLike Service,  Y'4Communications Daily, May 20, 1994, at 2; LPTV Emulating Cable, T#D  P7jQ ApP#ELEVISION# XR  P7jQXP# D#D  P7jQ ApP#IGEST# XR  P7jQXP#, May 23, 1994, at 6."Bi\+))n"Ԍ Y4ٙ 129.` ` The Commission is aware of at least one company that presently provides multichannel LPTV service. Reports indicate that Broadcast Services International, Inc. ("BSI") provides multichannel LPTV service to approximately 500 subscribers in Duluth,  Y4Minnesota and to 250 subscribers in nearby Ely, Minnesota.j*  Y44ԍSee Scrambled LPTV, supra note 361, at 3; Joel Schofield, LPTV: Finding a place in  Y4Wireless Cable, Wireless Broadcasting Magazine, March/April 1994, at 12. BSI is reportedly focussing  Y4its efforts on uncabled rural areas,:kf*  Y4ԍId.: and it is unclear to what extent BSI's service would be  Y4a competitive substitute for cable service.l*  Y/ 4ԍOne report suggests that multichannel LPTV will typically be limited to ten to twenty  Y 4channels, and potentially thirty channels with signal compression. LPTV Emulating Cable,  Y 4supra note 361, at 6. In contrast, over 95% of the nation's cable subscribers receive 30 or  Y 4more channels. See Appendix C, Table 3. Another possible LPTV site involves Selma, Alabama, where construction permits for multiple LPTV station assignments have been issued to a single applicant. In addition, many of the applications received in April 1994 are for multiple LPTV channel assignments, primarily for rural markets.  Y 4 130.` ` While multichannel LPTV services may eventually become available in many areas, the application freeze on new LPTV stations within 100 miles of the thirtysix largest United States cities and the spectrum needs of advanced television systems suggest that multichannel LPTV entry will likely be limited to smaller and midsized markets. In addition, it is unclear whether multichannel LPTV will enter the market as a competitor to cable, or as a substitute to cable service in largely uncabled areas.   Uy4 4.` ` Electric Utilities  Yb4  YK4 131.` ` Electric utility companies may provide another potential source for the delivery  Y44of video programming.emz4c *  Y44ԍFor purposes of this discussion, electric utilities are considered to include investor Y4owned utilities, municipal utility systems, and exempt public utility holding companies. See  15 U.S.C. 79c. However, that group could substantially increase if Congress passes pending legislation that would permit registered public utility holding companies to diversify into telecommunications and other industries. S. 1822, 103d Cong., 2d Sess. (1994) (which  Y!4will, inter alia, amend 15 U.S.C. 79i if adopted).e Some municipal electric utility companies are actively engaged in overbuilding privatelyowned cable systems, or are presently contemplating such  Y4overbuilding.qn*  Y4%4ԍSee Toward Competition, supra note 132, at 22.q As is the case with LEC provision of VDT services,Po0*  Y&4ԍSee infra 106.P the need for appropriate safeguards to avoid crosssubsidization between regulated and video distribution  Y4businesses is an issue associated with entry by electric utility companies."Co\+))i"Ԍ Y4ԙ 132.` ` Electric utilities' interest in cable television is based on the potential for capitalizing on their existing rights of way, and from the potential for using "demandside"  Y4load management capabilities for the distribution of video programming.gp*  YK4ԍToward Competition, supra note 132, at 23.g "Demandside"  Y4management involves, inter alia, a utility's ability to control or limit increases in demand for electricity during peak hours, for example by controlling its customers' air conditioners or  Y4poolheaters through the installation of a broadband communications link to each home.q {*  Y4ԍ Id. at 2324. However, American Electric Power Co. recently committed to implement commercially a technology that allows existing household phone lines to handle some of the key costsaving tasks that previously had been envisioned for techniques that rely on fiber/coaxial links to the home. The new technology is called "TranstexT" and allows the energy company to conduct demandside management by sending very low data rate signals over existing telephone connections. According to a trade press article, the use of this technology "could take utilities out of the broadband communications equation for some time  Y4to come." Fred Dawson, Utilities Debate Role in Broadband Networks, Multichannel News,  Y4July 18, 1994, at 46; see also AEP Plans to Install 25,000 Residential Energy Management  Y4Systems by 1997, E#D  P7jQ ApP#LECTRIC# XR  P7jQXP# U#D  P7jQ ApP#TILITY# XR  P7jQXP# W#D  P7jQ ApP#EEK'S# XR  P7jQXP# D#D  P7jQ ApP#EMAND# XR  P7jQXP#ѩS#D  P7jQ ApP#IDE# XR  P7jQXP# R#D  P7jQ ApP#EPORT# XR  P7jQXP#, Mar. 31, 1994, at 1;  Y4Ron Lietzke, AEP to Help Customers Cut Bills, C#D  P7jQ ApP#OLUMBUS# XR  P7jQXP# D#D  P7jQ ApP#ISPATCH# XR  P7jQXP#, Mar. 30, 1994, atF1.  Ya4 133.` ` As discussed in Section III.B.1, supra, the GEPB (Glasgow Electric Plant Board) in Glasgow, Kentucky is an example of a utility currently providing cable service. GEPB's initial purpose in creating its fullyinteractive communications and control systems was simply to find a better way to manage its distribution network, and to reduce energy  Y 4costs to consumers by monitoring consumption.r %*  Y4ԍToward Competition, supra note 132, at 23 (citing Bob Bruce, The Lure of Fiber  Y4Optics, Public Power, Sept.Oct. 1993, at 16,18). In June 1989, GEPB began offering cable television service to all 13,000 of its customers in competition with the local cable operator,  Y 4and it has since acquired fifty percent of the market for cable television service.s *  Y%4ԍPush by Municipal Utilities, Communications Daily, Jan. 25, 1994, at 4; Pressure  Y4Growing to Make Electric Utilities Major Players in NII, Washington Telecom Week, Jan. 28, 1994, at 23.   U 4 5.` ` Video Cassette Recorders (VCRs)  Y4  Y}4 134.` ` VCRs (video cassette recorders) are not "multichannel video programming  Yf4distributors." However, the Commission noted in the 1990 Cable Report that widespread ownership of VCRs allows many viewers to see overtheair programs at times other than when they are broadcast, and also permits those viewers to choose prerecorded tapes on a variety of subjects, giving them more control over both the programming they watch and the"#D"s\+))w"  Y4time they watch it.ot*  Yy4ԍ1990 Cable Report 10910, 5 FCC Rcd at 501920.o The evidence in that proceeding demonstrated that VCR penetration had grown dramatically, reaching a penetration level of 72% in 1990, up 30% from 1986.  Y4Moreover, the Commission found that nationwide revenues from the sale and rental of video cassettes exceeded the revenues for basic cable service. Therefore, the Commission concluded that high VCR penetration levels and video cassette rentals, combined with broadcast or other overtheair video delivery systems, offer an alternative that may act as a  Yv4partial substitute for cable services.:uv{*  Y 4ԍId.:  YH4 135.` ` Since the 1990 Cable Report was released, VCRs have become still more prevalent. Time Warner states that by the end of 1993, there were approximately 80.5 million households with VCRs, which compares to approximately 57 million cable  Y 4households at that time.~v *  Y4ԍTime Warner Comments at 14 n.17 (citing Kagan Media Index at 14).~ Although those 80.5 million households with VCRs would account for nearly 84% of all television households in the United States, a study conducted  Y 4by the Commission following its release of the 1990 Cable Report found that VCRs are more properly categorized as competitors of premium or payperview cable programming, rather  Y 4than of cable services generally.w *  Y4ԍSee Florence Setzer & Jonathan Levy, Broadcast Television in a Multichannel  Y4Marketplace 108 (Federal Communications Commission, Office of Plans and Policy, OPP Working Paper Series, June 1991)." E* w\+))"  Y4  \{ IV.  X4}MARKET STRUCTURE CONDITIONS AFFECTING COMPETITION ă  Y4 136.` ` In this section of the Report, the Commission discusses the status of horizontal concentration and vertical integration in the cable television industry, and the competitive effects of that concentration and integration. In brief, the Commission finds that horizontal  Yy4concentration has increased moderately since it released the 1990 Cable Report. Vertical integration among programmers and cable operators, on the other hand, has not changed significantly. As part of its responsibility for implementing the 1992 Cable Act, the Commission has adopted and enforced rules to mitigate the anticompetitive effects of such integration on entry of new competitors. Those rules appear generally to be effective in ensuring that those new competitors can gain access to programming produced by vertically Y 4integrated cable companies.x *  Yj 4ԍAppendix F contains descriptions of program access cases that the Commission has resolved through September 19, 1994. Finally, the Commission discusses in the concluding paragraphs of this section certain technological developments that have the potential to change the structure of the industry.  X4 A.Horizontal Concentration In The Cable Industry  Yg4  137.` ` In the 1990 Cable Report, the Commission noted that horizontal concentration in the cable industry had significantly increased on a nationwide basis since the passage of the 1984 Cable Act. The Commission concluded that horizontal integration had not only "brought substantial benefits to American consumers, but also has added potential for certain  Y 4anticompetitive conduct."gy b*  Y 4ԍ1990 Cable Report  13(5), 5 FCC Rcd at 4972.g The benefits included more efficient production as a result of certain economies of scale, and the creation of a pool of capital for investment in  Y4programming.`z*  Y}4ԍId.  8284, 5 FCC Rcd at 500709.` The potential anticompetitive effects, on the other hand, included the danger that the larger MSOs would use their size to "extract unreasonable concessions from program suppliers and to unfairly restrain competition from alternative distribution  Y4services."V{*  Y 4ԍId.  71, 5 FCC Rcd at 5003.V The Commission did not express an opinion in the 1990 Cable Report as to whether the observed increase in horizontal integration was desirable. The Commission did  Yn4state, however, that it intended to continue monitoring changes in concentration.d|n?*  YJ$4ԍId.  76, 91, 5 FCC Rcd at 5006, 5111.d "WF |\+))3"Ԍ Y4 138.` ` The language of the 1992 Cable Act clearly indicates that Congress recognized the potential for both beneficial and harmful effects from increased horizontal  Y4concentration.}*  Yb4ԍSee H.R. Rep. No. 862, supra note 11, at 43 (consolidation has benefited consumers with efficiencies in administration, distribution and procurement of programming, and can  Y64promote the introduction of new programming services in the market); S. Rep. No. 92, supra note 11, at 33. In Section 11(c) of the 1992 Act, Congress directed the Commission to establish "reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person, or in which such person has an  Y4attributable interest."s~O*  Yy 4ԍCommunications Act 613(f)(1)(A), 47 U.S.C. 533(f)(1)(A).s Moreover, Congress required the Commission to consider a number  Yv4of specific public interest objectives when it established those limits.dv*  Y 4ԍId. 613(f)(2), 47 U.S.C.  533(f)(2).d Those requirements reflect Congressional recognition that there are benefits to increased concentration, including the fact that as compared to smaller system operators, large MSOs can more easily risk  Y14providing more diverse, innovative, narrowly targeted, and controversial programming.1*  YY4ԍH.R. Rep. No. 862, supra note 11, at 43; see also 1990 Cable Report  8284, 5 FCC Rcd at 500709. On the other hand, those requirements also reflect a recognition by Congress of the potential for large MSOs to extract concessions from cable programmers in exchange for carriage of their programming, which could discourage entry of new programming services and  Y 4adversely impact the diversity of programming available for consumers.g  *  Y4ԍH.R. Rep. No. 862, supra note 11, at 423.g  Y 4 139.` ` Pursuant to Section 11(c) of the 1992 Cable Act, the Commission promulgated  Y4horizontal ownership rules.( *  Y4ԍImplementation of Sections 11 and 13 of the 1992 Cable Act Horizontal & Vertical  Y4Ownership Limits, Second Report & Order ("Second Ownership Report & Order"), 8 FCC  Y4Rcd 8565 (1993).( Those rules prohibit any entity from having an "attributable  Yy4interest"y%*  Y; 4ԍIn determining what constitutes an "attributable interest," the Commission adopted the  Y$!4broadcast attribution criteria contained in 47 C.F.R. 73.3555. See 47 C.F.R.   76.501,  Y"476.503(f). That decision was suggested in Senate Report 92. S. Rep. No. 92, supra note11, at 80. in cable systems that reach more than thirty percent of all homes passed  Yb4nationwide by cable,Jb*  Y%4ԍ47 C.F.R. 76.503(a).J or thirtyfive percent if the additional systems are "minority"bG\+))"ԫ Y4controlled."*  Yy4ԍ47 C.F.R. 76.503(b). "Minoritycontrolled" is defined as "more than 50 percent owned by one or more members of a minority group." 47 C.F.R. 76.503(d). In deciding upon those percentages, the Commission stated that it was balancing two Congressional concerns. In particular, the Commission said: XX` ` A 30% horizontal ownership limit is generally appropriate to prevent the nation's largest MSOs from gaining enhanced leverage from increased horizontal concentration. Nonetheless, it also ensures that the majority of MSOs continue to expand and benefit from the economies of scale necessary to encourage investment in new video programming  YH4services and the deployment of advanced cable technologies."uHb*  YG 4ԍSecond Ownership Report & Order  25, 8 FCC Rcd at 857677.u `  Y 4 140.` ` After a federal district court ruled that Section 11(c) of the 1992 Cable Act is  Y 4unconstitutional, *  Y4ԍSee Daniels Cablevision, Inc. v. United States, 835 F. Supp. 1, 10 (D.D.C.), appeal  Y4docketed and pending, Civ. Act. No. 935290 (D.C. Cir. 1993). the Commission stayed enforcement of its horizontal ownership rules  Y 4pending appellate review.} *  Y4ԍSecond Ownership Report & Order  3, 8 FCC Rcd at 8567.} In addition, the horizontal ownership rules currently are under  Y 4reconsideration by the Commission.A * *  Y4ԍSee Petition for Reconsideration of Consumer Fed'n. of Am. & Center for Media  Y4Educ., Second Ownership Report & Order ("Consumer Fed'n Petition for Recon."),  Yr4 MMDocket No. 92264 (Dec. 15, 1993); Petition of Bell Atl. for Ltd. Reconsideration,  Y]4Second Ownership Report & Order ("Bell Atl. Petition for Recon."), MM Docket No. 92264 (Dec. 15, 1993). In their Petition, the Center for Media Education and Consumer Federation  Y14of America urge the Commission to establish limits of around 10-20%.  Consumer Fed'n  Y4Petition for Recon. In commenting on that Petition, Viacom recommended a limit of 15%.   Y4Comments on Petition for Reconsideration of Viacom Int'l Inc., Second Ownership Report &  Y4Order, MM Docket No. 92264 (Feb. 14, 1994).   U 4 1.` ` Status of Concentration in the Cable Industry  Yy4 141.` ` In most of the local markets where cable operators provide cable service to subscribers, they remain the sole distributors of multichannel video programming. As noted  YK4above, there are limited instances of competition through overbuilding in the United States.EK*  Y%4ԍSupra  54.E In addition, suppliers that use technologies other than cable have not yet reached the"4H\+))" subscribership levels necessary for the Commission to conclude that vigorous rivalry  Y4currently exists in most local markets for multichannel video distribution.N*  Yb4ԍSee infra III.B.1.N   Y4 142.` ` There has been a moderate increase in the nationwide horizontal concentration  Y4of the cable industry since the issuance of the 1990 Cable Report, as measured by the  Y4HerfindahlHirschman Index ("HHI"),l{*  Y4ԍSee Appendix G, Tables 1 & 2; NCTA Comments at 2021.l which is a standard measure of horizontal  Yx4concentration.x*  Y/ 4ԍThe HHI is calculated by summing the squares of the firms' percentage shares of the  Y 4market. 1992 Horizontal Merger Guidelines  1.5, 4 Trade Reg Rep. (CCH)  13,104, at20,5734 to 20,5736.  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 is  YJ4discussed above,LJ*  Yp4ԍSupra 4953.L 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 HHI provides more useful information.  Y 4 143.` ` In 1990, the national market for the distribution of cable services was unconcentrated, with an HHI of approximately 866. The largest MSO, TCI, had a 24%  Y4market share.c( *  YW4ԍAppendix G, Table 2. In 1990, the Commission reported an HHI of 975 (rounding  Y@4off to the nearest full percentage point). 1990 Cable Report, Appendix G, Table I, 5 FCC Rcd at5106-07. All 1990 market share and HHI figures were derived from a base consisting of the top 50 MSOs in the United States. Those top 50 MSOs accounted for 89.6% of the  Y4total industry. Id. Appendix G, Tables I, II & III, 5 FCC Rcd at 510608. In this Report, we have revised, and corrected when necessary, the 1990 market share and HHI calculations.  Taken together, the top four companies had a 47% market share; the top ten had 63%. Between that time and the end of the first quarter of 1994, the market remained "unconcentrated" in terms of horizontal concentration. The HHI for the industry as  YM4of March31, 1994, is 898, which represents a modest increase since 1990.GM?*  Y)#4ԍAppendix G, Table 1. G TCI still had the largest market share, 24.8%, 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%.   Y4 144.` ` At the end of the first quarter of this year, the individual market shares of the rest of the top ten MSOs was as follows: Time Warner was the second largest MSO, with 12.5% of the market; the third largest MSO, Continental, and the fourth largest, Comcast,"I\+))m" each had approximately 5% of the market; the fifth largest MSO was Cablevision, which had a little less than 4% of the market; the sixth was Cox Cable Communications, Inc. ("Cox"), with a little more than 3%; and the seventh through tenth MSOs each had between 2.25% and 2.5% of the market.   Y4 145.` ` By the middle of September, 1994, however, transactions had been announced that would significantly alter the market shares of those top ten companies. Three significant mergers have been announced, all of which are expected to be consummated in the near  YH4future: H*  Y 4ԍThe management of Adelphia (the 11th largest MSO) has stated that "the telecommunications industry, including the cable television and telephone industries, is in a  Y 4period of consolidation characterized by mergers, joint ventures...." Adelphia  Y| 4Communications Corp., Form 10Q 11 (Jun. 30, 1994). During this period, TCI reacquired Liberty Media, a transaction approved by the Commission. That acquisition did not change TCI's market share or the HHI measurement relevant herein, as the Commission concluded  Y74that throughout the period, the firms were commonly controlled.  See TeleCommunications, Inc. & Liberty Media Corp., Applications for Consent to Transfer Control of Radio Licenses,  Y 4Order ("TCI/Liberty License Transfer Orders"), DA 94832 (File Nos. CAR-44064 et al.  Y4Aug. 1, 1994) (Chief, Cable Services Bureau). (1)the largest MSO, TCI, has agreed to acquire TeleCable, which would add over 700,000 subscribers to TCI's total, increasing its market share to 26.1%; (2)Comcast has agreed to acquire from Rogers (Rogers Communications) those systems in the United States that Rogers acquired from Maclean Hunter earlier this year, which will give Comcast a 5.6% share and move it from fourth place to third place; and (3)Cox, the sixth largest MSO on March 31, 1994, agreed to acquire Times Mirror Cable Television ("Times Mirror"), which would give Cox a 5.4% share of the market, and make that combined entity the fourth largest MSO, right behind Comcast. In addition to those mergers, Time Warner agreed in September 1994 to (1)consolidate in a joint venture certain of its systems with those operated by Newhouse Broadcasting Corp. and Advanced Publications, Inc., and (2)purchase Summit Communications Corporation (which has 160,000 subscribers). Those transactions will give the second largest MSO, Time Warner, operating control of the seventh largest MSO, causing Time Warner's market share to increase to 15.21%.  Y4 146.` ` If the four transactions listed above are consummated, the HHI will rise to  Y4approximately 1051.R *  Y:!4ԍSee Appendix G, Table 1A. R Standard antitrust analysis considers a market with an HHI between  Y41000 and 1800 to be "moderately concentrated."M *  Y#4ԍHorizontal Merger Guidelines 1.51, 4 Trade Reg. Rep. (CCH) 13,104 at20,5735 to 20,5736. According to the guidelines developed by antitrust enforcement agencies, "[m]ergers producing an increase in the HHI of more than 100 points in moderately concentrated markets postmerger potentially raise significant"J\+))="  Y4competitive concerns depending on [various] factors . . ."I*  Yy4ԍId.` ` I None of the four announced mergers would individually increase the HHI by 100 points.   Y4 147.` ` When the Commission established limits for horizontal concentration on a national level, it declined to impose regional limits, concluding that "the benefits and efficiencies of regional concentration outweigh any anticompetitive effects in the local  Yv4programming and advertising marketplace."v{*  Y 4ԍSecond Ownership Report & Order  1617, 8 FCC Rcd at8573. At this time, the Commission does not have much evidence concerning regional concentration. Bell Atlantic notes that MSOs have been swapping territories with each other, and sees a trend towards largescale regional  Y14concentration of MSOs.1*  Y 4ԍBell Atlantic Comments at 34.  See also GTE Comments at 15. The June 13, 1994  Y4edition of Cable World reported that Cox Chairman Jim Kennedy indicated that Cox "will focus its acquisition efforts on systems that geographically match the new company's current  Y4properties." K.C. Neel, CoxTimes Mirror Deal Raises Questions, Cable World, June 13, 1994, at 1, 60.   U 4 2.` ` Competitive Effects of Horizontal Concentration  Y 4 148.` ` The comments and reply comments that the Commission has received in this proceeding generally reiterate both the benefits and risks of increased horizontal concentration that have previously been described by both Congress and the Commission in  Y4the legislative history of the 1992 Cable Act, the 1990 Cable Report, and in the horizontal  Y{4ownership rules.{_ *  Yw4ԍSee, e.g., Bell Atlantic Comments at 14; NCTA Comments at 20; TCI Comments at 1213, 2022, App. A at 12, App. B at 7; Time Warner Comments at 6, 33. One commenter, TCI, provided additional information addressing the issue whether increased horizontal concentration could adversely affect entry of new programming services in its view, whether one MSO can accumulate through acquisition a "critical mass" of subscribers to which all programmers must gain access in order to survive  Y4or succeed. *  Y 4ԍTCI Comments, App. B, at 1114 (Stanley M. Besen, Steven R. Brenner & John R. Woodbury, An Economic Analysis of the FCC's Proposed Cable Ownership Restrictions (Charles River Assocs. Feb. 9, 1993)). Such an MSO would be able to dictate terms to programmers, and in effect, dominate the market for cable television programming. TCI, the largest MSO, with  Y4approximately twentyfive percent of the nation's subscribers,OV*  Y%4ԍSee Appendix G, Table1.O denied that it had access to"K\+))r"  Y4the critical mass of subscribers necessary to make or break a new programming service.n*  Yy4ԍTCI Comments, App. A at 23. TCI also stated that the point of "critical mass" was different for each type of programming, depending on the cost of production. At another place, TCI acknowledged that increased concentration among MSOs reduces transaction costs for programmers. TCI Comments at 1213, App. B at 7. n Further, it asserted that a large MSO has no rational incentive to restrict its purchases from programmers, or its supply of programming to cable subscribers, by exercising purchasing  Y4power over programming suppliers.L4*  Y 4ԍTCI Comments, App. B at 14.L   Y4 149.` ` As shown herein, the persistence of high concentration at the local level tends  Yv4to impair market performance.Lv*  Y 4ԍSee infra V.A.2.L In addition, Congress and the Commission have noted that greater national concentration may have both adverse and procompetitive effects. On the one hand, large MSOs have assisted in the creation and survival of new and underfinanced programmers. On the other hand, those same MSOs may have used their programming purchasing power to deter the entry of new cable programmers or competitive alternatives to cable. To the extent that large MSOs used their power over verticallyintegrated programmers to obtain exclusive distribution rights to satellitedelivered programming, and those exclusive rights disadvantaged competitors of those large MSOs, the 1992 Cable Act's program access provisions and the Commission's program access rules appear to have largely  Y 4addressed the problem.U p*  Y4ԍSee infra IV.B.2.a.U  Yy4 150.` ` Concentration at the national level enables cable operators to achieve certain  Yb4efficiencies, such as discounts for programming.4b *  Y4ԍTasneem Chipty, Horizontal Integration for Bargaining Power: Evidence from the  Y4Cable Television Indus. 3, 2021 (Conference Paper, AEI Telecommunications Summit: Competition & Strategic Alliances, Am. Enter. Inst., July 7, 1994). 4 Programming costs are a significant  YK4portion of total operating costs, accounting for about thirtysix percent of expenditures.mK~ *  Yf 4ԍToward Competition, supra note 132, at 43.m֠ Lower prices for programming result from two aspects of firm size. First, given that many programmers grant quantity discounts based on the number of subscribers, larger MSOs will pay lower prices for programs than their non-MSO counterparts. Second, the largest MSOs also may be able to exert superior bargaining power, and thereby, negotiate significant  Y4discounts for programming.*  Y&4ԍId. at 3, 2021. The authors of a 1988 study on concentration contended that discounting was prevalent throughout the cable industry, citing price differentials in excess of"f(\+))'"  Yy490%. National Telecommunications & Info. Admin., U.S. Dep't of Commerce, NTIA Rep. 88233, Video Program Dist. & Cable Television: Current Policy Issues &  YK4Recommendations 81 (1988). Lower prices for programming are not, in themselves, a"L4\+))v" cause for concern. Discounts on programming can significantly lower the cost of packaging and distributing the cable product. Lower costs also might increase the profits of an MSO which can, in turn, use those funds to increase the supply and quality of programming. However, greater programming discounts, if unfairly and discriminatory granted, may be a competitive concern.  Yv4 151.` ` Concentration in regional, or locally clustered, marketing areas may also be  Y_4procompetitive or anticompetitive.r_4*  Y0 4ԍSome of the recently announced mergers involve such clustering. For example, the CoxTimes Mirror transaction involves clusters in Southern California and New England. The ComcastMaclean Hunter acquisition involves clusters in Michigan, and New Jersey. The CablevisionSutton purchase involved a New Jersey cluster. r Regional concentration may result in significant efficiencies. A centrallylocated regional installation and maintenance office can perform those functions for a number of nearby markets, allowing more efficient use of highcapacity, productive assets. Duplication of other factors of production, such as management, billing, and office space, may also be eliminated by regional clustering. Advertising, marketing and sales functions might realize such economies as well. Larger firms may also realize  Y 4economies in the purchase of inputs of production, such as programming.T *  Y4ԍChipty, supra note 414.T Moreover, it may be possible to spread fixed headend costs over a large number of subscribers using fiber optic links. If fiber optic links are substituted for headends, some scale economies could be achieved by eliminating duplication of headend equipment. That flexibility may allow cable firms to adopt more efficient system sizes, and thereby, lower their costs.  YK4 152.` ` The sharing of fixed resources required for the deployment of innovative services, including video-on-demand, may also be characteristic of regional economies of scale. Interlinked cable systems will eliminate the need for costly duplication of expensive capital equipment required for these new services. If duplication is required, the access costs related to innovative services may not warrant their provision in less densely populated or rural cable markets. However, if a group of markets were all served from a central location, a standard product could be served to all customers within the cluster. If so, consumers will benefit as the new services will be deployed more rapidly to all markets.  Y|4 153.` ` Clustering 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"NM+ \+)) "  Y4video programming.*  Yy4ԍSee Geraldine Fabrikant, Time Warner and Newhouse Form Joint Cable Operation,   Yd4New York Times, September 13, 1994, at D1; Paul Farhi, Time Warner Cable  YO4Combination, Washington Post, September 13, 1994, at D1; Amy Harmon & J. Lippman,  Y:4Times Mirror Deal with Cox Signals New Strategy, Los Angeles Times, June 6, 1994, at A1.  Creating large geographic regions of contiguous cable markets may allow a single MSO to construct more cheaply the network necessary to provide telephone services on a wide scale. By connecting the contiguous systems with fiber optic links, a large regional cable firm may be able to compete better in both voice and video distribution  Y4with the RBOCs, which serve large geographic regions.:<*  Y} 4ԍId.: Future cable networks that offer multiple services (voice, video, and data) may require companies to serve larger markets in order to fully take advantage of economies of scale and scope. Therefore, clustering may be viewed as pro-competitive both in terms of cable companies' entry into the market for switched voice and data services, and in terms of positioning themselves for potential competition from LECs in the market for video programming  Y 4 154.` ` There are, however, competitive risks associated with increased regional clustering of commonlyowned cable systems. The creation of large, contiguous clusters of commonlyowned systems may result in the removal of cable systems that are not affiliated with large MSOs from significant regions of the country. Those "independent" systems may serve presently as a competitive constraint, offering a credible threat of expansion into adjacent markets. If high capital expenditures discourage entry, then adjacent systems may be the most likely entrants, because such systems may be able to use parts of their existing  Yb4cable plant to support expansion into adjacent areas.`b*  Y4ԍSee C. Cramer, Local Competition for Telephone Service, Rev. of Indus. Org. 273-91  Y4(June 1994). Existing headends and trunk lines that could be used in expanding the reach of an adjacent cable system account for twentyfive percent of cable plant investment.` The elimination by acquisition of these potential competitors may increase the market power of clustered systems by decreasing the likelihood of entry.  Y4 155.` ` A possible consequence of the accumulation of large regional clusters of interconnected cable systems is that such systems may send an entrydeterring signal to potential rivals. When a firm incurs substantial sunk costs by investing in its operations, it signals a longterm commitment to the market. Cable firms making the first move to provide a fiberbased broadband network may dissuade potential entrants from entering the market, or cause then to enter on a smaller scale. For example, a commitment by an MSO to build an integrated broadband network capable of delivering a wide variety of services may  Ye4discourage the more limited wireless systems from investing in particular markets.eL *  YN&4ԍSee Jean Tirole, The Theory of Industrial Organization 368 (1988).ą Moreover, increased concentration in tightly clustered markets may also enable the few surviving cable operators to coordinate their conduct, with the effect of raising rivals' costs. "7N \+))" Nevertheless, major sunk cost investment by cable systems should expand and improve the quality of services provided to subscribers. Therefore, 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.   Uv4 3.` ` Conclusion   YH4 156.` ` The record in this proceeding shows that horizontal concentration in the cable industry has increased moderately since 1990. If the recently announced mergers are consummated, they will result in a further increase in concentration. The Commission will monitor further changes in concentration, and will complete its reconsideration of the horizontal concentration rules. Furthermore, the Commission will continue its analysis of the possible economic efficiencies and inefficiencies of horizontal concentration. Finally, the Commission will continue to evaluate issues associated with industry mergers as required by  Y 4its implementation of the horizontal ownership provisions of the 1992 Cable Act, *  Y 4ԍ47 U.S.C.  533(f). The Commission's implementation of the horizontal ownership provisions of the 1992 Cable Act will depend on the ultimate disposition of those provisions on appeal, as well as the Commission's reconsideration of its existing horizontal ownership  Y4rules, which the Commission has stayed. See supra 140. as well as  Y4by its public interest responsibilities under other provisions of the Communications Act.b6*  Yc4ԍSee, e.g., 47 U.S.C. 310(d).b   Xb4   B.Vertical Integration in the Cable Industry  YK4  Y44 157.` ` In the 1990 Cable Report, the Commission found that verticallyintegrated cable operators have the ability to deny competing MVPDs access to programming services  Y4in which cable operators have ownership interests.Z*  Yz4ԍ1990 Cable Report 113, 5 FCC Rcd at 5021. Vertical integration in the cable industry refers to situations where cable operators, or companies with which they are affiliated, hold interests in vendors that supply video programming to cable systems and other MVPDs, and vice versa.Z The Commission concluded that such practices could jeopardize the viability of new competition to cable. The Commission also observed that programming services, particularly new ones, at times had difficulty obtaining  Y4carriage on cable systems.e/ *  Y#4ԍ1990 Cable Report 113, 5 FCC Rcd at 5021.e  Y4 158.` ` In response to similar record evidence and in order to promote competition in the program supply and distribution markets, Congress enacted provisions of the 1992 Cable Act that limit the ability of verticallyintegrated satellite programming vendors and cable operators to inhibit competitive entry into both the programming supply and distribution"PO \+))&"  Y4markets. *  Yy4ԍCommunications Act, 612(f)(12), 628, 47 U.S.C. 533(f)(12), 548. Congress noted that it had received information that "some vertically integrated MSOs have agreed to carry a programming service only in exchange for an ownership interest in the service. . . . Other witnesses . . . testified that vertical relationships strongly promote diversity and make  Y4the creation of innovative, and risky, programming services possible." H.R. Rep. No. 862,  Y4supra note 11, at 41. The Senate committee stated that "to encourage competition to cable, the bill bars vertically integrated, national and regional cable programmers from  Y4unreasonably refusing to deal with any multichannel video distributor...." S. Rep No. 92,  Y 4supra note11, at 28. Congress also recognized that exclusivity could be a "legitimate business strategy where there is effective competition. Where there is no effective competition, however, exclusive arrangements may tend to establish a barrier to entry and  Y 4inhibit development of competition in the market." Id. Specifically, Section 11 of the 1992 Cable Act required the Commission to  Y4adopt, inter alia, restrictions on the number of channels on a cable system that can be  Y4occupied by programming services in which the operator has an attributable interest.z *  Y4ԍCommunications Act 613(f)(1)(B), 47 U.S.C. 533(f)(1)(B). z Section 12 of the 1992 Act prohibits cable operators and other MVPDs from: (1)requiring that they have a financial interest in a programming service as a condition for carriage; (2)coercing programming vendors to provide exclusive rights as a condition of carriage; and (3) discriminating on the basis of affiliation of vendors in the selection, terms or conditions  YJ4of carriage.gJ*  Y4ԍCommunications Act 616, 47 U.S.C. 536.g Finally, Section 19 of the 1992 Act prohibits unfair methods of competition and proscribes several specific practices by verticallyintegrated satellite cable programming vendors, satellite broadcast cable programming vendors, and cable operators, including, in  Y 4certain circumstances, the granting of "exclusivity" provisions in cable carriage contracts.| *  Y^4ԍCommunications Act, 628(bc), 47 U.S.C.  548(bc). |  Y 4 159.` ` On April 1, 1993, the Commission implemented Section 19 by adopting rules that prohibit unfair and discriminatory acts and prohibit or limit the types of exclusive programming contracts that may be entered into between cable operators and vertically Y4integrated programming vendors (the "program access rules").Y*  Y!4ԍProgram Access Report & Order 12341, 8 FCC Rcd at 341623; see also 47  Ys"4C.F.R.  76.1000 et seq. On September 23, 1993, the Commission issued rules implementing Section 11, which restrict the number of channels on a cable system that may be occupied by programmers affiliated with the owner of that  YM4system (the "channel occupancy rules").M*  Y&4ԍ Second Ownership Report & Order, 8 FCC Rcd 8565 (1993), recon. pending; 47C.F.R. 76.501, 76.504. Compliance with those channel occupancy rules is to be"(\+))'" monitored in the first instance at the local level and enforced through a complaint process.  Yb4Second Ownership Report & Order 9899, 8 FCC Rcd at 8606; 47 C.F.R. 76.504(e). In a separate order, also issued on September 23,"MPM\+))" the Commission adopted rules implementing Section 12 of the Act, which prohibit cable operators from coercing programming vendors into granting them exclusive rights and from discriminating against program suppliers on the basis of the operators' ownership interests  Y4(the "program carriage" rules).{M*  Y4ԍ Program Carriage Report & Order, 9 FCC Rcd 2642 (1993).{  Y4 160.` ` As discussed in the following sections, the level of vertical integration in the  Yv4cable industry has remained at roughly the same level as found in the 1990 Cable Report. However, the program access provisions of the 1992 Act and the Commission's implementation of its program access rules have helped ensure that satellitedelivered programming is made available to competing MVPDs and has reduced the gap between programming prices paid by cable operators and their competitors. Moreover, since 1990, there has also been growth in the diversity and quality of programming services that are offered or whose launch has been announced. Although the Commission believes that its program access rules have generally been successful in ensuring the supply of programming to competing MVPDs, there remain a number of unresolved issues relating to vertical integration that require further attention.   U{4 1.` ` Status of Vertical Integration in 1994  Yd4  YM4 161.` ` While the number of verticallyintegrated national programming services has grown substantially since 1990, so too has the overall number of programming services available for distribution. Consequently, approximately 53% of programming services are integrated with cable system operators today, compared with 50% of programming services  Y4that were vertically integrated in 1990.m*  Yz4ԍSince the time of the data used in the 1990 Cable Report, the overall number of  Ye4national programming services has increased from 70 to 106. Compare 1990 Cable Report,  YP4Appendix G, Tables IVV, 5 FCC Rcd at 510910, with Appendix G, Tables 34 of this  Y;4Report. It appears that MSOs have increased their ownership in national programming  Y& 4services from a total of thirtyfive services in 1990 to fiftysix in 1994. Compare 1990  Y!4Cable Report, Appendix G., TableIV, 5 FCC Rcd at 5109, with Appendix G, Table 3 of  Y!4this Report.  Y4 162.` ` The Commission noted in the 1990 Cable Report that all of the successful channels that were introduced after passage of the 1984 Cable Act were affiliated with cable  Y4system operators,| *  YA'4ԍ1990 Cable Report 80, Appendix G, 5 FCC Rcd at 5007, 5106.| and today, verticallyintegrated national programming services continue to dominate the group of services that are most widely viewed. Twelve of the top fifteen"Q\+))+" mostwatched services, according to primetime rankings, are vertically integrated, an  Y4increase from ten in 1990.O*  Yb4ԍSee Appendix G, Table 8.O Cable operators have interests in fifteen of the top twentyfive  Y4services, an increase from thirteen in 1990.{*  Y4ԍSee Appendix G, Table 7. The top 25 programming services are determined by number of subscribers. It is too early to determine, however, whether vertically-integrated services that have been introduced since 1990 will be more successful than their nonintegrated counterparts.  Yv4 163.` ` There has been only moderate change since 1990 in cable system ownership of the most popular programming services. All but three of the top twentyfive programming  YH4services listed in the 1990 Cable Report are still in the top twentyfive. One of the three services that have entered the top twentyfive since 1990, Comedy Central, has cable  Y 4ownership interests, and two, EWTN and Prevue Channel, are not vertically integrated.O *  Y4ԍSee Appendix G, Table 7.O  Y 4Since the 1990 Cable Report, cable operators acquired ownership interests in two of the top  Y 4twentyfive services and divested interests in one. *  Y/4ԍGaylord Entertainment ("Gaylord") acquired The Nashville Network. Viacom acquired the USA Network through its purchase of Paramount and sold its interest in Lifetime.   Y 4 164.` ` In total, cable operators have acquired interests in eight existing programming  Y 4services that had no cable ownership in 1990.  *  YY4ԍCompare 1990 Cable Report, App. G, at Tbls. 45 with NCTA Comments, Attachment C, at Tables 12. Those include the April 1994 acquisition of Paramount Communications, Inc., by Viacom International, Inc., in which Viacom acquired  Y}4ownership interests in the USA Network and the SciFi Channel.N} *  Y4ԍViacom Reply Comments at 12.N TCI/Liberty Media also acquired a controlling interest in the Home Shopping Network, which offers two  YO4programming services.NO6*  Y"!4ԍLiberty Media Comments at 12.N Gaylord Entertainment ("Gaylord"), an owner of three cable  Y84systems, acquired Country Music TV, The Nashville Network and superstation KTVT.Z8*  Y#4ԍ  Nashville Network's Parent Going Public, Multichannel News, Sept. 2, 1991, at34;  Y$4Richard A. Oppel, Jr., Country and Western Europe; Gaylord Strums Its Stuff Overseas on  Y~%4Cable Network, Dallas Morning News, Mar. 14, 1993, at 1H.Z "!RH\+))"Ԍ Y4 165.` ` During this same period, cable operators divested themselves of five existing programming services. Viacom sold its interest in Lifetime to Hearst and Capital  Y4Cities/ABC.*  YK4ԍ Viacom Sells 1/3 Interest in Lifetime to Hearst & Capital Cities/ABC for $317.6  Y64Million, Cable TV Programming, Mar. 31, 1994, at 1. Cablevision sold its interest in CNBC to NBC.{f*  Y4ԍCablevision Sys. Corp., 1991 Annual Report 14 (Dec. 31, 1991).{ Nostalgia and The Travel Channel were reported in 1990 as having MSO ownership, but since then, cable operators  Y4have divested those interests.*  YD 4ԍCompare 1990 Cable Report, App. G, tbls IVV, 5 FCC Rcd at 510910, with NCTA Comments, Attachment C, Tables 12. Finally, a few of the programming services listed in the  Y41990 Cable Report have gone bankrupt or have merged with other services. The Fashion  Yx4Channel, a financial investment of TCI, went bankrupt in 1991.x*  Y4ԍTCI Comments, App. A, at 18. QVC, a programming service owned in part by TCI, acquired the bankrupt Fashion Channel's transponder rights and affiliation agreements in  Yr41989. QVC Buys Out Fashion Channel as Comedy Wars Continue, Comm. Daily, Dec. 15,  Y]41989, at 3. In 1991, QVC launched the QVC Fashion Channel. QVC Will Launch New  YH4Shopping Channel, Comm. Daily, June 19, 1991, at 6. In late 1992, VISN, a TCI investment, merged with American Christian TV System ("ACTS") to form the Faith  YJ4and Values Channel, in which TCI has no ownership interest.J *  Y4ԍ Union of Religious Cable TV Networks Blessed by TCI, Jones, Denver Bus. J., Oct. 16, 1992, at 15.   Y 4 166.` ` Since 1990, thirtysix new programming services have been launched, twenty Y 4two of them since the passage of the 1992 Cable Act.R Z*  Y4ԍSee Appendix G, Tables 34.R Of the services launched after 1990,  Y 4twenty are owned in part by one or more cable operators. *  Y4ԍId. However, only 30 of the 98 newly announced programming services are owned,  Yo4in whole or in part, by cable operators. See Appendix G, Table 5. The Commission has examined the market penetration growth of the fourteen new services that had more than one million  Y 4subscribers after their launch, the results of which are set forth in Table 4.1.kH *  Y!4ԍOf these fourteen new programming services, five Fox Net (launched in July 1991), Value Vision (October 1991), Mor Music TV (August 1992), ESPN2 (October 1993) and Americana Television (April 1994) had no cable system investment. Cable system operators had investments in nine of the new services examined the International Channel (launched in July 1990), Comedy Central (April 1991), Court TV (July 1991), QVC Fashion Channel (December 1991), Cartoon Network (October 1992), Z Music (March 1993), Cable Health Club (October 1993), MTV Latino (October 1993), and the Television Food Network"?(\+))'"  Yy4(November 1993). Total United States subscribers taken from Basic Cable: 19751993,  Yd4Cable Television Developments 2A (National Cable Television Assoc. Apr. 1994). Average penetration based on subscriber counts for listed systems as a percent of total United  Y64States subscribers. The subscriber counts are taken from Database, Network Subscriber  Y!4Counts, Cablevision, Apr. 25, 1994, at 44; Database, Network Subscriber Counts,  Y 4Cablevision, Dec.6, 1993, at 106; Database, Network Subscriber Counts, Cablevision,  Y4Feb.2, 1993, at 42; Database, Network Subscriber Counts, Cablevision, Sept.21, 1992,  Y4at54; Database, Network Subscriber Counts, Cablevision, May4, 1992, at 102; Database,  Y 4Network Subscriber Counts, Cablevision, Oct. 21, 1991, at52; Database, Network  Y 4Subscriber Counts, Cablevision, Mar.11, 1991, at 60; Database, Network Subscriber  Y 4Counts, Cablevision, Nov. 19, 1990, at 45.k " S \+)) "ԌT#D  P7jQ ApP#љ Y ddx !6ddxTT Y  ~  " X4a/# XR  P7jQXP# Table 4.1 xAverage Market Penetration of  X4New Programming Services#D  P7jQ ApP# jc S Y4ԍSource for Subscriber Counts: Database, Network Subscriber Counts, Cablevision, Apr. 25, 1994 at 44; Dec. 6, 1993 at 106; Feb. 2, 1993 at 42; Sep. 21, 1992 at 54; May 4, 1992 at 102; Oct. 21, 1991 at 52; Mar. 11, 1991 at 60; Nov. 19, 1990 at 45. The penetration figures are calculated as the percent of total U.S. subscribers in that year: 1990 54,871,330 subscribers; 1991 55,786,390 subscribers; 1992 57,211,600  Y.4subscribers; and 1993 58,834,440 subscribers. NCTA, Cable Television Developments, Apr. 1994 at 2A.j~  "  R"i Market Penetration !at Launch""Market Penetration after One Year ""Market Penetration #after Two Years  ~ Services with Cable Ownership""*47.17%""11.11%"";20.83% (   "/  Services with No Cable Ownership /"*45.35% /"<8.66% /" xP6'<#7.75%*(  P /R #>!* Based on information for only two services.P R Y& 4# XR  P7jQXP#\ It appears that vertically integrated services, on average, achieved greater market penetration in their first two years than services without cable ownership. On the other hand, ESPN2, a new service with no cable ownership, had the highest penetration at launch of any new  Y4programming services and continues to grow at a steady rate.v l  Y $4ԍESPN2 launched with 10 million subscribers, approximately 1.7 million more than Comedy Central's initial 1991 launch, the nextbest successful launch of the group studied. It is unclear to what extent ESPN2's early growth is related to negotiations between its broadcast network corporate affiliate, ABC, and cable system operators relating to the"(\+))'" "retransmission consent" provision of the 1992 Cable Act, 47 U.S.C.  325(b). It has been reported that in those negotiations, ABC tied its consent to the carriage of its broadcast  YK4stations by various cable operators to the operators' agreement to carry ESPN2. See, e.g.,  Y64American Cable Television; Not Now, Darling, The Economist, Sept. 3, 1994, at 63; Bill  Y!4Carter, The Media Business; Networks' New Cable Channels Get a Big Jump on the  Y 4Competition, N.Y. Times, Mar. 14, 1994, at D7. As discussed infra at 173, NBC and Fox have also launched satellitedelivered programming services. As with ESPN2, it has been reported that the NBC and Fox programming services were part of their parents'  Y 4negotiations under the retransmission consent provision of the 1992 Act. See Scott Hettrick,  W 4Putting New Signature on Cable; QVC Tie May Enable CBS to Put Early Failure, Retrans  Y 4Acrimony in Past, The Hollywood Reporter, July 1, 1994; Richard Mahler, A Look at Cable,  Y 41994; Are We Really Close to This?, L.A. Times, Dec. 31, 1993, at F1."Ts \+))I "Ԍ Y4 167.` ` Currently, there are fiftysix verticallyintegrated programming services.Os l  Y4ԍSee Appendix G, Table 3.O They are owned, in whole or in part, by only twenty MSOs. Twelve of those MSOs have at  Y4least a fivepercent interest in one or more of the fiftysix services,5l  Y4ԍSee Appendix G, Tables 6, 910. The MSOs with attributable interests in programming include Cablevision, Comcast, Continental, Cox, Gaylord, Jones, Lenfest Communications ("Lenfest"), TCI/Liberty Media, Newhouse, ScrippsHoward, Time Warner and Viacom. 5 which qualifies as an  Y4"attributable ownership interest" under the Commission's program access rules.Ull  Y4ԍSee 47 C.F.R. 76.1000(b).U An additional eight MSOs hold ownership interests of less than five percent in one or more of  Y4those services. l  Y54ԍSee Appendix G, Tables 6, 910. Those MSOs are Adelphia, CVI (Cablevision Industries), Colony Communications, CTEC Cable, Sammons, TeleCable, Times Mirror and TKR.  Y_4 168.` ` Nine of the ten largest MSOsf_|l  Yx 4ԍThe only large MSO with no apparent attributable programming interests is CVI. One small MSO, Gaylord, has majority interests in three programming services and operates three cable systems that have a total of 63,195 basic subscribers. Appendix G, Table 9;  Y3#41994 Factbook at D1950.f have attributable ownership interests under the  YH4program access rules in one or more of these fiftysix programming services.VHl  Y%4ԍSee Appendix G, Tables 6, 910.V The four largest MSOs have partial ownership interests in seven of the fifteen most popular services"1Us\+)) "  Y4and in nine of the top twentyfive.Rl  Yy4ԍSee Appendix G, Tables 78.R TCI/Liberty Media, the nation's largest MSO, has attributable interests under the program access rules in twentythree national programming services, which amounts to approximately 22% of the available programming services. Time Warner, the nation's second largest MSO, has attributable interests in sixteen national  Y4programming services, or approximately 15% of those available.J{l  Y4ԍId., Table 6.J In contrast, in 1990, TCI held interests in twentytwo national programming services, which was 28.5% of the programming services available at that time. In 1990, Time Warner had interests in eight  Y_4national programming services, representing 10% of available programming services.d_l  Y 4ԍ1990 Cable Report 77, 5 FCC Rcd at 5006.d   Y14  169.` ` Twentyfour of the fiftysix verticallyintegrated national programming services  Y 4are owned, in part, by a single MSO having a 50% or greater ownership interest. l  Yp4ԍSee Appendix G, Table 9. The MSOs are Cablevision, Gaylord, Jones, Lenfest, TCI/Liberty Media, Time Warner, and Viacom. Viacom has a 50% or greater interest in twelve services, three of which are ranked among the top  Y 4fifteen national programming services.: Al  Y4ԍId.: TCI/Liberty Media has a 50% or greater interest in  Y 4three services.  l  YR4ԍId. TCI also has a 24.8% interest in Turner Broadcasting Systems ("TBS"), and three officers of TCI/Liberty Media are members of the Board of Directors of TBS. TCI Comments, App. A, Chart 4; TBS Comments at 34.  Gaylord has a 50% or greater interest in three of the top fifteen national programming services. Four other MSOs have 50% or greater ownership interests in one or two services each.   Yy4 170.` ` There are nineteen national programming services that are each owned, in part, by several MSOs whose ownership interests, if aggregated, would comprise a majority  YK4interest in that programmer. Five of those are among the top fifteen services.PKQ l  Y9 4ԍSee Appendix G, Table 10.P In contrast, there are only two verticallyintegrated programmers that are each owned, in part, by several MSOs, whose ownership interests, if aggregated, would constitute a minority interest in that"V\+)) "  Y4programmer.\l  Yy4ԍSee Appendix G, Table 10 at 2. One of these, Black Entertainment Television ("BET") was launched without cable investment. However, TCI and Time Warner provided financing to BET in return for equity interests in the programmer. TCI Comments, App. A, at1516; Time Warner Comments at 3233.\ In addition, there are five verticallyintegrated programming services that  Y4have only one MSO with a minority ownership interest.6l  Y4ԍSee Appendix G, Table 10. Only one of those services, The Family Channel, in which TCI/Liberty Media holds a minority interest, is ranked within the top fifteen national programming services. TCI/Liberty Media holds minority interests in the other four services Cable Health Club and the three Request Television services. Liberty Media Comments at9.   Y4 171.` ` Also included in the fiftysix verticallyintegrated services are the two C-SPAN networks. Those services are considered programming services with cable interests because they receive funding from their cable affiliates. However, according to NCTA, cable  Yv4operators have no ownership in, or program control over, the CSPAN services.Xvy l  Y4ԍNCTA Comments, Attachment C, Table 3. X Finally, there are four national programming services about which NCTA stated that cable system operators had ownership interests, but for which the Commission does not have information regarding the identity of the MSOs that hold the interests, or the amount of those interests in the identified services.   Y 4 172.` ` To complete the picture of vertical integration in national programming services, the Commission notes that ABC, NBC, and Fox, each own national programming services. ABC holds an eightypercent ownership interst ESPN and ESPN2, has a fiftypercent interest in Lifetime and has a minority interest in A&E. NBC owns CNBC and America's Talking, has a fiftypercent interest in Bravo and has minority interests in A&E,  Yy4AMC, and Court TV. Fox owns fX and Fox Net.~y l  Y,4ԍCable Net Ownership, Cable TV Programming, Aug.29, 1994, at 23.~    UK4 2.` ` Competitive Effects of Vertical Integration   W4` ` a. Competitive Access to Programming  Y4 173.` ` Commission Enforcement Activities. In contrast to the "substantial evidence  Y4of specific problems concerning program access" that were noted in the 1990 Cable  Y4Report,k l  Y&4ԍ1990 Cable Report 113, 5 FCC Rcd at 5021.k the commenters in this proceeding have not complained about widespread unavailability of programming to distributors competing with cable operators. For example, DirecTV states its belief that the program access provisions in the 1992 Cable Act and the"WT\+))N " Commission's regulations provide the most effective means for the development of  Y4competition to cable.Il  Yb4ԍDirecTV Comments at 23.I Moreover, the NCTA submits that the program access rules have facilitated increased competition in the video marketplace, and provide more than adequate  Y4remedies for instances of unfair conduct by verticallyintegrated programming vendors.Hyl  Y4ԍNCTA Comments at 2526.H These comments are consistent with the relatively small number of complaints filed with the Commission concerning denial of access to programming on the grounds of exclusivity agreements.  YH4 174.` ` From November 1993, when the program access and carriage agreement regulations took effect, through June 30, 1994, only twelve program access cases were filed;  Y 4eleven have since been resolved.q l  Y4ԍA brief description of the resolved cases appears in Appendix F.q The Cable Services Bureau has asked for additional information in the one unresolved case. Most of the eleven resolved cases involved exclusivity issues.  Y 4 175.` ` Another nine cases were filed since late July 1994, and the pleading deadlines in those cases expire in September or October of 1994. Six of those lateJuly filings involve allegations of price discrimination brought by a single programming distributor. Two of the unresolved matters involve requests by CVI for Sci Fi Channel exclusivity and by Lenfest Communications (fiftypercent owned by TCI/Liberty Media) for exclusivity for a local news service. One additional price discrimination complaint was filed in September. In total, the Commission has received fifteen complaints, five petitions for a finding that exclusivity is in the public interest, and one petition for a waiver of the rules.   Y4 176.` ` Two resolved cases involving petitions to the Commission to permit exclusive agreements between verticallyintegrated programmers and cable operators are of particular note. In one of those matters, Time Warner filed a petition for exclusivity with regard to the Court TV network. In denying the petition, the Commission first concluded that a party seeking to show that an exclusivity agreement is in the public interest bears the burden of demonstrating that the public interest benefits from exclusivity outweigh its presumptively  Ye4anticompetitive effects on competing distributors.=el  Y!4ԍSee Time Warner Cable Petition for Public Interest Determination Relating to Exclusive Dist. of Courtroom Television, Memorandum Opinion & Order ("Court TV  Y#4Exclusivity Order") 26, FCC 94132 (No. CSR4231P June 1, 1994). = The Commission then found that continued enforcement of Time Warner's exclusive agreement for the distribution of Court TV adversely affected Liberty Cable's ability to compete effectively in the Manhattan"7X& \+)) "  Y4marketl  Yy4ԍSee Id. 37. Liberty Cable is a SMATV system operator that competes in New York City with cable systems owned and operated by Time Warner . and would be likely to have similar effects in other markets.Jdl  Y4ԍId. 3839.J The Commission further found that no countervailing public benefits would be derived from the proposed exclusivity. Because Court TV is a viable, successful programming service with a broad and growing national appeal, as shown in part by its thirteen million subscribers, exclusivity was not found to be necessary for survival of the service or to promote diversity in  Y4programming.Jl  Y- 4ԍId. 4353.J Accordingly, the Commission concluded that continued enforcement of  Yv4Time Warner's contract with Court TV was not in the public interest.vl  Y 4ԍCourt TV Exclusivity Order 55. Following the Commission's decision in this matter, Time Warner withdrew its petition for exclusivity with respect to distribution of  Y4Prime Ticket Network. Time Warner Cable, Petition for Public Interest Determination  Yt4Under 76.1002(c)(4) Relating to Exclusive Dist. of Prime Ticket Network, Order, 9 FCC Rcd 4029 (1994).  YH4 177.` ` In the second case, the Commission found that New England Cable News ("NECN"), a regional news programming source that is fiftypercent owned by Continental Cablevision, had shown that exclusivity was critical to attract investment and secure  Y 4distribution, which was essential to its financial viability. l  Y4ԍNew Eng. Cable News, Petition for Public Interest Determination Under 47 C.F.R.  Yt476.1002(c)(4) Relating to Exclusive Dist. of New Eng. Cable News, Memorandum Opinion  Y_4and Order ("NECN Exclusivity Order") 3439, FCC 94133 (No. CSR4190P June 1, 1994). The evidence indicated that NECN had about 900,000 subscribers in a potential market of about 3 million. NECN also showed that  Y 4exclusive distribution would foster diversity.J 0l  Y4ԍId. 4143.J The Commission found that exclusivity would not have an adverse effect on the development of competition with the cable systems  Y 4affiliated with it.J l  Y*!4ԍId. 2932.J Therefore, the Commission found that reasonablytailored exclusivity was in the public interest and granted NECN's petition with certain limits as to the duration  Y4of exclusivity.nl  Y$4ԍUnder the terms of the Commission's order, NECN is allowed to offer exclusive distribution rights to cable affiliates for a period of 18 months, but all such exclusive distribution rights must terminate seven years from the effective date of the Commission's  YV'4order granting NECN's petition. NECN Exclusivity Order 4951, 53. "yY\+)) "Ԍ Y4 178.` ` The Commission's enforcement of the program access provisions appears to be meeting one of the goals of Section 19 of the 1992 Cable Act ensuring access by competing MVPDs to satellite cable programming from verticallyintegrated programming services. There remain, however, several unresolved program access issues, which the Commission considers below.  Yv4 179.` ` Access to Programming of NonVerticallyIntegrated Vendors. Several commenters, such as WCA, People's Choice, American Telecasting ("ATEL") and Liberty  YH4Cable, advocate extension of the statutory prohibitions and requirements to all programming  Y34vendors regardless of vertical integration.3l  Y 4ԍWCA Comments at 1314; People's Choice Comments at 5; ATEL Reply Comments at 7; Liberty Cable Reply Comments at 11. Those MVPD commenters compete with cable operators and claim to have been denied access to some programming from vendors that are not vertically integrated with cable system operators. Certain MVPDs allege that large MSOs exert pressure on nonverticallyintegrated programming vendors to provide  Y 4exclusivity to cable operators in exchange for carriage on their systems.q bl  Y4ԍSee WCA Comments at 1314; People's Choice Comments at 5. q  Y 4 180.` ` Since these comments were filed, the Commission has amended its program carriage rules to provide standing to MVPDs to file complaints alleging that cable operators have coerced programmers, whether verticallyintegrated or not, into granting exclusivity to  Yf4their competitors.fl  Y4ԍMemorandum Opinion & Order 40, FCC 94203, App. A (MM Docket No. 92265) (released Aug. 5, 1994). The Commission concluded that coerced programmers might not file complaints because of the potential for damage to their future business relationships with the  Y84MSOs that coerced them.C8l  Y^4ԍId. 30.C The Commission wrote that the mere threat of potential complaints by competing distributors should provide an added check on anticompetitive  Y 4behavior by MSOs with respect to their negotiation of carriage agreements.C ( l  Y4ԍId. 24.C The Commission will continue to monitor this situation to determine whether exclusivity agreements granted by services that are not vertically integrated have significant anticompetitive effects.  Y4 181.` ` Access to Programming not Delivered by Satellite. Liberty Cable contends that the fact that the program access provisions of the 1992 Cable Act only apply to satellitedelivered programming restricts its ability to obtain attractive, desirable programming that is delivered by other means, and thus impedes its ability to compete with cable competitors who  Y;4control or otherwise have access to such programming.\; l  Y(4ԍSee Liberty Cable Comments at 1314. \ Liberty Cable further predicts";Zf \+))* " that, unless corrected, this problem will grow in the future because verticallyintegrated programming vendors will have the incentive to modify the distribution of their programming, using fiber optics or other nonsatellite means, in order to evade application of  Y4the program access requirements.Al  Y44ԍFor instance, Liberty Cable complains that it is unable to secure access to "New York One," a regional news programming service, under the program access rules because it is not  Y4"satellite cable programming." See Liberty Cable Comments at 1314.A  Y4 182.` ` Time Warner disputes this concern, stating that satellite transmission remains  Yv4the most effective method for distributing programming._vMl  Y` 4ԍSee Time Warner Reply Comments at 2324._ NCTA argues that the program access provisions were intended to apply to popular, nationallydistributed and satellitedelivered basic and premium services, which arguably are vital to the success of MVPD competitors that use alternative technologies, and were not intended to affect unique, locallyoriginated programming. NCTA contends that forcing verticallyintegrated programmers to provide such programming to competitors of cable system operators affiliated with them would create a strong disincentive to the development of costly and risky ventures like local  Y 4news programming. l  Y^4ԍNCTA Reply Comments at 10. It is possible, however, that providing locallyoriginated programming to other MVPDs may prove beneficial to the local cable programmer by spreading the fixed costs of production over a larger subscriber base. The Commission will monitor industry conduct involving programming services that are not delivered via satellite transmission.  Y4 183.` ` Alleged Price Discrimination with Respect to HSD Programming Distributors. NRTC and CSS contend that price discrimination continues to be a significant problem for HSD distributors, which allegedly must often pay prices two to five times higher than those charged to comparable cable operators. The programming vendors that filed comments, however, respond that the 1992 Cable Act permits differential pricing with respect to HSD packagerdistributors because there are additional costs and services associated with serving  Y4such distributors.[ l  Y4ԍSee, e.g., TBS Comments at 2; Superstar Satellite Reply Comments at 611; and Southern Satellite Systems ("Southern Satellite") Reply Comments at 3. When it addressed this issue in a prior proceeding, the Commission agreed with the programmers' argument, writing that: XX` ` service to HSD distributors may be more costly than service to others using different delivery systems such as cable operators, as additional costs are often incurred for advertising expenses, copyright fees, customer service, DBS Authorization Center charges and signal security. The record indicates that these cost differences are particularly evident when providing program services to HSD"N[ \+))& " distributors who do not provide a complete distribution path to  Y4individual subscribers.nl  Yb4ԍProgram Access Order 106, 8 FCC Rcd at 3406.n ` Accordingly, the Commission recognized that pricing differentials with respect to HSD distributors may be justified. The Commission said, however, that it could only determine  Y4whether particular cost differentials were justified on a casebycase basis.`{l  Y4ԍId. 111, 8 FCC Rcd at 340910.`  Y_4 184.` ` In this proceeding, CSS submitted a table showing that the prices charged to HSD distributors for many popular programming services remain significantly higher than listed prices charged to cable operators, with the differentials ranging from 114% to 490%  Y 4higher for HSD distributors.V l  Y4ԍSee CSS Comments at Appendix A.V Other commenters argue that the data in that table are  Y 4inaccurate, outdated and, in some instances, unverifiable. l  YY4ԍSee, e.g., Southern Satellite Reply Comments at 2; Viacom Reply Comments at 3; and HBO Reply Comments at 9. In its reply comments, HBO stated that counsel for CSS acknowledged in a meeting with HBO's counsel that information  Y 4in the table was erroneous.I Al  Y4ԍHBO Reply Comments at 9.I The Commission declines to evaluate such data in this proceeding. Rather, such data can best be assessed in the context of individual program access complaints brought pursuant to the Commission's rules.  Yy4 185.` ` Other Alleged Discrimination Against HSD Packagers. Certain commenters allege that programming vendors discriminate against MVPDs that use specific technologies other than cable through the use of subscriber penetration level requirements, program offering requirements (service must be sold in every package offered by the HSD distributor  Y4to a customer), or tier placement requirements associated with lower rates.g l  Y4ԍSee CSS Comments at 5; ATEL Reply Comments at 6.g The only programming vendor to address those contentions in this proceeding was Comedy Partners, which contends that it offers the same rates for high subscriber penetration and overall  Y4distribution regardless of the delivery technology used by the distributor.a} l  Y"4ԍSee Comedy Partners Reply Comments at 34.a The record is insufficient for the Commission to determine whether discrimination, is in fact, occurring with respect to penetration level requirements, tier placement requirements or service offering requirements. Those issues are best resolved in the context of specific adjudications. "e\ \+))V "Ԍ Y4 186.` ` Filing of Rate Information. Certain commenters request that the Commission  Y4require programming vendors to file rate information with the Commission.pl  Yb4ԍDirecTV Comments at 22; GTE Comments at 3; NRTC Comments at 27.p In the  Y4Program Access Report & Order, however, the Commission concluded that a requirement mandating all programming vendors to file rate cards or other rate information would impose an excessive administrative burden on the Commission and would pose difficult questions of  Y4confidentiality.qyl  Y4ԍProgram Access Report & Order 113, 8 FCC Rcd at 3411.q The Commission also stated that: XX` ` to the extent that parties have shown that standard "rate cards" generally do not exist, we believe that a filing requirement would impose an excessive constraint on vendors thus increasing the possibility of limiting the sale of programming and could diminish competitive pricing for multichannel programming through a standardization of higher programming rates as vendors become more  Y 4aware of the pricing practices by competitors.: l  Y4ԍId.: `   W 4` ` b. Commission Rules Promulgated to Assure Diversity in Programming  Y4  Y{4 187.` ` The Commission's channel occupancy rules place a fortypercent limit on the number of channels that a verticallyintegrated cable system may devote to video  YM4programmers in which the system operator has an attributable interest.> Ml  Y4ԍSecond Ownership Report & Order 68, 8 FCC Rcd at 8593. A higher limit was set  Y4for programming that is minoritycontrolled. Id. 71, 8 FCC Rcd at 8596. In addition to channel occupancy regulations, Section 11(c) of the 1992 Cable Act directed the Commission "to consider the necessity and appropriateness of imposing limitations on the degree to which [MVPDs] may engage in creation of video programming." Communications Act 613(f)(1)(C), 47 U.S.C. 533(f)(1)(C). The Commission determined that the structural limits imposed by the subscriber limits and channel occupancy rules, as well as behavioral restrictions contained in Sections 12 and 19 of the 1992 Cable Act, already limit the ability of cable operators to impede entry of new programming services, and that additional restrictions on the creation and/or production of video programming were  Y"4not warranted at that time. Second Ownership Report & Order 106, 8 FCC Rcd at 8608.> In promulgating these rules, the Commission decided to: (1) calculate the forty percent limit from all  Y4"activated" channels;r]l  Y&4ԍSecond Ownership Report & Order 54, 8 FCC Rcd at 8588.r (2) measure "attributable interest" in a manner similar to the cable"]\+))w "  Y4crossownership rules;l  Yy4ԍId.  6162, 8 FCC Rcdat 859192. These attribution rules, 47 C.F.R. 76.501, differ from the attribution rules used in the program access context, 47 C.F.R. 76.1000(b). (3) count each channel devoted to verticallyintegrated pay and  Y4multiplexed services in the fortypercent limitation;Vdl  Y4ԍId. 77, 8 FCC Rcd at 8598.V (4) exempt local and regional  Y4programming from the limit;Vl  Yr4ԍId. 78, 8 FCC Rcd at 8599.V (5) apply the channel occupancy limits only to the first  Y4seventyfive channels of a cable system;Yl  Y 4ԍId. 84, 8 FCC Rcd at 860102.Y and (6) apply the channel occupancy limits even to  Y4cable systems subject to "effective competition."WAl  Y 4ԍId. 88, 8 FCC Rcd at 8603. W  Yv4 188.` ` While these channel occupancy rules are in effect, the rules are currently under reconsideration by the Commission. Petitioners in the reconsideration proceeding have  YH4requested that the Commission, inter alia, lower the 40% channel occupancy limit and  Y34change the method by which the limit is calculated.}3 l  Y4ԍConsumer Fed'n Petition for Recon. (MM Docket No. 92264).} A petition from Bell Atlantic requests that the Commission exempt systems under "effective competition" from the channel  Y 4occupancy limits.r  l  Y!4ԍBell Atl. Petition for Recon. (MM Docket No. 92264).r  Y 4 189.` ` Currently, systems that exceeded the fortypercent limit as of December 4, 1992 are "grandfathered" and those operators are not required to delete attributable video programming services in order to comply with the limit. Instead, the Commission requires that once additional capacity becomes available on such a system (either through system upgrades or programming deletions), the cable operator must fill this additional capacity with video programming from unattributable programming vendors until it is in full compliance  YM4with the channel occupancy rules.uM l  Y 4ԍSecond Ownership Report & Order 93, 8 FCC Rcd at 860405.u To enforce the channel occupancy rules, cable system operators are required to maintain records regarding the nature and extent of their attributable interests in and carriage of video programming services, and the Commission welcomes monitoring by local franchise authorities of compliance within their franchise  Y4areas.]l  Yb$4ԍId.  9899, 8 FCC Rcd at 8606.]   Y4 190.` ` The Commission has not received any complaints alleging violations of its channel occupancy rules or petitions requesting that the restrictions be waived. That silence, ten months after the rules took effect, is a strong indication that there are no significant"^s\+)) " violations of the rules and that the rules are not unduly restricting the ability of verticallyintegrated MSOs to deliver programming to their customers. However, the Commission does not have a sufficient record to determine whether cable systems exclude affiliated  Y4programming services because of the rules.Rl  Y44ԍIn this regard, the Commission notes that, in 1993, 87% of all cable systems had channel capacities of less than 53 channels, while there are presently 106 national  Y4programming services available for carriage. See Appendix C, Tables 24; Appendix G, Tables3, 4.R Nor is there a sufficient record to address whether the channel occupancy limits have influenced investment of cable MSOs in programming, or whether unaffiliated programming vendors have benefitted from the limits.   U_4 3.` ` Conclusions  YH4   Y14 191.` ` In sum, it appears that the state of vertical integration in the cable industry has not altered significantly since 1990. Cable operators continue to invest in existing and new programming services.  Y 4 192.` ` The Commission's program access rules and its decisions applying those rules have given competing MVPDs access to programming produced by programmers that are affiliated with cable system operators. The Commission does not find it necessary to make any specific recommendations that Congress amend the program access provisions at this time. Nevertheless, the Commission will continue to monitor the marketplace, and will also rely on MVPDs competing in the marketplace to advise the Commission of further difficulties they encounter in obtaining programming, and the effect of those difficulties on their ability to compete.   Y4 193.` ` The Commission has not received sufficient information in this proceeding to enable it to evaluate fully the impact of the vertical ownership rules, and will continue to monitor the impact of those structural limitations.   X4 C.XNature of Technical Changes Affecting Cable Systems (#  Y|4 194.` ` As discussed in earlier sections of the Report, aspects of industry structure, such as horizontal concentration and vertical integration, might affect competition between cable operators and competing distributors. However, industry structure is not a static concept. Therefore, as historically has been the case in other industries, technological change, whether evolutionary or revolutionary, can directly affect the competitive viability of firms using existing technologies, and has the potential to alter dramatically both industry structure and the overall competitive environment.  Y 4 195.` ` Telecommunications technologies, including those used in the distribution of video programming, are evolving rapidly. For example, technologies used to transmit voice, video and data are crossing the boundaries that have traditionally separated information distributors. Moreover, the cable industry and competing information distributors are in the"#_6\+))% " midst of deploying new and improved transmission systems, and are projecting the nearterm introduction of new and innovative services, that are presently unavailable to consumers, or are only available on an experimental basis. Those changes have the potential to exert a major influence on industry structure, and will affect the sustainability of competition with incumbent cable systems from MVPDs that use technologies other than cable.  Yv4 196.` ` Developments in system architecture may affect industry structure and the  Y_4extent of competition.4_l  Y4ԍFor purposes of this section, system architecture refers to the various media that are used to transmit information, including satellites, terrestrial microwave, optical fiber, coaxial cable and copper, and how those media are used in communications networks.4 Different distribution media copper wire, coaxial cable, optical fiber, terrestrial microwave and satellites all differ in their information carrying capacity. Consequently, if technological breakthroughs allow one type of transmission system to increase capacity significantly, that technology may become more advantageous than other technologies. In such a case, the transmission systems using that technology may gain competitive advantages over systems that use other technologies.  Y 4 197.` ` For example, as companies seek to deliver more information, whether it be voice, video or data, through different transmission media, various compression and modulation techniques are used to fit the information within the media, and various switching  Yy4techniques are used to enhance their ability to deliver the information to end users.yKl  Ya4ԍSee, e.g., "Building for the Future Video Technology Special, Video Dialtone: Putting  YL4the Pieces Together," Telephony, July 25, 1994, Special Supplement at 6; "At Issue: Copper  Y74v. Coax," Telephony, Mar. 14, 1994, at 18; Paula Bernier, "Vendors Gear Up for Video  Y"4Flurry," Telephony, June 6, 1994, at 40.  Notwithstanding the benefits of increased network capacity, efficiency and functionality that are gained through various modulation, compression, multiplexing and switching techniques, many of these new technologies are designed in such way as to work most efficiently within a particular transmission medium, or with a particular transmission mode. Consequently, architectural design issues are affected by the various methods and technologies used for integrating and transmitting voice, video and data over the same network.  Y4 198.` ` However, transmission capacity is not the sole consideration that influences the deployment and utilization of new technologies. Cost may critically influence which technologies win broad consumer acceptance, and which providers thrive in the new  Y|4communications landscape.v|l  Y#4ԍFor example, David P. Reed concluded that his study of estimated capital cost functions tentatively demonstrated substantial economies of scope between telephone and distributed video services that are delivered through a hybrid fiber/coaxial cable architecture.  Y&4David P. Reed, The Prospects for Competition in the Subscriber Loop: The Fibertothe Yh'4Neighborhood Approach 12 (FCC Office of Plans and Policy, September 1993). Others"Q(\+))'" conclude that technological developments are increasing the likelihood of local competition.  Yb4See, e.g., Towards Competition, supra note 132, at 42.  The deployment of fiber optic technology is an important"|`M\+)) " example. Fiber optic wiring is often touted for its advantages of high capacity and low  Y4maintenance, and it is being widely deployed by cable operators and telephone companies. Ml  Y4ԍCable operators have been using fiber optics in their system upgrades to replace coaxial trunk lines, as well as to replace the local distribution plant in what is commonly known as "fiber to the neighborhood" or "fiber to the node." The installation of fiber in  Y 4cable systems has grown from close to zero in 1988, to over 24,000 miles by 1992. Cable  Yw 4TV Technology, Mar. 19, 1993, at 1. The cable television industry's rate of fiber deployment doubled between 1991 and 1992, and in 1993, over 25% of wired cable subscribers were served by systems employing fiber optics. 1994 Conference on Emerging Technologies ("1994 Conference") 115 (1994) (Society of Cable Television Engineers). It has been estimated that telephone companies had installed over 100,000 miles of fiber by  Y41992. Fiber Optics A New Horizon, Federal Communications Commission Fact Sheet, Oct. 1993.  Cable operators and LECs have both expressed interest in bringing fiber closer to  Y4subscribers' homes.l  Y^4ԍFor instance, last year, TCI announced plans to spend $1.9 billion over four years to  YG4install 7,000 miles of fiber in at least nine regional hubs. TeleCommunications, Inc. (press release Apr. 12, 1993). Some published reports suggest that the cost of fiber has fallen to the point where it may be economically installed for all but the last mile of network rebuilds and  Y4new construction.} ul  Y4ԍRaymond Smith, Comm. Daily, Sept. 22, 1989, at 11. } Others contend that while installation of fiber as part of a hybrid fibercoaxial architecture is economical, deployment of fiber to the curb or to the home is still prohibitively expensive, and cost considerations associated with how far fiber is deployed  YH4into a network may have important competitive consequences.} 7Hl  Y4ԍFor example, estimates of fiber costs range from $4,000 to $5,000 per fiber mile for  Y4HFC architectures and $20,000 per fiber mile for FTTC or FTTH architectures. See, e.g.,  Y4"Building for the Future Video Technology Special," Telephony, July 25, 1994, Special Supplement, at 13. Leland Johnson suggests that the cost of rebuilding an existing cable system with fiber to the neighborhood is in the range of $250 to $300 per subscriber, whereas upgrading a system with fiber to the curb in order to provide a combination of telephony and video service, increases the cost dramatically to approximately $1,242 per home passed, comparable to the cost of a LECprovided integrated network of $1,150 per  YC$4subscriber. Toward Competition, supra note 132, at 32.}  Y 4 199.` ` Finally, a number of other interrelated architecture issues exist, which may impact the competitive landscape, including interconnection, consumer interface, and" a \+))  "  Y4standards. l  Yy4ԍCable system interconnection is discussed in the Section IV.A of this Report.Ą The ability of the public to access, and interact with, the communications networks through modems or converter boxes the socalled on and offramps of the national information superhighway is an important competitive issue because it visibly  Y4manifests the issues of interoperability, interconnectivity and compatibility. e{l  Y4ԍ For example, some observers assert that a coaxial modem connection to personal  Y4computers will supplant the coaxial drop to the television as the link into the home. The  Y4Analyst Forum: Communacopia, Global Research (Goldman Sachs, May 19, 1994). Some economists predict that: (1) newly introduced technologies will be biased against compatibility; (2) incentives exist to make converters incompatible and costly unless bundling can occur; and (3) consumer demand for software variety may impact hardware technologies.  YM 4Symposium on Compatibility, 40 J. Indus. Econ. 1123 (Richard J. Giblert ed. Mar. 1992).  The issue of standards, which could impact interoperability, implicates the issue of open versus  Y4proprietary architectures.  l  Y4ԍSee, e.g., Lloyd Whittall, III, ArchitectureBased Competition and Interoperability in Advanced Cable Systems and the Coming Broadband Local Exchange Infrastructure, (1994) (unpublished graduate thesis, University of Colorado). There currently are about 20 groups working on, and competing to have their particular approach adopted as, the international digital industry standard.  The company (and industry) that captures the lead in these debates may have a significant competitive advantage over other information providers. Such an advantage could potentially be extended into competitive advantages in other areas where interoperability and compatibility are desired.  Y 4 200.` ` The foregoing discussion suggests that it is too soon to draw any conclusions regarding the ongoing dynamics of technological change that permeate the telecommunications industry today. Nevertheless, significant issues that may have a dramatic effect on how competition develops in the delivered multichannel video programming industry are coming into focus. The Commission's ongoing review of such issues will be essential to the formulation of public policies for video distribution markets that will provide consumers with early access to the remarkable advantages that such technologies seem to promise. "bb \+)) "  X4   ~V. d STATUS OF COMPETITION IN THE MARKET FOR  X4 THE DELIVERY OF VIDEO PROGRAMMING ă  X4 A.XExtent of Competition and Assessment of Market Performance(#  Y4  Uv4X 1.X` ` Overview(#`  Y_4  YH4 201.` ` The Commission finds in this Report that cable television remains the dominant medium for providing consumers with multichannel video programming. Most local markets for the distribution of multichannel video programming are highly concentrated, and for most consumers, cable television is the only provider of multichannel video programming. There are presently only a few scattered areas of the country where the  Y 4local cable operator faces direct competition from an overbuilder.[ l  YP4ԍSee supra Section III.B.[ Moreover, providers using alternative technologies have not yet reached the subscribership levels necessary for the Commission to find the existence of vigorous rivalry in the market for multichannel video distribution. Relative subscriber levels for the cable industry and competing distribution technologies, to the extent available, are shown in Table 5.1 below.  h !6ddxTT  A` dd<<Mc    8 h P   "@"   yO'cG #D  P7jQ ApP#TABLE 5.1 Estimated Subscribership of Various  yOd'7 Video Programming Distribution Systems (in millions) P  M "@l" " SYSTEMl"%1990l"a1991l"1992l"1993l"CURRENTP  P h "l_"  CABLE (mil)_"'51.7_"c53.4_"55.2_"*57.4_"!57.9P P  HSDX_"( .7X_"d .8X_"+ 1.0X_"7 1.6X_"# 2.0P P  MMDS _"( .3_"d .2_" .3_") .4_"" .5P P X SMATV _"4_"p_"_"_"# 1.0P P  OVERBUILDH_"4H_"pH_"+ 1.3H_"H_"# n/aP P  PRIMESTAR_"4_"p_"_"_"" .1P P H "__"  DIRECTV/ Y USSB _"4_"p_"_"_"%n/aP P  "__"  VDT8 _"48 _"p8 _"8 _"8 _" noneP P   "_l"   xP 'LMDS, , !l"4!l"p!l"!l"!l"%n/aP  8  "lc"  n/a = not available. Shares for alternative distribution technologies  Y"4include areas not passed by cable.# XR  P7jQXP#d "{  Y&4ԍSources for the figures in Table 5.1 are as follows: CABLE History of Cable &  Y'4Pay TV Subscribers & Revenues, Cable TV Investor, March 31, 1994, at 9. HSD ĩ"x(\+))'" 1990-91, 1992, and 1994 net authorizations supplied by letter received by telecopier on September 8, 1994 from Brigette Engel, of General Instrument, Inc. to Cable Services Bureau Staff, and General Instrument Press Release (Aug. 18, 1994); 1993 net authorizations  Y44from GI Net Authorization Near 1,900,000, SkyReport, July 1994 at 5. HSD subscribership  Y4estimate may also include HSD subscribers that subscribe to cable service; MMDS 1990  Y 4and 1994 from WCA Comments at 2, n.3; 1991 & 1993 from Average Annual Subs,  Y4Wireless Cable Investor, June 30, 1994, at 1; average annual subscribers for 1992 from  Y4telephone interview with Paul Kagan Associates, Inc. personnel explaining details of Wireless  Y 4Cable Investor, June 30, 1994 at 1; SMATV from Cable & Pay TV Census-- August,  Y 4Marketing New Media, Aug, 15, 1994; OVERBUILD 1992 from P.K. Cable TV  Y 4Overbuild Census, Cable TV Franchising, Apr. 30, 1992, at4; The Commission has been unable to update 1992 estimate, and will attempt to ascertain subscribership levels of  Yp 4overbuilt systems in future reports; PRIMESTAR Tom Kerver, DBS: One Plus One  Y[4Equals Three, Cablevision, May 23, 1994, at82; DIRECTV/USSB rollout of DBS services in selected markets began on June 17, 1994, and accordingly, meaningful  Y/4subscription figures are not yet available; VDT permanent VDT service is not presently available, although the Commission has recently granted application of Bell Atlantic to  Y4provide permanent service in Dover, New Jersey; LMDS the Commission does not possess sufficient information to estimate the number of households that subscribe to the  Y4services of LMDS programming providers, but the number of subscribers appears to be de  Y4minimis.d ""c\+))$r#" !c Y4\ԙ 202.` ` The dominance of cable television in local markets may be enhanced by  Y4horizontal concentration of cable MSOs nationwide. This Report finds that horizontal concentration among the largest cable MSOs has increased only modestly since the time of  Y4the 1990 Cable Report. The Commission notes, however, that there have been several proposed transactions in 1994, most notably, TCI-TeleCable, CoxTimes Mirror, ComcastMaclean Hunter, and Time WarnerNewhouse, that will, if consumated, involve the largest MSOs acquiring control over a number of additional cable systems. In addition, MSOs appear to be creating regional "clusters" of cable systems and franchises. If those trends persist, the cable television industry will become increasingly concentrated nationally and  Y54regionally over the next few years.Z5  Y}4ԍSee supra Section IV.A.Z In addition, MSOs continue to invest in video programming vendors. The Commission anticipates that such investment will continue, and that the Commission's program access and carriage rules remain necessary to prevent the  Y 4potential abuses of such investment.Z J  Y#4ԍSee supra Section IV.B.Z  Y 4 203.` ` In the longer term, increased rivalry in the market for delivered multichannel video programming should result in lower prices relative to present cable rates, and in a"d\+))r#" substantially broadened array of programming options for increasingly specialized  Y4audiences.h  Yy4ԍAs more fully discussed in Appendix H, it is also possible that competition in some local cable markets might tend to emphasize rivalry between and among highlydifferentiated program packages, rather than price competition for broadly similiar program packages offered by competing video programming suppliers.h In addition, consumers should receive more pricing options. Such rivalry may also be expected to provide a stimulus to more rapid development of new technologies and product innovation. At present, market performance in local cable markets does not yet reflect the benefits of this competitive rivalry. Therefore, lowering barriers to entry is likely  Y4to lead to  significant gains in consumer welfare.   U_4 2.` ` Market Performance Indicators (#`  Y14 204.` ` The effectiveness of the existing level of competition at improving market  Y 4performance, i.e., the extent to which a given market satisfies consumer demand in the least  Y 4costly manner, may be assessed using several market performance indicators. Among various alternative indicators of market performance, emphasis is placed on measures that  Y 4provide insight concerning the current relationship of cable rates to the cost of production.s K  Y4ԍNo direct evidence is presented in this Report concerning the cost of producing basic  Y4cable services provided by local cable systems. As shown in AppendixH, indirect methods are used to infer the magnitude of the relationship between basic cable rates and the marginal cost of production.s Empirical measures of market power provide such insight, and are discussed in the following paragraphs and AppendixH. Other indicators of market performance, such as the price effects of overbuild competition and improvements in cable services, are also considered.  Wh4` ` a. Pricing Above Competitive Levels Indicates Market Power  YQ4  Y:4 205.` ` The following discussion emphasizes on two key indicators that suggest that  Y#4cable systems are currently exercising market power: (1) the q ratio, a ratio of the market value of cable assets to the replacement cost of such assets; and (2) pricing analyses showing that prices in monopolized cable distribution markets exceed those in similar cable markets  Y4where there exist cable system competitors. If a firm can set its prices above its costs and  Y4earn excess economic profits for a sustained period of time, then the firm possesses market  Y4power.9  Y!4ԍMarket power sustained over a substantial period of time often signals the existence of  Y"4some impediment to market entry, although the impediment need not constitute a policy Y#4relevant barrier to entry. A policyrelevant barrier to entry (1) is any cost that a potential entrant must incur in the course of market entry that an incumbent firm need not incur, and  Y%4(2)implies a net loss in consumer welfare if the barrier persists. See Appendix H. 9 "e \+))4r#"Ԍ Y4 206.` ` In the past, the Commission has looked to the q ratio$k  Yy4ԍThe q ratio is subject to some theoretical limitations. See infra note 541. For a more  Yd4thorough analysis of the q ratio from an industrial organization perspective, see Eric  YO4Lindenberg & Stephen Ross, Tobin's q Ratio and Industrial Organization, 54 J. Bus. 132  Y:4(Jan. 1981); Michael Smirlock, Thomas Gilligan & William Marshal, Tobin's q and the  Y%4StructurePerformance Relationship, 74 Am. Econ. Rev. 105160 (Dec. 1984).  See also  Y4Appendix H (theoretical discussion of q ratios); 1990 Cable Report 5490, App. E, 5 FCC Rcd at 49975011, 5071 (contains a more detailed discussion of the qratio). $ as an indicator of  Y4market power.   Y 4ԍSee 1990 Cable Report 5559, 5 FCC Rcd at 499799. An alternative measure of  Yl 4market power is the Lerner Index, which is defined as the percentage difference between price and the marginal cost of production at the profitmaximizing level of production. As reported in Appendix H, the estimated Lerner Indices suggest that current cable industry prices substantially exceed marginal costs. The prevalence over time of prices in excess of marginal costs often indicates the existence of market power. However, if the technology of production implies substantial fixed costs and economies of scale, prices above marginal  Y4costs may not provide conclusive evidence of market power. As is shown in Appendix H, there exist both nontrivial fixed costs and economies of scale (albeit limited) in the cable industry. As explained in Appendix H, such cost characteristics complicate the interpretation of Lerner Indicies as measures of market power. Consequently, the Commission does not  Y4place primary reliance on the Lerner Indices in this Report.  Under conditions of perfect competition, potential buyers of the assets of a competitive firm which, by definition, does not earn excess economic profits, are unwilling to pay much more than the reproduction cost of the firm's tangible assets. As a result, the market value of a firm selling in markets that approximate the conditions of perfect competition is roughly equal to the reproduction cost of the firm's tangible assets. Given this logic, the qratio of a firm supplying competitive markets and earning no excess economic  Y_4profits over the longer term should equal one, i.e., the market value of a firm's assets should equal their replacement value.  Y 4 207.` ` Alternatively, q ratios well in excess of one suggest that a firm, or a collection of firms in an industry, may be earning excess profits. Such a result is consistent with the presence and exercise of market power, inasmuch as excess profits are generated by pricecost margins that are greater than what may be required simply to recover the total cost of  Y 4production in the presence of economies of scale.   Y"4ԍThe definition of economies of scale and emperical estimates of such economies in the cable industry are provided in Appendix H. If a q ratio is greater than one, then another firm would find it profitable to enter the market. Such entry would increase market supply, force prices and profits down towards a competitive level, and hence, reduce the market value of the incumbent firm or firms. When the q ratio reached one, entry would no longer be profitable. "Mf)\+))|r#"Ԍ Y4 208.` ` Professor Paul MacAvoy, currently Dean of the School of Organization and  Y4Management at Yale University, submitted q ratio estimates in connection with the 1990  Y4Cable Report. His "best estimate" of the q ratio for the cable industry was 4.3 for  Y4September30, 1989.  Y84ԍ1990 Cable Report 57, 5 FCC Rcd at 4998 (citing USTA Comments, App. 5, 1990  Y#4Cable Report, MM Docket No. 89600). In connection with this Report, the Commission calculated some q ratios based on more recent data. The calculations are useful not only because they provide some indication of the current level of market power in the cable industry, but also because, with some qualifications, they permit a comparison of the market power levels in 1989 with those of more recent times.  Y74 209.` ` There are two primary techniques for calculating market value, both of which  Y 4were used by the Commission in the q ratio calculations that were prepared for this Report. One, which MacAvoy refers to as "public" market value, involves the calculation of the sum  Y 4of a firm's liabilities and the value of its outstanding stock. f  Y4ԍUSTA Comments, App. 5, 1990 Cable Report, 5 FCC Rcd 4962 (MM Docket No.89600). In order to utilize this technique, it is necessary to have a sample of firms that are involved only in cable television delivery. MacAvoy identified five such firms for 1989. The Commission was able to identify four such firms for 1993, only two of which are also in the MacAvoy sample. The second technique, which MacAvoy labels "private" market value, involves the calculation of the average (weighted by number of subscribers) of per subscriber selling prices of cable  Yj4companies.:j  Y4ԍId.: In this second method, only cash transactions are included, because it is  YS4difficult to determine market values for transactions that include noncash components.vS  Y}4ԍFor details of the Commission's q ratio calculations, see Appendix I.v  Y%4 210.` ` There are also two primary techniques for calculating replacement costs. One is based solely on financial data, and consists of an estimate of the adjusted book value of tangible assets ("net plant"). The figure for net plant is adjusted for inflation, and then added to other tangible assets. The second method uses other tangible assets from financial accounts, but substitutes a construction cost estimate for net plant. The estimated cost of new construction per subscriber is depreciated by the average age of cable plant, and other tangible assets are added to calculate replacement cost. Once again, the financial data must come from firms that are involved only in cable television delivery. Because the bulk of tangible assets tend to be accounted for by net plant, the financial data play a smaller role in estimates that utilize construction costs. In calculating q ratios based on replacement costs that are estimated from construction costs per subscriber, MacAvoy chose the median of  Y(4several construction cost estimates.L(*  Y'4ԍSee Appendix I.L"(g \+))r#"Ԍ Y4ԙ 211.` ` The following table presents five q ratio calculations based on current data, and also sets forth the MacAvoy calculations to which they are most comparable. As explained in Appendix I, none of the current calculations are perfectly comparable to the MacAvoy calculations. However, the comparisons are at least suggestive of possible trends in cable market power. Appendix I contains a more detailed discussion of these calculations.  yO'#D  P7jQ ApP#T  ă c A` dd<<Mc    8  a4ddxUh  c T! c   yP'+a TABLE 5.2:  yO' Estimated q Ratios for the Cable Industry ăT U c"    Method " PCurrent q PEstimates " )#MacAvoy 1989 # q Estimates   "  Public Market Value/Adjusted Book Value (Current, four firms; MacAvoy five firms)   P4.47  #4.30    Public Market Value/Adjusted Book Value (for two firms common to both samples) P4.52 #4.17    Public Market Value/Median Construction Cost (Current, four firms; MacAvoy five firms)a P5.23a #4.56   "  Private Market Value (1993 transactions)/Median Construction Costy" P4.11y" #!6.2 (  a "/  Private Market Value (some 1994 transactions)/Median Construction Cost/ P3.95/ #!6.2(  Ry /R   zP'Source: See Appendix I.T# XR  P7jQXP#RR  Y4 212.` ` Even with the caveats enumerated in Appendix I, the current q ratios suggest that, overall, cable television operators possess substantial market power. The comparisons between 1989 and 1993/94 are inconclusive, however, allowing both the inference that market power may be increasing, based on the calculation that uses public market values, and the inference that market power may be decreasing, which is derived from the private  Yi4market value calculation." ait  Y4ԍAs a measure of market power, the q ratio must be carefully interpreted. As noted in  Y 4the 1990 Cable Report, the q ratio is subject to some limitations. Accordingly, a conservative interpretation of a q ratio views it as an upper bound indicator of monopoly  Y"4power, since it may also reflect monopsony power possessed by the firm or industry. 1990  Y#4Cable Report 59, 5FCC Rcd at 4999. Additionally, q ratios may also reflect certain financial risks unique to the industry or the ownership of a scarce resource that may not be generally available to competitors. Moreover, q ratios greater than one might indicate a current disequilibrium between market demand and supply as a consequence of sustained  Y0'4growth in demand over time. See 1990 Cable Report, App. E, 5 FCC Rcd at 507182. "(\+))'" Given such possible qualifications, a q ratio only slightly greater than one need not necessarily represent conclusive evidence of market power. The magnitude of the estimated q ratios reported in the table above, however, suggests the presence of substantial market power, notwithstanding the possibility that the estimation methodology may be subject to the  Y4limitations that the Commission recognized in the 1990 Cable Report. For further discussion of qualifications in the interpretation of q rations, see Appendix H. "ih\+))kO"Ԍ Y4ٙ 213.` ` Price Effects Shown by Overbuild Competition and the Commission's  Y4"Competitive Price Differential." The Commission received significantly more reliable  Y4pricing information in this proceeding than was available at the time of the 1990 Cable  Y4Report. The exercise of market power (pricing well in excess of marginal cost) in local markets is shown by (1)evidence concerning price changes in local cable markets following the entry of second cable companies, and (2) the Commission's cable rate reregulation orders, in which it estimated a "competitive price differential" by focusing primarily on the difference between prices charged by monopoly cable systems and those facing direct competition.   Y 4 214.` ` A number of empirical studies have addressed the effects of twofirm  Y 4(duopoly) competition in cable television markets using published or survey data.T t  Y4ԍSee also supra Section III.B.T The focus of those studies has been primarily on how such rivalry affects prices. A simple test for the presence of competitive price effects is to compare prices in monopoly and duopoly cable markets. Those studies consistently show that prices in duopoly markets are  Y 4significantly lower than in monopoly markets. For example, in a 1987 survey, the price of a package including basic service plus one premium service was found to be 23.5% lower in  Y4competitive cable markets than in monopolized markets. t  Y4ԍSee Thomas W. Hazlett, Cabling America: Economic Forces in a Political World,  Y4Freedom in Broadcasting 20823 (C. Veljanovski ed. 1989). More recently, a 1992 study found that basic rates were 21.9% lower in competitive markets than in monopolized  YQ4markets.k Q t  Y4ԍSee PK Overbuild Census, supra note 527, at 4.k  Y#4 215.` ` While studies using survey data show significant price differentials in duopoly cable markets, the survey approach fails to take into account the effects of local cost and  Y4demand conditions. For example, no consideration is given to per capita income in the cable market. If cable demand is sensitive to income levels, then ignoring that effect "biases" the estimate of the price effect of competition. Furthermore, the survey method fails to account for the number of available channels, the cable system size, regional wage rates, and other factors that are important determinants of the supply and demand for cable service.  Ym4 216.` ` An improved estimate of the effects of entry can be produced by using a methodology that accounts for demand and cost differences across markets. A number of"Vi \+))O" empirical studies have employed econometric techniques to estimate a competitive differential that is adjusted for demand and cost factors. Those studies support the findings of the more simple survey approach, and find cable rates in competitive markets to be significantly lower than rates in monopolized cable markets, even when other factors are held constant. For example, adjusting for a number of factors such as system size and the number and type of channels available, Stanford Levin and John Meisel found that cable rates are, on average,  Yv4$3.33 lower in competitive cable markets than in monopolized markets.l!vt  Y4ԍSee Levin & Meisel, supra note 130, at 519528.l In a far more  Y_4sophisticated study, Richard Beil, et al. estimated a competitive differential of $3.85, other things remaining constant, which amounts to a savings of over twnety percent for basic cable  Y34service."3{t  YK 4ԍSee Beil, Dazzio, Ekelund & Jackson, supra, note 130, at 40115. That study also found that systems in competitive markets priced premium services $1.10 lower than did monopoly systems.  Y 4 217.` ` A few recent studies, including the Commission's recalculation of the competitive differential for the purpose of rate regulation, have improved the measure of competitive price used in their statistical models to account for differences in the extent of competition across competitive cable markets. Those studies measure competition as the  Y4degree of overlap between competing systems. The application of this measure carries with  Y}4it the assumption that competitive prices in cable markets can vary depending on whether the overbuilder competes over the entire market or only overlaps with the incumbent in part of the market.  Y#4 218.` ` When it recalculated the competitive differential, the Commission adopted an overlap measure of competition, where competition is measured by the percent of the franchise market that both rivals serve. Adjusting for a number of variables including firm size, the number of available channels, and income, the Commission's analysis estimated a  Y4sixteen percent competitive differential, i.e.,Ġthat prices in areas served by two cable systems  Y4were sixteenpercent lower than prices in monopolized areas.v#t  Yi4ԍ1994 Rate Report & Order, 97 (MM Docket No. 92266).v That differential, along with the differentials for other systems subject to effective competition as defined in the 1992  Y4Cable Act, formed the basis for the rate rollback in the 1994 Rate Report & Order.J$t  Y 4ԍId. 2533.J Using the same measure of competition, a recent econometric study not only adjusted for demand and cost differences, but also accounted for other possible biases that might distort empirical  YA4estimates of the price difference between monopoly and duopoly cable distribution markets.V%AXt  Y6%4ԍSee Ford, supra note 130.V That study produced the estimate that a completely overbuilt system will have rates approximately twentypercent lower than a monopoly cable system, holding other things constant. The study allowed for demand elasticity estimates for both monopoly cable"j%\+))!O" systems and systems in duopoly markets. The demand curve for firms facing direct  Y4competition was found to be more elastic than the monopolist's demand curve, implying that a cable system's market power is constrained by overbuild competition.  Y4 219.` ` Excess Profits as an Inducement for Competitive Entry. New firms are likely to enter an industry if current and anticipated profits are supracompetitive. Large investments by competitors using alternative technologies, such as MMDS and DBS, and the  Ya4history of attempted entry by overbuilding,&at  Y4ԍAlthough overbuild competition today is limited, it is difficult at present to reach definitive conclusions about the profitability of direct competition with incumbent cable systems. Any analysis of competitive market entry must account for the effects of the local franchising process that may block, delay, or otherwise discourage competitive entry, notwithstanding the prohibition of such behavior by the 1992 Cable Act. suggest that potential profits in the cable market are substantial, a perception that is consistent with the foregoing discussion of pricing in local cable markets. The proposed entry into video distribution by local telephone companies is also noteworthy, since the high cost of upgrading telephone networks in order to allow video distribution might not be justified if LECs did not believe that there was potential profit in video packaging and distribution. There may be other explanations for the interest in competing with the cable operators. The prospective entrants may believe that they can provide services at lower costs than the incumbents, or they may believe that the market demand for additional services that can be supplied with cable programming is large enough to support additional entry. Therefore, while interest in entry in this market may suggest that prices exceed costs, such evidence taken alone is not conclusive with respect to the potential profitability of additional entry in local cable markets.   W64` ` #XRo=  x7.QcXX#b. Other Indicia of Market Performance #XR  P7jQXP#  Y4 220.` ` The finding of an exercise of substantial market power in local markets implies  Y4a loss of economic efficiency.6'1t  Y4ԍEconomic efficiency in the consumption of goods or services, or in their production, is achieved if it is impossible to improve the economic welfare of at least one individual without simultaneously making some other person worse off as a result of a change in the existing allocation of resources. In general, output prices equal to the marginal cost of production result in an economicallyefficient allocation of resources. The exercise of market power results in output prices that exceed the marginal cost of production. As a result, consumers purchase less output than they would if output price were equal to the marginal cost of production. The value of such foregone consumption is a measure of economic inefficiency, and represents a loss in consumer welfare.6 Market performance and consumer welfare are adversely affected by such losses. Other data suggest, however, that to some extent cable operators may be responding to consumer preferences and the resulting growth in demand for video programming. In this proceeding, the Commission has found that the demand for the multichannel programming services provided by local cable systems has continued to grow since 1990. The cable industry has responded positively to this growth in demand by"~k'\+))O" increasing the number of homes that could receive cable service ("homes passed") to 92.9 million in 1993, an increase of 8% over the number of homes passed in 1990. Actual demand for cable services grew from 51.7 million households in 1990 to 57.4 million households in 1993. Accordingly, nearly 60% of all television households in the United States subscribed to cable services in 1993, up from 55.4% in 1990. Moreover, mean cable penetration (the fraction of households with access to cable services that actually subscribe)  Yv4increased from 60.1% to 61.8% from 1990 to 1993.L(vt  Y4ԍSee supra Section II.L  YH4 221.` ` Broad consumer acceptance of the video programming services offered by cable systems is reflected in the growth in cable industry revenues from $17.86 billion in 1990 to $22.94 billion in 1993. That growth in revenues represents a greater than 28%  Y 4increase from 1990 through 1993. As is more fully discussed above in section II, such revenue growth clearly suggests that consumers find the growing array of programming services offered by cable systems responsive to their preferences for such programming services.  Y4 222.` ` Clearly, the cable industry continues to respond positively to the overall growth in consumer demand for more services and improved programming choices. Yet, growth in output has been accompanied by noncompetitive pricing of services that may have suppressed subscribership, relative to that which would otherwise prevail if basic service rates were lower. As shown in Appendix H, the demand for basic cable service tends to be  Y4responsive to reductions in price (i.e., demand is price elastic) at currently observed price levels. Therefore, price reductions would be expected to stimulate an increase in penetration levels while improving the net benefits that consumers derive from cable services. Accordingly, there remain today substantial opportunities for improving consumer welfare.   Y4 223.` ` Other indicators of economic efficiency as a criterion of market performance include measures of technological change in production, product innovation, and industry expenditures on research and development. Unfortunately, useful data on such indicators of economic efficiency in the cable industry are limited. As a result, the Commission does not possess sufficient data for a complete empirical assessment of whether the cable industry is performing well by enhancing consumer welfare. Nevertheless, evidence developed in this  Y"4Report facilitates a qualitative assessment of these indicators of industry performance.  Y4 224.` ` Although difficult to measure and assess at present, the quality of multichannel video programming services offered by cable systems appears to have improved since 1990, when measured in terms of the number of channels available to subscribers. The record in this proceeding demonstrates that cable systems with the capacity for providing thirty or more channels accounted for over 77% of all cable systems for which information was  Y#4available in 1993.:)#{t  Y'4ԍId.: That percentage represents an increase from 67% in 1990. Growth in the number of programming networks is another rough indicator of improvements in the"l$l)\+))&O" quality of cable service. The record reveals that the total number of networks increased by over 51% from 70 in 1990, to 106 at present. Those improvements in service quality should permit a closer alignment between diverse consumer tastes for video programming and the ability of cable systems to meet such consumer demand. Improved matching of consumer demand with the available supply of video programming through time represents an improvement in economic efficiency.   Y_4 225.` ` Industry investment expenditures represent a commitment by firms to meet current and future growth in consumer demand while improving both product quality and variety. Investment spending is the vehicle, therefore, for implementing improvements in the technologies of production, and for implementing product or service innovations. The record before the Commission shows that total cable industry capital investment has fluctuated  Y 4around $3 billion annually since 1990, but is projected to increase to $3.8 billion in 1994.:* t  Ye 4ԍId.: Such spending reflects a commitment to implement technical change that will increase the quantity and improve the quality of cable service in the future.  Y4 226.` ` As described in Section IV.C, supra, the ongoing installation of fiber optic distribution facilities in local cable systems will dramatically increase transmission capacity while expanding the number of services that cable systems may eventually offer their subscribers. Moreover, the cable industry supports a substantial research and development program through Cable Labs. That industry research effort may well result in a new cable network structure incorporating technical changes that will improve the quality and variety of services offered to subscribers over the longer term.   W4` ` c. Conclusion  Y4 227.` ` Current market performance in the multichannel video programming distribution industry, when assessed in terms of several indicators of economic efficiency, is mixed. While the industry is responsive to growth in consumer demand, the output is supplied to consumers at prices that often imply substantial losses in economic efficiency. The industry continues to invest in the deployment of improved video distribution facilities, which should offer the consumer expanded video programming options. The industry also invests in research and development, which should improve the capabilities and performance of local cable networks and services in the future. The willingness of new entrants to invest substantial resources in competition with the incumbent cable systems suggests, however, that there exist further opportunities for improved market performance.   U!4 3.` ` Existing and Potential Impediments to Competition  Y#4 228.` ` In this Section of the Report, the Commission addresses certain existing and potential impediments to competitive entry that may have a dampening effect on the extent of  YU%4competition in the video programming delivery market. In particular, the Report addresses impediments flowing from the strategic behavior of incumbent firms, legal restrictions, and"@&m{*\+))(O" technological bottlenecks. As will be discussed, in certain instances, those impediments may block potential entrants from entering the market altogether. More commonly, however, the impediments serve to increase the cost of a rival's entry, and hence its cost of production as compared with that of incumbent firms.   W4` ` a. Strategic Behavior to Deter Competitive Entry  Y_4 229.` ` The cost of constructing a cable distribution network may be viewed as a sunk  YH4cost, i.e., an operator's investment in its cable plant cannot typically be physically redeployed to some other profitable use if operation of the system were to become  Y 4unprofitable.+ t  Y 4ԍThe concept and economic significance of sunk costs are discussed in AppendixH. The existence of those sunk costs creates strong incentives for the incumbent cable operator to engage in strategic behavior designed to protect that investment. While such behavior may take the form of vigorous competition, which enhances consumer welfare, cable operators also have the incentive to engage in strategic behavior designed to deter entry by potential rivals.  Y4 230.` ` Access to Program Supply. Under certain conditions, agreements that restrict a supplier's right to deal with competitors of a dominant downstream firm can have the effects of raising its rivals' costs by restraining the availability of needed inputs and of decreasing the demand for programming. Through such exclusionary rights agreements, a dominant firm can deter competitive entry, and retain the power to raise prices in its output  Y4market.,t  YL4ԍSee Tom Krattenmaker & Steve Salop, Anticompetitive Exclusion: Raising Rivals'  Y74Costs to Achieve Power Over Price, 96 Yale L. J. 209, 223224 (1986). As recognized by  Y"4Congress in the 1992 Cable Act, and discussed in Section IV, supra, exclusive contracts may not be inefficient or anticompetitive if the video programming and local distribution markets are sufficiently competitive.   Y4 231.` ` One example of such behavior in the cable industry involves efforts by cable operators to restrict the supply of programming to suppliers that use alternative distribution technologies. As Congress recognized in enacting the program access provisions of the 1992 Cable Act, by controlling access to programming supply, cable operators were able to inhibit competitive entry and maintain their monopolies over the distribution of programming in  Y~4most markets.l-~t  Y!4ԍSee Court TV Exclusivity Order (No. CSR4231P)l In this proceeding, the Commission has found that following the implementation of the program access provisions of the 1992 Act, the cable industry's use of program availability as a means of deterring entry has, to a large extent, abated. The record also reflects a number of continuing concerns over potential strategic behavior by cable operators involving access to programming that are not within the purview of the current  Y 4regulatory scheme.R. vt  Y(4ԍSee supra Section IV.B.2.a.R" n .\+))O"Ԍ Y4ԙ 232.` ` In particular, the program access provisions of the statute only apply to  Y4"satellite cable programming." Therefore, as discussed above, programming services  Y4distributed by any other means are not subject to the program access requirements.Q/t  YK4ԍSee supra 18283.Q As a result, some commenters raise the possibility that cable operators may have the incentive and ability to engage in strategic behavior designed to shift programming from satellite distribution to fiber optic or some other form of terrestrial distribution, thereby removing the  Yv4programming from the purview of the program access provisions. In addition, regional clustering of systems combined with a system's ownership of one or more regional programming networks, may create additional incentives for the operator to engage in strategies designed to deny competing distributors access to its programming. One such strategy could include shifting regional programming to terrestrial distribution to facilitate denial of the programming to competitors.  Y 4 233.` ` A second area in which commenters argue that cable operators may have the continued ability to engage in strategic behavior with respect to program access matters involves the program access provision's limitation to programming supplied by vertically Y4integrated programming vendors, i.e, vendors in which cable operators have an attributable  Y{4interest.R0{{t  Y4ԍSee supraĠ179180.R Thus, commenters have suggested that cable operators, using their buying power over programmers, can extract concessions from nonvertically integrated programmers that raise rival operators' costs of obtaining programming or deny them access to programming altogether. Moreover, as the industry becomes further concentrated, the potential for collusion among operators jointly to pressure programmers to adopt what may be broadly  Y4thought of as procable distribution policies, may be further enhanced.  Y4 234.` ` To a certain extent, the potential for such conduct may have been limited by the Commission's recent decision amending its program carriage (as distinguished from the  Y4program access) rules.l1t  Yc4ԍCarriage Mem. Opinion & Order (MM Docket No.92265).l The Commission has amended its rules to provide standing to MVPDs to file a complaint alleging that a cable operator has coerced a programmer, whether  Y~4affiliated or not, into granting exclusivity to the cable operator.Q2~t  Y 4ԍId. 40, App. A.Q  YP4 235.` ` Other Entry Deterring Behavior. The record also reflects several other types of strategic behavior allegedly engaged in by cable operators that may have the effect of raising rivals' costs and thereby deterring competitive entry. For example, one SMATV commenter complains that a competing cable operator purposely impedes subscriber" oX2\+)) O" changeovers by failing to disconnect subscribers in a timely manner and refuses to coordinate  Y4the process with the alternative provider.Q3t  Yb4ԍLiberty Cable Comments at 1617.Q  Y4 236.` ` In addition, there are allegations in the record of cable operators engaging in conduct that may impede the ability of MMDS operators to acquire needed licenses. In particular, it is claimed that cable operators have induced ITFS licensees not to lease their  Yv4excess capacity to wireless cable operators.V4vyt  Y 4ԍSee supra 8586.V  YH4 237.` ` A final type of strategic behavior that may serve to delay entry and raise rivals' costs is the aggressive use of the legal process. For example, TCI filed a civil action seeking to overturn the award of a second franchise to Fibervision by the state of Connecticut. At the time the suit was filed one published report suggested that the suit could  Y 4delay Fibervision's construction schedule and complicate its ability to raise financing.D5 t  Y4ԍGeoffrey Foisie, TCI Goes to Court to Block Overbuild, Broadcasting & Cable,  Y4Apr.25, 1994, at 38; Anthony Giorgianni, Cable Company Complains Competitor Given an  Yw4Edge, The Hartford Courant, Apr. 1, 1994, at B1.D That  Y 4suit has recently been resolved in Fibervision's favor.6 t  Y4ԍOverbuild Appeal Denied, Broadcast & Cable Telefax, Sept. 13, 1994. In a second situation, Warner Cable, a predecessor to Time Warner, filed various legal challenges which delayed the planned construction by the city of Niceville, Florida of a municipal overbuild. In one of these cases, the Supreme Court of the State of Florida rejected Warner's challenge to a lower court order authorizing the city to issue revenue bonds to construct the municipal  Yb4overbuild.7b, t  Y+4ԍWarner Cable Communications v. City of Niceville, 520 So. 2d 245 (Fla. 1988). In a second case, the Eleventh Circuit affirmed the lower court's rejection of  YK4Warner Cable's challenge to the municipal overbuild.8K t  Y4ԍWarner Cable Communications v. City of Niceville, 911 F.2d 634 (11th Cir. 1990),  Y4cert. denied, 501 U.S. 1222 (1991). Despite these court victories, one published report noted that Niceville still had not begun construction of its system as of  Y41993.9U t  Y"4ԍBob Boyle, Florida Municipal Overbuilders in Wait Mode, Multichannel News, Oct.18, 1993, at37; Bell Atlantic Comments at 4 n.6.  Y4 238.` ` The filing of sham litigation has long been recognized as a means of raising  Y4rivals' costs that is actionable under the antitrust laws.: YR'4ԍSee, e.g., MCI Communications Corp. v. AT&T, 708 F.2d 1081, 1156 (7th Cir.),  Y=(4cert. denied, 464 U.S. 891 (1983). On the other hand, such claims"pg:\+))O" may have a legitimate basis (beyond deterring entry), and, therefore, constitute protected conduct. For example, Time Warner commented that actions it brought against Niceville to enjoin construction of a municipal overbuild were not a "delaying tactic," as asserted by Bell  Y4Atlantic.;t  Y44ԍSee Bell Atlantic Comments at 4 & n.6; Time Warner Reply Comments at 11, n.12. Rather, Time Warner claims that it initiated the litigation to vindicate its due  Y4process and First Amendment rights.W<{t  Y4ԍTime Warner Reply Comments at 11 n.12.W   Wv4` ` b. Regulatory Impediments  Y_4  YH4 239.` ` The record in this proceeding also reflects various regulatory impediments to competitive entry. One regulatory impediment to SMATV and wireless entry arises from the  Y 4Communications Act's definition of a "cable system." As discussed herein, a SMATV or wireless system that connects separately owned buildings with a wire (even if the wire does not cross a public rightofway) is deemed a "cable system" under the Communications Act  Y 4and would be required to obtain a local franchise.I= t  Y4ԍSee supraĠ88.I As an alternative to submitting to the franchising process, operators either use moreexpensive microwave relays to distribute between adjacent buildings or forego service to the buildings altogether.   Yy4 240.` ` The record also reflects federal statutory schemes that prevent competitive entry altogether, or may prevent the most efficient form of entry. More importantly, under the Communications Act, LECs are prohibited from providing video programming directly to subscribers in their service areas. The Commission has established a VDT model by which LECs can operate broadband video distribution systems on a common carrier basis,  Y4consistent with this cabletelco ownership ban.J>t  YZ4ԍSee supra 104.J However, conditioning LEC entry on the provision of common carrier services may affect the manner in which LECs can most efficiently enter the market. For this reason, the Commission continues to advocate repeal of the cabletelco crossownership ban, subject to the imposition of appropriate safeguards to  Y4prevent crosssubsidization from local exchange services.?Vt  Y 4ԍTelcoCable First Report & Order 4446, 7 FCC Rcd at 32223.Ĉ  Y|4 241.` ` Various state laws may also serve to impede competitive entry. For example, a recently enacted California statute allows municipalities to require video programming  YN4distributors to undertake various actions in cities in which they offer video programming.`@Nt  Y%4ԍ5 Cal. Gov. Code 1(a) 53088.12.` That requirement will potentially impose significant costs on alternative distributors. "7q @\+))7O"  Y4Similarly, despite limited preemption by the Commission,IAt  Yy4ԍSee supra 76.I local zoning regulations may inhibit competition from directtohome programming distributors, by preventing home users from installing HSDs and smaller DBS dishes.   W4` ` c. Potential Technological Bottlenecks  Yv4 242.` ` The creation of technological bottlenecks in the telecommunications industry, historically, has been of great concern to the Commission. The record in this proceeding reflects a variety of potential bottlenecks, some as old as the industry itself, and others related to emerging technological developments.  Y 4 243.` ` In particular, concerns have recently reemerged with respect to utility poles as a potential bottleneck where cable operators themselves might be suffering competitive  Y 4harm.ZB {t  Y4ԍSee, e.g., Selkirk Communications, Inc. v. Florida Power & Light Co., 8 FCC Rcd  Y4387 (1993); Heritage Cablevision Assocs. v. Texas Elec. Co., 8FCC Rcd 373, appeal denied  Y4sub nom., Tex. Elec. Co. v. FCC, 997 F.2d 925 (D.C. Cir. 1993).Z Many cable operators lease space on utility poles in order to string wires and deliver programming. The contract between the cable operator and the owner of the pole is known as a "pole attachment agreement." "[A]s a solution to a perceived danger of  Y4anticompetitive practices by utilities in connection with cable television service,"lCt  Y4ԍFCC v. Florida Power Corp., 480 U.S. 245, 247 (1987).l Congress passed the Pole Attachments Act of 1978, which directs the Commission, with certain exceptions, to ensure that the "rates, terms and conditions [of such agreements] are just and  YK4reasonable . . . ."PDKt  Yw4ԍ47 U.S.C. 224(b)(1).P At this juncture, the Commission notes that pole attachment is an area that could affect the status of competition in the delivered video programming market and  Y4may merit Commission attention in the future.>E, t  Y4ԍThe Commission did not seek or receive public comment on the issue of pole  Y4attachments in this proceeding. Accordingly, this Report makes no conclusions concerning the status of this issue or the need for Commission or congressional action. >  Y4 244.` ` The Commission notes that MSOs are currently investing in digital compression and encryption technologies, which could impact the manner in which "raw" video programming is distributed via satellite nationally, and possibly create a technological bottleneck to competing distribution media. For example, two commenters have expressed concern that TCI's National Digital Television Center might be used to block access to  Y|4programming by competing MVPDs.rF| t  Y'4ԍSee WCA Reply Comments at 34; Direct TV Comments at 78. r That facility would convert the analog feeds of participating programmers into a compressed and encrypted digital format and then uplink"er<F\+))IO"  Y4the feed to satellites for distribution to cable systems and home satellite users.3Gt  Yy4ԍSee, e.g., Peter Lambert, MSOs Split on TCI's Headend in the Sky, Multichannel  Yd4News, Mar. 28, 1994, at 1; Kate Maddox, TCI Opens New Digital Tech Center,  YO4E#D  P7jQ ApP#LECTRONIC# XR  P7jQXP# M#D  P7jQ ApP#EDIA# XR  P7jQXP#, Apr. 11, 1994, at 4; Cherian George, Cable TV Stays Ahead with  Y:4Technology, T#D  P7jQ ApP#HE# XR  P7jQXP# S#D  P7jQ ApP#TRAITS# XR  P7jQXP# T#D  P7jQ ApP#IMES# XR  P7jQXP#, May 5, 1994, at 7.3 Commenters appear to be concerned that, over time, access to the Digital Television Center may become necessary in order to gain access to programming that is encrypted through that  Y4facility.EH<t  Y4ԍWCA Comments at 34.E  Y4 245.` ` Finally, as the cable industry converts to digital technology and twoway communications, issues concerning network architecture, standardization, and access may become important competitive issues as they have in the telephone industry. While this  YH4Report provides no analysis of the potential significance of such issues at this time, it is  Y34likely that such issues will require attention in future Reports.I3t  Y4ԍRecent papers that address such issues from an economic perspective may be found in  Y4Symposium on Compatibility, 40 J. Indus. Econ. 1123 (Richard J. Gilbert ed. Mar. 1992).   X 4 4.` ` Extent of Competition in the Multichannel (#` ` ` Video Programming Distribution Market  Y 4   Y 4 246.` ` Today, most local markets for multichannel video programming distribution services are supplied by monopoly cable systems. At present, competitive rivalry in most local multichannel video programming distribution markets is largely, often totally, insufficient to constrain the market power of incumbent cable systems. As the overbuild experience demonstrates, the entry of competitors to local cable systems over the coming months and years should exert a significant, favorable effect on market conduct and performance in local markets for multichannel video distribution services. Consequently, the outlook for improved market performance in multichannel video programming distribution markets as a consequence of increasing competitive rivalry remains promising.   X4   B.Future Considerations and Recommendations for Promoting  X4Competition to Cable Systems  Y4 247.` ` The Commission has, throughout this Report, identified several types of dominant firm strategic behavior, policyrelevant barriers to entry, and technological bottlenecks that could adversely affect performance in the multichannel video programming  YW4distribution market. The Commission has noted in this Report that several alternative distribution media are just now becoming operational and available to a significant number of consumers. In particular, the nation's first highpowered DBS operators, DirecTV/USSB, which project that there will be five to ten million households receiving DBS services by the"svI\+))O"  Y4end of the decade, have only become operational within the last six months.bJt  Yy4ԍUSSB Comments at 2, 8; DirecTV Comments at 1, 16.b Moreover, LECs hope to make available networks that are capable of delivering video programming to  Y4over twenty million subscribers by the end of the decade.JKyt  Y4ԍSee supra 118.J However, while numerous LECs are engaged in various trials of VDT service, such service has been authorized in only a single market. As a result, while the Commission believes that several specific reforms  Y4might improve market performance, most of the competitive issues raised in this Report will require ongoing monitoring as a more dynamic and competitive environment develops in this market.  Y34 248.` ` The Commission's procedures for "effective competition" challenges to rate regulation are not designed to, and do not, provide enough information to monitor the extent  Y 4of competitive entry on a nationwide scale.PL t  Y4ԍSee supraĠ5153.P In the coming year, Commission staff will endeavor to find a mechanism to collect, interpret and monitor the growth of alternative  Y 4distribution media so future Reports will be able to provide a more complete picture of the status of competition at both the local and national levels.  Y4 249.` ` In particular, consistent with the 1992 Cable Act's policy of encouraging cable overbuilding, the Commission will continue to collect data and information regarding the extent of cable overbuilding and the competitive checks that overbuilds have on the pricing behavior of incumbent cable systems.  Y!4 250.` ` The Commission will also monitor whether undue delays in granting final determinations on overbuild franchise applications interfere with the effectiveness of Section621 of the Communications Act, which prohibits a franchising authority from refusing to grant a competitive franchise. Section 621 provides an applicant with the right to appeal the denial of an application to the Commission, but only from the "final" decision or  Y4determination of a franchising authority.IMt  Y4ԍSee supraĠ56.I  Y4 251.` ` In addition, the Commission will continue to monitor litigation involving the application of the Congressional ban on the granting of exclusive cable franchises to existing  YR4situations. The Commission believes that the approach of the Eleventh Circuit in Cox Cable  Y=4Communications, Inc. v. United States^N=Vt  Y0%4ԍ992 F.2d 1178 (11th Cir. 1993). ^ correctly interprets the statute, but notes the  Y(4inconsistent holding of the court in Jones Cable Partners v. City of Jamestown.uO(t  Y'4ԍ822 F. Supp. 476 (M.D. Tenn. 1993). See supra note126.u If the  Y4holding of the Jones court gains approval in a United States Circuit Court of Appeals, the"t O\+))% O" Commission will recommend that Congress revise Section 621 of the Communications Act to provide a clear expression of Congressional intent to have the provision apply to existing exclusive franchise agreements.  Y4 252.` ` The Commission recommends that Congress consider modifying 47 U.S.C. 522(7)(B) so as to exclude from the definition of a "cable system" not only commonlyowned, but also separatelyowned, dwellings interconnected by wires which do not cross public rightsofway. Such a revision would promote the growth of wireless cable and SMATV systems as competitors to cable systems by substantially reducing the costs of expanding their systems.  Y 4 253.` ` Besides these specific proposals, however, there are several other issues of strategic behavior, barriers to entry, and technological bottlenecks that the Commission believes merit future study through this annual report process. Because this market is dynamic and evolving, the Commission anticipates that, to a certain extent, this series of  Y 4reports will be a work in progress in which certain parts are continually updated and revised.  Yy4 254.` ` At present, the Commission expects the following issues to be among those covered in next year's and subsequent competition reports: (a) changes and trends in cable industry performance; (b) the status of competing technologies; (c) horizontal concentration of MSOs, cable operator ownership of other distribution technologies, and investments by firms outside the cable industry, such as LECs, in the cable industry; (d)vertical relationships between MVPDs and programming interests; and (e) emerging technological advances, such as digital compression and encryption, and their impact on the cost structure for providers of video programming, and the potential creation of barriers or "bottlenecks." Future reports will also continue to provide updated information concerning application of the program access and program carriage rules administered by the Commission, as well as continuing analyses of the evolution of contracting practices between programmers and MVPDs in response to those rules. Finally, the Commission will report information regarding the number and character of cable systems deemed to be in "effective competition," and therefore no longer subject to rate regulation.  Y 4 255.` ` Because of these recurring issues, the Commission stated in its NOI that "it  Y 4may be desirable to establish more systematic reporting procedures,"WP t  Y 4ԍNOI 78, 9 FCC Rcd at 2908. W and requested the industry to comment on the methods the Commission might use in the future to gather information. In particular, the Commission requested comment on whether surveys or questionnaires of MVPDs and video programmers would be an appropriate method of  Y!4updating the various tables attached to this Report; whether the Commission should institute annual reporting requirements for all or some MVPDs as a method of tracking and evaluating the development of competition in the video programming marketplace; and how information on vertical relationships between cable systems and video programmers (already maintained pursuant to 47 C.F.R. 76.504(e)) could be compiled and maintained for use by the"U%u{P\+))'O"  Y4Commission in these reports.`Qt  Yy4ԍId. 7980, 9 FCC Rcd at 290809.` The Commission also sought comments concerning whether  Y4the information compiled pursuant to the Primestar Consent Decrees should be made  Y4available to the Commission,jR{t  Y4ԍNOI 8687, 9 FCC Rcd at 290910. Viacom contends that it would be inappropriate for the Commission to compel disclosure of the information required by the  Y4Primestar Decrees, as this would discourage parties from entering into such agreements. Viacom Reply Comments at 4.j and how the Commission could gather or examine  Y4proprietary or confidential data and protect information that is obtained.]St  Y1 4ԍNOI 8889, 9 FCC Rcd at 2910.]   Y4 256.` ` Several commenters note that a majority of the basic information sought by the Commission generally is available through public sources, such as company reports filed with the Securities and Exchange Commission, and the publications of Paul Kagan Associates  YJ4Inc., NCTA and SBCA.TJvt  Y]4ԍSee NCTA Comments at 2930; Liberty Media Comments at 1415; SBCA Comments at 1415, Appendix A; Viacom Reply Comments at 4. In addition, commenters state that the Commission will obtain pertinent information, such as data on industry pricing, through rate and program access  Y 4complaints.U t  Y4ԍTCI Comments at 14; Liberty Media Comments at 15; PrimeTime 24 Reply Comments at 45. The majority of the commenters oppose as burdensome the imposition of any  Y 4additional mandatory reporting requirements.V t  Y=4ԍSee TWC Comments at 37. See also TCI Comments at 1415; Liberty Media Comments at 14; WCA Comments at 2728 (wireless operators do not keep data on their wired competitors). Several commenters also express concern  Y 4about the collection of confidential and proprietary business information.W t  Y4ԍSee, e.g., TWC Comments at 3738; HBO Comments at 21; PrimeTime 24 Reply Comments at 4. GTE contends that any reporting requirements should be kept to a minimum, should be phased out when video distribution markets are found to be competitive, and should be collected from programmers in order to avoid doublecounting of subscribers. GTE Comments at 3, 6, 910.  Some commenters dispute whether the Commission even has the authority to impose such reporting" vOW\+)) O"  Y4requirements.WXt  Yy4ԍHBO Comments at 1921; TCI Comments at 1314; TWC Reply Comments at 2829;  Yb4PrimeTime 24 Reply Comments at 3; but see Viacom Reply Comments at 4 (Commission "has ample authority" to collect data "in the context of a specific enforcement or investigative proceeding"). W In contrast, a few commenters favor some form of reporting  Y4requirements.Y6t  Y4ԍNRTC Comments at 2527; CSS Comments at 6; DirecTV Comments at 22; Bell Atlantic Comments at 1011.  Y4 257.` ` The Commission believes that Sections 19(f)(2) and 3(g) of the 1992 Cable  Y4Act,VZt  Y 4ԍ47 U.S.C. 548(f)(2), 543(g).V as well as its licensing authority and other sections of the Communications Act,i[Y t  Y4ԍSee, e.g., 47 U.S.C. 154(i), 308(b), 403.i provide a sufficient legal basis for the Commission to establish and impose reporting requirements with respect to MVPDs and verticallyintegrated programming vendors. However, the Commission is sensitive to the concerns expressed by the cable industry and others regarding the imposition of additional and costly administrative burdens. The Commission also is sensitive to the concerns of the industry regarding proprietary and confidential information.  Y 4 258.` ` Consequently, at this time, the Commission will not recommend any additional  Y 4reporting requirements to facilitate preparation of future competition Reports. At present, for its next report, the Commission intends to develop information through a new notice of inquiry and submitted comments, limited voluntary surveys, and publiclyavailable information from trade and industry sources. The Commission will also review information already filed with the Commission, such as information provided in rate and program access complaints. In addition, as described above, Commission staff will endeavor to find a mechanism other than certification challenges to determine the extent of effective competition to cable nationwide.  Y4 259.` ` Consistent with the requirement that the Commission annually report to Congress on the status of competition, future reports will be submitted to Congress by November 15 of each subsequent year."w [\+))OO"  X4{\ VI.  X4[ADMINISTRATIVE MATTERS \  Y4 260.` ` This Report is issued pursuant to authority contained in Section 19(g) of the Cable Television Consumer Protection and Competition Act of 1992, 47 U.S.C.  548(g), and Sections 4(i) and 403 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 403.  YJ4 261.` ` It is ORDERED that the Secretary shall send copies of this Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. ` `  hhCqFederal Communications Commission ` `   ` `  hhCqWilliam F. Caton ` `  hhCqActing Secretary p   p   Y84 p    u @-  -- A- -@  [R APPENDIX A #XR  P7jQXP#у  Y 4$  Notice of Inquiry, Docket No. CS 9448 ă  X4 Comments`(#NDate received ă     Y4X` hp x (#%'0*,.8135@8:-Fiber to the Home ("FTTH") A type of architecture involving the installation of fiber optic cable throughout the network from the trunk to enduser premises.  c-Fiber to the Node ("FTTN") A type of architecture involving the installation of fiber optic cable from the trunk, through the distribution network, to the neighborhood or the node. Typically, a node will serve between 400 and 500 homes.  c"-#d6X@`7@##D  P7jQ`P##XR  P7jQXP#Hybrid FiberCoax ("HFC") A type of architecture involving the installation of fiber through part of the distribution network, with coaxial cable installed in the remainder of the network to the enduser. HFC architecture is generally used with either FTTC or FTTN, with coax replacing conventional copper wire to the enduser.  c*'-#XR  P7jQXP#Instructional Television Fixed Service ("ITFS") A fixed microwave station operated by an educational organization and used mainly to transmit educational information to fixed"(\+))@)" receiving stations. Wireless cable operators have access to the channels allocated to ITFS on  c-a leased, parttime basis. Public Service Division, Federal Communications Comm'n,  c-Communications Glossary 10 (1993).  c-#XR  P7jQXP#InterLATA Telecommunications services that originate and terminate in different Local Access and Transport Areas ("LATAs").  c_-#x6X@`7VbX@##XR  P7jQXP#Local Access and Transport Area Contiguous local exchange areas developed in connection with the divestiture of AT&T within which Bell Operating Companies ("BOCs") may provide service. Pursuant to the Modification of Final Judgment ("MFJ"), BOCs are not permitted to transport calls across LATA boundaries but rather must connect them to interexchange carriers.  c -Local Exchange Carrier ("LEC") Carrier which transports calls within a local exchange area and provides customers access to long distance telecommunications services. The term is sometimes used to refer to the Bell Operating Companies and other local telephone companies.  cb-#x6X@`7VbX@##XR  P7jQXP##Xx6X@DQVbX@##XR  P7jQXP##x6X@`7VbX@##XR  P7jQXP#Modified Final Judgment ("MFJ") Agreement between AT&T and the Department of Justice which, as amended by the federal courts, effected divestiture and imposed various  c4-restrictions on the Regional Bell Operating Companies (RBOCs). United States v. AT&T,  c-552 F. Supp. 131 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001  c-(1983). See also Leland L. Johnson, Toward Competition In Cable Television 192 (1994).  c-Motion Picture Experts Group ("MPEG") A group within the International Standards Organization that developed the digital compression standard for voice and video.  c-  c~-#XR  P7jQXP#Multiplex To transmit multiple signals over a single channel.  cP-National Television System Committee ("NTSC") A committee comprised of industry representatives that established the NTSC standard for blackandwhite television in 1940, and color television in the early 1950s.  c -  c-Optical Digital Loop Carrier System System of routing calls through fiber optic cable originating from the central office of the LEC to remote distribution units. From these units, a conventional copper loop is used to connect subscriber premises.  c"-Trunk A single transmission channel between two points that are usually switching centers.  c#-#XR  P7jQXP#"#\+))$"  c-  @- B- -- C- -@bX APPENDIX C #XR  P7jQXP#Yw cy-ԍFor the tables that appear in this Appendix of the Report, the Commission has chosen to display information for three years 1987, 1990 and 1993. The year 1990 was chosen because it was the last time the Commission reported to Congress on the status of competition in the industry, and 1993 was chosen because it is the most recent year for which information is generally available. Accordingly, the rate of change is measured over a threeyear period, and 1987 was chosen to provide a threeyear period to be used as a basis for comparison. Yփ  J ddx !ddx"J  S I " sU-kq#D  P7jQ`P# TABLE 1:  sUa- Cable Television Industry Growth, 198793 S I " ly! lQ 0* dd y:)  " oY -lX` hpx (#%'0*,.8135@8: 1; the percentage change in quantity demanded exceeds the percentage change in  c-price. If   < 1, demand is inelastic. If consumers are very sensitive to changes in price, then demand will be elastic as small price increases greatly reduce the quantity purchased of any given good or service. For example, an ownprice demand elasticity of   = 2 implies a 20% decrease in quantity demanded will follow a 10% increase in price. Conversely, if consumers are not very sensitive to price changes, demand will tend to be inelastic.  If consumer demand at observed market prices tends to be relatively insensitive to the level of market price, then it is likely that the product or service faces extremely limited competition from actual or potential substitute goods. If the supplier of such a product or service is a monopolist, then it is possible that observed market price will exceed the price that would otherwise prevail if either more competitors were supplying the market or other products or services were highly substitutable for the given product or service. In other words, measures of enduser price sensitivity are important in assessing the  c-market power of suppliers. "n0~ \+))?"Ԍ c-3.` ` Market power refers to the ability of a firm, or group of firms, to set price profitably above the competitive level and maintain such a price over time without attracting competitive entry. In a perfectly competitive market, equilibrium price is equal to marginal  c-cost.Qr c4-ԍA high pricecost margin, i.e., [(p MC)/p], where p measures the unit price of output and MC measures the marginal cost of production, does not necessarily imply that the  c-firm earns excess economic profits, i.e., revenues in excess of what is required to compensate all inputs of production their opportunity costs. If the technology of production implies economies of scale at the observed level of production, then marginal cost for a single output  c -will be less than average cost, and setting price equal to marginal cost will result in total revenue less than the total cost of production. Thus, the firm will necessarily set price  c -greater than marginal cost, although no excess economic profits will be realized if total cost just equals total revenue. Under these special circumstances, output prices that (1) represent different markups over the marginal cost of production for each output as determined by the ownprice elasticity of demand for each individual output, and that (2) constrain the the sum of markups over marginal cost for all outputs to just recover the total shortfall in revenue that  c#-might otherwise result if prices were set at marginal cost are called Ramsey prices and represent secondbest, economicallyefficient prices in the presence of economies of scale. In the case of a single output, the Ramsey price is equal to the average cost of production for  c-any given level of output. For further discussion of Ramsey pricing, see William J. Baumol  c-& David F. Bradford, Optimal Departures from Marginal Cost Pricing, 60 AM. ECON. REV.  c-26583 (1970). See also Stephen j. Brown & David S. Sibley, The Theory of Public Utility  c-PricingĠch. 3 (1986). Thus, if output price persistently remains above marginal cost over time, the firm  c-does not face perfect competition and has, at least, some market power. The existence of  c-market power is distinguished, however, from the extent of market power, since small deviations from marginal cost pricing will not, in general, imply serious distortions in market performance.  _3- B.The Implicit Lerner Index  c -4.` ` To assess the extant market power of local cable systems, this Report applies  c -two commonly used measures of market power, namely, (1) the Lerner Index; and (2) the q  c -Ratio. The Lerner Index establishes a direct relationship between market power and the own c -price elasticity of demand and is defined as L = [(p MC)/p], where p and MC measure the  c -unit output price and the marginal cost of production, respectively. The q ratio is the ratio of the market value of cable system assets to the replacement value of such assets and is described in Section I.C of this Appendix.  cQ-5.` ` In most cases, it is difficult to compute reliable estimates of marginal cost at  c:-the equilibrium level of output. Consequently, direct estimates of the Lerner Index of market power are often impossible to compute. As an alternative methodology, the firstorder  c -condition for monopoly profit maximization can be used to compute an implicit estimate of the Lerner Index. The divergence of price from marginal cost can be formalized as the  c-Implicit Lerner Index of market power which is given by the formula L = [(p MC)/p] ="1\+))"  c-(1/  ), where  measures the ownprice elasticity of demand.azr cy-ԍThe Implicit Lerner Index is itself subject to important limitations. For example, it is assumed that the estimate of the ownprice elasticity of demand used to estimate the Implicit Lerner Index corresponds to the profitmaximizing value of the ownprice elasticity of demand along the monopolist's demand curve. This assumption may or may not be troublesome, depending on the correct specification of the firm's demand function. If the correctlyspecified demand function facing a cable system is linear, then the ownprice elasticity of demand will vary continuously as the quantity demanded changes. Conversely, if the correctlyspecified demand function is loglinear, then the ownprice elasticity of demand is constrained to a constant value regardless of the level of quantity demanded. If quantity demanded is specified as the penetration rate, a logit transformation of the penetration rate allows for estimation of the ownprice demand elasticity at different levels of quantity  c| -demanded, i.e., penetration rates. See Kent Webb, The Economics of Cable TelevisionĠch.4 (1983). To avoid possible bias in the measurement of the extent of market power induced by selecting an incorrect estimate of the ownprice elasticity of demand, a range of possible ownprice elasticities of demand found in the empirical literature was assumed to "bracket" correct values. In addition, empirical ownprice elasticities inconsistent with monopoly profitmaximization were excluded. See Section I.D and Table H1 in this Appendix.a Given reliable estimates of  c-the ownprice elasticity of demand, , the extent of market power can be inferred indirectly without the requirement of estimating marginal cost at the profitmaximizing level of production.  c-6.` ` The Lerner Index is a measure of the extent of market power. If the elasticity of demand for a firm's product is infinite, as it is in a perfectly competitive market, then the deviation of price from marginal cost is zero. As illustrated by the Lerner Index, the larger in absolute value is the ownprice elasticity of demand, the smaller the divergence between monopoly and competitive price, where competitive price is just equal to marginal cost in the  c -absence of economies of scale.  r c-ԍWhen measuring the extent of market power of a given firm, the market and the firm  c-demand curves must be carefully distinguished. If the entire market is served by a single firm, i.e., a monopoly, then the market demand curve is equivalent to the firm demand curve. Under perfect competition, each firm's demand curve is perfectly elastic and the market demand curve does not coincide with the firm demand curve. To the extent that monopoly cable systems begin to face competition from overbuilders or other technologies for  cN!-distributing multichannel video programming, then local cable operators will face a residual  c8"-demand curve ĩ the horizontal distance between the market demand curve and the total fringe supply that will tend to become more elastic over time and, therefore, tend to decrease the incumbent's market power. As the number of substitutes for cable service increases, the elasticity of demand for video programming services offered by incumbent cable systems will increase. Thus, even if competition in local cable markets is between a few firms selling somewhat differentiated products, such rivalry may significantly increase the elasticity of demand for each of the rivals' services and eliminate significant deviations of price from marginal cost. " 2\+))."Ԍ c-ԙ7.` ` If the ownprice demand elasticity of a dominant firm facing some competition  c-is not known, the market share of the dominant firm, i.e., the percentage of total industry output supplied by the firm, can sometimes be used to compute the extent of market power. Given certain assumptions, the market power of a dominant firm, such as a local cable system beginning to face some competition, can be estimated using an estimate of the firm's  c-market share; the ownprice elasticity of the market demand curve; and the supply elasticity of rival firms, i.e., the percentage increase in quantity supplied by rival firms given a one percent change in output price. In this case, the Lerner Index, or the pricecost margin, can  cJibe written more generally as L = SD/[m+ s(1 SD)], where SD is the market share of the  c4idominant firm; m is the market ownprice demand elasticity; and s is the supply elasticity  c -of the rival or fringe firms. r c -ԍSee William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94  c -HARV. L. REV. 93796 (1981). From this equation, it is apparent that the larger the market share of the dominant firm, the greater its market power, other things remaining the same.  c -The larger (in absolute value) the market demand elasticity, other things equal, the larger will be the dominant firm's ownprice demand elasticity and the smaller the deviation of price from marginal cost. The larger the supply elasticity of the competitors, measured by the ability of existing firms to increase output as well as new firms to enter the market, the larger the ownprice demand elasticity of the dominant firm and, therefore, the lower its market  c|-power.1|cr c-ԍThe simple, inverseelasticity Lerner Index is a special case of the marketshare Lerner Index just described. If the entire output of a singleproduct industry is supplied by a single firm, the market share of that firm is 100%, and the market demand curve is equivalent to the firm demand curve. In this special case, the marketshare Lerner Index  c4icollapses into the simple, inverseelasticity Lerner Index. Under these circumstances, m is  ciequal to , and the expression s(1 SD) reduces to zero, since SD is equal to one. An assumption inherent in the simple, inverseelasticity Lerner Index is that the monopoly firm faces no potential competitors or that such potential competitors do not as yet provide any constraint on the exercise of monopoly power by the monopoly firm.    _N- C.The q Ratio  c7-  c -8.` ` An alternative measure of market power is the q ratio, which is the ratio of the market value of a firm (measured by the market value of its outstanding stock and debt) to  c-the replacement cost of the firm's physical assets.F\ r c"-ԍThe q ratio as an indicator of market performance was proposed by James Tobin. See  c#-James Tobin, A General Equilibrium Approach to Monetary Theory, 1 J. Money Credit &  c$-Banking 1529 (1969).F If the market value of a firm is greater  c-than its replacement cost, excess economic profits are being earned.r cl'-ԍDennis W. Carlton & Jeffrey M. Perloff, MODERN INDUSTRIAL ORGANIZATION 343 (2d ed. 1994). The market value of a"3z\+))%" firm consists of three components, namely, the capitalized value of rents attributable to  c-monopoly power; scarce factors of production; and the firm's existing capital stock. r cb-ԍMichael Spirlock, Thomas Gilligan, & William Marshall, Tobin's q and the Structure cL-Performance Relationship, 74 AM. ECON. REV. 105160 (1984). The magnitude of the capitalized value of these rents is reflected by the extent that the q ratio  c-exceeds one.: dr c-ԍId.: The size of these rents reflects earnings in excess of the amount necessary to compensate all factors of production at rates equal to their full opportunity cost. The q ratio is a measure of longrun profitability, which makes it useful for measuring monopoly power  cv-for public policy considerations. vr c= -ԍMichael A. Salinger, Tobin's q, Unionization, and the ConcentrationProfits  c' -Relationship, 15 RAND J. ECON. 15970 (1984). The q ratio is often a preferable measure of profitability compared to the pricecost margin, since the difficulties in measuring marginal cost are avoided.   c -9.` ` While the q ratio is an alternative to the Lerner Index as a measure of market power, the two measures can be directly linked under certain conditions. It can be shown  c -that q = 1+(1/  )(R/K)[1/(# g)], where R is the firm's revenue for a given period of time; K is the dollar value of the firm's capital stock; (1/  ) is the simple Lerner Index; #  c -is the long term discount rate; and g is the projected long term percentage growth rate of  c -revenue.l  r c"-ԍId. at 161. This definition of the q ratio assumes longrun equilibrium with constant returns to scale in the production of output; no taxes or inflation; and all future profits accrue to capital. If the production process is characterized by economies of scale, then the simple Lerner Index, [(p MC)/p] = 1/  , must be replaced with [(p AC)/p] where p is the unit price of output and AC is the average cost of production. Therefore, the q ratio, under increasing returns to scale, reflects the markup of price over the average cost of production. l From this equation, it is apparent that the Lerner Index (1/  ) and the q ratio tend to be correlated: large q ratios will be associated with large Lerner Indices, other things remaining constant. Much like the simple, inverseelasticity Lerner Index, the q ratio measure of profitability is highly sensitive to the ownprice elasticity of demand. If the firm sells its output in perfectly competitive output markets, then the firm's ownprice elasticity of demand approaches infinity, and its inverse, (1/||) or the simple Lerner Index, necessarily  c-approaches zero in value. As a result, the expression (1/||)(R/K)[1/(#  g)] must also approach zero, and the q ratio converges to one in value, where by definition, the firm possesses no market power. Thus, it is apparent that q values in excess of one imply the exercise of market power, absent measurement problems or substantial violations of other assumptions inherent in the definition of q.  c- 10.` ` As noted in the 1990 Report, q ratios in excess of one may be attributable to factors other than excess economic profits. Since the q ratio is a fraction, incorrect estimates in either the numerator or denominator can have significant effects on the q estimates. Thus, inaccurate measures of either the market value or replacement costs of a firm's tangible assets"R4 \+))\" can produce imprecise and misleading measures of q.  c- 11.` ` In general, the market value of a firm, the numerator of the q ratio, can be accurately estimated by summing the value of securities, i.e., stocks and bonds, issued by the firm. This approach is referred to as the "public" market value. However, if stock market values are extremely volatile, then this approach will produce less reliable estimates of firm  cv-value. vr c-ԍxSee R.J. Shiller, Do Stock Prices Move Too Much to Be Justified by Subsequent  c-Changes in Dividends?, 71 AM. ECON. Rev. 43136 (1981). For example, if the data are limited to a specific year, or even month, the value of securities may produce misleading estimates of the q ratio, if stock prices are abnormally high at that given time. This particular problem is minimal if stock prices are not volatile or the data are drawn from different time periods.  c - 12.` ` It is far more difficult, however, to obtain an estimate of the replacement value of the firm, the denominator of the q ratio. One particular measurement problem is the exclusion of the value of intangible assets, such as goodwill, in the estimate of replacement cost. If advertising, or some other factor, generates a positive amount of goodwill, the q ratio will typically exceed one, since goodwill will increase the market value of the firm but not its replacement value. In addition, since the assets of the firm are "used," estimated replacement costs may be affected by the particular accounting method chosen to adjust the  cb-assets for depreciation.bdr cw-ԍx For a comprehensive analysis of these issues, see Spirlock, Gilligan, & Marshall,  ca-supra note 9. Again, inaccuracies in the measurement of replacement cost will result in a q ratio greater than one, even if excess economic profits are zero.   c- 13.` ` Moreover, a particular firm's q ratio may be greater than one as a result of superior management skills or exceptionally efficient productive methods. Neither of these factors will be reflected in the estimate of replacement cost, but both will most likely affect the market value of the firm. It seems unlikely, however, that superior management skills or efficient production techniques can explain a significant portion of a cable firm's profits, given the current lack of effective competitive constraints on cable operators. Therefore, these factors are unlikely to have a significant effect on estimates of q for many, if not most,  c|-cable systems today.y|r c-!-ԍxWhile high profits may be related to risk rather than monopoly power, the q ratio  c"-includes an automatic adjustment for risk. See Salinger, supra note 11; Spirlock, Gilligan &  c#-Marshall, supra note 9. With respect to superior management skills, the value of the firm will only be affected to the extent that the managers do not capture for themselves the rents produced by their skill. The effects of superior management skills on the value of cable  c%-systems are addressed in the 1990 Cable Report, Appendix E.  cN- 14.` ` Notwithstanding the possible conceptual limitations of the q ratio as a measure of market power, the estimated q ratios reported in Table 5.2 in the text of this report are so"75A \+))=" far above the benchmark value of one that it appears difficult to contradict the hypothesis of substantial market power in local cable distribution markets. Details describing the estimation of the q ratios and the pertinent assumptions made in the various computations are provided in Appendix I.  _- D.Empirical Studies on the OwnPrice  _v-Elasticity of Demand for Basic Cable Services  cH-15.` ` The calculation of implicit Lerner Indices requires robust econometric estimates of the ownprice elasticity of demand for cable services, especially basic cable service. Fortunately, a number of recent econometric studies of the demand for basic cable service report estimates of the ownprice elasticity of demand. These econometric studies provide various estimates of the ownprice elasticity of demand for both basic and pay cable services. The econometric estimates of ownprice elasticities for some of the more recent  c -empirical studies are reported in Table H1.v }I c-ЍxSee *Robert W. Crandall, Elasticity of Demand for Cable Services and the Effect of  c-Broadcast Signals on Cable Prices, paper appended to TCI Reply Comments in Mass Media  c-Docket 904; **Robert N. Rubinovitz, Market Power and Price Increases for Basic Cable  c-Service Since Deregulation, 24 Rand J. Econ. 1-18 (Spring 1993); ***Tasneem Chipty,  c-Horizontal Integration for Bargaining Power: Evidence from the Cable Television Industry,  c-paper presented at the AEI Telecommunications Summit: Competition and Strategic Alliances,  c-American Enterprise Institute, July 7, 1994; ****J.Mayo and Y.Otsuka, Demand, Pricing  cu-and Regulation; Evidence From the Cable TV Industry, 22 Rand J. Econ. 396410 (Autumn  c_-1991); ***** R. Beil, T. Dazzio, R. Ekelund & J. Jackson, Competition and the Pricing of  cI-Cable Television Services, 6 J. Reg. Econ. 40115 (December 1993); ****** George Ford, Competition in the Cable Television Industry: An Economic Analysis of Overlap Variations  c-and Cable Prices (unpublished doctoral dissertation completed at Auburn University, 1994).v Most empirical studies relate the unit price of  c -cable service to either (1) the number of subscribers or (2) the penetration rate defined as the number of households subscribing to either basic or pay cable service divided by the number  cz-of households passed by cable. z r c-ԍxThe penetration rate expresses the number of subscribers in relation to the potential  c-market demand for any defined franchise area, i.e., homes passed. The penetration rate provides several advantages as a measure of cable system demand. First, since the penetration rate is measured as a ratio or percentage, it is not affected by the size of the cable system. Thus, penetration rates for both large and small cable systems can be usefully compared. Second, weighting the quantity of subscribers by the reciprocal of homes passed corrects for heteroskedasticity in the regression analysis. Using the penetration rate as a quantity measure neither affects the interpretation of demand elasticity nor its relevance in calculating the Lerner Index, as the penetration rate is merely an alternative measure of quantity demanded. Since demand elasticity is itself dimensionless, it should be unaffected by the penetration rate transformation.  The ownprice elasticity estimates are broadly similar"z6S\+))"  c-despite different econometric specifications, estimation methodologies, and data sets.gr cy-ԍNone of the studies on overbuild competition provide an estimate of the crossprice  cc-elasticity of demand, i.e., the extent to which the quantity sold of one firm's product is affected by a change in the price of a related product, other things remaining the same. If  c6-the crossprice elasticity is positive, the products are substitutes; if negative, the goods are  c -complements. Given that the ownprice demand elasticity for a product or service is affected by the number of substitutes for that product or service, it can be shown that the higher the positive value of the crossprice elasticity between two rival cable operators' services, the larger will be the absolute value of a firm's ownprice elasticity of demand for its particular services. Thus, the larger the crossprice demand elasticities between the services offered by two rival cable firms, the less likely it is that either firm will possess significant market power, since market power is inversely related to the ownprice demand elasticity as illustrated by the implicit Lerner Index. For a general discussion of crossprice elasticity,  ci -including its relationship to the ownprice elasticity of demand, see CARLTON & PERLOFF,  cR-supra note 8, at 807. Today, econometric estimation of crossprice demand elasticities between rival cable operators is hindered by multiple problems, including the wide variations in the extent of system overlap between competing systems and other data and statistical difficulties. As competition develops in the cable industry, estimating crossprice elasticities may become feasible.  c-16.` ` The Crandall study estimates two demand model specifications, namely, Specification 1 that constrains the estimated elasticity to be a constant for all values of cable price and number of subscribers; and Specification 2 that permits the estimated elasticity to vary for different values of cable price and number of subscribers. As shown in Table H1, the estimated ownprice elasticities were not dramatically affected by the different instrument sets. Crandall's results suggest that the ownprice elasticity of demand for basic cable service tends to be elastic, ranging from approximately 1.6 to 3.4, depending upon the model specification and instrument set. The Rubinovitz and Beil, et al., studies also show that the demand for basic cable tends to be elastic, although somewhat less elastic than shown in the Crandall study. Mayo and Otsuka find demand to be close to unity across the markets in their sample. According to their estimates, demand elasticities tend to be higher in urban areas and larger television markets. The Chipty study estimates ownprice elasticities of demand for both basic and pay cable service. Again, these empirical estimates tend to show that the demand for basic (and pay) cable services are elastic. Finally, the Ford study shows that in duopolisticallycompetitive cable markets, the demand curve faced by the cable system operator is more elastic than in markets where competition is absent, i.e., in monopoly markets.  c4-17.` ` Notwithstanding the differing econometric methodologies and data sets, the demand elasticities reported in Table H1 generally suggest that the demand for cable television tends to be elastic. To the extent that existing cable rates exceed the incremental cost of production, rate reductions should be expected to increase the number of subscribers and levels of penetration, and increase revenues for local cable systems, while possibly reducing local cable system profits. To the extent that local cable rates are the result of"7\+))" monopoly power exercised by local cable systems, additional competition should result in rate reductions for basic cable service as the elasticity of demand for the cable operator increases, a result consistent with the results reported in Ford's study. "8\+))"Ԍ c-&b TABLE H1 ă H ECONOMETRIC ESTIMATES OF OWNPRICE ELASTICITY  OF DEMAND FOR CABLE TELEVISION\ c addx` 8 #  TTx9s\ c  A   ;  * * ;"TDemand Measure; EA    ;   * Study| 2  U Number of Subscribers  &Penetration Rate 2OwnPrice Elasticity Estimate (||)      SIx Crandall (1990)* Instrument Set A Specification 1 Specification 2 Instrument Set B Specification 1 Specification 2 Instrument Set C Specification 1 Specification 2C  e/X e/X e/X e/X e/X e/XC    ;1.760 ;2.329 ;2.134 ;3.375 ;1.578 ;2.151 q  w   SIx Rubinovitz (1993)** e/X w =1.46q   w   SIx Chipty (1994)*** Basic Cable Minimum Value Maximum Value Mean Value Pay Cable Minimum Value Maximum Value Mean Valuec    X X X X X X  ;1.054 ;2.387 ;1.877 ;1.050 ;3.748 ;2.029      SI[x Mayo and Otsuka (1991)**** Top 50 Markets Urban Suburban Second 50 Markets Urban Suburban Below Top 100 Markets Average   X X X X X X  =1.51 =1.05 =1.22 =0.98 =0.81 ;0.969 q  w   SIGx Beil, et al (1993)***** 0w X0w =1.09q    w   SIx Ford (1994)****** Specification A Monopoly Duopoly Specification B Monopoly Duopoly$  $  X X X Xs%  =0.87 =1.51 =1.31 =2.62  0 kV%-Source: References cited in footnote 16. &"%9\+))%"Ԍ _- E.Empirical Estimates of the Implicit Lerner Index  c-18.` ` The econometric estimates of the ownprice elasticity of demand reported in Table H1 that are consistent with the theoretical conditions for profitmaximization range  c-from 1.054 to 3.375.Hq c-ԍAn unconstrained profitmaximizing firm will always price its output in the elastic region of its demand curve where the absolute value of the ownprice elasticity of demand is  c-greater than 1. See Carlton & Perloff, supra note 8, chs. 1, 9.H Table H2 reports estimates of the Implied Lerner Indices using a representative sample of the ownprice elasticities reported in Table H1. Table H2 also  cv-reports the Implied Markup Factors that are derived from an algebraic restatement of the Lerner Index. The Implied Markup Factor expresses the profitmaximizing price as some multiple of marginal cost. Firms selling their output in a perfectly competitive market would set price equal to marginal cost, implying a markup factor equal to one. Markup factors in excess of one are indicative of market power. Similarly, the value of the Lerner Index for a firm selling in perfectly competitive output markets is zero, since a competitive firm does not realize any markup over the marginal cost of production.  c -b TABLE H2 ă 3IMPLICIT LERNER INDICES CFOR CABLE SYSTEMS  ^ TTx9s\  ddxP: "BB^   5 0 U   Econometric Studyu">% Basic Service  OwnPrice Elasticity \of Demand 3/[  ]eblImplied Lerner Index z[1/  ]ebhIQImplied RMarkup T!Factor G[  /(   1)]hI'5 q P Uw  Rubinovitz (1993)w"1n1.46wb 0.69wb[3.17q q  Chipty (1994)gw">%1n1.88gwb 0.53gwb[2.14q C  wW  Crandall (1990) Specification B1 Specification B2W">% 1n2.13 1n3.38Wb  0.47  0.30WbhI [1.88 [1.42C s  g W  Ford (1994) Monopoly Duopoly ">% >% 1n1.31 1n2.62 b  0.76  0.38 bhI [4.22 [1.61s   c - Source: Table H1. "!:L\+))!y"Ԍ c-19.` ` If it is assumed that local cable systems attempt to set profitmaximizing prices for basic cable service, then the presence of market power is implied for the range of empirical estimates of the ownprice elasticity of demand shown in the second column of  c-Table H2.I^r c4-ԍCrandall, in his study cited in Table H2 that uses TCI cable system cost data, estimates the pricecost ratio for a representative TCI cable system as approximately 2.0. This pricecost ratio is quite close to the implied markup factor of 1.88 implied by Crandall's estimated ownprice elasticity of demand equal to 2.134 as shown in Table H2. To the extent that TCI cable systems are broadly representative of cable systems more generally, estimated ownprice elasticities for basic cable service in the vicinity of 2.0 are probably  c -consistent with profitmaximizing prices for basic cable service. See Robert W. Crandall,  c -supra note 16, at 28. The Implied Lerner Index suggests that the percentage markup over profitmaximizing price, i.e., [(p MC)/p], ranges from thirty to seventysix percent. Similarly,  c-the Implied Markup Factors range from 1.42 to 3.50. I^r c-ԍThe Implied Lerner Indices and Implied Markup Factors shown in Table H2 are only  c-suggestive of market power in local multichannel video programming distribution markets dominated by local cable systems. If the production of local cable services is subject to some economies of scale and scope in the longer term, then prices may be expected to exceed marginal cost. In other words, some excess over marginal cost may be required to recover the total cost of production even in the absence of excess economic profit. Consequently, values of Implied Lerner Indices should be compared with other measures of market power, such as q ratios, in order to evaluate the reasonableness of the estimated values.  With regard to overbuild competition, the Implied Markup Factors produced using Ford's ownprice demand elasticity estimates clearly show that such competition diminishes market power.  cH-  _1- ~II. /SUPPLYSIDE CONCEPTS  c - ` `  _ - A.Economies of Scale and Scope  c -20.` ` Changes in the cost of production as output expands may have an important effect on market structure. If, for example, the average cost of production is little affected by the quantity produced by any given firm in an industry, then the market might be supplied by many firms, with no individual firm having any important cost advantage relative to any  cb-other. In other words, the scale of production does not affect the cost of production for any firm in the industry. Under these circumstances, market structure may resemble a perfectly competitive industry, unless various types of barriers to entry preclude competitive entry.   c-21.` ` Conversely, should the expansion of output by any given firm result in a  c-reduction in the average cost of production as highercapacity facilities are used to produce higher volumes of output, then market structure may be dominated by a few firms that supply  c-the entire market. In such a case, each firm realizes economies of scale in the production of output, although such production economies are usually exhausted at sufficiently large";\+))~y"  c-volumes of production. In a special, limiting case, a single enterprise may be able to supply total market demand at least total cost compared to multiple competing suppliers, reflecting the application of a technology of production so technically efficient at large levels of output  c-that only a single supplier is required. Such a firm is called a natural monopoly. Often, firms defined as natural monopolies are treated as public utilities and subjected to regulation. Historically, such regulation precludes competitive entry, since, by definition of a natural monopoly, any competitor to the public utility can only produce output at higher average cost and, hence, a higher price to the consumer relative to the prices charged by a regulated  cJ-natural monopoly firm.o J^r c -ԍThe standard view of singleoutput natural monopoly implicitly assumes that the natural monopoly firm minimizes the total cost of production for any level of output, notwithstanding the lack of competition that would ordinarily force a competitive firm to behave this way. But without competition to force the natural monopoly firm to minimize the total cost of production, it is both possible and likely that the natural monopoly firm will  cP-tolerate Xinefficiency, i.e., higher unit cost for any level of output compared to the unit cost of production for a firm that faced competition and consequently minimized its expenditures on the inputs of production. Such Xinefficiency may be expected to persist even if the natural monopoly firm is subject to public utility regulation. Although the idea of X-inefficiency can be traced to Adam Smith, Harvey Leibenstein has advocated its  c-importance in recent years. See Harvey Leibenstein, Allocative Efficiency vs. XEfficiency,  c-56 Am. Econ. Rev. 392415 (June 1966). A recent collection of articles assessing the state  c-of Xefficiency theory is Studies in Economic Rationality: XEfficiency Examined and  c-Extolled (Klaus Weiermair & Mark Perlman eds. 1990). o  c -22.` ` The cost structures of firms that supply multichannel video programming to subscribers are likely to be both complex and dynamic over the longer term as new technologies of video programming distribution become more widely available. Analytically,  c -a multioutput cost function is a useful tool for understanding the behavior of plantlevel costs of production. In particular, such a cost function permits the definition and measurement of  c -productspecific economies of scale and economies of scope, the cost savings attributable to producing multiple outputs in the same plant using certain shared inputs of production. For a firm that produces a single output, large economies of scale in production may be sufficient to result in a natural monopoly. Most firms, however, produce multiple outputs. The notion of natural monopoly in the case of multiple outputs is necessarily more complicated than the singleoutput case, although recent theoretical work on the economics of multioutput production have established the cost conditions defining natural monopoly under these  c -circumstances. P^r c $-ԍThe modern theory of multioutput cost functions is fully developed in William J. Baumol, John C. Panzar, & Robert D. Willig, Contestable Markets and The Theory of  c%-Industry Structure (1982). "<\+))y"Ԍ c-23.` ` Technological change, learning curve effects, and systems rivalrye^r cy-ԍThe distribution of multichannel video programming is an example of a system, i.e., "collections of two or more components together with an interface that allows the components  cL-to work together." Output provided to consumers on networks often implies certain feedback  c6-effects that may directly affect market structure. A common approach for evaluating  c -feedback effects in networkbased markets is studying market competition between systems as  c -opposed to competition between products.  See Michael Katz & Carl Shapiro, Systems  c-Competition and Network Effects, 8 J. Econ. Persp. 93 (1994). between and among competing multichannel video programming distributors may accentuate economies of scale and scope in video programming delivery through time. Such economies  c-do not, however, imply a natural monopoly market structure in local video programming distribution markets over the longer term, although such economies may constrain the number  c-of profitable video programming delivery systems in some local markets.^r c5-ԍA distinction is drawn between the plantlevel technology of production that displays  c-natural monopoly cost characteristics, i.e., productspecific economies of scale, economies of  c-scope, or both, and a natural monopoly market structure. Many firms, especially firms that  c-tend to be capitalintensive, utilize technologies of production that result in some economies of scale or scope in production at observed levels of demand, i.e., reflect natural monopoly  c-cost characteristics. The extent of such economies is often insufficient, however, to preclude the entry of rivals that also produce output subject to similar economies of scale and scope. Ordinarily, each entrant differentiates its output from that of its competitors, which, if successful, enhances the consumer's willingnesstopay for the specific output of the given firm. Thus, even if the incumbent firm could produce total market demand at least total cost, consumers in general do not find the product variety offered by a single firm equivalent to, or even preferred to, the collection of differentiated products and services offered by competing firms. Thus, in most markets, both productspecific economies of scale and economies of scope are never fully realized, since consumers value the benefits of product diversity provided by diverse firms more highly than more homogeneous output produced at lower unit cost and price. By contrast, a natural monopoly market structure will emerge in instances where (1) the technology of production implies productspecific economies of scale, economies of scope, or both that are pervasive and profound; (2) the fixed costs of production are large and almost entirely sunk; and (3) consumers place little or no value on product differentiation. Given these conditions, a monopoly market structure will emerge "naturally" over the longer term, even without governmentimposed barriers to entry. Few realworld markets, where entry is free and not constrained by public policy, tend to converge, however, toward natural monopoly as an equilibrium market structure over the longer term. Such industry  cx-cost conditions are unlikely to represent policyrelevant barriers to entry, however, since their  cb-realization is likely to be the result of systems rivalry rather than an impediment to such  cL-competition.rL^r c'-ԍPolicyrelevant entry barriers are discussed in the next section.r Some insight concerning the extent of possible economies of scale and scope"L=J \+))y" is provided by econometric studies of cable system cost functions. Several of these studies are reviewed in the next section.  _- B.Empirical Studies on Economies of Scale in Cable Television Distribution  c-  cv-24.` ` Rigorous study of the cost structure of local cable systems requires the formulation and estimation of multioutput econometric cost functions. Two empirical studies estimate the cost structure of local cable systems, namely, studies by (1) Owen and  c1-Greenhalgh and (2) Noam.O1^r c -ԍxBruce M. Owen & Peter R. Greenhalgh, Competitive Policy Considerations in Cable  c -Television Franchising, 4 Contemp. Pol'y Issues 6979 (1986); Eli Noam, Video Media  c~ -Competition: Regulation, Economics and Technology (1985).O Both studies find some evidence of economies of scale,  c -although such economies are not large.p M^r c-ԍxGiven limited data availability, there are few published or publiclyavailable econometric studies of cost functions for cable firms. Only such econometric studies, however, provide rigorous measures of productspecific economies of scale and economies of scope attributable to multioutput production by a single firm.p  c -25.` ` Owen and Greenhalgh estimate a fourteen percent cost penalty to overbuilding using data from franchise applications, where output is defined as the number of  c -subscribers. ^r c(-ԍxIn other words, entry of a second cable system forces the incumbent to restrict output (at least initially) and operate at a higher point on its average cost curve, all other things remaining the same. Owen and Greenhalgh estimate the size of this effect as approximately 14% over what cost would have been absent the overbuild competitor. This estimate overstates the cost penalty of overbuilding, since total market output is assumed to be constant, i.e., no price competition results from overbuilding. Empirical studies on competition in the cable industry suggest, however, that total market output tends to increase as marginal customers subscribe to basic cable service in response to  cc-a reduction in price.|c% ^r c9-ԍx See Beil, Dazzio, Ekelund & Jackson, supra note 16.| When changes in the output of the cable system are measured not only as an increase or decrease in the number of subscribers, but include proportional changes in the amount of institutional (local public, educational, and government) network investment and miles of wire (cable plant), Owen and Greenhalgh's estimates show that the average cost of production is approximately constant with respect to a proportional change in all three measures of output. As noted by the authors and subsequent studies, Owen and Greenhalgh's estimates are troublesome, however, since the franchise application data used in their study  c-are only estimated construction and operation expenditures. Such data include the estimates of both efficient and inefficient bidders; could be biased by opportunistic behavior or "gamesmanship;" and ". . . do not clearly reflect the minimum cost based on using best">\+))y"ԫ c-practice techniques of running a cable system of a given size.".^r cy-ԍOwen & Greenhalgh, supra note 27, p. 72. A number of studies assert that  cc-opportunistic behavior at the franchise stage is significant. See Oliver Williamson, Franchise  cM-Bidding for Natural Monopolies In General and With Respect to CATV," 7 Bell J. Econ.  c7-73104 (Winter 1976); Robin Prager, Firm Behavior in Franchise Markets, 21 Rand J. Econ.  c!-211225 (Summer 1990)..  c-26.` ` In a more sophisticated attempt at measuring scale and scope economies in cable distribution, Noam estimates a series of cost functions using 1981 data for more than 4800 cable systems. His estimates suggest the presence of economies of scale in the  c-production of cable services, but the economies vary according to the definition of output. b!^r c_ -ԍData used by Noam consisted of monopoly systems only. The nature of cost under duopolistic competition may be significantly different than under monopoly supply. For example, numerous analysts have suggested the possibility of Xinefficiencies in monopoly  c-markets. See Noam, supra note 27; Thomas W. Hazlett, Duopolistic Competition in Cable  c-Television: Implications for Public Policy, 7 Yale J. Reg. 65120 (Winter 1990), at 80;  c-Nelson & Primeaux, The Effects of Competition on Transmission and Distribution Cost in the  c-Electric Utility Industry, 64 Land Econ. 33846 (1988). Productspecific scale elasticity estimates for the outputs defined as "basic subscribers," "pay  c_-subscribers," and "homespassed" are 1.054, 1.074, 1.020, respectively. !b_K ^r c[iԍProductspecific scale elasticity, s, is defined as the percentage change in output  cEidivided by the percentage change in cost, or s = [(%Output)/(%Cost)], where values greater than one imply average cost is decreasing as the level of output increases, i.e.,  c-economies of scale are present. Total scale elasticity measures the change in output as the proportional response of multiple outputs to a proportional increase in the scale of production. Again, values greater than one imply average cost is decreasing as the scale of  c-plant is increased. See W. Baumol, J. Panzar, and R. Willig, supra note 23, pp. 7374.  Productspecific economies of scale are observed for the basic and pay subscriber output measures. The productspecific scale elasticity estimate for the homespassed measure of output is not statistically different from one, however. These results suggest that economies of scale are observed only in the number of basic and pay subscriptions, and not the physical size of the network, i.e., homespassed. Taking into account economiesofscope between the size of the distribution network and the number of subscribers for both basic and pay cable services,  c -Noam's estimates indicate slight economies of scope; the total scale elasticity estimate is calculated to be 1.096, implying that a tenpercent decrease (increase) in all outputs in fixed proportion will result in approximately a onepercent increase (decrease) in the cost of production. The scale elasticity estimates from the Noam study (the most sophisticated to date) do not suggest, however, that significant economies of scale regardless of the measure of output pervade the cable distribution industry.  c-27.` ` Based on the two econometric cost studies, competitive entry in local multichannel video programming markets may appear to imply some loss in economic benefit"?u!\+))y" to consumers, since such entry may prevent the incumbent cable system from fully realizing all the economies of scale and scope inherent in the production of cable services. Such an  c-inference, however, ignores the possible benefits of competitive entry. For example, if post c-entry prices are lower than preentry prices, then cost penalties must be weighed against increases in consumer welfare resulting from lower prices. Therefore, even if economies of  c-scale are present, gains in consumer welfare from lower prices may be expected to more than offset the cost penalty of duplicated facilities. As a result, allowing openentry into local cable markets, where such entry results in lower prices, can increase net social welfare (exclusive of product variety), despite some loss in static economic efficiency resulting from foregone economies of scale.   c -28.` ` Although local cable distribution networks are probably characterized by slight economies of scale, empirical evidence concerning the favorable price effects of overbuild competition suggest that entry restrictions in local cable markets are likely to be economicallyinefficient and detrimental to the welfare of consumers. Given the prospective entry of competitors using different local distribution technologies, such as MMDS, DBS, and LECs, natural monopoly cost characteristics may tend to constrain the number of overbuilders in most local cable markets but need not necessarily constrain the extent of competitive rivalry that should tend to improve consumer welfare over the longer term.   _7- C.Conditions of Entry  c -29.` ` Barriers to entry and exit are probably the single most important factor influencing market structure. For public policy purposes, however, the concept of barriers to entry should be carefully defined. Bain specified three sources of barriers to entry, namely, (1) the absolute cost advantages of incumbent firms; (2) economies of scale; and (3) the  c-product differentiation advantages of incumbent firms.e"^r c&-ԍJ.W. Bain, Barriers to New Competition (1956).e Stigler proposed a more general definition of barriers to enter, namely, ". . . a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by  ch-firms already in the industry."q#hy^r c-ԍGeorge J. Stigler, The Organization of Industry 67 (1968).q Stigler's general definition of a barrier to entry is broadly accepted in many contemporary industrial organization studies. Christian von Weizscker proposes a more restricted definition of a barrier to entry that qualifies Stigler's definition, namely, a barrier to entry is ". . . a cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry and which implies  c-a distortion in the allocation of resources from the social point of view."$*^r c$-ԍC.C. von Weizscker, A Welfare Analysis of Barriers to Entry, 11 Bell J. Econ 400 (Autumn 1980). Weizscker's definition of a barrier to entry suggests in effect that the proposed removal of a barrier to entry requires a costbenefit analysis that identifies all gains in economic efficiency, including relevant externalities, that are derived from the presence of the entry barrier as well as the"!@$\+))"y" actual or potential losses in economic efficiency resulting from the entry barrier, including all costs implied in eliminating or minimizing its effects.  c-  30.` ` Since some models of market competition establish a direct relationship between the number of firms supplying the market and the quality of market performance, it appears selfevident that any obstacle impeding the free and easy flow of new firms into the  cv-market must have a direct and unequivocal adverse effect on market performance.6%v^r c-ԍFor a modern economic analysis of some aspects of the relationship between the number  c-of firms and certain indicators of market performance, see Michael L. Katz & Harvey S.  c -Rosen, Microeconomics, 2nd ed. (1994): pp. 489493.6 As a  c_-result, the elimination of any impediment to entry should produce an unambiguous, although possibly small, incremental improvement in market performance and consumer welfare. Following this logic, the "optimal" public policy toward impediments to market entry is, therefore, one of "zero tolerance."  c -31.` ` Closer examination of a zero tolerance policy toward barriers to entry  c -suggests, however, that such a policy without important qualifications is unlikely to be  c -optimal. From a public policy perspective, not all impediments, however, are necessarily  c -barriers to entry that require some type of government intervention or remediation. For  c-purposes of this Report, costs borne by entrants but not incumbents that have adverse affects  c~-on consumer welfare are defined as policyrelevant barriers to entry.&`~K^r cz-ԍA similar point of view regarding the definition of barriers to entry is advanced by Baumol, Panzar, and Willig. They argue that ". . . unlike von Weizscker's, our definition seeks to specify operationally what types of impediments meet its criteria, [and] we hope to show . . . that our criterion and his overlap in substance. That is, we argue that anything that is an entry barrier by our definition does reduce the sum of consumers' and producers' surplus, while phenomena such as fixed costs and scale economies need not do so."  c-BAUMOL, PANZAR, & WILLIG, supra note 23. Barriers to entry defined in this way are candidates for regulatory or antitrust scrutiny, where such scrutiny may result in policy recommendations for reducing or eliminating such entry barriers. Such scrutiny should be approached as a costbenefit analysis that identifies all possible economic efficiencies, if any, that might result from the presence of the barrier to entry; identifies all offsetting economic inefficiencies that might be attributable to the barrier to entry, if any; identifies all relevant positive and negative externalities; and, finally, estimates the economic cost of eliminating the barrier to entry or minimizing its effects.  `- 1. ` ` Fixed and Sunk Costs as Barriers to Entry   c-32.` ` The existence of both scale and scope economies in local cable system networks may represent a limited impediment to unconstrained market entry by potential overbuilders. The essential question is whether such an impediment to entry is also a policyrelevant barrier to entry. Answering this question, however, requires a careful distinction  c&-between several types of cost, especially, fixed costs and sunk costs."&As &\+))y"Ԍ c-ԙ 33.` ` For a singleoutput firm, economies of scale are a consequence of enlarging the production capacity of a plant by installing highercapacity facilities and enlarging, as necessary, the labor force necessary to produce at larger levels of output. At this higher  c-level of output, the average total cost of production, i.e., the sum of total fixed cost plus total  c-variable cost, divided by the higher level of output, is lower compared to the average total cost of production for smaller levels of output where the capacity of productive facilities is smaller. In general, total fixed cost ordinarily represents the estimated dollar value of the annual (implied) flow of productive services rendered by capital equipment, such as  cJ-investment in cable headend and distribution facilities, that do not vary with small changes in  c4-the level of output.!'4^r c -ԍ For a brief review of the capital theory principles that convert the price of a durable  c -asset (a stock) into an annual price of capital services (a flow), see Carlton & Perloff, supra note 8, Appendix 3A, pp. 7778.!  c -!34.` ` Achieving a lower total average cost by investing in highcapacity production  c -facilities requires a substantial capital investment and is sometimes described as a capital  c -barrier to entry. So long as both the incumbent and the entrant can acquire the same large c -scale production facilities at the same purchase price, large total fixed costs implied by investment in highcapacity production facilities do not meet the definition of a policyrelevant barrier to entry. Implicit in the conclusion, however, is a crucial assumption that the fixed cost of highcapacity facilities cannot be reduced by reducing the level of production,  ch-but can be eliminated by total cessation of production. In other words, fixed cost can be  cR-eliminated by shutting down production altogether and redeploying the capital assets to some other production process within the firm or selling the assets to some other firm. Indeed, the incumbent may be willing to sell the capital assets to an entrant at the current opportunity cost of the assets and abandon production in this particular market.  c-"35.` ` If, however, the highcapacity production assets cannot be redeployed to some other profitable use and should the continued production of output in the existing application become unprofitable, then the fixed cost represented by the investment in such capital assets  c-becomes a sunk cost. By definition, sunk costs cannot be eliminated even by total cessation  c-of production.(L^r c-ԍSee BAUMOL, PANZAR, & WILLIG, supra note 23. Since sunk cost assets cannot be redeployed, they have no opportunity cost. As a simple example, investments in railway cars are largely a fixed cost, apart from ordinary wear and tear resulting from usage. If the current usage of a railway car between two points, A and B, becomes unprofitable, then the railroad can easily redeploy the cars to some other route. The fixed cost represented by the investment in roadbed between points A  c-and B obviously cannot be redeployed and, therefore, represents a sunk cost.   c-#36.` ` The policy significance of the difference between fixed and sunk costs is"B(\+)) y"  c-important.)y^r cy-ԍTransaction cost economics places much emphasis on assetspecificity, a concept logically equivalent to sunk cost, although the concept is used to explain the choice between private contracting and the internal organization of firms as alternative institutions for  c5-effectuating exchange relationships. See Oliver E. Williamson, The Economic Institutions of  c-Capitalism (1985). See also Oliver E. Williamson, Transaction Cost Economics, HANDBOOK  c -OF INDUSTRIAL ORGANIZATION ch. 3 (Richard Schmalensee & Robert D. Willig eds. 1989).  While fixed costs do not ordinarily represent a policyrelevant barrier to entry, sunk costs sometimes do. Sunk costs may have a direct, and sometimes dramatic, effect on the behavior of dominant firms, such as local cable system operators. Much like the railroad track example above, the costs of constructing a cable distribution network may be viewed as  c-sunk, where the coaxial cable plant is analogous to the roadbed investment by railroads.* ^r c^ -ԍTo some extent, sunk costs are a matter of degree, since almost every asset will have some value in the secondhand market. Tirole notes that sunk investments are not an "allornothing" notion; investments are sunk as long as the costs of redeploying the asset exceed the  c-benefits from doing so. JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 13 (1988). Significant aspects of the cable distribution and video programming industries are characterized by sunk costs. As a result, strategic behavior by incumbent cable systems may be anticipated as a factor directly affecting market structure for local distribution of video programming.  c -$37.` ` If entry into an industry requires large sunk costs, the value of incumbency can be substantial. Incumbent systems may be able to use their incumbency to forestall or deter  c -competitive entry via a number of entry deterring strategies.+ ^ ^r c-ԍEvaluating all theories of entry deterrence where sunk costs are significant is beyond  c-the scope of this Appendix. For a general review of entry deterring strategies, see Robert  c-Wilson, Strategic Models of Entry Deterrence, 1 Handbook of Game Theory with Economic  c-Applications (Robert J. Aumann & Sergiu Hart eds. 1992). In general, economic models  c -of entry deterrence stress the inherent advantage in making the "sunk" investments first, thereby limiting the opportunities for profitable entry later. For example, suppose that an incumbent cable system has wired an entire franchise area. A potential entrant will realize that any large scale entry into that market will probably force price down, as the output of the entrant is absorbed by the market. Even if the costs of the entrant are as low as those of the incumbent, the postentry price may fall below average cost, and entry will prove  cL-unprofitable.,L^r c#-ԍ Albert Smiley constructs a model which simulates cable overbuilding with engineering demand and cost functions. His simulations show that profitable entry can be  c%-deterred if the incumbent wires the entire franchise market. See ALBERT SMILEY, Direct  c&-Competition Among Cable Television Systems, United States Department of Justice, Antitrust Division, EAG Paper #869 (1986). If the prospective entrant's expectations match this scenario, entry is deterred. This entrydeterrent effect depends on the expectations of the entrant about postentry"5C#,\+))y" behavior of the incumbent, the degree of economies of scale, and the level and nature of demand.  c-%38.` ` If an incumbent sets price at the monopoly level, then a prospective entrant may perceive entry to be profitable. The incumbent may be able to deter entry, however, by  c-setting a limit price, i.e., a price below monopoly price but above average cost. The incumbent, by accepting less than maximum profit in the short run, prevents entry and  c`-maximizes profit in the long run.{-``^r c-ԍ This simplistic view of limit pricing fails to consider, however, the strategic reactions to entry by incumbent firms. In other words, incumbents must decide whether accommodating or opposing entry is more profitable. If the incumbent firm finds it more profitable to accommodate entry, it will reduce its output, making room for the entrant. Bain and SylosLabini assume that entrants expect incumbents to maintain output at preentry  cf -levels. See BAIN, supra note 34; Paolo SylosLabini, Oligopoly and Technical Progress (1962). { The implications of a limit pricing strategy for consumer welfare are complex. Since a limit price is lower than the monopoly price, it clearly  c2-enhances consumer welfare. If the limit price is above the duopoly price, then potential welfare is diminished by the entrydeterring effect of the limit price. Thus, consumer welfare  c -is directly affected by the type of limit pricing strategy that an incumbent cable system may  c -adopt..` ^r c-ԍ Leland Johnson  provides an example of a limit pricing response by a cable system when it faced competitive entry. The city of Glasgow, Kentucky, decided to build a competitive municipal cable system. Before the first mile of cable was strung, the incumbent cable operator cut its rates by 60%. This response did not discourage the municipality from continuing construction, but did send a signal to the city regarding the future profitability of  c-its system and the competitive stance the incumbent was prepared to take. See Leland  c-Johnson, Toward Competition in Cable Television 20 (1994).   ` - 2. ` ` Product Differentiation as a Barrier to Entry   c-&39.` ` In addition to sunk costs, product differentiation is sometimes viewed as an impediment to entry in local markets for multichannel video programming distribution. Incumbent cable systems may have an advantage over potential entrants arising from consumer preferences for their products. This preference might be the result of advertising, goodwill, reputation, inertia, or other factors. Product differentiation, according to Bain, is a barrier to entry as entrants must entice customers with a lower price and/or incur a greater  c -selling expense per unit than the incumbent(s). Greater selling expenses, incurred only by the entrant, make product differentiation a Stiglerian barrier to entry as well.  c-'40.` ` Product differentiation may constitute a barrier to entry if the extent of differentiation is sufficiently "intense," i.e., consumers perceive alternative products as poor substitutes for the differentiated product or service. Intense product differentiation tends to steepen the slope of the demand curve for the differentiated product and increase the margin"D.\+))^y" of price over the marginal cost of production. As a result, advertising and other marketing  c-expenditures that effectively deepen the consumer's perception that a product or service or certain of its attributes is unique relative to possible substitutes both preserves pricecost margins and may make it more difficult for an entrant to launch a competitive product or service. An entrant must incur promotional expenditures to overcome the incumbent's existing market dominance. Such expenditures are unrecoverable by the entrant in the event of market exit and may constitute, therefore, a sunk cost impediment to entry.  cI-(41.` ` One view of competition in cable television holds that successful entrants must  c2-be able to sell an identical product, leaving price competition the only option; however, it is possible that competition in local cable markets may be enhanced by greater product  c -differentiation. Avinash Dixit shows that entry is easier if two products, the incumbent's and  c -the prospective entrant's, are more differentiated, i.e., poorer substitutes./x ^r ch -ԍ Dixit notes that the product differentiation in the Bainian sense relates to absolute differences in demand, i.e., the incumbent's level of demand is not sensitive to the entrant's price, which may still be considered a barrier to entry. In Dixit's model, product differentiation is characterized by a finite crossprice elasticity allowing the incumbent's level  c -of demand to change with the output price of the entrant. See Avinash Dixit, A Model of  c-Duopoly Suggesting a Theory of Entry Barriers, 9 Bell J. Econ. 2032 (1979). For example, if two goods were not considered substitutes (e.g., peanut butter and cars), then incumbent firms would have no incentive to deter entry. Interestingly, entry is more easily prevented if the incumbent can claim that its product is a good substitute for the prospective entrant's product. If the substitutability of goods enhances impediments to entry, then incumbent cable firms may be able to slow entry by expanding channel capacity, using programming proliferation to make interfirm differentiation more difficult. Thus, incumbent cable firms may increase the quantity and quality of programming in order to lower the profitability of entry, even in niche markets. If entry does occur, product differentiation will allow a firm to exploit monopoly power more effectively by "claiming a special niche for [its] product" that  c -more closely match the diverse preferences of consumers.90 ^r c-ԍId., at 29.9 Thus, if consumers prefer extensive variety in programming choices, entrants may find it more profitable, at least  c-initially, to compete with the incumbent cable system by offering complementary rather than competitive programming.   `- 3.` ` Other Sources of Entry Barriers   cj-)42.` ` Although not fully addressed in this Report, other impediments to market entry in local multichannel video programming distribution markets may grow in importance as competition develops. For example, the network nature of video distribution, whether over  c&-wire or air, implies the existence of network effects and the applicability of the systems  c-competition literature.f1^r c{(-ԍFor an overview see Katz & Shapiro, supra note 24.f If compatibility between systems becomes an issue, then barriers to"El 1\+))y" entry may arise. For example, if costly systemspecific interfaces are developed, the fact that potential entrants must convince customers to switch interfaces, losing both the financial and  c-human capital investment, may effectively impede entry.2^r cK-ԍThe implications of compatibility in systems markets for the development of competition  c4-is addressed in the "Symposium on Compatibility," 40 J. Indus. Econ. (March 1992). These network effects are more likely to be an issue for wireless entry as systemspecific receivers must be purchased by the subscriber.   cv-*43.` ` In the 1992 Cable Act, Congress addressed two particular policyrelevant entry barriers, namely, access to video programming and exclusive franchise contract rules. By foreclosing access to a vital input, such as cable programming, incumbent cable firms can erect a potential entry barrier that impedes or deters competitive entry. This foreclosure can occur either through the bargaining power of a large incumbent (an MSO for example), or by the downstream firm vertically integrating into the programming market and refusing to sell its programming to actual or potential rivals. Program access for multichannel video  c -programming distributors using alternative technologies was addressed by the 1992 Cable Act and enforcement of the rules appears successful. The local franchise process is, perhaps, the  c -most important policyrelevant barrier to competitive entry in local cable markets.Q3 b^r c-ԍSee Thomas W. Hazlett, supra note 32; Oliver Williamson, supra note 41; Richard  c-Posner, The Appropriate Scope of Regulation in the Cable Television Industry, 3 BELL J.  c-ECON. 98129 (1972).Q  c- Recognizing the potential barrier that franchising poses, Congress, in order to further competition in the cable industry, prohibited the "unreasonable" denial of a competitive  cd-franchise in the 1992 Cable Act. The effectiveness of this prohibition has yet to be  cN-determined.  c7-  ` - 4.` ` Conclusion   c-+44.` ` This discussion suggests that the presence of various types of sunk costs in the cable television industry probably represents policyrelevant barriers to entry in local multichannel video programming markets. As a result, entrydeterring behavior by incumbent cable systems may be anticipated as competition between cable systems and other  c-MVPD firms develops. This Report does not propose, however, a policy response to this possible anticompetitive conduct at this time.  _i-   _R-D.Sunk Costs and Industry Structure  c$-,45.` ` The pervasiveness of sunk costs may have a decisive effect on long term  c -industry structure.H4 ^r c&-ԍA formal economic analysis of the effects of sunk costs on industry structure is  c'-provided by JOHN SUTTON, SUNK COSTS AND MARKET STRUCTURE (1992). The following discussion closely follows Sutton's conceptual approach.H Explaining the relationship between sunk costs and industry structure" Fj 4\+))y"  c-depends on the distinction between exogenous and endogenous sunk costs. Exogenous sunk costs represent irreversible investments in productive capacity determined in substantial part by the current technology of production. Thus, in the cable industry, the investment in headend and local distribution facilities sufficient to serve a defined service area represents  c-exogenous sunk costs: both the current technology of multichannel video distribution and the service requirements established by franchising authorities are exogenous factors that drive the amount of investment that a cable operator must commit to a particular multichannel  c`-video distribution market."5`^r c-ԍFrom the perspective of the franchising authority, such costs are clearly endogenous. It is the perspective of the firm as a potential market entrant, however, that is critical in understanding the effects of sunk costs on market structure." More simply, business firms in general and cable operators in particular have very limited discretion in determining the magnitude of exogenous sunk costs.  c --46.` ` By contrast, endogenous sunk costs represent expenditures on inputs of production that business firms in general and cable operators in particular can vary with substantial discretion in pursuing business objectives. In general, spending on advertising and research and development are prominent examples of endogenous sunk costs. Although the firm can vary the amount of spending on such inputs of production, such spending, once made is necessarily committed to a particular purpose or business objective and cannot be costlessly redirected to some other purpose. In the cable television industry, spending on video programming is a conspicuous example of a major endogenous sunk cost: spending committed to one type of programming cannot be costlessly redeployed to another type of  cL-programming.6LK^r cH-ԍLongterm contractual relationships with program packagers or suppliers rather than "spot market" transactions impart a sunk cost quality to such expenditures.  c-.47.` ` The analytical significance of the distinction between exogenous and endogenous sunk costs in the cable industry is apparent if the evolution of industry structure  c-is viewed as a twostage game.7^r c-ԍAlthough the following discussion is derived from Sutton's gametheoretic model, only an intuitive interpretation of the formal analytics is provided. In the first stage of the game, a cable operator invests in a local distribution network of sufficient scale to serve subscribers in the franchised service  c-area. These fixed setup costs incurred in this first stage of the game represent exogenous sunk costs.  c-/48.` ` The second stage of the game analyzes the nature of price competition that  ch-occurs after the sunk setup costs are incurred.8h ^r c%-ԍAlthough most local multichannel video distribution markets are presently supplied by a single cable system, this monopoly industry structure is not necessarily inevitable over the longer term, especially if policyrelevant barriers to entry are removed. Thus, price competition to varying degrees should be expected in local multichannel video distribution"S(7\+))w(" markets over the longer turn, as the limited experience with cable overbuilds tends to show. Prices for video programming services set at"hGy8\+))]y"  c-the second stage of the game depend only indirectly on the exogenous sunk costs required to  c-enter the market, however.j9y^r c-ԍSee Sutton, supra note 52, at 29.j More specifically, setup costs influence the entry decision of potential competitors. If the exogenous sunk costs implied by market entry are not perceived as unreasonably large, then more firms will enter the market for local multichannel video programming, leading to greater price competition in the second stage of the game.  cw-049.` ` From this conceptual viewpoint, entry decisions of firms into local markets for  c`-multichannel video programming will be influenced by the interplay between the levels of setup costs in the first stage of the game and the intensity of price competition that firms face  c3-at the second stage.::3+^r c-ԍId.: If price competition is intense at the second stage of the game, then  c -postentry profits will be lower, all other things remaining the same, and the fewer will be the number of firms choosing to enter the market for local video programming. Thus, long term market structure will reflect a tension between the level of exogenous sunk costs that must be committed to enter the market and that must be recovered to justify entry expost and the intensity of price competition that occurs in the second stage of the game. In general, more entrants will tend to increase the intensity of price competition. Lower prices resulting from  c-such competition will make entry less attractive, however, to still other potential entrants.;y^r c!-ԍxId. This relationship between the extent of market entry and the extent of price  c -competition depends critically on the form of price competition that actually develops. Three possibilities are commonly cited, namely, (1) Cournot competition; (2) Bertrand competition;  c-and (3) joint profit maximization. For further discussion, see Sutton, supra note 52, chps2&3. Experience in local multichannel video markets where overbuilders compete directly with incumbent cable systems appears roughly consistent with Bertrand competition.  ce-150.` ` Implicit in the foregoing analysis of exogenous sunk costs and price competition is the assumption that each entrant in the local market for multichannel video programming offers similar, or virtually homogenous, programming to its subscribers. If, however, different firms offer their subscribers substantiallydifferentiated programming compared to that offered by competitors, then longterm market structure may differ from that of the homogenous product case. Spending on programming is an endogenous sunk cost that a cable operator can vary to deepen the extent of product differentiation relative to the programming offered to subscribers by competitors. Other things remaining the same, increases in endogenous sunk costs may be expected to enhance the subscribers' willingness to pay for the video programming package offered by the cable operator and, thereby, weaken the extent of price competition in stage two of the game. Therefore, unlike the case of homogenous programming offered by competing cable operators, market structure may still remain relatively concentrated, notwithstanding the relatively higher level of postentry"QH ;\+))My"  c-profits that persist given the weakened level of price competition.A<^r cy-ԍId. at 27.A  c-251.` ` This discussion illustrates in a highly simplified way how both exogenous and endogenous sunk costs may have a decisive effect on the evolution of local market structure for multichannel video programming distribution over the longer term. This analysis identifies possible tradeoffs between the number of actual competitors in any local cable market and the intensity of price competition that might prevail. Implicit in the analysis is the possible influence that large market areas served by any given cable operator may have in reducing market concentration; more firms may be willing to commit to the exogenous sunk costs required to enter the market if the universe of potential subscribers is larger. As a  c -result, the possible entrydeterring effects of vigorous price competition in the stage two game would be mitigated to some extent. Such market structure implications should help guide both the nature of inquiry and policy analysis in future reports.   c -X~ III. &METHODOLOGICAL ISSUES  c-   c}-352.` ` The assessment of the extent of competition in the market for the delivery of multichannel video programming may be approached from alternative perspectives. In general, the few comments received on methodology recommended that a legal and economic approach should inform the Commission's analysis and urged the Commission to take a relatively broad view of competition in this and future reports. For example, WCA would  c -like the Commission to seek data that will permit a competitive analysis broader than the  c-"wired" market.G=z^r c-ԍWCA Comments at 2627.G TCI urges the Commission to adopt a dynamic approach to analyzing  c-competition in the delivered video programming market.n>+^r c-ԍTCI Comments at 26; see also NCTA Reply Comments at 2.n Similarly, Time Warner states that the Commission should take a broad approach in its methodology which would consider  c-virtually all information and entertainment media in its analysis.M?^r c<-ԍTime Warner Comments at 49.M Finally, Home Box Office ("HBO") submitted a paper by Professor Paul L. Joskow which examined various  c-methodologies the Commission could and should adopt in studying "competition".@^r c"-ЍPaul L. Joskow, Economic Methodologies for Evaluating Competition and Performance in Video Programming and Distribution Markets (Exhibit A to HBO Reply Comments). HBO and Professor Joskow urge the Commission to use "comparative institutional analysis" as a means of assessing competition, which would broadly apply the tools of modern industrial"RI @\+))ky"  c-organization economics to this industry.A^r cy-ԍId. at 29. Comparative institutional analysis would be beneficial, Professor Joskow argues, because it would evaluate markets in the context of their basic economic characteristics; would focus on longrun consumer welfare; would be able to consider the effect of regulation on market performance; and would be flexible enough to balance  c-"imperfections of regulation against imperfections of unregulated . . . markets." Id. at 9.  c-453.` ` As proposed in the Notice of Inquiry in this proceeding, a prominent methodological approach developed in the field of modern industrial organization economics  c-is the structureconductperformance (SCP) paradigm.oB^r ct -ԍSee F.M. SCHERER and DAVID ROSS, INDUSTRIAL MARKET STRUCTURE & ECONOMIC  c^ -PERFORMANCE ch. 1 (3rd ed. 1990); Carlton & Perloff, supra note 8, atchs. 1 & 9; Tirole  cH -supra note 42. o The SCP methodological framework facilitates the systematic study of the extent of competition from a variety of viewpoints, and is broad enough to accommodate a number of more specialized approaches toward the study  c`-of competition. In a general way, the organization of this Report is consistent with the SCP paradigm. The Commission, however, is not adopting a specific methodology for assessing the extent of competition in markets for multichannel video programming distribution at this time. Future reports, however, may address such methodological issues at greater length and propose a general methodology that is consistent with the purposes of such studies on competition in video programming distribution markets." J B\+))^ y"  c-  @- H- -- I- -@B] APPENDIX I #XR  P7jQXP#у  c-5ٲ1.` ` This appendix describes the q ratio calculations that appear in Section V of the  c-main text. The q ratio, defined as the ratio of the market value of a firm to its replacement  c-cost, is a measure of market power. The Commission discussed its properties in the 1990  c-Cable Report.^r c -ԍ1990 Cable Report 5459, App. E, 5 FCC Rcd at 499799, 507182. This appendix addresses the "nuts and bolts" details of the calculations. The broad procedures used follow those used by Professor Paul MacAvoy in a 1990 submission to  ce-the Commission.ez^r c -ԍ See Paul W. MacAvoy, Tobin's q and the Cable Industry's Market Power, Comments  cz -of the United States Telephone Association in Appendix 5, 1990 Cable Report, 5 FCC Rcd 4962 (1990) (MM Docket No. 89600).   c7-2.` ` MacAvoy used two separate techniques for calculating market value. He  c -calculated "public" market values for a sample of "pure" cable companies (i.e., companies whose sole business activity was cable television delivery). The public market value is the sum of a firm's liabilities and the value of its outstanding stock (price multiplied by number of outstanding shares). This figure may then be divided by the number of subscribers that the firm serves. Table I-1 shows 1993 public market value calculations for the four firms that the Commission identified as pure cable companies. Two of them, Adelphia and TCA, were also in the MacAvoy sample. (The other three firms in the MacAvoy sample are American TV and Communications, Falcon Cable Systems Co., and Galaxy Cablevision.)  cR-3.` ` The second market value concept is "private" market value. This is the subscriberweighted average of per subscriber selling prices of cable companies during a relevant period. Table I3 contains two such estimates, one based on twentyfour 1993 transactions and one based on six announced 1994 transactions. In each case, only cash transactions are included in the calculation, because it is difficult to determine an equivalent cash value for transactions with other components.  c-4.` ` MacAvoy also employed two techniques for calculating replacement costs. The first is based solely on financial data for pure cable companies and consists of an estimate of adjusted book value of tangible assets. For each pure cable company, tangible  cl-assets are divided into net plant and other tangible assets. Net plant (i.e., depreciated book value of plant) is adjusted for inflation and added to other tangible assets, and the sum is divided by the relevant number of subscribers. The inflation adjustment is based on a rough estimate of the average age of plant. The average age of plant is taken to be the difference between gross and net plant divided by current annual depreciation. That average age is multiplied by an annual inflation rate (assumed herein to be four percent) to get the percentage by which net plant must be increased to adjust it for inflation.  c!- 5.` ` The second replacement cost method uses current construction cost estimates to derive a net plant figure. This procedure entails adjusting current construction cost per""K\+))#y" subscriber for depreciation to obtain net plant per subscriber. Adding this net plant figure to other tangible assets per subscriber (from the sample of four pure cable companies) yields an estimate of replacement cost per subscriber. The average ratio of net to gross plant for all cable companies in the data source (the Paul Kagan Cable Financial Databook) is used to adjust current construction costs. Table I-2 exhibits these calculations for four construction cost estimates.  c_- 6.` ` The estimates of construction costs generally have three components. They  cH-are: (1) headend and cable plant; (2) converter box; and (3) "drop and install." This last item is the cost connecting a subscriber to the cable that passes his or her home. One of the  c -headend and cable plant estimates comes from a paper by David Reed. ^r c -ԍ David P. Reed, The Prospects for Competition in the Subscriber Loop: The Fiberto c} -theNeighborhood Approach (presented at the TwentyFirst Annual Telecommunications Policy Research Conference (September 1993). Reed's estimate of $962 is based on an assumed 40% cable penetration rate of homes passed. The actual  c -penetration rate in 1993 was 63%.v M^r c-ԍ Paul Kagan Associates, Inc., Marketing New Media, Dec. 20, 1993, at4.v Adjusting for this yields an estimated headend and cable plant cost of $611 per subscriber. Reed estimates the cost of a converter box at $125 and of drop and install as $50. These latter figures are also used in conjunction with the alternative cable plant and headend estimates.  cy-7.` ` MacAvoy's series of construction cost estimates contains one figure that excludes the drop and install component. The exclusion could be justified on the grounds that at least some cable subscribers pay a separate fee for installation rather than paying for it indirectly via the monthly service charge. To preserve some consistency with the MacAvoy procedure, the current series of construction costs contains one estimate, based on Reed's figures, that excludes drop and install. Accordingly, the "Reed 1" figure in table I-2 is 736=611+125 and the "Reed 2" figure is 786=611+125+50.  c-8.` ` The other two entries in Table I <P2 ԩ <P2 2 are labelled "MacAvoy 1" and "MacAvoy2." They track two of MacAvoy's construction cost estimation procedures. The present calculations are based on data from a different source than MacAvoy used, but the technique is the same. MacAvoy 1 starts with estimates of new build construction costs for 1993 of $646 million and new homes passed of 1.8 million. These figures, along with the 1993 penetration rate of 63% yield an estimated cable plant construction cost of $569.66. Adding to this the converter box and drop and install figures yields $744.66. The MacAvoy 2 estimate begins with the same new build construction cost estimate and with an estimate of 54,900 miles of new plant construction for 1993. Applying an assumed 90 homes per mile and the 63% penetration rate yields an estimate of $207.53. Inclusive of converter box and drop and install, the MacAvoy 2 construction cost estimate is $382.53.  c!-9.` ` Table I-3 contains a series of q ratio calculations, which are also reproduced in the main text of this report. By way of comparison with MacAvoy's earlier work, it is""L\+))#y" interesting to note that his public market value per subscriber figure of $1698 is lower than the $2326 figure for the current sample of pure cable firms. By contrast, MacAvoy's private market value estimate of $2311 per subscriber is significantly higher than the $1759$1831 range for 1993 and early 1994. With respect to replacement cost, MacAvoy's median estimate based on construction cost data was $372.50, while the current figure is $444.99. The calculations herein are thus similar to those of MacAvoy, but not precisely comparable. The current sample of pure cable firms differs from that used by MacAvoy, and the construction estimates come from different sources. "1M\+))py" #D  P7jQ`P# h ddxP: "BB ddxN"DB@@@h s    " " " sU-MQ TABLE I1  sU- Replacement Data for Four Pure Cable Companies l  "  " "BkJ"V   ADELPHIA3 ">j $MERCOM3 " zMULTIMEDIA3 "/TCA Average3 ">[Weighted AAverage  "dgBalance Sheet yDateK "V   March 1993K ">j (#YearEndK " }YearEndK " October 1993K "T  P 3 " J" "hEquity (mil)J$ 287.231J$B9.960J$1,274.442J$702.838J$]!ԃP P K"a/Liabilities (mil) J$R 1,818.207 J$=C29.109 J$768.20 J$162.814 J$]!ԃP   "J" "dkMarket Value f|(Total Equity fo+ Liabilities) x(mil) $ ԃ  ԃ  ԃ R 2,105.438 $Gԃ Gԃ Gԃ =C39.069 $ԃ ԃ ԃ 2,042.732 $ԃ ԃ ԃ 865.652 $]!ԃ    " " "a,Subscribers Per tPSystem "V   1,244,000 ">j /37,757 " 417,333 " 473,000 "T    "dkMarket Value kper System $ ԃ  $1,692.47 $Gԃ *$1,034.75 $ԃ $4,894.73 $ԃ ;$1,830.13 $]!ԃ @?$2,326.28 P  " J" "b?Net Plant (mil)J$ 398.859J$=C17.946J$240.762J$106.411J$]!ԃP   "J " "fAdjusted Net kPlant (mil)+ $ ԃ  449.469+ $Gԃ =C22.305+ $ԃ 290.520+ $ԃ 125.311+ $]!ԃ  "b>Other Tangible hAssets (mil)C $ ԃ  111.135C $Gԃ B1.310C $ԃ 163.056C $ԃ 7.259C $]!ԃ  +"gReplacement mCost (mil)[ $ ԃ  560.604[ $Gԃ =C23.615[ $ԃ 453.576[ $ԃ 132.570[ $]!ԃ  C " " "gReplacement qCost Per lSubscriber;$ ԃ  ԃ  $450.65;$Gԃ Gԃ 3$625.45;$ԃ ԃ $1,086.84;$ԃ ԃ $280.27;$]!ԃ ]!ԃ I$538.81  ["b>Other Tangible cAAssets Divided dLby Subscribers$ ԃ  ԃ  $89.34$Gԃ Gԃ 8$34.69$ԃ ԃ =$390.71$ԃ ԃ $15.35$]!ԃ ]!ԃ N $44.46 P ; "J" "q$Q Valuek J$ 3.7556k J$B1.6543k J$64.5036k J$6.5298k J$X 4.4669P ( "J" " oY -HSources: Paul Kagan Assocs., Inc., Cable TV Financial Databook, 58, 70,72, 74 (1994). Subscriber  oY!- information supplied by MERCOM, Inc. Cable TV Investor, June 7, 1997, at 4.(k  "[#N\+))"" #XR  P7jQXP# r ddxN"DB@@@ ddxO 00000r (Tk  "s"   c-I TABLE I2 _Replacement Cost Per Sub bOBased on  _-Construction Cost Estimates ă T,  "sV" "Bw"V  z Gross Plant  c- Per Sub:7 c' -ԍSee text.:f"#Net Plant Divided by  c-pGross PlantwyZ c -ԍPaul Kagan Assocs., Inc., Cable TV Financial Databook 72 (1994).wf"~ Estimates Net Plantf" Other .Tangible  c-qAssetsJ* cr-ԍFrom Appendix I, Table 1.J V"T  0Replacement ECosts, q T "Vw" "p!Reed 1 w" 736 w$Hԃ.541 w$398.18 w$X44.46 w$I442.64q q  "p!Reed 2b w" 786b w$Hԃ.541b w$425.23b w$X44.46b w$I469.69q q  "c]MacAvoy 1 w$ 744.66 w$Hԃ.541 w$402.86 w$X44.46 w$I447.33q   b  "w" "c]MacAvoy 2T$ 382.53T$Hԃ.541T$206.95T$X44.46T$I251.41    "O\+))."  c-X` hp x (#%'0*,.8135@8: