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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** FCC 95-491 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Annual Assessment of the Status of ) CS Docket No. 95-61 Competition in the Market for the ) Delivery of Video Programming ) SECOND ANNUAL REPORT Adopted: December 7, 1995 Released: December 11, 1995 By the Commission: Commissioner Barrett issuing a separate statement. Table of Contents Paragraph I. Introduction. . . . . . . . . . . . . . . . . . . . . . . .1 A. Scope of this Report . . . . . . . . . . . . . . . . .2 B. Summary of Findings. . . . . . . . . . . . . . . . . .5 II. Competitors in Markets for the Delivery of Video Programming11 A. Cable Industry . . . . . . . . . . . . . . . . . . . 11 B. Direct-to-Home Satellite Services. . . . . . . . . . 48 1. Direct Broadcast Satellite Service. . . . . . . 49 2. Home Satellite Dishes . . . . . . . . . . . . . 61 . C. Wireless Cable Systems . . . . . . . . . . . . . . . 68 1. Multichannel Multipoint Distribution Service. . 68 2. Local Multipoint Distribution Service . . . . . 84 D. Local Exchange Carriers. . . . . . . . . . . . . . . 86 E. Satellite Master Antenna Television Systems. . . . .104 F. Broadcast Television Service . . . . . . . . . . . .112 G. Other Actual and Potential Distributors. . . . . . .118 III. Market Structure Conditions Affecting Competition . . . .128 A. Horizontal Issues in Markets for the Delivery of Video Programming128 B. Vertical Integration in the Cable Industry . . . . .148 C. Technical Advances . . . . . . . . . . . . . . . . .173 IV. Status of Competition in Markets for the Delivery of Video Programming . . . . . . . . . . . .194 V. Administrative Matters. . . . . . . . . . . . . . . . . .216 Appendices A. List of Commenters B. Cable Industry Tables C. Status of LEC Entry D. Local Exchange Carrier Proposals E. Status of VDT Technical and Market Trials F. Top 20 Satellite Master Antenna Television Operators G. Horizontal Concentration Tables H. Vertical Integration Tables I. Comments on Program Access Issues I. INTRODUCTION 1. Section 628(g) of the Communications Act of 1934, as amended, directs the Commission to report annually to Congress on the status of competition in the market for the delivery of video programming. This is the Commission's second report issued in compliance with this statutory requirement. This second report ("1995 Report") is based on publicly available data, filings in various Commission rulemaking proceedings, and information submitted by commenters in response to a Notice of Inquiry ("NOI") in this docket. A. Scope of this Report 2. The purpose of this 1995 Report is to provide data and information that summarizes the status of competition in the market for the delivery of video programming and that updates our Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, First Report ("1994 Report"). We begin this 1995 Report with an examination of the cable television industry, other existing multichannel video programming distribution technologies, and potential competitors to cable television (Section II). Among the alternative distribution technologies and providers discussed in this section are direct-to-home ("DTH") satellite services, including direct broadcast satellite ("DBS") services and home satellite dishes ("HSDs"), wireless cable systems using frequencies in the multichannel multipoint distribution service ("MMDS") or local multipoint distribution service ("LMDS"), local exchange telephone carriers ("LECs"), satellite master antenna television ("SMATV") systems, and broadcast television service. We also consider several other existing and potential distributors of video programming, such as electric utilities, and other distribution technologies, including video cassette recorders ("VCRs"), interactive video and data services ("IVDS"), and the Internet. 3. Section III of this 1995 Report examines market structure and competition. We evaluate horizontal concentration in the cable television industry in Section III.A. In Section III.B, we evaluate vertical integration between cable television systems and programming services, and report on issues of access to programming. Finally, we address technical advances in Section III.C. 4. Our assessment of the status of competition in the market for the delivery of video programming is presented in Section IV. In this section, we examine the extent of competition and evaluate market performance. We also report on existing and potential impediments to entry and competition, including strategic behavior that could deter entry and regulatory, legal, and other potential impediments. B. Summary of Findings 5. We conclude that cable television systems remain the primary distributors of multichannel video programming services and continue to enjoy market power in local markets, although some progress has begun toward a competitive marketplace for the distribution of video programming. In the last year, DBS systems have attracted many subscribers to newly available services. MMDS and SMATV systems have also continued to increase in subscribership. Several LECs, however, have modified their plans for wire based video service, including video dialtone ("VDT") service, from the scale of entry reported last year. Some LECs are continuing their deployment of wire based facilities in selected markets, either through VDT or traditional cable systems. In other cases, LECs appear to be focusing their efforts on wireless entry through investment in MMDS facilities. In sum, while subscribership for distributors using alternative technologies has generally increased over the last year, overall subscribership for all distributors using alternative technologies is just 9% of total multichannel video programming distributor ("MVPD") subscribership, whereas cable systems account for 91% of the total. Over the long term, it is difficult to predict the extent to which local markets will be characterized by vigorous rivalry among multiple distributors, or the extent to which distributors using alternative technologies may remain essentially "fringe" competitors, with relatively small market shares or offering services largely differentiated from other services, at least from those multichannel packages offered by cable systems. In addition, technological advances, particularly the conversion from analog to digital transmission, may affect the nature and cost of the services provided by cable operators and other MVPDs, and consequently, the extent of rivalry in markets for the delivery of video programming. 6. In this 1995 Report, the Commission makes the following findings: 7. Cable Industry Growth. Since the 1994 Report, subscriber penetration, average system channel capacity, the number of programming services available, revenues, expenditures on programming, and capital investment generally have increased for the cable industry. The number of homes passed by cable grew from approximately 90.6 million at the end of 1993 to approximately 91.6 million at the end of 1994, which is 96% of all television households in the United States. The number of subscribers increased from 57.2 million to 59.7 million between the end of 1993 and the end of 1994. Penetration (i.e., the number of subscribers as a percent of homes passed) rose 3.3% from the end of 1993 to a penetration of 65.2% at the end of 1994. Channel capacity grew slightly, with 97% of all subscribers now receiving service from systems that can provide at least 30 channels. Cable systems with the capacity to offer more than 53 channels accounted for the biggest growth during 1994, with a 9.9% increase in the number of systems, and a 10.1% increase in the number of subscribers. Total cable revenues, as well as revenues from regulated services, remained stable over the year. The industry's cash flow, a measure of earnings before interest, taxes, depreciation, and amortization, was $9.94 billion in 1994, a 1.6% decline from the 1993 industry cash flow of $10.1 billion. Capital expenditures continue to increase, rising 28% to $3.8 billion in 1994. 8. Horizontal Concentration. Since 1994, there has been an increase in the horizontal concentration of cable multiple system operators ("MSOs") nationwide. A number of cable MSO acquisitions and system trades have resulted in increased regional concentration, or "clustering," of cable system ownership. Based on recent reports of additional proposed transactions, it appears that this trend will continue as cable operators consolidate their holdings regionally. Although the cable industry tends to be moderately concentrated nationally, local markets for the distribution of multichannel video programming tend to be highly concentrated as measured by subscribership among all MVPDs. 9. Competitive Entry. The percentage of subscribers choosing competitive alternatives to incumbent cable operators has increased since our last report, although cable subscribership continues to dwarf the combined subscribership of all other MVPDs. In September 1995, cable television systems served 61.7 million households, while all other MVPDs combined (i.e., DBS, HSD, MMDS and SMATV systems) served 5.8 million homes. Although market share is not dispositive evidence of market power, we cannot conclude that a competitive market currently exists for the delivery of video programming. However, some progress towards a competitive marketplace has begun. In particular, we find:  There continue to be only a few scattered areas of the country where local cable systems face direct competition through "overbuilding" (where two franchised cable television systems compete directly with each other), although instances of overbuild competition, particularly from LECs, appear to be increasing;  Direct-to-home satellite services continue to increase their subscribership. DBS services are now available in all states except Hawaii. The number of subscribers to DBS services has more than doubled since the end of 1994, increasing from 602,000 to approximately 1.7 million subscribers. Prices have declined for some DBS receiving equipment (i.e., satellite dishes and set-top decoders) used by those distributors that require subscribers to buy their own equipment. There are currently 2.3 million subscribers to packaged programming services that distribute satellite programming to HSD users compared with 2.2 million in 1994;  Wireless cable systems experienced a 33% growth in subscribers since the end of 1994, and now serve approximately 800,000 subscribers. The first wireless cable trial of digital technology, which will increase a system's coverage area and the number of channels that it can offer, has been successfully completed. In addition, several LECs have made substantial investments in wireless cable operations. The deployment of wireless video services also has been facilitated by the streamlining of the Commission's application process, adoption of competitive bidding procedures, and expansion of the protected service areas for licensees. The Commission also released a notice of proposed rulemaking seeking comment on its proposal to allocate a portion of the 28 GHz band to LMDS, which can be used for the distribution of video programming;  The VDT framework adopted by the Commission in 1992 allows LECs to construct and operate common carrier platforms that can be used by program packagers to provide programming and other services to subscribers in the LEC's telephone service areas. Subsequent court decisions and Commission actions permit LECs to offer video programming in their service areas. The first permanent commercial VDT system is expected to begin operation in Dover Township, New Jersey, by the end of 1995. Additional applications for permanent authorizations and trials, including U S West Inc.'s ("U S West") plan for Omaha, have been approved. The Commission also streamlined the Section 214 process for some LECs to construct stand alone cable systems within their local service areas. Since the 1994 Report, some LECs have modified their plans for entry into video distribution markets and, in addition to pursuing VDT deployment, have announced plans to enter the market using either wired cable or wireless cable facilities. A number of LECs also have announced joint ventures to collaborate on the production and acquisition of video programming;  SMATV systems have increased their number of subscribers from a combined total of approximately 850,000 to approximately 950,000 since the end of 1994. The industry also appears to be attracting new investment from other sectors, both within and outside the telecommunications industry;  Regulatory changes and technological advances may, at some point in the future, permit existing and potential video technologies -- broadcast television, low power television ("LPTV"), LMDS -- to be used to distribute multichannel video programming. Other potential distributors, such as electric utilities, and other technologies, including VCRs, IVDS, and the Internet, also may, in the future, affect the nature of competition; and  Technological advances are occurring that will permit MVPDs to increase the quantity of service (i.e., increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). New system architectures are being developed that combine fiber optic wires and coaxial cables to expand the uses of wired transmission media. Digital compression is currently being deployed, which will enhance the service of both wired and wireless providers by allowing increased channel capacity and the provision of video, voice, and data services that cannot be offered currently. On the basis of the information reported, however, it is unclear which distributors will benefit the most from these technological advances -- existing cable operators or their existing and potential competitors. 10. Vertical Integration. The number of cable programming services increased from 106 to 129 over the past year. Of these 129 services, 66 are vertically integrated, representing approximately 51% of all national services, which is a slight decline from last year's figure of 53%. The Commission's program access and program carriage rules, and its decisions applying those rules, seem to have been successful in ensuring the availability to competing MVPDs of programming services produced by affiliates of cable MSOs. II. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Industry 11. In this section, we address the performance of firms that own or operate franchised cable systems. The performance section is divided into three categories: (1) output performance -- both quantitative measures of the current amount of cable industry services that are being produced (including recent trends in that production) and qualitative measures of the nature of the service, which is related to output since higher quality services are more highly valued and, therefore, can be thought of as increased output; (2) financial performance -- the revenues and cash flow that are generated by the industry's output; and (3) capital acquisition and disposition -- the amount of funds companies have been able to raise and use to improve their existing physical plant and acquire new systems, and how they have chosen to allocate those funds. In addition, this section discusses the status of overbuilding, one of the oldest forms of competition to the cable industry, and the limited evidence of the cable industry's response to existing and potential competition. 12. While we report and analyze statistical information in this section, we do not specifically evaluate the effects of a number of rule changes adopted during the past year that could affect industry performance and competition. In reviewing these figures, however, we note that the Commission's revised rate regulations instituting the 17% benchmark ("Second Cable Rate Order") became effective July 31, 1994. The rules allowing new product tiers and additional programming services ("Going Forward Rules") became effective on January 1, 1995, and the amendment of our rules relating to small systems ("Small System Order") has effective since August 21, 1995. 1. Output Performance 13. Cable Industry Output. Since we released the 1994 Report, the cable industry has continued to expand. The number of homes capable of receiving service from a cable system (commonly referred to as homes passed) grew from approximately 90.6 million at the end of 1993 to approximately 91.6 million at the end of 1994, a 1.1% increase. Thus, 96% of all television households in the United States have cable service available to them. 14. The year-end figures for the industry's basic service tier subscribership grew from a total of 57.2 million in 1993 to 59.7 million in 1994, a 4.4% increase. This is the largest increase since 1990, and is reflected in the industry's basic cable penetration level, which rose by 3.3% from 63.1% to 65.2% of homes passed. This increase in penetration is the largest annual increase since Paul Kagan Associates, Inc. ("Kagan") began tracking penetration figures in 1977. 15. Premium service subscribership showed similar growth trends. The number of homes subscribing to at least one premium channel grew by 6.4% in 1994 from approximately 26.4 million to approximately 28.1 million homes. At the same time, the total number of subscribers to premium channels grew by 8.4% from approximately 41.5 million to approximately 45 million. 16. There is some evidence that the subscribershi growth reported for 1994 has continued in 1995. A.C. Nielsen Co. estimates that total cable subscribership increased by 4.1% in the first half of 1995 and, according to financial analysts, the industry has maintained subscriber growth of over 4% through the first three quarters of 1995. 17. Cable Industry Services. During 1994, average channel capacity increased slightly. In 1993, cable systems with the capacity to offer 30 or more channels accounted for over 77% of all cable systems. The equivalent figure for 1994 was 78%. Cable systems with more than 53 channels accounted for the biggest growth in channel capacity during 1994. Of the 141 systems that upgraded to a capacity of 30 or more channels, 129 of them can offer 53 or more channels. At the same time, systems with channel capacities of 12 or fewer channels declined from 7.2% of cable systems in 1993 to 6.7% in 1994. 18. During 1994, the number of subscribers served by such high capacity systems (53 or more channels) grew by 10.1% to 23 million. Moreover, the number of subscribers receiving service from systems with at least 30 channels rose 2.2% to 53.8 million at the end of the year, which accounted for 96.9% of all subscribers. 19. Since the 1994 Report, there has also been growth in the number of cable programming choices. The number of basic programming networks grew from 80 at the end of 1993 to 94 at the end of 1994. The number of premium networks increased from 9 to 20 over the same period. Overall, the number of programming networks increased by over 26.7%, from 101 to 128. In addition, 18 additional networks have announced plans to launch service by the end of 1995, and 62 more have announced plans to launch after 1995. 20. Over the past decade, the number of television viewers watching non-premium cable programming networks has grown. Between the 1984-85 and 1993-94 seasons, the combined audience of such cable networks increased from an 11% share to a 26% share of television households. During the same period, the combined audience of the network- affiliated, independent, and public broadcast television stations has decreased from an 87% share to a 77% share of television households. This growth in the viewership of the cable networks seems to have continued into 1995. The average prime time share of the cable networks for the first fifty-one weeks of the television season increased 12.5% between the 1993-1994 and 1994- 1995 seasons, to 29% of television households. 21. License fees paid by cable system operators to non-premium cable network programmers increased by 15.8% from $1.9 billion in 1993 to $2.2 billion in 1994. At the same time, license fees paid by cable system operators to premium cable network programmers increased by 5.6% from $1.8 billion in 1993 to $1.9 billion in 1994. 22. Consumer Satisfaction. In an effort to improve consumer satisfaction, the cable industry, through the National Cable Television Association ("NCTA"), launched a new on-time guarantee program on March 1, 1995. Under this program, operators promise that: (1) if an installation appointment is not performed on time, the installation will be done for free, and (2) if a service appointment is not performed on time, the customer will receive a $20 refund. This initiative has been adopted by cable systems serving 25 million subscribers, but the effect of the initiative is unclear. 2. Financial Performance 23. Cable Industry Revenue. Analysts report that after growing by over 8% in 1993, the industry's revenue remained essentially the same in 1994, growing only from $22.76 billion to $22.79 billion. For the purposes of this report, we estimate the annual, industry-wide total revenues from 1992 to 1994. Based on these estimates, it appears that the industry generated revenue of over $20.35 billion in 1992, $22.45 billion in 1993, and $22.59 billion in 1994. The 1994 figure represents an increase of 0.1% from 1993, which is consistent with reports by industry analysts. 24. Using the figures produced by industry analysts, it appears that the cable industry generated $389.50 in annual revenue per subscriber served in 1994. This figure was over $5 lower than the $404.89 generated in 1993. When total cable system revenue is broken down by source, between 1993 and 1994, revenue from regulated tiers (referred to by the Commission as the basic service and cable programming service tiers) remained unchanged. It appears that revenue from premium services declined by 2.2%, continuing a downward trend since reaching its all-time high in 1990. Revenue from advertising, pay-per-view, and home shopping grew 9.5%, 7.1%, and 12.4% respectively. 25. In Table 8 of Appendix B, we present detailed, quarterly revenue results for sixteen publicly held MSOs, including the eight largest. For each quarter of 1994 and the first two quarters of 1995, total revenue growth over the same quarters of the previous year is calculated for these sixteen MSOs based on their filings with the Securities and Exchange Commission ("SEC"). As of December 31, 1994, these sixteen MSOs served over 35.3 million of the industry's 59.7 million subscribers, which accounts for 59.1% of the industry. Based on the combined revenues of these MSOs, an estimate of the total industry's revenue was made and is also presented in the table. 26. As can be seen in Table 8, after showing slow growth in the first quarter of 1994 (1.1%) and decreasing revenue in the second and third quarters of 1994 (-1.2% and -0.2% respectively), the industry's revenue increased in each of the following three quarters. In the fourth quarter of 1994, the industry's revenue was 2.8% higher than in the fourth quarter of 1993. The revenues for the first and second quarters of 1995 were 5.6% and 10.4% higher, respectively, than the revenue produced in the same periods of 1994. 27. Cable Industry Expenditures and Earnings Before Interest, Taxes, Depreciation, and Amortization. Measurements of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), commonly referred to as "cash flow" by the industry, are often used to value the financial position of cable firms. Analysts report that after growing by 4.1% to $10.1 billion in 1993, industry wide cash flows declined 1.6% in 1994 to $9.94 billion. For the purposes of this 1995 Report, the Commission has also produced an estimate of annual, industry- wide cash flows from 1992 to 1994. Based on the Commission's estimates, it appears that the industry generated cash flow of $9.35 billion in 1992, $10.27 billion in 1993, and $9.93 billion in 1994. The 1994 figure represents a decline of 3.3% from 1993 which, although somewhat larger than the decrease shown by the analysis referred to above, appears to broadly confirm that analysis. 28. Using the figures produced by industry analysts, it appears that the cable industry generated $169.85 in annual cash flow per subscriber served in 1994. This figure was nearly $10 lower than the $179.72 generated in 1993, and almost $9 lower than the $178.64 per subscriber generated in 1992. The ratio of cash flow to revenue ("cash flow margin") declined from 46.1% in 1992 to 44.4% in 1993, and again to 43.6% in 1994. 29. An analysis of the industry's cash flow for the full year may not provide a complete picture of the trend in the industry's performance during that year. A more informed analysis may be is provided by comparing each quarter of 1994, and the first two quarters of 1995, with the same quarters of the previous year. These quarterly growth rates are shown in Appendix B, Table 9. After exhibiting declining cash flow compared to the same quarter of the previous year for the first three quarters of 1994 (-3.8%, -7.2%, and -8.4%, respectively), the industry's cash flow improved in each of the following three quarters. Cash flow for the fourth quarter of 1994 was the same as in the fourth quarter of 1993, and then grew by 3.6% and 6.1%, respectively, in the first and second quarters of 1995 over the first and second quarters of 1994. Analysts are predicting a healthy third quarter financial performance from the cable industry with most MSOs predicted to report double digit average cash flow growth for the quarter. 3. Capital Acquisition and Disposition 30. Historically, the cable industry has relied on various combinations of private and public financing, with the exact distribution of these combinations varying greatly from year to year. After several years of declines in the issuance of private debt (i.e., debt held by banks, insurance companies, and institutional investors), banks displayed an interest in lending to cable operators in 1994, especially the larger MSOs. New private debt financing totalled $4.8 billion in 1994, and public debt financing totaled $1.1 billion. The remaining industry financing is obtained through a mixture of private equity (i.e., individuals, venture capital firms, investment banks, limited partnerships) and public equity offerings (i.e., stock markets). New private and public equity offerings totalled $409 million and $461 million, respectively, in 1994. Overall, the cable industry obtained $6.7 billion in new financing in 1994, which was its highest level since 1989, and an increase of $4.8 billion over the 1993 total. 31. Cable Industry Financing: Recent Developments. The growth trend exhibited in 1994 has continued into the first six months of 1995. Cable operators are reported to have raised approximately $5 billion in capital during the first half of 1995. Included in this total was a net redemption of $200 million of privately held debt; $3.8 billion was raised in the bond market;$615 million was raised in the privately equity market; and $800 million was raised in the public equity market. 32. The growth in total financing during 1994 helped increase the cash available to the cable industry for investment (equal to cash flow from operations plus cash from new financing) to its highest level ever. The $16.7 billion available in 1994 was an increase of 39.2% over the $12 billion that was available in 1993. With this increase in funds available for investment in 1994, the cable industry's major MSOs were able to increase internal capital expenditure programs and system acquisition efforts. 33. Capital Expenditures. In 1994, the cable industry invested $3.8 billion in construction of new plant and equipment (including maintenance, inventory, system upgrades, converters, the passing of new homes, and the rebuilding of existing systems). This was a 27% increase over the $3 billion spent on construction in 1993. It also represents the second straight year of increases in capital expenditures by the industry. Moreover, at least one analyst predicts that capital investment will continue to increase in 1995 and the large amount of new capital raised in first half of 1995 also points toward a further increase in capital expenditures for 1995. This increased investment may be attributed to several factors, including preparing for future competition and general maintenance and system extensions. 34. Cable System Transactions. Between 1987 and 1993, the number of cable systems being sold each year declined, while the total number of subscribers served by systems sold each year increased. This trend continued through 1994, and appears to be continuing in 1995. In 1994, the number of cable companies and systems that changed hands decreased by 33%, while the number of subscribers to, and homes passed by, systems changing hands increased by 95% and 88%, respectively. In addition, the total dollar value of acquisitions increased 69% between 1993 and 1994. However, the average dollar value per subscriber of these acquisitions decreased by 13% (from $2,160 to $1,869) and the average cash flow multiple decreased by 9% (from 11.3 to 10.3). Overall, transactions announced in 1994 involved more subscribers and higher purchase prices than in any year since 1988. 35. This year, the average size of cable system acquisitions in terms of subscribers, homes passed, and dollar value has remained approximately the same as in 1994. However, the number of acquisitions has increased. For the seven months from January to July of 1995, 63 acquisitions were announced, involving 7.3 million subscribers, 11.4 million homes passed, and purchase prices totaling $13.5 billion dollars, all of which nearly equal the figures reported for all of 1994. 4. Status of Overbuilding 36. The term "overbuild" is used in this Report to refer to a situation in which two or more wireline cable television systems directly compete for subscribers in a local market. The 1994 Report surveyed a substantial body of empirical evidence, obtained by the Commission and academic researchers, which indicated that overbuild competition results in lower rates for both basic and pay cable television services. One recent empirical analysis of overbuilding also shows a positive correlation between overbuild competition and the availability of an increased number of cable programming services. Although the benefits of overbuild competition are apparent and desirable, the 1994 Report concluded that "the extent of overbuilding seems to have remained quite limited." 37. Several planned overbuilds that were reported in the 1994 Report have yet to be constructed. For example, as of February 1995, plans we noted last year by Cablevision Systems Corp. ("Cablevision") to overbuild several cable systems in New Jersey were reported to be "strictly at the drawing board" stage and had not advanced beyond the initial research point. The 1994 Report also discussed plans by Fibervision, a firm started by former cable executives, to overbuild systems operated by Tele-Communications, Inc. ("TCI") in Hartford, Connecticut, and the status of litigation brought by TCI that delayed construction of the overbuild. In August 1995, the Connecticut State Supreme Court rejected TCI's appeal of a lower court decision, which dismissed TCI's challenge to the Connecticut Department of Public Utility Control's grant of a Hartford cable franchise to Fibervision. That appeal has been reportedly seen as Fibervision's primary obstacle to obtaining financing and starting construction. 38. In its comments, Home Box Office ("HBO") discusses plans by Liberty Cable Company, Inc. ("Liberty Cable") to overbuild Cablevision's Nassau County, New York systems, which serve 387,500 subscribers. According to a July 1994 report cited by HBO, Liberty Cable had started negotiations with the Nassau County Village Officials Association to provide cable service over the network infrastructure of the NYNEX Telephone Company ("NYNEX") and NYNEX planned to spend $150 million to upgrade its network to handle video transport. As of October 21, 1995, those negotiations were reportedly still pending. 39. Although several of the planned overbuilds mentioned in the 1994 Report have not yet advanced to the construction phase, new overbuilding activity appears to be occurring. Most notably, Ameritech Operating Companies ("Ameritech"), several other Regional Bell Operating Companies, and a number of smaller LECs, are pursuing the construction of cable systems in their local telephone service areas. In addition, trade press reports indicate that cable operators, either in the midst of or contemplating overbuild situations, are affiliating with non- cable companies such as telephone and power companies in order to build systems capable of offering advanced services. There is also anecdotal evidence regarding the activities of existing municipal overbuild ventures involving local utility companies. 40. As pointed out in the 1994 Report, the limited extent of overbuild competition may be attributable, in part, to local franchising requirements. In order to address one of the potential impediments to overbuild competition imposed by the franchising process, Congress amended Section 621(a)(1) of the Communications Act in the 1992 Cable Act to provide that "a franchising authority may not grant an exclusive franchise and may not unreasonably refuse to award an additional competitive franchise." 41. Since the 1994 Report was released, a split has developed among the federal circuit courts of appeal over the application of Section 621(a) to franchises in existence at the time the 1992 Cable Act was enacted. Commenters disagree whether exclusive franchises are an impediment to competition, and whether Section 621(a) should be applied to existing franchises. James Cable Partners ("James"), the plaintiff in a case in the Sixth Circuit, argues that exclusive contracts are not an impediment to competition, that there are very few exclusive franchises, and the impact on the industry as a whole is thus de minimis. 42. Other commenters argue that since exclusive franchising is an impediment to the expansion of overbuild competition, Section 621(a) should be applied to prohibit the enforcement of existing exclusive franchises. GTE Service Corporation ("GTE") argues that existing exclusive franchises prevent prospective entrants from effectively negotiating with local franchising authorities for competitive franchise contracts. Likewise, Ridgebury Township, Pennsylvania, and the Pennsylvania State Association of Township Supervisors ("Ridgebury") argue that exclusive franchises "create barriers," and believes that many rural communities, like Ridgebury Township, granted exclusive franchises "at times when few, if any, viable alternatives existed." Ridgebury attributes certain negative experiences with its exclusive franchisee to its inability to award a competitive franchise. Ridgebury believes that its problems are not unique, and are likely to arise in other communities that have entered into exclusive franchise contracts with cable operators. 43. BellSouth Telecommunications, Inc. ("BellSouth") argues that the franchising process itself, even absent exclusivity, is a substantial impediment to competition that imposes significant costs on potential competitors. It asserts that the cable industry uses the franchising process as a means to impose on potential competitors expensive and burdensome requirements such as universal service. 44. As we have previously recognized, we continue to believe that franchising requirements -- including the imposition of such requirements as universal service and the enforcement of exclusive franchises -- can be an impediment to overbuild entry. Accordingly, we continue to support clarification of Section 621(a) to make clear that it applies to enforcement of all exclusive franchises regardless of when they were adopted. 5. Cable Systems' Responses to Competition 45. There is anecdotal evidence of various steps cable operators apparently have taken to retain their share of the MVPD market in response to the increased numbers of consumers choosing to subscribe to the services of competing MVPDs. In Omaha, Nebraska, the incumbent cable operator has modified the pricing of the package of services it provides to its customers, apparently in response to the emergence of competition from a VDT system. According to one report, two days before U S West's tariff for its Omaha VDT market trial went into effect, Cox, one of Omaha's local cable operators, announced that it was offering a "free" 21-channel lifeline service, called Cox Localink. New subscribers reportedly must pay a $19.95 installation fee, and existing subscribers can switch to the new service for an $8.03 one-time fee. 46. Jones Intercable, Inc.'s ("Jones") system in Alexandria, Virginia provides another example of a cable operator preparing to compete with a LEC. In September 1995, Jones began connecting subscribers to a new, $35 million hybrid fiber coax ("HFC") network. Initially the network will be used to provide increased channel capacity. However, Jones reportedly plans to expand its services to include telephony and Internet access. According to Jones's President, James O'Brien, "This system places us firmly in front of the Bell Atlantic Corporation ("Bell Atlantic") in the ability to offer a complete slate of services to area residents." 47. Cable operators are also merging and trading systems to create clusters, which has been attributed to a response to competitors and potential competitors that can operate on a regional basis. These regional groupings of cable systems under common ownership could permit operators to offer uniform packages at comparable prices throughout an area and to market their services accordingly. In two recent proposals to resolve rate complaints, cable operators sought provisions that would allow them to offer similar packages at similar prices in contiguous merged systems. B. Direct-To-Home Satellite Services 48. Direct-to-home ("DTH") satellite services use satellites to deliver video programming directly to subscribers. There are two different types of DTH services: direct broadcast satellite ("DBS") services and home satellite dish ("HSD") services. Both offer subscribers many of the same satellite delivered video programming services typically provided by cable systems, in addition to some offerings not typically available from cable systems. DBS operators are like other MVPDs in that they are distributors that (1) downlink programming from many different satellites pursuant to contracts with programmers; (2) package the programming into service offerings; and (3) make the programming available to subscribers over a proprietary facility. However, DBS services use satellites instead of broadband wires or terrestrial microwave stations to transmit their programming to subscribers, who generally use relatively small (18-24 inch) dishes to receive the programming. By contrast, HSD users employ relatively large (4-8 foot) dishes to receive unscrambled programming for free, and scrambled programming in a secondary market from program packagers that are licensed to facilitate subscribers' receipt of programming transmitted from various C-Band satellites, which is also received by cable operators and other MVPDs. HSD users typically purchase HSDs from equipment dealers, and obtain their programming separately from program packagers, some of which also sell receiving equipment. The program packagers authorize subscribers to use the receivers connected to their HSDs to decode and view the programming. 1. Direct Broadcast Satellite Services 49. Subscribership. In the past year, subscribership to DBS services has increased rapidly. Between the end of 1994 and the end of September 1995, subscribership increased from approximately 600,000 to about 1.7 million households. During the same time period, the availability of DBS service has expanded from 23 states to all 48 contiguous states and Alaska. The monthly gain in new DBS subscribers slowed during the spring and early summer of 1995, but began to increase in August. For example, DBS services reported only 100,000 new subscribers in July, after which the number of new subscribers increased to 155,000 in August. The increase in August may reflect lower prices and new financing options for receiving equipment, and the availability of new programming packages, which we will discuss in the paragraphs below addressing individual DBS suppliers. 50. DBS service providers and industry observers predict that DBS subscribership growth will continue at a rapid rate. One analyst expects the DBS industry to serve 3 million subscribers by the end of 1996 and 6 million subscribers by 1999. Other estimates of the total number of DBS subscribers at the end of the decade range from a minimum of 4.66 million to a maximum of over 21 million, with a consensus estimate of 10 million subscribers. 51. Individual DBS Service Providers. Two high power DBS services and one medium power DBS service currently provide programming to subscribers.  DIRECTV offers a high power DBS service to subscribers who have the Digital Satellite System ("DSS"), which uses an 18-inch receiving dish in all 48 contiguous states. Subscribership to DIRECTV's services increased from a total of approximately 300,000 at the end of 1994 to 600,000 by June 1995, and to an estimated 900,000 in September 1995. DIRECTV projects that 1.5 million households will subscribe to its services by the end of 1995, and 10 million by the end of 2000. DIRECTV provides approximately 150 channels of entertainment and informational programming, of which, approximately 50 are pay-per-view movie and sports programming channels.  United States Satellite Broadcasting Company, Inc. ("USSB") offers a high power DBS service to subscribers using the same DSS receiving equipment, and one of the same satellites, as DIRECTV. Because DIRECTV and USSB offer mutually exclusive programming, a customer must subscribe to both services in order to receive all of the most popular cable programming. Nearly all subscribers to one service also subscribe to the other. USSB currently offers twenty channels of movies and other programming.  Primestar Partners, L.P. ("Primestar") offers a medium power DBS service to subscribers using 36-inch or 40-inch dishes. Primestar is a joint venture of five cable MSOs, and GE American Communications, Inc. Using a satellite operating in the Fixed Satellite Service ("FSS"), Primestar provides 73 channels of video programming similar to that offered by DIRECTV and USSB. The number of subscribers to Primestar's service increased from about 70,000 in June 1994 to approximately 500,000 in June 1995, and to approximately 775,000 in September 1995. 52. Several firms are planning to initiate new DBS programming services:  EchoStar and its affiliate, Directsat, plan to offer approximately 126 channels of programming on satellites that they expect to launch in late 1995 and early 1996. Philips Consumer Electronics has announced an agreement to manufacture DBS receivers for EchoStar to be distributed under the Magnavox and Philips labels. EchoStar expects to price its receiver system at about $500.  AlphaStar, a Canadian DBS firm, is reportedly scheduled to offer service to the continental United States with more than 100 channels of digital video and audio programming services. AlphaStar reportedly plans to lease twenty-four transponders on an AT&T Telstar Ku-band satellite that was launched in the fall of 1995, and to begin offering service to subscribers in early 1996. The company currently owns an uplinking facility in Canada. The new service would apparently transmit programming over FSS frequencies to subscribers who purchase or lease AlphaStar's twenty-four inch dishes.  Tempo Satellite, Inc. (a wholly-owned subsidiary of TCI), is authorized to provide eleven channels of service and is required to be operational by May 1, 1998.  Continental Satellite Corporation ("CSC") has been assigned eleven DBS channels at both the 61.5o and 166o orbital locations. On November 21, 1995, CSC was granted an extension of its conditional construction permit to August 15, 1999, which will allow CSC to construct, launch, and begin operating its DBS system at two orbital locations.  Dominion Video Satellite, Inc. originally held construction permits for DBS frequencies and channel assignments at the 119ø orbital position, but those permits were cancelled by the Commission. Dominion was recently assigned eight DBS channels at the 61.5ø orbital location, and may be assigned eight additional channels at the 166ø orbital location. 53. Receiving Equipment. In order to subscribe to services offered by DIRECTV and/or USSB, consumers must purchase DSS receiving equipment. Thomson Consumer Electronics ("Thomson"), under the brand name RCA, was the only manufacturer of DSS equipment until June 1995, when Sony shipped its first 18-inch dish systems. The DSS equipment includes the receiving dish, digital receiver and remote control unit. The RCA list price for the basic DSS receiving equipment is $699. Subscribers either pay $100 to $200 for professional installation or purchase the installation equipment for $69.95. The basic DSS unit allows a subscribing household to watch one channel at a time. In order to view different channels simultaneously on different television sets, a subscriber must purchase a DSS unit for $899 and then also purchase a $649 decoder for the second television set. 54. Starting in May 1995, Sony was licensed to produce the DSS equipment for the next six months as the sole competitor to Thomson. Sony made its first shipments in June 1995, pricing its basic model at $749. Retailers have been offering Sony's basic model for $699, and RCA's receiving system is now available for $597. The price of DSS receiving equipment is expected to drop further as other manufacturers enter the market. Hughes Network Systems plans to begin selling the equipment in early 1996, Uniden in mid-1996, and Toshiba in mid-1996. 55. DIRECTV now offers its customers a financing plan for DSS receiving equipment. The financing plan is available through consumer electronics dealers in both rural and urban areas. Under the plan, DIRECTV subscribers make equipment payments of $15 per month for 48 months, in addition to their payments for programming packages. The total monthly charge for receiving equipment and programming ranges from about $27 to $45, depending on the programming package chosen. 56. Primestar subscribers can lease receiving equipment through a network of more than 400 local distributors, at a total price for equipment and basic programming of about $1 per day, after payment of a $299 installation charge. Leasing enables subscribers to reduce the large initial expenditure for receiving equipment. In addition, Primestar offers to maintain the subscriber's receiving equipment, and upgrade it to prevent obsolescence as DBS technology advances. 57. Limitations on DBS Services. The number of high powered DBS services in the United States is limited because the Ku-band spectrum that is needed to provide these services is limited by international treaty. Only eight orbital positions have been allocated to serve the United States. At each of the eight orbital locations, the spectrum is fully distributed among the 32 available channels. Further, it appears that at most four of the eight orbital locations can be used to provide service to all 48 contiguous states, although the Commission recognizes that this number may increase in the future. In addition, DBS dishes are not generally equipped to receive signals from different orbital locations. Therefore, when creating packages of video programming, DBS service providers are effectively limited to the use of those frequencies for which they hold permits at a given orbital location. 58. According to Primestar, DBS service is subject to another limitation. Primestar contends that its inability to transmit of local broadcast network affiliate programming to most of its subscribers inhibits the ability of DBS services to become effective competitors to cable. To offset this disadvantage, DIRECTV provides its subscribers with a remote controlled A-B switch to obtain local broadcast signals over a broadcast television antenna. DIRECTV also has proposed that cable operators be required to offer a "closed basic tier" consisting only of local broadcast, public, educational, and governmental channels, which would give consumers the option of buying basic programming from a cable operator and satellite programming from DIRECTV. On the other hand, DBS systems provide subscribers with service attributes that are not generally available on cable systems at present, such as digital video and sound. DBS systems also offer subscribers programming not available on most cable systems. For example, DIRECTV subscribers can receive nearly all of the games in the schedules of the National Football League, National Basketball Association or National Hockey League for $139 per season. 59. Proposed Use of DBS Facilities to Provide Programming to MVPDs. TCI has proposed to offer a "headend in the sky" ("HITS") service, which apparently would involve the provision of authorization services and the distribution of Primestar's programming to MVPDs. The subscribing MVPDs could then combine HITS service with local broadcast channels and transmit the programming package over the MVPDs' networks to their subscribers, who would use set top boxes to receive the service. It has been reported that Primestar has signed an $80 million agreement to use HITS. In filings with the Commission, other DBS operators, such as DIRECTV and EchoStar, have suggested that they may also use their DBS facilities to provide service to MVPDs. 60. Planned Migration to High Power DBS. Primestar has been planning to migrate its DBS service from the satellite it is now using to a high power DBS satellite and expand its capacity to 94 video and audio channels. For its new service, Primestar was planning to use construction permits that had been held by Advanced Communication Corporation (ACC). ACC had agreed to sell the permits to Tempo DBS, Inc. ("Tempo"), an affiliate of TCI. In a decision by the International Bureau, which the Commission has affirmed, ACC's application to extend its permit was denied because ACC failed to exercise due diligence in constructing its DBS system, and the application for assignment of the ACC permit to Tempo consequently was denied as moot. The Commission recently proposed auctioning the channels reclaimed from the former ACC construction permits. 2. Home Satellite Dishes 61. HSD owners have access to more than 400 channels of programming placed on C- band satellites by programmers for receipt and distribution by MVPDs, of which 115 are scrambled and approximately 285 are unscrambled. HSD owners can watch the unscrambled channels without paying a subscription fee. To receive scrambled channels, however, an HSD owner must purchase an integrated receiver-decoder ("IRD") from an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide, approximately thirty program packagers offer packages of scrambled channels to HSD owners. Like DBS systems, however, HSD program packagers do not provide local broadcast network affiliate channels, which are generally not available on C-Band satellites. 62. It has proven difficult to obtain accurate estimates of the total number of HSD users, which includes: (1) viewers who subscribe to a packaged programming service, (2) viewers who receive satellite programming services illegally without subscribing, and (3) viewers who receive only non-subscription programming. As of October 1994, the estimates of total HSD users ranged from 2.3 million to 4.5 million. It is estimated that there were approximately 2.2 million subscribers to packaged HSD programming services in 1994. Based on this information and reports that almost all recent buyers of HSD systems are choosing to subscribe to a programming service, SBCA estimated that there were between 3.5 million and 4 million HSD users at that time. 63. Mirroring the success of DBS service in 1994, HSD users increased by more than 640,000, a record number. The number of subscribers to packaged programming services for HSDs increased from about 1.6 million in 1993 to approximately 2.2 million in 1994. The HSD industry's expansion occurred despite severe module shortages, which may have caused sales in September and October 1994 to drop significantly from the all-time high of 90,905 units shipped in August 1994. 64. HSD system use has grown more slowly in 1995 than it did in 1994. Only 222,000 HSD systems were shipped through August of this year compared with 436,100 systems shipped during the same period in 1994. Similarly, the number of subscribers to HSD packaged programming services grew only from approximately 2.2 million in 1994 to about 2.3 million in 1995. Channel Master, a major HSD manufacturer, has predicted that growth in HSD purchases will level off to 15,000 to 20,000 new systems per month, as competition from DBS systems takes subscribers away from HSD. 65. Several factors may influence the future growth rate of HSD system use. On the one hand, HSD services currently offer more programming options than any other video delivery system. However, as other video providers such as DIRECTV and Primestar increase channel capacity and improve programming selections, they may begin to provide comparable programming choices. On the other hand, HSD receiving equipment is more expensive than the receiving equipment for other video distributors. Consumers pay an average of $2,000 to $2,300 for a complete HSD system, which is significantly greater than the equipment cost of a DBS system. To decrease this cost differential, General Instrument Corporation, Inc. ("GIC"), a major manufacturer of HSD equipment, recently announced its intention to discount the wholesale prices for the HSD system hardware and IRDs. In addition, HSD viewers often experience a delay of several seconds when changing channels if the selected channel is on a different satellite than the prior channel. In order to receive the selected channel, the dish must rotate to face the location of its satellite. Viewers of other MVPD's service do not experience similar delays when changing channels 66. The growth rates of both HSD and DBS services also may be affected by zoning ordinances that many localities have enacted, which restrict the deployment of receiving dishes. SBCA cites zoning ordinances and other local restrictions as a significant impediment to the growth of HSD. Although the Commission has preempted zoning ordinances that either discriminate against receiving equipment without "a reasonable and clearly defined health, safety or aesthetic objective," or impose "unreasonable limitations" on the use of satellite dishes, SBCA alleges that local authorities continue to enact ordinances that violate these rules. SBCA has also contended that homeowners' associations use covenants and other restrictions to prohibit HSDs. 67. In response to complaints about local restrictions on receiving equipment, we initiated a rulemaking proceeding to modify its zoning preemption rules. To clarify its rules, the Commission proposes a rebuttable presumption against local laws and regulations that restrict relatively small receiving dishes. We also propose procedures by which Commission review of zoning disputes occurs after exhaustion of local administrative remedies. This is a change from previous policy which required exhaustion of all legal remedies before appeal to the Commission. The Commission is reviewing the comments that were filed in response to the proposals and will adopt a final rule in the near future. C. Wireless Cable Systems 1. Multichannel Multipoint Distribution Service 68. MVPDs that use microwave frequencies in the multichannel multipoint distribution service ("MMDS") or multipoint distribution service ("MDS") to transmit video programming to subscribers with rooftop antennas are commonly referred to as wireless cable systems. Wireless cable operators have access to a maximum of thirty-two or thirty-three channels and currently use traditional analog transmission technologies. The thirty-three channels include twenty channels allocated to Instructional Television Fixed Service ("ITFS") that are leased on a part-time basis. 69. Subscribership. Between the end of 1993 and the end of 1994, the total number of subscribers to wireless cable systems increased by 51%, from 397,000 to 600,000 subscribers. During the same time period, the number of homes capable of receiving a wireless cable operator's signal (commonly referred to as homes seen) rose by 10% to over 27 million homes. The growth of subscribership relative to homes seen has pushed the industry's penetration rate from 1.6% at the end of 1993 to 2.2% at the end of 1994. Apparently, this trend has continued in 1995, as reported by the Wireless Cable Association International, Inc. ("WCAI"), which claims that in June 1995 the industry was comprised of approximately 190 systems serving about 800,000 subscribers. 70. Although few wireless cable systems approach the total size of their wired cable counterparts, the industry has 15 systems with at least 12,000 subscribers, including 7 with over 20,000 subscribers. The largest wireless system, operated by CAI Wireless Systems, Inc. ("CAI") in Philadelphia, Pennsylvania, has approximately 51,900 subscribers (3.3% of the approximately 1.5 million homes capable of subscribing to CAI's service). The second largest is Cross Country Wireless, Inc.'s ("Cross Country") system in Riverside, California, which has approximately 42,000 subscribers (10.8% of the homes capable of subscribing). In general, where a wireless system is competing with an incumbent wired cable system, the wired cable system has substantially greater subscribership. There are only 12 systems with penetration rates over 10%, and we are aware of only one system, operated by Heartland Wireless Communications, Inc. ("Heartland") in Ada, Oklahoma (serving 28.1% of the homes seen) that has more subscribers than its wired competitor. 71. Analysts expect the wireless industry's recent subscriber growth to continue for the next several years. Paul Kagan Associates projects that the industry will grow by over 60% in both 1995 and 1996, and should serve over two million subscribers sometime in 1997, which is still only a fraction of the wired cable industry's 59.7 million subscribers at the end of 1994. Another observer projects that the industry's average annual subscribership will grow by over 280% between 1995 and 1998. Commenters have attributed this growth to a combination of price competition, product differentiation, favorable regulatory actions and increased investments by the LECs. 72. Consolidation. Several large operators have begun to consolidate systems in major markets across the country. After its acquisition of ACS Enterprises, Inc. ("ACS") and the purchase of systems from Eastern Cable Networks Corporation ("ECN") and American Wireless Systems, Inc. ("AWS"), CAI operates in most of the largest markets in the Northeast, and has line-of-sight coverage of over 11 million homes. Its Northeast holdings cover the following markets: New York City, Philadelphia, Pittsburgh, Washington, D.C., Baltimore and Boston. People's Choice TV Corporation ("PCTV") has two regional clusters, one in the Midwest and the other in the Southwest. With its acquisition of Preferred Entertainment, Inc. ("Preferred") and the purchase of systems from ECN, PCTV's Midwest cluster encompasses systems in Chicago, Detroit, Milwaukee, Indianapolis, Kansas City and St. Louis. PCTV's southwestern cluster includes systems in Houston, Phoenix and Tucson. Between these two clusters, PCTV has a total of almost 8 million line-of-sight homes. 73. Digital Trials. According to reports, the Wireless Cable Digital Alliance ("WCDA") completed the first field trials of digital technology in Colorado Springs and Chicago in the spring of 1995, which yielded several important results. First, it has been reported that wireless operators should be able to fit three to nine digital channels into one 6 MHz video channel by combining a digital signal with compression algorithms, which is comparable to the results achieved by other MVPDs. Second, it has been reported that use of a digital signal increased the coverage area of a wireless transmitter, allowing MMDS operators to reach additional homes that were previously unable to receive a clear signal. 74. Upon receipt of Commission approval, WCDA's continued development of a digital wireless cable system will begin this fall when American Telecasting, Inc. ("American Telecasting") will conduct a commercial trial involving 50 homes. Operators with systems in urban markets have said that they hope to deploy digital systems by the second half of 1996. 75. Independent of the WCDA's efforts, it has been reported that Decathlon Communications, Inc. ("Decathlon") has developed its own digital wireless cable technology based on MPEG 1+ encoding. Transworld Telecommunications Inc. has announced plans to implement Decathlon's technology in its Tampa/St. Petersburg system. American Telecasting has announced plans to install Decathlon's technology in its Fresno, California system by the end of 1995, as has Sky Cable of Omaha. 76. On July 13, 1995, a coalition of ninety-nine organizations with interests in the wireless cable industry filed a petition requesting a "declaratory ruling on the use of digital modulation by" stations using MDS and ITFS frequencies. On August 23, 1995, the Commission established a pleading cycle for that petition, with comments filed on September 22, 1995 and reply comments filed October 10, 1995. 77. Financial Performance. The industry's total revenue for 1994 was $203 million, a 48% increase from 1993. The industry's cash flow (as defined above in paragraph 27) declined during 1994, dropping from a loss of $10.6 million in 1993 to a loss of $14.2 million. 78. Equity Markets. In the ten months prior to June 1994, the wireless cable industry raised almost $600 million in financing from public markets. In the following twelve months, the industry obtained $638 million of additional financing from both public and private sources. There are also $350 million of financing transactions awaiting consummation. Of this combined $988 million (excluding investments made by LECs), $725 million is in the form of public bond offerings. 79. LEC Investment. An important development in the wireless cable industry this year has been the decision by three LECs to make major investments in two wireless operators. In March, 1995, Bell Atlantic and NYNEX made a substantial investment in CAI. Their initial investment in CAI was $100 million, and included the issuance of warrants, which would give them the opportunity to purchase 45% equity in CAI for an additional $300 million. Helped by this infusion of capital, CAI acquired the systems mentioned above in paragraph 72. In April 1995, PacBell acquired Cross Country for $175 million. 80. Recent Regulatory Developments. In June 1995, the Commission took several actions to enhance the competitiveness of wireless cable systems and to facilitate the development and rapid deployment of wireless cable services. The Commission adopted streamlined measures to process new applications for MDS spectrum, adopted competitive bidding procedures for the licensing of MMDS spectrum and expanded the protected service area of MDS stations. 81. Factors Affecting Competition. Despite its recent gains, the wireless cable remains industry a relatively small provider of multichannel video services in terms of market share. As of the end of September 1995, only 0.8% of television households subscribed to wireless cable services, compared to 64.3% of television households subscribing to wired cable systems. 82. Various factors, including technological limitations (e.g., line-of-sight and channel capacity), have been blamed for the relatively low penetration of wireless cable systems. Due to their relatively small size, wireless cable systems potentially face higher programming costs per-subscriber than many of their larger, wired cable system competitors. According to WCAI, several non-vertically integrated programmers engage in the practice of charging a wireless cable operator more than a similarly situated franchised cable system for programming. Wireless cable operators also have been dealing with increased competition from DBS services, although some analysts believe that such competition has not had a substantial impact on wireless cable operators' subscribership (less than 0.1% of wireless cable subscribers have switched to DBS service). One wireless cable operator alleges that predatory pricing by wired cable operators, including low promotional rates, reduces wireless cable operators' ability to compete. 83. In addition to the recent progress on the technological front, wireless cable systems may enjoy lower per unit costs than wired cable systems when adding new subscribers. Investment analysts estimate the average investment per subscriber for wireless cable operators is between $330 and $600, compared with $625 to $1300 for traditional wired cable operators. Moreover, WCAI believes that the wireless cable industry's cost of digitization will be lower, on a per subscriber basis, than the cost of digitization for the wired cable industry. At least one analyst agrees with this view, reporting the investment per digital subscriber to be $900 for wireless operators, and $1500 for wired cable operators. 2. Local Multipoint Distribution Service 84. LMDS frequencies are microwave channels in the 28 GHz band that may be used to deliver multichannel video programming. As with distribution using MMDS, LMDS distribution requires subscribers to have a special antenna that is located within a "line-of-sight" to the transmitter. The propagation characteristics of the 28 GHz band are such that an LMDS system must operate in "cells" with radii of three to six miles in order to provide service to a metropolitan area that could be covered by a single wireless cable transmitter. With the exception of CellularVision of New York, L.P.'s ("CellularVision") 5,300-subscriber LMDS system in Brooklyn, New York (which has been managed by Bell Atlantic), LMDS frequencies are not currently being used to distribute video programming. 85. In July 1995, the Commission issued a Third Notice of Proposed Rulemaking and Supplemental Tentative Decision seeking comment on: (1) a plan to allow both LMDS and Fixed Satellite Service ("FSS") systems to operate in the 28 GHz band; (2) a competitive bidding scheme for awarding mutually exclusive LMDS and FSS license applications by Basic Trading Areas ("BTAs"); and (3) flexible use of the 28 GHz spectrum band. The Commission also sought comment on the number of LMDS licenses that should be made available in a particular market, and the amount of spectrum that should be allocated. Given the potential for competition between LMDS and cable systems, we also requested comment whether to permit cable operators to acquire LMDS systems in their service areas. At this time, it remains unclear whether, and to what extent, LMDS systems might emerge as significant competitors to wired cable systems. D. Local Exchange Carriers 86. Local exchange carriers ("LECs") are local telephone companies that operate in local service areas commonly known as local access and transport areas ("LATAs"). In the 1994 Report, the Commission noted an increase in LEC video related activity since the Commission's 1990 Cable Report, spurred by the adoption of the video dialtone ("VDT") framework and technological advances. In the year since the 1994 Report, LEC plans for entry into the video marketplace have evolved considerably. At present, however, it is difficult to predict the level of future LEC entry into markets for the delivery of video programming over the long run, or the form that entry will take. 1. Commission and Judicial Actions 87. Shortly after release of the 1994 Report, the Commission resolved the pending petitions for reconsideration of the 1992 VDT Order. In the VDT Reconsideration Order, the Commission affirmed its decision to enforce the statutory cable-telco cross-ownership prohibition, and generally affirmed the regulatory framework for VDT services. However, shortly thereafter two federal circuit courts of appeal held that the statutory cable-telco cross- ownership restriction was an unconstitutional infringement of telephone companies' First Amendment rights, and upheld lower court orders enjoining the Commission from enforcing the statutory restriction against parties to those cases. 88. In response to those decisions and a number of similarly decided federal district court cases, the Commission took a number of actions to clarify further the manner in which LEC entry into the MVPD and related markets would be regulated. In January 1995, the Commission issued another notice of proposed rulemaking seeking comment on, among other things, whether Title II or Title VI of the Communications Act, or some combination thereof, should apply to a LEC that, directly or indirectly through an affiliate, provides video programming over a VDT platform to subscribers within its local telephone service areas. 89. In April 1995, the Commission clarified that it will not enforce the cable-telco cross-ownership restriction against: (1) any telephone company that is a party to any of the cases in which the Commission has been enjoined from enforcing the statutory cross-ownership ban; or (2) any telephone company operations that are within the geographic boundaries of the Fourth or Ninth Circuits, where the ban has been held unconstitutional. In May 1995, the Commission determined that it has legal authority to grant waivers of the cable-telco cross-ownership ban to allow telephone companies to provide video programming on VDT networks in their telephone service areas. In August 1995, the Commission streamlined the Section 214 process for LECs to construct stand alone cable systems within their local service areas. Finally, over the course of the year, the Commission has established many of the reporting and accounting requirements applicable to the provision of VDT service. 2. LEC Entry into MVPD and Program Supply Markets 90. In this section of the 1995 Report, we examine the status of LEC entry into various video markets. First, we report on the status of LEC entry into what may be thought of as the video transport segment of the market for the delivery of video programming -- the provision by LECs of common carrier video transport services over VDT facilities to customer- programmers that distribute programming packages to end user subscribers. Second, we address LEC entry into these markets through construction of, or investment in, traditional stand alone cable systems, wireless cable systems, and other integrated proprietary facilities that bundle video transport services with the provision of programming services to subscribers. Finally, we note instances of LEC entry into the video programming supply and packaging market. 91. Status of VDT Technical and Market Trials. At the time of the 1994 Report, five applications for VDT technical and market trials had been granted, three applications for initial trials were pending, and two applications for expansion of existing trials were also pending. Since the 1994 Report, no additional applications for VDT technical or market trials have been filed with the Commission. The three applications for new trials that were pending at the time of the 1994 Report have all been granted. In addition, three applications for expanded or extended trials have been granted. Information pertaining to the VDT trial participants, the status of the trials, and results of market and technical tests are summarized in Appendix E. 92. Status of VDT Permanent Commercial Applications. At the time of the 1994 Report, twenty-three applications for permanent commercial VDT authorizations were pending before the Commission and one application to provide permanent commercial VDT service had been granted -- to Bell Atlantic for service to approximately 38,000 households in Dover Township, New Jersey ("Dover"). Those applications represented a potential market for VDT services of over 8.5 million homes. 93. Since release of the 1994 Report, fifteen of the twenty-three applications for permanent commercial VDT authority have been granted (two to NYNEX, four to PacBell, four to GTE, and five to Ameritech); two applications were withdrawn (by Bell Atlantic); the processing of five applications has been suspended (at the request of U S West); and one application remains pending (by Bell Atlantic). In addition, five new applications to provide commercial VDT service have been filed with the Commission since the 1994 Report. Of these five applications, four (filed by U S West) were dismissed by the Commission for insufficient data. The fifth new application (filed by Southern New England Telephone Company ("SNET")) remains pending. 94. Consequently, a total of sixteen applications for commercial VDT service have been approved, and two applications for commercial VDT service remain pending before the Commission. The status of the approved applications for permanent commercial VDT authorization is as follows:  Bell Atlantic's July 1994 authorization for a VDT system in Dover Township, New Jersey, that will pass 38,000 homes. The tariff for this system was permitted to become effective following a one-day suspension, subject to investigation. This VDT system is scheduled to begin service in 1995, and is expected to become the first permanent commercial VDT system in operation.  NYNEX's March 1995 authorization for two VDT systems, one in Rhode Island that will pass 63,000 homes and one in eastern Massachusetts that will pass 334,000 homes. NYNEX's applications, filed in July of 1994, proposed completion of construction in 2010. According to some trade press accounts, NYNEX is proceeding on target with a "cautiously aggressive" strategy with its VDT systems in eastern Massachusetts and Rhode Island. Earlier reports suggested, however, that while still pursuing VDT entry, NYNEX had scaled back its deployment plans and may utilize wireless cable in the near term to reach subscribers while constructing its VDT systems.  PacBell's August 1995 authorization for four VDT systems in California, which will pass 490,000 homes in San Francisco; 360,000 homes in Los Angeles; 259,000 homes in San Diego; and 210,000 homes in Orange County, California. PacBell's applications, originally filed in December 1993, proposed an advanced, wire based video and telephone network that would be constructed sometime in 1996 at an expense of approximately $16 billion. It appears that PacBell currently plans to pass only 500,000 homes with this advanced network in 1996, increasing to one million homes in 1997. These reports suggest, however, that PacBell is accelerating construction of the VDT network in the San Francisco Bay Area, scaling back its VDT deployment plans in its other authorized areas, and deploying wireless facilities in those areas in the near term while building out the VDT systems.  GTE's May 1995 authorization for four VDT systems that will pass 476,000 homes in Pinellas and Pasco, Florida; 334,000 in Honolulu, Hawaii; 122,000 in Ventura, California; and 109,000 in Manassas, Virginia. Reportedly, GTE is aggressively moving ahead with its VDT plans. By the end of 1996, GTE reportedly plans to pass a total of 500,000 homes in three markets: Ventura, California; Pasco and Pinellas counties, Florida; and Honolulu, Hawaii. By 1997, GTE reportedly plans to enter the Manassas, Virginia market, increasing its total homes passed to 900,000 homes in all four markets. GTE states that its goal is to pass seven million homes with VDT in 66 top markets within the next ten years.  The remaining five applications for permanent commercial VDT authority were granted to Ameritech in January 1995 for five systems that proposed to pass 232,000 homes in Detroit, Michigan; 501,000 homes in Chicago, Illinois; 115,000 homes in Indianapolis, Indiana; 262,000 in homes in Cleveland and Columbus, Ohio; and 146,000 homes in Milwaukee, Wisconsin. After obtaining these authorizations, Ameritech decided to pursue entry into the MVPD marketplace through stand alone cable systems, rather than VDT systems. 95. As noted above, seven of the Section 214 applications for permanent commercial VDT authority that were pending at the time of the 1994 Report have been withdrawn or suspended by the applicant. These seven applications represented a potential market of over 4.3 million homes passed by VDT. The disposition of these applications includes the following:  On May 24, 1995, Bell Atlantic withdrew two applications for permanent commercial VDT systems that proposed to pass 1.2 million homes in the D.C. LATA and 2 million homes in the mid-Atlantic area. Bell Atlantic announced that it was considering new technologies and would submit amended applications at a later date, after further evaluating the technologies. Press reports suggest that in the D.C. and mid-Atlantic regions, Bell Atlantic plans to use wireless technology pending further development of switched digital video ("SDV") architecture. Notwithstanding its withdrawal of two significant VDT proposals, Bell Atlantic is going forward with VDT in other areas, including the construction of a permanent commercial VDT operation in Dover.  On May 31, 1995, U S West requested suspension of further Commission consideration of the five applications it filed in January and March 1994, which proposed permanent commercial VDT service to 1.1 million homes, including 90,000 homes in Boise, Idaho; 357,000 homes in Denver, Colorado; 357,000 homes in Minneapolis, Minnesota; 162,000 homes in Portland, Oregon; and 160,000 homes in Salt Lake City, Utah. U S West stated that it wanted time to review results of its Omaha, Nebraska market trial and to study new technologies. 96. Thus, in addition to Bell Atlantic's Dover VDT system, the available data indicates that four LECs, Bell Atlantic, PacBell, GTE, and NYNEX, are entering or planning to enter the MVPD marketplace as VDT operators in a total of eleven markets that range in size from 63,000 to 490,000 homes passed. These eleven permanent VDT systems represent potential VDT service to approximately 2.5 million homes passed. 97. LEC Entry Into the MVPD Marketplace Through Cable and Wireless Facilities. Several LECs have indicated an interest in providing cable service in their telephone service areas. For example, as noted above, Ameritech is pursuing entry through construction of cable systems, and has sought and obtained from local cable franchising authorities and the Commission authority to construct cable systems in Plymouth, Canton and Northville Townships in Michigan (near Detroit); in Columbus, Ohio; and in Glendale Heights, Illinois (near Chicago). Ameritech plans to begin offering stand alone cable services in 1996 and to complete its cable systems by early 1997. SBC has received Commission approval for a temporary market trial of cable service in Richardson, Texas. BellSouth has applied to provide cable service in Daniel Island, South Carolina. In addition, four smaller LECs -- MebCom Telephone Company, Hargray Telephone Company, Inc., Bluffton Telephone Company, and Kingsgate Telephone, Inc. -- have obtained authority to provide stand alone cable service, pursuant to the Commission's streamlined Section 214 review. 98. Other LECs are pursuing entry into markets for the delivery of video programming through investments in, and acquisitions of, wireless providers. CAI, in which, as noted above, Bell Atlantic and NYNEX have invested, has wireless systems located in both Bell Atlantic's and NYNEX's local telephone service areas. Cross Country, which, as noted above, was recently acquired by PacBell, has wireless systems in PacBell's local telephone service area. The extent to which these LEC's plans are intended to be a transitional means of entering the MVPD market pending development of a wireline distribution system, or are intended to be complementary to or a substitute for such entry, remains unclear. 99. LEC Entry into Video Programming. In addition to offering video transport services, LECs have also entered into a number of joint ventures to produce and package video programming. As noted in the 1994 Report, several LECs had already entered into ventures with programmers. 100. In October 1994, Bell Atlantic, NYNEX, and PacTel announced the formation of a joint venture, since named Tele-TV, to provide interactive video networks. One part of the venture will produce content for the LEC's distribution facilities and the other will develop technical systems. In April 1995, Ameritech, BellSouth, and SBC announced an alliance with Disney Corporation to develop and package video programming and interactive services. On August 10, 1995, GTE joined this group. 3. Conclusions 101. When the 1994 Report was released, there had been no actual entry by LECs, beyond VDT trials, into multichannel video programming distribution markets in their local telephone service areas. However, large scale wire-based entry by LECs in the near term, primarily through the construction of VDT systems, was widely anticipated. As noted in the 1994 Report, if granted and constructed, the VDT applications pending at that time would have allowed service to approximately 8.5 million houses, which is nearly ten percent of the nation's television households. 102. Since the 1994 Report, some LECs appear to be reassessing their options for entry into the MVPD marketplace within their local telephone service areas. While some LECs intend to pursue construction and operation of permanent VDT systems, other LECs are also considering wireless technology and stand alone cable systems. It appears that, in the aggregate, currently authorized VDT facilities of four LECs (Bell Atlantic, NYNEX, GTE, and PacBell) would allow service to approximately 2.5 million homes in eleven markets. However, considering all modes of entry into MVPD markets, LEC plans may have not declined in terms of markets entered and the number of homes passed. At least three LECs (PacBell, NYNEX and Bell Atlantic) appear to have increased their respective overall number of homes passed by adding wireless technologies to their entry plans. Other LECs (including U S West, SBC, Bell South, Ameritech and several smaller LECs) have entered, or are entering, MVPD markets as cable operators. 103. Thus, an examination of LEC activity since the 1994 Report makes it clear that the state of LEC entry into the MVPD marketplace is continuing to evolve, both in terms of the mode and timing of entry. The pace of technological change may affect the speed of LEC entry into the MVPD marketplace, irrespective of which mode of entry the LEC chooses. Both U S West and Bell Atlantic cited the need to further evaluate new technologies as a reason for asking the Commission to suspend review of certain Section 214 applications. GTE and Bell Atlantic acknowledge in their comments a reluctance to commit to a technology that may become obsolete in the near future. Moreover, as was the case in 1994, unresolved issues remain that affect the ability of LECs to offer delivered video programming: (1) the Commission's regulatory framework for VDT is still developing; telecommunications reform legislation is still pending before Congress; and (2) the Supreme Court is expected to decide the constitutionality of the statutory cable-telco cross-ownership ban sometime next year. E. Satellite Master Antenna Television Systems 104. SMATV systems are MVPDs that serve residential, multiple dwelling units ("MDUs"), and various other buildings and complexes. A SMATV system generally offers the same type of programming as a cable system, and the operation of a SMATV system largely resembles that of a cable system -- one or more satellite dishes and antennas receive the programming signals; equipment combines, amplifies and processes the signals; and wires distribute the programming to individual dwelling units. By statute, however, a SMATV system is defined by way of an exception to the definition of a cable system. A system is a cable system if "closed transmission paths" (i.e., wires) are used: (1) to serve buildings that are not commonly owned, controlled, or managed, or (2) to cross a public right-of-way. To qualify as a SMATV system, and not be subject to cable system regulation, neither of the two statutorily defined operational elements for a cable system may exist within the system. 105. A typical SMATV system is an unfranchised, stand alone system that serves a single building or complex, or a small number of buildings or complexes in relatively close proximity to each other. For this reason, SMATV systems are sometimes referred to as "private cable systems." Recently, SMATV operators have begun using 18 GHz microwave facilities to link MDUs that are separately owned or separated by public rights-of-way. By using microwave equipment instead of coaxial cable to link their facilities, SMATV operators avoid being regulated as cable operators. This permits them to realize efficiencies associated with using some of the same headend equipment to serve more subscribers. 106. Relying upon industry sources, the 1994 Report concluded that there were approximately 3000 to 4000 SMATV systems operating nationwide, and approximately one million SMATV subscribers as of August 15, 1994. Recently, however, some industry sources have reassessed estimates of SMATV subscribership over the past few years and concluded that the estimates should be revised downward. Thus, rather than the estimated one million subscribers in 1994, and 1.09 million this year, the current estimates are 850,000 SMATV subscribers in 1994, and 950,000 in 1995. Both sets of estimates, however, indicate continued SMATV subscriber growth. 107. One analyst representing the industry suggests that particular markets, such as those in Dallas, Texas, Phoenix, Arizona and Florida, are experiencing SMATV system growth, and that this growth has spurred interest by firms such as General Electric Capital, Videotron, and MCI in investing in the SMATV market. SMATV system growth may also be due in part to the fact that SMATV operators may be able to deliver video programming for less cost than cable operators. Liberty Cable, for example, states that its video services are attractive to subscribers because it does not charge for additional outlets and its services are offered at half the price charged by the incumbent cable operator. 108. A few current examples of SMATV systems follow. Interactive Cable Systems, Inc. provides SMATV service to 700 properties, passes 230,000 households and serves 80,000 retail subscribers. OpTel, Inc. ("OpTel") provides SMATV service to more than 350 properties, passes more than 110,000 households, and serves more than 50,000 subscribers in Los Angeles, San Diego, Houston, Phoenix and the Dallas-Ft. Worth metropolitan areas. Liberty Cable serves approximately 28,000 subscribers at approximately 150 sites in the New York metropolitan area. Cable Plus has approximately 140 SMATV systems in the western United States, passing about 45,500 homes and serving about 18,000 retail subscribers. 109. The Motion Picture Association of America, Inc. ("MPAA") states that the Commission's decision this year to permit cable operators to acquire SMATV systems within their existing service territories removed a significant barrier to entry into the SMATV business. Commenters in that proceeding claimed that potential SMATV operators were hesitant to enter the SMATV business because they did not have the ability to recoup sunk costs by selling their SMATV systems to locally-franchised cable operators when that operator was the only potential buyer. In eliminating the prohibition against cable operators buying SMATV systems operating in their existing franchise areas, the Commission noted that one of the benefits of this decision might be to provide an exit strategy for SMATV operators; however, the economic data supporting this contention was inconclusive. 110. SMATV operators raise concerns about cable operators' use of exclusive contracts and certain zoning restrictions. Liberty Cable and OpTel argue that cable operators are abusing their market power by coercing MDU owners into perpetual exclusive contracts that foreclose competition from new market entrants. WCAI argues that cable operators have begun to pre- wire residential units for cable service at no charge to the developer in exchange for deed covenants and other restrictions forever barring the homeowner from installing rooftop antennas. These commenters urge Congress or the Commission to take action to curb these alleged abuses. 111. As for the future, SMATV operators, like other MVPDs, are looking to increase their channel capacity though digital technology. At the same time, SMATV operators are trying to keep costs down by connecting systems through 18 GHz microwave facilities. SMATV operators are also penetrating new markets such as colleges and universities. In addition, SMATV operators are trying to differentiate themselves from cable operators by offering security services and intra-MDU communications (or private telephone) services together with multichannel video programming services. F. Broadcast Television Service 112. In assessing the competitive position of broadcast television, it is important to distinguish between broadcast television as a source of programming that is an input to cable service and broadcast television as a transmission medium. As a source of programming, broadcast television continues to be the most watched source of video programming. Between 1984 and 1994, the number of broadcast signals available to the public increased by 32%. In the last year, the number of operating commercial and noncommercial television stations increased from 1,518 to 1,542. In addition, two new networks, United Paramount's UPN and Warner Brothers' WB, commenced program distribution in the 1994-95 television season. 113. In the 1994-95 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 66% share of prime time viewing among all television households; UPN and WB achieved a combined 9% share of prime time viewing. The most recent data available for households subscribing to cable service indicates that, even in cable homes, programming originated on local broadcast television stations accounted for a combined 64% share of all day viewing in the 1993-94 television season, while non-premium cable networks and pay cable services achieved a combined 45% share of all day viewing. It appears that broadcast television service continues to satisfy the demand for video programming for a significant number of viewers. Indeed, the importance of broadcast television as a source of programming is reflected in the fact that the inability of certain distribution technologies (e.g., DBS) to carry local stations may affect their competitiveness. 114. Moreover, broadcasting continues to be a profitable business, as total advertising revenues reached $13.5 billion in the half of 1995. Advertising revenues for the four major networks alone reached $6.2 billion in the first half of 1995, an increase of 3% over the first half of 1994. In 1994, advertising revenues for the four major networks reached approximately $10.9 billion, while cable programming networks received an estimated $2.3 billion in advertising revenues. 115. On the other hand, as 96% of the nation's television households are currently passed by cable and basic cable subscribership continues to escalate, the use of the broadcast spectrum as a transmission medium for direct video program delivery has clearly declined. Approximately two thirds of the nation's 95.9 million television households watch local broadcast channels through the facilities of an MVPD, and only one third of the households rely on over-the-air transmissions. Accordingly, we continue to believe, as in the 1994 Report, that broadcast television as a transmission medium is insufficient to constrain cable market power. 116. Several recent developments and technological innovations have the potential to affect the constraining effect of broadcast television as a transmission medium on cable operator conduct. First, the Commission has undertaken a series of proceedings aimed at removing existing regulations that may restrain more efficient and effective use of broadcasting as a video programming and transmission medium, which may prevent a rational, more efficient organization of the broadcast industry. Second, advances in broadcast technology, such as digital compression and advanced television, could permit multiple programs to be broadcast over a single channel, thereby expanding the number of broadcast video signals available in a particular market and strengthening broadcast television as a competitor to cable. Advanced television could also provide a higher quality signal and improve reception in those areas where broadcast television is otherwise unavailable. Depending upon Commission regulatory approval, digital technology could allow each broadcast licensee to send several streams of video programming simultaneously, as well as a mixture of video and non-video services. This technology could also enable the broadcaster to send a mixture of subscription and non- subscription services. The spectrum needed for the transition to digital television could be obtained from the spectrum currently allocated to broadcasting. In order to facilitate this transition, the Commission is considering the appropriate regulatory framework. However, because advanced television is in its initial planning phase, it is premature to determine its competitive effect in the cable industry. 117. Low Power Television. In the 1994 Report, the Commission noted that low power television ("LPTV") stations could offer multichannel video programming services on a subscription basis. At that time, the Commission was aware of at least one LPTV station providing multichannel service in an uncabled rural area of Minnesota. Construction permits were also issued to a single applicant for another possible LPTV site in Selma, Alabama. On the other hand, the allocation of spectrum use for new LPTV stations was frozen for service within 100 miles of the thirty-six largest United States markets in order to preserve spectrum availability for the implementation of advanced television systems. At present, we are unaware of any new LPTV stations providing multichannel services, and thus, they do not seem to have a significant competitive impact on the market. G. Other Actual and Potential Distributors 118. In this section, we address several other actual or potential distributors of video programming and distribution technologies that may affect competition. 1. Electric Utilities 119. Electric utility companies may be a potential source for the delivery of video programming. The entry of electric utilities into the video programming market is currently limited by law. However, if Section 205 of S. 652, the telecommunications bill passed by the Senate this year, is enacted as part of a new telecommunications law, the number of electric utilities permitted to provide video service could increase substantially. That provision would permit registered public utility holding companies to diversify into telecommunications and other industries. 120. An electric utility could either provide video service either directly to consumers or serve as a "pipeline" by offering its facilities to video program providers. Such companies already have incurred substantial costs to deploy a network that reaches nearly every household in the country and, according to one commenter, they have the financial resources and existing rights-of-way (e.g., pole attachments) needed to enter the video marketplace. Most major utilities already have fiber optic lines for controlling power distribution, and need only additional coaxial cable or fiber to the home to offer competitive wideband telecommunications services. Electric utilities have been experimenting with advanced communications technologies, including demand-side management programs that use two-way communications with customers and fiber optic cable that can carry video programming. As discussed above, some municipal electric utility companies are actively engaged in or contemplating overbuilding, and have formed joint ventures with cable and telephone companies to provide video service. Over the last year, additional plans have been announced by a few electric companies intending to enter the market for communications services. As stated previously, there is some interest by electric utilities in the provision of video service, although there is no evidence of the extent of their potential entry at this time. 2. Video Cassette Recorders 121. Video cassette recorders ("VCRs") permit viewers to watch television programs at times other than their scheduled times, and allow viewers to view pre-recorded tapes. Approximately 85% of all homes own at least one VCR, about the same share of households as a year ago. VCRs are used primarily for viewing pre-recorded video cassettes. Although VCRs are not MVPDs, the Commission has recognized that VCRs have at least some effect on cable operator conduct. Previously, the Commission determined that VCRs are best considered competitors to premium and pay-per-view services provided by cable operators because both offer movies without commercial interruptions. The price charged by video stores for movie rentals appears to have a constraining effect on the charge for pay-per-view movies from cable operators. According to industry analysts, consumers are willing to pay a premium for the convenience of pay-per-view service, but the differential between home video rental and pay-per- view prices cannot be too large. The average pay-per-view movie cost $4.25 in 1994, somewhat higher than the average cost of renting a movie from a video store. Currently, the average rental fee for all movies is $2.47 and the average for new movies, most comparable to the offerings of the pay-per-view services, is $2.70. 122. Digital video discs ("DVDs") and digital VCRs are expected to be available by 1996. DVDs feature sharper digital pictures, a vast capacity for audio and data storage, and greater convenience and durability than videotape, although they cannot be used for home recording. Digital VCR tapes are expected to have more than two times the recording capacity of normal tapes. It is predicted that the availability of this technology will enhance competition as consumers will have access to programming not available over-the-air or through traditional cable service. However, as with the introduction of conventional VCRs, these new home video technologies may not materially penetrate the market until their prices drop from the expected initial level of $1,000 to approximately $500. On this basis, we expect that VCRs will continue to have some constraining effect for some consumers on the pay-per-view and premium movie services offered by cable systems, even though VCRs cannot provide the full range of services offered by cable systems generally. 3. Interactive Video and Data Services 123. The interactive video and data service ("IVDS") is a point-to-multipoint, multipoint-to-point, short distance communications service in which licensees may provide information, or services to individual subscribers at fixed locations within a service area, and subscribers may provide responses. This radio based interactive service is available for a variety of public uses that may be delivered by, and coordinated with, broadcast television, cable television, MMDS, DBS, or any other future television delivery technology. By itself, however, the service is not capable of delivering voice or full-motion video. Among the types of services that IVDS licensees may offer, in conjunction with video or data delivery systems, are polls, educational classes, home banking, and home shopping. The Commission is also considering a proposal to allow IVDS licensees to provide ancillary mobile service to subscribers within their service area. 124. The Commission awarded 18 IVDS licenses by a lottery held September 15, 1993. Pursuant to new radio spectrum auction authority, the Commission auctioned an additional 594 licenses on July 28 and 29, 1994. Each license permits service within a specified service area, which is equivalent to a cellular radio service area. Under the rules, an IVDS licensee must make service available within one year to at least ten percent of the population or area that it is licensed to serve. This condition has been waived for 17 of the 18 firms awarded licenses through the lottery process, and the Commission is currently considering a request by a number of auction winners that the requirement be eliminated. To date, only a few of the licensees have met the ten percent "build out" requirement. Thus, at this time, it appears that IVDS services are not available to sufficient numbers of consumers to affect the video marketplace. 4. Internet 125. The Internet is a world-wide network of computer networks operated by governmental, educational, and commercial entities, including entertainment firms. The interconnected computer networks use a common communications protocol, TCP/IP (Transmission Control Protocol/Internet Protocol), which is essentially a common language for interoperation of computer networks that might use a variety of local protocols. 126. The portion of the Internet in the United States generally has three levels -- local area networks, regional (mid-level) networks, and backbones. Until recently, NSFnet was the primary backbone for this portion of the Internet, but on April 30, 1995, NSFnet ceased operation and traffic in the United States is now carried on several privately operated backbones. These backbones generally use fiber optic facilities and, by the summer of 1995, there were at least fourteen national and super-regional high-speed TCP/IP networks. MCI, which assisted in operating the original NSFnet, is one of the largest carriers of Internet traffic in this country, but the market includes firms such as Sprint, Alternet, PSInet and UUNet. 127. Currently, the main categories of Internet activities are: (1) electronic mail; (2) interactive "chats"; (3) information retrieval; (4) remote program execution; and (5) user groups. As bandwidth increases, these networks may increasingly distribute more complex data types, such as voice and video, as well as more traditional data. The functionalities of these networks can be expected to become increasingly varied and to include home shopping and banking, video-on-demand, and video conferencing. Currently, Internet users generally rely upon existing communications facilities to access and use the network, such as standard telephone lines, private lines, integrated services digital network ("ISDN") lines, wireless facilities, or coaxial cable. As a result, the Internet is not a separate local distribution network except for extremely high volume users who access the network via private lines. Cable access to the Internet currently is being tested, and through the Digital Audio-Visual Council ("DAVIC") the cable industry is working to develop a standard for cable modem and Internet access technology. Server software that will enable the delivery of live, real-time audio, and video over the Internet is becoming available. Consumer and business demand for the commercial, academic, governmental, and entertainment offerings is likely to grow as the networks connected to the Internet and their capabilities increase. Being an open network, the Internet has the potential to affect the video marketplace, perhaps significantly. However, it appears too early to assess its impact. III. MARKET STRUCTURE CONDITIONS AFFECTING COMPETITION A. Horizontal Issues in Markets for the Delivery of Video Programming 128. In this section of the 1995 Report, we examine several issues concerning rivalry in markets for the delivery of video programming. First, we discuss the market definition that we used in the 1994 Report, and have used again this year. We also consider the extent of concentration among MVPDs in local markets, and the nature of competition among MVPDs. Finally, we document increasing consolidation nationally and regionally among cable MSOs (and other MVPDs) over the past year, and the potential effects of such increased consolidation on rivalry in local markets for the delivery of video programming. 1. Market Definition 129. To analyze rivalry among providers of video programming services, it is necessary to define the relevant product and geographic markets. In the NOI, we invited comment on our use last year of the 1992 Cable Act's definition of "multichannel video programming service" as a starting point for the definition of the relevant product. Although few commenters directly addressed this issue, most commenters generally relied on the same definition of the relevant product market. Examples of comments concerning the appropriate product definition include DIRECTV's approval of the Commission's inclusion of all MVPDs in the relevant product market, and HBO's assertion that subscribers can create their own service comparable to cable by combining over-the-air broadcast service with service from a non-cable MVPD and "premium" programming obtained from a non-cable MVPD or a VCR. Accordingly, we reaffirm here our determination to use definition of an MVPD in the 1992 Cable Act as a starting point, and have considered all reasonable substitutes for the video programming services generally offered by cable systems and other MVPDs. 130. We also sought comment in the NOI on the relevant geographic market -- the area in which buyers can obtain alternative sources of supply, or in which there are sellers who act to restrain the prices charged to those buyers. A buyer of multichannel video service may select only from among the firms distributing multichannel video programming in a particular area -- the subscriber cannot turn to other providers whose services are not available in an area. Accordingly, commenters generally agree that the relevant geographic market is the local franchise area, and we continue to believe that the relevant geographic market in which MVPDs compete is essentially local in nature. 2. Concentration in Local Markets 131. A firm with market power can maintain prices above the level that would prevail if the market were competitive, and the exercise of market power tends to produce a wealth transfer from buyers to sellers. Sellers with market power can lessen competition in such areas as product quality, innovation and service. Market power among buyers of a product, referred to as monopsony power, can depress the price of the product below competitive levels, thereby reducing output below the optimal level. When potential entrants are unlikely to be able to respond quickly to an exercise of market power, the degree of concentration among competitors, which is referred to as horizontal concentration, can have a significant effect on rivalry and market performance. Market concentration reflects the number of firms a market and their respective market shares, and is particularly relevant where, as here, a market is characterized by substantial barriers that delay competitive entry. In general, as markets become increasingly concentrated, firms have increased opportunities to coordinate their conduct tacitly or overtly, limit competition, and increase their rates of return. 132. Last year, we found that local markets for providing multichannel video programming were highly concentrated, and that most consumers could not choose the services of an MVPD other than the local cable operator. Although providers of DBS and MMDS services have increased their subscribership since last year, as shown in Table 1 of Appendix G, the combined national market share of non-cable MVPDs at the end of September 1995 was slightly less than nine percent. Thus, on average, we expect that most local markets as measured by current subscribership continue to remain highly concentrated. If we used total number of subscribers as a measure of market share, we could calculate the Herfindahl-Hirschman Index ("HHI") for the market, which is a standard measure of horizontal concentration in an industry that is calculated by summing the squares of the firms' percentage shares of the market. The United States Department of Justice and the Federal Trade Commission generally regard a market with an HHI below 1000 as "unconcentrated," a market between 1000-1800 as "moderately concentrated," and a market above 1800 as "highly concentrated." Using total numbers of subscribers as a measure of market share, the average HHI in local markets for video programming would be over 8650, or more than four times as high as the threshold at which a market may be considered "highly concentrated." 133. An alternative way to view MVPD concentration may be to assign equal market shares to competing MVPDs with similar capacities for serving subscribers. Such an approach is consistent with the approach taken by the United States Department of Justice and Federal Trade Commission. Assigning equal market shares to firms that have similar abilities to serve new customers may be appropriate because, to the extent competing MVPDs have similar levels of capacity deployed in a market, they may have an equal ability to serve customers. Under such an approach, a local market served by five video distributors of roughly comparable capacity would have an HHI above 2000, and thus would be considered highly concentrated. Only when a sixth MVPD is providing service in a particular local market would the HHI for that market fall below the highly concentrated level, to an HHI of 1673. Because less concentrated markets are generally less susceptible to impaired market performance and are, therefore, more likely to benefit consumers, the Commission will continue its efforts to eliminate barriers that delay entry by competitive firms, although issues associated with such conentration are likely to remain a concern for at least several years. 3. Nature of Competition in Local Markets 134. The extent to which concentration in local markets for the delivery of video programming affects consumer welfare is affected by the degree to which the services of other MPVDs are interchangeable with the services of cable systems. While we continue to believe that the distribution of multichannel video programming is the relevant market in which cable operators compete, we recognize that MVPDs use different distribution technologies that can each be described by a unique set of attributes, which can be similar to, or significantly different from, the attributes of a typical cable system. For example, products within this market can differ from each other in terms of the number of channels and types of programming offered. Demand for the services of different MVPDs is a function of consumer preferences for the different attributes of the distribution systems. 135. The extent to which other firms within the multichannel video market provide pricing discipline for cable television, therefore, is dependent on the extent to which the offerings of these other firms differ from the services of cable systems. Cable systems are less able to raise prices above competitive levels, all other things being equal, if consumers are able and willing to choose instead the services offered by other firms. We believe current cable subscribers are more likely to switch to the services of other MVPDs in response to a price increase if those other MVPDs offer bundles of attributes comparable to the attributes offered by the cable operator. 136. Concerns about concentration are also informed by an analysis of the incentives for other MVPDs to engage in product differentiation strategies, which can also affect the competitive interactions among firms within a given market. All other things being equal, firms that offer products with dissimilar attributes are less likely to compete with each other on the basis of price. To a certain extent, MVPDs can choose the attributes of the services they offer. Choosing dissimilar attributes may allow firms to decrease the amount of price competition in the industry. This is especially true to the extent that the firms can commit to their choice of attributes, since this credibly signals their willingness to pursue this strategy. For example, one MVPD may decide to specialize in the offering of sports programming. Such a strategy could differentiate its services from those offered by most cable systems, which typically provide a variety of programming, including some sports. By differentiating its services, the MVPD might reduce the extent of competition between its services and those offered by cable systems generally. To the extent that this firm signs long-term contracts with sports programmers, it can commit itself to pursue this differentiation strategy for a given period of time. 137. On the other hand, once firms have expended the fixed costs necessary to enter the video distribution market, they might have an incentive to expand output in order to lower unit costs and to help recoup their fixed investment. One way to do this might be to position their services as closer substitutes for those of cable systems and compete more strongly with those systems on price terms. To date, some firms, such as cable overbuilders and MMDS firms, appear to have pursued a strategy based on a certain degree of price competition with incumbent cable systems. They appear to generally provide programming choices that are very similar to the ones provided by incumbent cable systems and try to draw customers away by offering lower prices. In contrast, it currently appears that DBS operators have tended to pursue more of a product differentiation strategy, with DBS operators focusing on their ability to offer digital programming that includes programming and operational features currently unavailable from most cable systems. 138. We continue to believe that efforts to encourage competitive entry and reduce concentration will increase opportunities for rivalry and improve market performance. However, it is difficult to predict the extent to which local markets will be characterized over the long term by vigorous rivalry among multiple distributors, or whether additional MVPDs may remain essentially fringe competitors, with either relatively small market shares or services largely differentiated from those of cable systems. 4. Concentration of Cable Systems Nationally 139. In addition to our ongoing concern with concentration in local markets, the 1992 Cable Act was concerned with and places limits on the nationwide concentration of cable systems, given the potential effect of this increased national concentration on competition in the provision of multichannel video programming. In the 1994 Report, we found that the four largest cable MSOs accounted for service to 47% of all cable subscribers, with TCI (24.75%), Time Warner (12.53%), Continental (5.08%), and Comcast (4.82%) comprising the four largest cable operators. We also calculated an HHI of 898 for cable systems nationally based on transactions consummated at the time of the 1994 Report, which means that a national market would have been considered "unconcentrated." 140. One year later, we find that the four largest MSOs accounted for service to 55% of cable subscribers, with TCI (25.87%) Time Warner (16.21%), Continental (6.85%), and Comcast (5.66%) remaining the four largest MSOs. Greater concentration among the largest MSOs contributed to an increase in an HHI to 1098, which means that a national cable market would now be considered moderately concentrated. 141. A number of transactions have been announced since our report last year, including acquisitions by the two largest MSOs. If all of those transactions are consummated, the top four companies' share of subscribers would increase to 61.3%, and the percentage of subscribers served by the ten largest MSOs would increase from 73.42% to 79.89%. The announced transactions include: (1) TCI's pending purchase of cable systems from Viacom, which would add 1.16 million subscribers to its subscriber base; (2) Time Warner's pending acquisition of Cablevision Industries Corporation ("CVI"), which serves 1.4 million subscribers; (3) Comcast's announced transaction with Scripps Howard, which has attributable interests in systems serving over 750,000 subscribers; and (4) a number of smaller announced transactions. If all of those transactions are consummated, an HHI calculated for cable systems nationally would increase from 1098 currently to 1355, which is well into the range in which a market would be considered moderately concentrated. 5. Regional Concentration of Cable Systems -- "Clustering" 142. Overall, it appears that the desire of cable MSOs to develop local "clusters," is a major factor underlying many of the cable industry transactions, including sales of systems and system-for-system exchanges between MSOs. In its 1994 annual report to shareholders, Time Warner describes the clustering of its cable systems as the basis both for anticipated revenue growth from cable service and for entering the market for local telephone service. One analyst estimates that twenty percent of the nation's cable subscribers will have changed hands in 1995, and that nearly all of these transactions are driven by MSOs' interest in clustering systems. 143. The number of clusters of systems serving at least 100,000 subscribers increased from 88 at year-end 1993 to 97 by year-end 1994. These 97 clusters accounted for 34% of all cable subscribers. Time Warner had 33 of these clusters, TCI had 12, and Continental had 6. In addition to creating clusters from previously unaffiliated systems, the largest MSOs are increasing the size of their existing clusters. At the end of 1993, there were 6 clusters of systems serving a combined total of over 300,000 subscribers. By the end of 1994, however, the number of such clusters of over 300,000 subscribers had increased to 13, and over 6 million of the nation's subscribers were receiving service from one of those "mega" clusters. 144. In addition to a number of the smaller transactions, two of the largest system sales announced since the 1994 Report were apparently motivated, at least in part, by the desire to cluster systems:  TCI's pending purchase of cable systems from Viacom and Chronicle Publishing would result in TCI controlling 1.3 of the 1.45 million cable subscribers in the San Francisco Bay area, and 900,000 of the 1 million subscribers in Seattle.  Time Warner's pending acquisition of Cablevision Industries and its acquisition of KBLCOM would result in Time Warner having clusters of over 1 million subscribers in New York City, 638,000 in central Florida, 512,000 in Tampa Bay, Florida and 249,000 subscribers in Houston. 145. Cable MSOs have also sought to create clusters by trading systems. The largest system-for-system exchange since the 1994 Report occurred on September 11, 1995, when TCI and Cox announced that they had agreed to exchange cable properties involving 600,000 subscribers. Other significant system-for-system exchanges announced in the past year include Time Warner and Century trading systems that involved a total of 200,000 subscribers; Time Warner and Jones Intercable exchanging a total of 182,000 subscribers on one occasion, and 141,000 in another instance; TCI and Intermedia Partners exchanging systems that served a total of 155,000 subscribers; TCI and Post-Newsweek Cable exchanging 102,500 subscribers; and TCA and Time Warner swapping systems involving 58,000 subscribers. 146. As we recognized last year, increased regional concentration could have both procompetitive and anticompetitive effects. In its comments this year, Time Warner notes that the economies associated with clustering were an important factor in its decision to make multimillion dollar investments in facilities that will provide the next generation of telecommunications services. Time Warner also disagrees with a number of concerns associated with clustering that we discussed last year. In particular, it argues that clustering does not tend to remove any competitive pressure that unaffiliated, adjacent cable systems exert on each other through threats of overbuilding because, according to Time Warner, adjacent cable systems do not exert competitive pressure on each other because adjacent systems cannot compete for each other's subscribers. Similarly, Time Warner argues that clustering does not send entry-deterring signals to potential rivals, and notes that entry by DBS and LECs into local markets has taken place concurrently with its own substantial investment in its systems. 147. Finally, as mentioned above in the sections addressing competition to cable systems by MVPDs using various distribution technologies, there has been a significant increase in actual and proposed consolidation among non-cable MVPDs since last year. In particular, the largest MMDS system operators have acquired a number of previously unaffiliated MMDS systems, and two of the largest MMDS systems have themselves become partly or wholly owned by LECs providing telephone services in the region. The likely overall effect on market performance of these transactions among non-cable MVPDs is currently unclear. Such consolidation may make the non-cable MVPDs more effective competitors, in particular by combining LEC resources with the operations of other MVPDs. On the other hand, increased consolidation among non-cable MVPDs may tend to reduce the number of firms that ultimately offer multichannel video programming in most local markets which, as discussed above, may reduce the potential for sustained and vigorous price competition. B. Vertical Integration in the Cable Industry 148. In this section of the 1995 Report, we review the status of vertical integration in the cable industry, and update information provided in the 1994 Report. We also provide information on the Commission's enforcement and rulemaking activities relating to provisions of the 1992 Cable Act designed to address the potential anticompetitive effects of vertical integration and to foster competitive entry in the video programming supply and distribution markets -- the program access, program carriage and channel occupancy rules. 1. Status of Vertical Integration in 1995 149. In the 1994 Report, the Commission found that the percentage of programming services that were affiliated with a cable operator had grown from approximately 50% to 53% since 1990. In addition, we found that most of the programming services that had been launched since 1990 were owned in part by one or more cable operators. We further determined that vertically integrated programming services continued to be among the most widely viewed national services. 150. Since the 1994 Report, the total number of national programming services has increased from 106 to approximately 129. Of those 129 services, 66, or approximately 51% of all national services existing today, are vertically integrated. This represents a slight decrease in the level of vertical integration in the industry from last year's figure of 53%. 151. Based on its analysis of recent data, NCTA states that little has changed with regard to cable MSO ownership or affiliation with programming networks since the 1994 Report. As NCTA points out, a number of cable networks that were launched in the past year have no affiliation with a cable MSO. Five of the twelve national programming services that were launched since September 1994, or approximately 42%, are affiliated with a cable operator. In addition, cable operators have thus far invested in only 18 of the 80 national programming services that have been announced but not launched since the 1994 Report, or approximately 23% of such announced services. 152. The ten largest MSOs in terms of subscribership have a stake in 65 of the 66vertically-integrated services, or in 99% of all such services. TCI, the largest MSO, holds ownership interests in 38 national programming services, which amounts to approximately 30% of the available national programming services. This represents an increase in TCI's level of vertical integration since last year, when we reported that TCI held interests in 22% of all available national programming services. Time Warner, the nation's second largest MSO, holds interests in 18 national programming services, or approximately 14% of those available. This represents a 1% decline from 1994. 153. Since the 1994 Report, the number of national programming services in which an MSO holds a 50% or greater interest has increased. Currently, 36 vertically-integrated national programming services are owned, in part, by an MSO holding a 50% or greater ownership interest. Viacom holds a 50% or greater interest in 12 of those 36 services, but, as discussed above, has agreed to sell its cable systems to TCI. This would significantly reduce the degree of such ownership interests by cable operators, as well as the overall level of vertical integration in the cable industry. TCI/Liberty Media and Time Warner hold such interests in 10 and 5 of those 36 services, respectively. 154. Since 1994, there has been a decrease in the number of programming services in which multiple MSOs hold combined interests of greater than 50%. Currently, there are nine programming services that are each owned, in part, by several MSOs whose ownership interests, if combined, would comprise an interest of 50% or greater in that programmer. There are eight programming services that are each partially owned by several MSOs whose ownership interests, if aggregated, would constitute a minority interest in that programmer. In addition, there are approximately ten vertically-integrated programming services in which a single MSO holds a minority ownership interest. 155. Programming services affiliated with an MSO continue to be among the most popular programming services in the country. One exception is the non-vertically integrated ESPN, which remains the top service by subscribership, and is the fifth most popular service based on prime time rating. Of the top 25 programming services in terms of subscribership, 15 are owned in whole or in part by an MSO, and 10 by one of the four largest MSOs. Two of those top 25 services, C-SPAN and C-SPAN II, while not owned in the usual sense by cable operators, were creations of the cable industry. Of the top 15 services by prime time rating, 11 are vertically integrated, and 9 are owned, in part, by one or more of the four largest MSOs. 156. In the last year, there has been little change in the relative rank of vertically- integrated programming services. Only two of last year's top 25 programming services by subscribership no longer appear on that list. While one of those services, Comedy Central, is vertically integrated, the other service, EWTN: The Catholic Network, is not. However, the two services that replaced them, Home Shopping Network and The Learning Channel, are vertically integrated. Only two services that previously were in the top 15 by prime time rating, MTV and Nickelodeon/Nick at Nite, no longer rank among the 15 highest rated networks in terms of prime time audience. Both MTV and Nickelodeon/Nick at Nite are vertically integrated. In addition, both The Learning Channel and E! Entertainment Television, which, unlike last year, are now among the top 15 services by prime time rating, are vertically integrated. 2. Access to Programming 157. As part of the 1992 Cable Act, Congress sought to promote entry into local distribution markets through interim limits on strategic vertical restraints between vertically- integrated cable operators and programmers. This Congressional policy is embodied in Section 628 of the Communications Act and the Commission's program access rules. These provisions place limitations on the conduct of vertically integrated firms distributing satellite programming and MVPDs, so as to foster competitive entry by competing distribution technologies. In general, the rules prohibit unfair methods of competition and limit discriminatory conduct, including the use of exclusive contracts. In addition, under the program carriage provision of the Act, competing distributors have standing to challenge exclusive arrangements that are the result of coercive activity. 158. Although vertical relationships can often have pro-competitive effects, under certain market conditions, strategic vertical restraints (achieved by vertical integration, exclusive distribution contracts, or monopsony pressure) can also deter entry into the distribution market for delivered multichannel video programming. Accordingly, the Commission's program access policies balance the likely competitive harm to consumers created by a particular vertical arrangement against its likely efficiency benefits. By targeting those vertical restraints that can impede entry into the distribution market, the program access policy attempts to contribute to the long-term market performance of both the distribution market and the programming market. 159. We note that several parties have set forth general arguments both in favor of, and critical of, the program access regime. In general, we continue to believe that the program access rules, as enforced by the Commission, successfully promote competition from existing and potential competitors in the video programming distribution market, and do not unreasonably inhibit efficient integration or restrict the development and distribution of new programming. a. Commission Activities 160. The Commission's enforcement of the program access provisions appears to be meeting one of the goals of the 1992 Cable Act -- ensuring access by competing MVPDs to satellite cable programming from vertically-integrated programming services. Commenters generally agree that the program access rules have resulted in decisions that help emerging competitors to cable obtain access to programming, although some commenters, including the National Rural Telecommunications Cooperative ("NRTC"), still allege that they do not have access to programming, or have access to it at discriminatory rates. 161. Enforcement Activities. Of the four program access cases that have been resolved since the 1994 Report, two involved petitions for exclusivity and two involved complaints by competing MVPDs. In an exclusivity petition decided in 1995, Cablevision Industries Corp., ("CVI"), a cable MSO, and USA Networks ("USA"), a cable programming vendor (the "Petitioners"), asked the Commission to authorize them to enforce an exclusive distribution agreement with the Sci-Fi Channel programming service ("Sci-Fi"). In denying the petition, the Cable Services Bureau concluded that limiting access to the Sci-Fi channel would impede the development of competition in local markets by denying a popular programming service to actual or potential competitors in seventy-eight communities nationwide. The Bureau concluded that the exclusive contract was not in the public interest because the harmful effects of exclusivity on the development of competition in local distribution markets, and on competition from competing distributors, outweighed any efficiency-enhancing or pro-competitive effects of the requested exclusivity. 162. In another exclusivity petition resolved in the last year, NewsChannel, a Division of Lenfest Programming Services, Inc. ("NewsChannel"), which is a regional and local news network that is 50% owned by TCI, asked the Commission to authorize it to enter into exclusive program distribution agreements with its cable affiliates. The Bureau found that NewsChannel had demonstrated that the limited exclusivity would not have a significant limiting effect on competition, and granted the petition based upon consideration of the public interest factors involved set forth in Section 628(c)(4)(A)-(E). 163. One of the two discrimination cases resolved in 1995 involved a complaint by CellularVision against Prime SportsChannel Network alleging discrimination in the sale of satellite cable programming in violation of Section 628(c)(2)(B) of the Communications Act and Section 76.1002(b) of the Commission's rules. CellularVision, the nation's sole LMDS licensee, which operates a single system in Brooklyn, New York, alleged that SportsChannel Associates, a programming vendor vertically integrated with Cablevision, refused to provide its SportsChannel New York programming to CellularVision. SportsChannel New York contended that it had not received satisfactory assurances from CellularVision concerning the way the latter would secure the programming services it distributes. The Bureau found SportsChannel's security concerns unpersuasive and held that SportsChannel's refusal to sell its programming to CellularVision constituted an unreasonable refusal to sell. 164. In another discrimination complaint, NRTC filed a price discrimination complaint against EMI Communications Corporation, a fixed service satellite carrier that distributes the signals of satellite broadcast stations WWOR-TV and WSBK-TV to cable operators and HSD users through program packagers such as NRTC. The parties, assisted by Commission staff, settled the matter and the case has been dismissed. 165. Rulemaking Activities. In November 1994, the Commission released an order on reconsideration addressing a number of program access issues that remained after the Commission's first report and order concerning program access issues ("Program Access Report and Order") In that order on reconsideration, the Commission generally affirmed its initial determinations that: (1) a showing of harm is not required for actions brought under Section 628(c); (2) differences in costs at the MVPD level cannot justify pricing differences by a satellite broadcast programming vendor in the sale or delivery of satellite cable programming or satellite broadcast programming among or between cable operators, or other MVPDs; (3) the Commission's rules apply to contracts that were in existence before the effective date of the rules; (4) a 5% attribution standard should be used to assess the existence of vertical integration; and (5) a remedy allowing recovery for injuries from violations of program access rules is not necessary at this time. 166. In December 1994, the Commission released another order on reconsideration of the Program Access Report and Order, in which it denied a petition by NRTC to include exclusive contracts between DBS operators and vertically-integrated MVPDs within the per seprohibition of Section 628(c)(2)(C) and Section 76.1002(c) of the Commission's rules. On the basis of the findings and the legislative history of the 1992 Cable Act, which was focused on concerns over exclusive arrangements of cable operators, as well as the language of the provision, the Commission denied NRTC's petition. The Commission, however, noted that in declining to broaden its rules, it did not preclude the petitioner or any other aggrieved party from seeking relief from such contracts through other provisions of the program access rules. 167. Issues of Concern to Commenters in 1995. In the NOI, we invited comment on additional information we should consider with respect to vertical integration. This year, parties focused their comments on three principal areas: (1) the extension of the program access rules to non-vertically integrated programmers; (2) the extension of the program access rules to non-satellite delivered programming; and (3) the application of the program access rules to customers of LEC VDT platforms and to programming services affiliated with LECs. Parties' comments are summarized in Appendix I. 168. In general, commenters raise essentially the same arguments that were raised last year with respect to application of the program access regime to programming services of non- vertically integrated vendors and to non-satellite delivered programming services. As we noted last year, the Commission's program carriage rules provide standing to MVPDs to file complaints alleging that cable operators have coerced programmers, whether vertically integrated or not, into granting them exclusive distribution rights. In addition, apart from the general assertion that non-vertically integrated programmers charge non-cable MVPDs higher rates than cable operators, as was the case last year, commenters have not presented any specific evidence regarding anticompetitive behavior that would require further action by the Commission at this time. 169. Regarding commenters' claims about the applicability of the program access regime to VDT platforms, a number of commenters correctly point out that these issues are either already subject to Commission proceedings, or may be affected by pending legislation. We also note that application of the Commission's program access rules to customer-programmers of VDT platforms is the subject of a pending program access complaint. Therefore, we do not address these issues in this Report. b. Additional Competitive Issues Relating to Vertical Integration 170. Channel Occupancy and Program Carriage Comments. In the NOI, we sought comments on the channel occupancy and program carriage rules. Time Warner argues that the Commission's channel occupancy and program carriage rules generally constrain the ability of cable operators to produce programming by diminishing economic incentives to do so. Time Warner also submits that cable operators are less likely to risk scarce channel capacity on an unproven network if they cannot offer that network on an exclusive basis because of the program carriage rules. Time Warner contends that cable operators are less likely to produce programming if they are not able to deliver it on their own systems because of the channel occupancy rules. HBO submits that the channel occupancy rules are of little use in ensuring diversity in programming and "may in fact impede the use of technologies that will benefit consumers." Pay-Per-View Network, Inc. d/b/a Viewer's Choice ("Viewer's Choice") agrees, arguing that the channel occupancy rules are contrary to the public interest because they limit cable subscribers' access to programming they would prefer to receive. TCI sees little evidence that the channel occupancy limits are necessary to ensure access for non-vertically integrated programmers. 171. The channel occupancy limits have been the subject of a reconsideration order. In April, the Commission denied petitions for reconsideration filed by the Center for Media Education/Consumer Federation of America ("CME") and Bell Atlantic. We declined: (1) to reduce the number of channels that a cable operator could devote to affiliated programming from 40% to 20% of activated channels; (2) to reverse the decision to include over-the-air broadcast, public, educational and government, and leased access channels when calculating total channel capacity; (3) to reverse the decision to exempt local and regional networks from channel occupancy limits; (4) to reverse the decision not to apply channel occupancy limits beyond a system's first 75 channels; and (5) to reverse the decision to grandfather all vertically integrated programming services being carried as of December 4, 1992, the effective date of the 1992 Cable Act. In addition, the Commission declined to reconsider its decision to apply channel occupancy limits to cable systems that face actual head-to-head competition. Bell Atlantic and Time Warner have appealed the channel occupancy decision to the United States Court of Appeals for the District of Columbia Circuit. In general, we find little indication that cable channel occupancy limits have had a significant impact on the video marketplace during the last year. 172. Leased Access. Another means of addressing concerns relating to media diversity is found in the statutory leased access requirements. One commenter, ValueVision International ("ValueVision"), believes that commercial leased access could address many of the problems of programmer access to cable systems. However, ValueVision claims "the `implicit fee' provisions of the Commission's initial leased access rules . . . have been relied upon by larger cable operators to effectively eliminate leased access as the kind of tool Congress contemplated to promote such competition." Petitions for reconsideration of these rules are under review. Although the leased access rules provide a means of allowing editorial voices other than those selected by the system operator to be heard, a variety of difficult issues remain to be resolved. C. Technical Advances 173. Technological developments are likely to have particularly significant effects on competition in communications industries, where technologies, including those used in the distribution of video programming, are evolving rapidly. For example, the simultaneous transmission of two-way voice, video, and data has historically required a separate transport architecture for each type of information. Today, digital technology has evolved to the point where it appears that it may become economically feasible for voice, video, and data to be transported simultaneously over the same network. Digital technology has also paved the way for the development of compression technologies aimed at conserving bandwidth, which among other things, may permit MVPDs to expand offerings. Moreover, many different communications companies are in the midst of deploying new and improved system architectures to increase the bandwidth and efficiency of their distribution facilities. Such upgrades will allow for the introduction of new services that are currently unavailable to consumers. 174. Advances in digital technology and the deployment of advanced system architectures have the potential to exert a major influence on the structure of the market for the delivery of video programming, but the overall effect of these developments on future industry structure and competition with incumbent cable systems remains unclear. Whether these new technologies result in increased competition largely depends on how competing MVPDs are able to employ them to conserve bandwidth and to develop interactive services. 1. Background 175. Because the delivery of full motion video requires a large amount of bandwidth relative to other types of communication, the limited supply of bandwidth has always been a barrier to the expansion of video services. For example, a telephone company can use as little as 3 kHz of spectrum to transmit a voice signal, whereas 2,000 times as much spectrum (a minimum of 6 MHz) has historically been needed to transmit a single broadcast channel of analog video. Thus, networks transmitting analog video channels can reach their maximum capacity very quickly. The point at which MVPDs encounter this barrier, however, differs depending upon the distribution media and technologies they employ. 176. Cable systems' use of coaxial and fiber optic cable gives them the most bandwidth of all of the currently deployed MVPDs. The electrical characteristics of coaxial cable make it suitable for very high bandwidth transmission, up to one GHz of bandwidth. Roughly 15% of total cable plant miles are in systems with 400 MHz to 1 GHz capacity, with offerings ranging from 52 channels to 150 channels. Another 75% are in systems with capacities ranging from 330 MHz to 400 MHz, with offerings of between 40 and 52 channels. Capacity continues to increase as operators integrate fiber optic cable into their systems. 177. LECs, like cable systems, use spectrum enclosed in wires for the distribution portion of their networks. The difference is that the majority of LEC local loop plant (the portion of the network between the local central office telephone switch and the customer) currently consists of twisted copper wire pairs, designed for the transmission of narrowband signals, but not as well suited for transmission of broadband signals. Thus, despite the sophisticated switching capability and ubiquitous deployment of their networks, the local portion of the LEC plant is generally limited in terms of bandwidth when compared with that deployed by other MVPDs. These constraints are not likely to apply to video dialtone architectures, which are generally designed with broadband distribution plant. 178. Many current and potential competitors to cable operators use or plan to use wireless technologies to distribute video programming to subscribers. These competitors include systems using MMDS, LMDS, and DBS distribution technologies. The principal advantage of these wireless technologies is that they can be deployed without the installation and maintenance of a wireline system. A potential disadvantage is that they have been allocated only a comparitively small amount of spectrum. 179. In anticipation of emerging competition in markets for the delivery of video services, many MVPDs are apparently planning enhance their standard services and expand their offerings to include new services such as Internet access, video on demand, and other interactive services. Such efforts require increased bandwidth and two-way network capabilities. Two of the primary strategies MVPDs are employing to increase bandwidth are upgrading system architecture and deploying digital compression. Cable operators and LECs are pursuing both strategies while MVPDs using wireless distribution methods are focusing primarily on digital compression. 2. Upgrading Wired Architectures 180. A major limitation on cable system capacity is the inability of coaxial cable to carry signals over long distances without the use of amplifiers. On the other hand, fiber optic cable can transmit signals over much longer distances without the use of amplifiers. Fiber optic cable can be deployed in the trunk and distribution portions of cable networks, or extended all the way to the node (the point at which a cluster of individual households connect to the network). From the node, information is transmitted to subscribers' houses over coaxial cable. This combination of fiber optic cable and coaxial cable is referred to as a hybrid fiber-coax ("HFC") architecture. 181. During the past three years, the cable industry's deployment of fiber optic cable has grown by over 100% annually. Current estimates indicate that over 33% of all cable subscribers are served by cable systems employing an HFC architecture, and some estimate that the number of subscribers served in this manner will increase dramatically over the next five years. 182. LECs are also integrating fiber optic cable into their networks. During 1994, LECs upgraded over 21,000 route miles of their networks to fiber optic cable. Nonetheless, only 6% of LECs' networks, which total nearly 3.7 million route miles of cable, consist of fiber optic cable. Furthermore, roughly 60% of this fiber is contained in the interoffice portion of the network (the part of the network that connects local telephone office switches to one another). Thus, the local loops, which comprise 89% of the LECs' networks, are almost entirely comprised of low capacity twisted copper wire pairs. LECs are considering two principal architectures to replace their current architectures dominated by copper wires -- switched digital video ("SDV") and HFC. 183. In its most advanced form, the SDV architecture requires the deployment of fiber optic cable to an optical network unit ("ONU") serving a small number of homes. The remainder of the distance from the ONU to a subscriber's home would be traversed by a combination of twisted copper wire pairs and coaxial cable. Using this architecture, LECs could provide switched telephony and compressed digital video services without replacing all of the twisted copper wire pairs connecting homes to their networks. The transmission of analog video signals, however, may still require a separate coaxial cable connecting subscribers' homes to the ONU. 184. As described above, the HFC architecture, which connects homes to a shared node using coaxial cable, would allow LECs to deliver analog and digital video signals to subscriber homes both as a broadcast service (i.e., a basic package of channels delivered simultaneously to all homes) and as a "near video on demand" or "video on demand" service, where individual subscribers can receive specific programming. Voice and data services could also be offered over the existing twisted copper wire pair or potentially over the coaxial cable. 185. Proponents of SDV architecture stress its higher capacity, its efficient handling of both voice and video digital signals, the low maintenance costs associated with fiber, and the efficiency of using existing twisted copper wire pairs to connect homes to the network. Advocates of HFC architecture, on the other hand, emphasize the cost of the HFC solution relative to that of installing fiber-to-the-curb in an SDV architecture. Currently, the cost of deploying SDV is estimated to be about $400 higher per household than HFC, although AT&T Microelectronics reportedly has introduced low-priced SDV chip sets. 3. Digital Compression 186. Digital compression is the process by which analog signals are digitized (converted to streams of "1"s and "0"s) and then compressed, using an encoding process that extracts only the information necessary for the decompression of the signal at its destination. By transporting only essential information, the amount of bandwidth the signal occupies is dramatically reduced. Various encoding techniques have been developed to implement this technology with resulting compression ratios as high as 10:1. 187. Industry representatives are working to develop uniform standards for digital transmission, compression and possibly security. This effort is being undertaken by the Digital Audio Visual Council ("DAVIC"), Moving Pictures Expert Group ("MPEG"), and the Video and Electronics Standards Association ("VESA"). In a step toward interoperability, a standard developed by MPEG has emerged as the most likely industry standard for digital compression. The group has developed several compression standards for different media applications. The standard for digital television is called MPEG-2, and consists of video, audio, and systems components for compressing television signals. Numerous vendors are in the process of employing MPEG-2 in the development of digital encoders and decoders for use by MVPDs and subscribers. 188. DBS providers, including DIRECTV, USSB, and Primestar, are the first MVPDs to implement digital compression technology on a wide scale. Currently, DIRECTV and USSB are broadcasting programming using the MPEG-1+ encoding format for audio and video and, according to industry analysts, are in the process of upgrading the video component to MPEG- 2. The set-top boxes currently in subscribers' homes are reportedly compatible with the MPEG-2 format, and subscribers will not have to upgrade their equipment. Primestar currently uses General Instrument's DigiCipher set-top boxes, which employ a compression scheme different from MPEG-2. Primestar has announced plans to upgrade its set-top boxes sometime in 1996 to DigiCipher II, which includes an MPEG-2 decoding option. Digital compression technology, such as MPEG and DigiCipher, allows packagers of DBS programming to deliver four to eight channels of video programming with compact disc quality sound using the same amount of bandwidth required to deliver a single channel of analog programming on satellite systems. Similarly, as discussed above, MMDS operators are considering digital compression technology to increase the capacity of their systems. 189. According to industry sources, cable operators plan to introduce digital services into their major markets in 1996 or 1997. It has been reported that plans to deploy digital technology earlier had been delayed in part by the industry's indecision over an encoding standard. The video portion of this standard appears to have been found in MPEG-2. However, there is some question whether issues relating to the implementation of this standard may further delay the deployment of digital services by cable operators. 190. The cost of digital set-top boxes is another significant factor delaying the implementation of digital technology. As with other new products based on semiconductors, the initial cost of digital set-top boxes has been relatively high. Even at high volumes of production, current prototypes of digital set-top boxes to be deployed by cable systems are estimated to cost over $500. According to industry sources, however, MSOs are seeking set-top box prices in the $300 to $400 price range. The cost of encoding equipment is also an issue. Such equipment must be installed at the headend so that incoming analog programming can be digitized before it is transmitted to the subscriber. Although, the price of MPEG-1 encoders has dropped significantly over time, a state of the art MPEG-2 encoder is currently priced at about $100,000 per channel of video. Even as these prices decline over time, systems serving small suburban and rural markets may be unable to afford such equipment and, consequently, unable to take advantage of digital technology to expand their capacity. TCI's proposed distribution of Primestar's programming to cable operators and other MVPDs, which it calls "Headend in the Sky" service, may provide such systems with access to digital programming, although the extent to which programmers will make their services available is unclear. 191. LEC Plans for Using Digital Compression in ADSL Networks. Given the preponderance of narrowband copper wiring in the local loops of LECs' networks, digital compression that uses that plant is being explored. The particular implementation of compression technology that has been under consideration by LECs is called Asymmetric Digital Subscriber Line ("ADSL"). Using ADSL, LECs will be able to offer services such as VHS- quality interactive television and video conferencing over their existing copper network. Some consider ADSL to be an interim strategy to give LECs a foothold in the video distribution market while they upgrade their networks to SDV or HFC architectures. On the other hand, ADSL technology also may be used as an adjunct to other distribution technologies. 192. Currently, deployment of ADSL technology costs $2,000 to $3,000 per line, although some vendors are promising to decrease the cost to under $600 by the end of 1996. Another limitation of ADSL is the limited distance over which high speed transmissions can be maintained on the copper portion of the network. Currently, ADSL services can transmit data over a single copper pair to subscriber's home at a rate of 6 megabits per second ("mbps") with a 640 kilobits per second ("kbps") return path over a distance of about 9,000 feet. On average, the distance between homes and LEC central offices is about 13,517 feet. Thus, the implementation of ADSL would require LECs to install fiber optic cable in local loops, but not as much as would be required by a fiber to the curb SDV architecture. Industry vendors are addressing both of these limitations. 193. According to industry sources, after expressing an initial interest in ADSL technology, many LECs shifted the focus of their upgrade strategies to fiber and HFC architecture. Recent advances in ADSL technology have at least partially reversed this trend. NYNEX and Bell Atlantic are reported to be interested in using ADSL technology in concert with their recent investment in MMDS. MMDS would be used to provide one-way broadcasts of multiple cable channels, while ADSL would be employed to provide interactive services such as video on demand and Internet access. U S West is also reported to be considering the deployment of ADSL technology in its networks. IV. STATUS OF COMPETITION IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING Extent of Competition and Assessment of Market Performance 1. Overview 194. The Commission finds in this 1995 Report that cable television systems remain the primary distributors of video programming. Although competitive pressures from alternative video distributors are increasing, the Commission concludes that markets for the distribution of video programming are not yet competitive. Most video distribution markets continue to be highly concentrated, and incumbent cable operators face direct competition from overbuilders in only a few markets. During the past year, DBS systems have entered most markets, making service become available to consumers throughout the continental United States, and achieving rapid increases in subscribership. Wireless cable systems have also increased subscribership at a rapid rate. However, the number of subscribers to alternative video distributors remains extremely low relative to the number of subscribers to cable systems. 195. The Commission's experience with the "effective competition" provisions of the 1992 Cable Act offers some evidence of the limited extent of competition in the video programming distribution market. Under the 1992 Cable Act, a cable system is subject to effective competition if it meets any one of the following three tests: (1) fewer than 30% of the households in the cable system's franchise area subscribe to its service (the "low penetration" test); (2) the franchise area is (a) served by at least two unaffiliated MVPDs, each offering comparable video programming to at least 50% of the households in the franchise area, and (b) the number of households subscribing to programming services offered by MVPDs other than the largest MVPD exceeds 15% of the households in the franchise area (the "competing provider" test); or (3) an MVPD operated by the franchising authority for the franchise area offers video programming to at least 50% of the households in the franchise area (the "franchise authority provider" test). 196. Information about cable systems subject to effective competition comes primarily from two sources: (1) the Commission's survey of cable systems to establish the benchmark rate regulation scheme under the 1992 Cable Act and (2) orders of the Cable Services Bureau in cases to determine whether to certify a local franchise authority to regulate basic service rates. Of the 496 cable systems surveyed, 244 systems met one of the three tests for effective competition, but only 45 (less than 10% of the systems surveyed) satisfied the competing provider test. Of the 137 effective competition cases the Bureau has resolved, 130 involved the low penetration test, and the Bureau determined that effective competition existed in 77 of these cases. In the 12 cases involving the competing provider test, the Bureau determined that the system faced effective competition in 4 cases, of which, 3 involved a competing cable system and 1 involved a wireless cable system. The Commission believes that these four cases provide the most convincing evidence of competitive forces at work, because at least 15% of the consumers in these franchise areas actually chose service from a provider other than the largest MVPD. The fact that consumers made this choice in only 4 of 137 cases -- together with the small percentage of systems surveyed that met the competing provider test -- suggests that effective competition, as defined by the 1992 Cable Act, remains limited in markets for the distribution of video programming. 197. In a recent order, the Commission proposes to waive, on a temporary and trial basis, certain rules regulating rates charged for cable programming services in Dover Township, New Jersey, upon the initiation there of the first permanent commercial VDT service by Bell Atlantic. The proposed waiver would be effective for a two-year trial period beginning when Bell Atlantic initiates service within the incumbent cable operators' franchise areas. The Commission believes that, although the statutory definition of effective competition will not yet be met, the beginning of VDT service will ensure that the incumbent cable operators' rates for cable programming services will not be unreasonable. The Commission also believes that the waiver may reduce regulatory burdens on the cable operators. 2. Market Performance Indicators 198. In the 1994 Report the Commission assessed the extent to which the existing level of competition favorably influenced market performance -- i.e., how well a given market satisfies consumer demand in the least costly manner -- using several standard market performance indicators. Specifically, the Commission emphasized three indicators of market power, where little or no observed market power is consistent with good market performance: (1) the q ratio, a ratio of the market value of cable assets to the replacement cost of such assets; (2) pricing analysis showing that cable prices were lower in markets with cable system competitors; and (3) the Lerner Index of market power, the percentage difference between price and the marginal cost of production at the profit maximizing level of output. Each of these market performance indicators suggested that cable operators possessed and exerted market power in video programming distribution markets in 1994. 199. We see no need in this 1995 Report to replicate or update the formal empirical analysis of market performance indicators provided in the 1994 Report. First, given the concentrated structure of most video programming distribution markets and the persistence of impediments to entry and competition, it is unlikely that the entry and growth of new firms over the past year is extensive enough to change market conduct and, hence, market performance appreciably since last year. By contrast, the 1994 Report updated the empirical market performance indicators last reported in the 1990 Cable Report, a time period of sufficient length that some change in market structure and performance might be reasonably expected. Even then, the 1994 Report still found that the q ratios ". . . suggest the presence of substantial market power," although one q ratio estimate was consistent with some reduction in market power in the cable industry. 200. Second, the data employed by the Commission in the 1994 Report to derive the market performance indicators preceded for the most part the imposition of price regulation on the cable industry. Given that the conceptual basis of all three of the market performance indicators relies on the assumption that firms are unconstrained in their attempt to maximize profit, the exact meaning of these indicators is unclear in the presence of cable rate regulation. Thus, it may be misleading to compute empirical market performance indicators that could be uncritically compared with earlier estimates that do not reflect the effects of cable rate regulation. 201. Although formal empirical indicators of market performance are, therefore, not provided in this 1995 Report, it is possible to describe measures of market performance that reflect changes in the economic welfare of cable subscribers since the 1994 Report. Recent data suggest that consumer welfare may be improving in some ways, although not as fast or as much compared to what might be realized if incumbent cable systems faced the ongoing and persistent pressure of fully-developed competition. For example, since the 1994 Report, video distributors have continued to expand their capacity to deliver programming to consumers. The cable industry has expanded in terms of the number of homes passed, the number of subscribers, and the number of systems. 202. Distributors using alternative technologies have also expanded their capacity to supply delivered video programming to consumers, as evidenced by the growth in the number of subscribers to DBS, HSD, MMDS, and SMATV services reported above. Continued expansion by such alternative distributors is likely. In addition, LECs plan to enter markets and offer service to millions of households using several distribution methods (MMDS, VDT, and cable). 203. The range of programming choices offered to consumers has expanded, and continued expansion is likely. Since the 1994 Report, cable operators have increased the number of cable networks that they offer, while vertical integration has decreased slightly. Alternative distributors have also increased the number of choices available to consumers. Furthermore, several LECs have entered into ventures relating to the supply and packaging of video programming. 204. Conclusion. Growth in cable network capacity, the number of cable programmers, and the range of consumer choice resulting from new entrants, such as DBS operators, generally have improved the economic welfare of consumers of multichannel video programming. However, the lack of intense competition in most video distribution markets means that further improvements in consumer welfare remain unrealized. While the Commission's cable rate regulation has attenuated the exercise of market power to some degree and provided some improvement in market performance and consumer welfare, further dramatic improvements in market performance will depend on the eventual emergence of intense competitive rivalry between and among multiple suppliers in local video programming distribution markets. Thus, market performance in local markets today remains only mixed, reflecting economic growth that has benefitted consumers, but not reflecting the level of market performance that more intense competitive rivalry may be expected to produce. A particular concern, moreover, is that impediments to entry and competition may delay or prevent future improvements in performance. 3. Existing and Potential Impediments to Entry and Competition 205. There may be existing and potential impediments that deter entry and prevent increased competition in video programming delivery markets. Some impediments result from the strategic behavior of incumbent firms, and others from legal and regulatory restrictions. These impediments may block potential entrants from entering the market, or increase the entrant's cost, or decrease the attractiveness of the entrant's service, compared with that of the incumbent firms. a. Cable System Behavior to Deter Entry and Eliminate Competition 206. Much of the cost of constructing a cable distribution network is a sunk cost, i.e., an operator's cable system probably cannot be put to another equally profitable use if video distribution became unprofitable. The existence of sunk costs creates strong incentives for incumbent cable operators to engage in strategic behavior designed to protect their investments. Alternative distributors must also incur sunk costs to enter the video distribution market and compete with incumbent cable operators. As we discuss below, strategic behavior by cable operators to disadvantage their rivals can create a credible threat that entry will be unprofitable. In that case, because the costs of entering video distribution are sunk, entrants will be unable to shift their systems to some other profitable use. Thus, entrants' need to incur sunk costs may enable incumbent cable operators to deter entry by engaging in strategic behavior. 207. An incumbent may attempt to disadvantage its rivals by raising their costs or decreasing their access to a needed production input. For example, cable operators may attempt to decrease access to programming by competing video distributors. The Commission's enforcement of the program access provisions of the 1992 Cable Act appears to be ensuring competing video distributors' access to satellite programming from vertically integrated programming services. 208. An incumbent may also attempt to disadvantage its rivals by strategic non- uniform pricing. In this regard, the Commission has observed that cable systems often offer bulk discounts to subscribers in MDUs, and has expressed a desire that bulk discounts not be used as a means of displacing competition from alternative MVPDs, such as SMATV operators. The Commission's desire is thus consistent with the underlying purpose of Section 623(d) of the Communications Act. Accordingly, 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 offering the discount. 209. In response to the NOI, commenters complain that cable operators are offering potential MDU customers discounted and non-uniform rates that are not available to other MDU customers, and are thereby violating the uniform rate structure of the 1992 Cable Act. The Commission believes that its current uniform rate rule strikes an appropriate balance between limiting the potential for anticompetitive strategic conduct, and avoiding micromanagement of cable operator marketing decisions. To the extent a competing distributor believes that it has been the target of prohibited non-uniform rates, it may file a uniform rate complaint under the Commission's rules. We recognize, however, that the decision of the United States Court of Appeals for the District of Columbia Circuit in Time Warner has narrowed the protection of the uniform rate provision to markets where the cable operator is not subject to effective competition. b. Legal, Regulatory and Other Potential Impediments 210. In the past year, the Commission and courts eliminated or reduced several impediments to entry identified in the 1994 Report. Two federal circuit court decisions have overturned the cable-telco cross-ownership ban, and the Commission staff clarified that it would not enforce this ban against LECs subject to the court decision. The Commission streamlined its rules on LEC entry through overbuilding. In addition, the Commission recently granted several Section 214 applications to Ameritech to build cable systems. The Commission recently decided to permit cable operators to acquire SMATV systems within their service areas. In the past year, the Commission also has taken actions to promote entry and more rapid expansion of wireless cable, including the adoption of measures to process new applications for MDS spectrum and expanding the protected service area of MDS stations. 211. Despite these actions by the Commission and courts, however, several impediments to entry and competition may remain. For example, a number of actual and potential competitors to incumbent cable operators contend that cable operator conduct under the Commission's home wiring rules has a chilling effect on competition. The Commission's home wiring rules require, inter alia, that cable operators provide subscribers with the opportunity to acquire cable home wiring within thirty days after termination of service before the cable operator removes the wiring from the premises. Actual and potential competitors to incumbent cable operators argue that the Commission's definition of home wiring for MDUs does not permit potential competitors to connect subscribers to their systems without damaging the subscriber's premises, since the wiring in many MDUs is embedded in the walls. Several commenters state that this is a significant disincentive for subscribers to switch providers. Cable operators argue, however, that the Commission's home wiring rules merely permit a cable operator to remove its own property from MDUs, or to terminate its own lines. These issues are the subject of pending petitions for reconsideration. 212. Commenters also identify local franchise regulation as an impediment to entry by overbuilding. In the 1994 Report, the Commission discussed Section 621(a) of the Communications Act, which prohibits the unreasonable denial of a competitive franchise. We continue to support clarification of Section 621(a) to make clear that it applies to all exclusive franchises regardless of when they were adopted. 213. Some local laws and regulations may also impede entry. For example, despite limited preemption by the Commission, local zoning regulations may inhibit competition from direct-to-home programming distributors by preventing home users from installing receiving dishes. As noted above, the Commission has an ongoing rulemaking proceeding to modify its zoning preemption rules. 214. While legal and regulatory obstacles may delay the spread of competition, the speed of deployment of new competitive technologies also is affected by the business decisions of potential entrants. Decisions regarding the choice of technologies, investment strategies and assessment of risk strongly influence the speed at which competition emerges. Finally, there remains a possibility that new potential entrants may be evaluating the costs and political climates of building an entirely new infrastructure or trying to acquire existing systems. 4. Outlook for Competition in Video Programming Distribution Markets 215. In most local markets, a single cable system remains the primary distributor of multichannel video programming services. Despite the growth of DBS and wireless cable subscribership in the past year, competitive rivalry in most local video programming distribution markets is insufficient to constrain the market power of incumbent cable systems. The continued growth of DBS and the entry of additional competitors may exert a significant, favorable long- run effect on market conduct and performance in video programming distribution. In addition, LECs are planning to enter video distribution markets by several means, including VDT, wireless cable and stand alone cable systems. In sum, the market for the distribution of video programming is not yet competitive, although we are cautiously optimistic about the outlook for increased competition. Nevertheless, we believe that it will take some time for entry to have a significant effect on the market power of cable operators. V. ADMINISTRATIVE MATTERS 216. This Report is issued pursuant to authority contained in Sections 4(i), 4(j), 403 and 628(g) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 403 and 548(g). 217. It is ORDERED that the Secretary shall send copies of this 1995 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A List of Commenters Comments 1. Bell Atlantic 2. BellSouth Telecommunications, Inc. 3. CAI Wireless Systems, Inc. 4. CNBC, America's Talking and Canal de Noticias 5. DIRECTV, Inc. 6. ESPN, Inc. 7. General Instrument Corporation 8. Group W Satellite Communications 9. GTE Service Corporation 10. Heartland Wireless Communications, Inc. 11. Home Box Office 12. James Cable Partners, L.P. 13. Liberty Cable Company, Inc 14. Lifetime Television 15. METS Fans United/Virginia Consumers for Cable Choice and Fairfax County Citizens For Cable Competition 16. Motion Picture Association of America, Inc. 17. National Cable Television Association, Inc. 18. National Cable Television Cooperative, Inc. 19. National Rural Telecommunications Cooperative 20. National Telephone Cooperative Association 21. NYNEX Telephone Companies 22. OpTel, Inc. 23. Pay-Per-View Network, Inc. d/b/a Viewer's Choice 24. Primestar Partners L.P. 25. PrimeTime24 26. Satellite Broadcasting and Communications Association of America 27. Satellite Receivers, Ltd. 28. SBC Communications, Inc. 29. Time Warner Cable 30. Vermont Wireless Cooperative 31. Viacom Inc. 32. Video Dialtone Association 33. Wireless Cable Association International, Inc. Reply Comments 1. BellSouth Telecommunications, Inc. 2. Cablevision Systems Corporation 3. Comcast Cable Communication, Inc. 4. DIRECTV, Inc. 5. ESPN, Inc. 6. Group W Satellite Communications 7. GTE Service Corporation 8. Home Box Office 9. James Cable Partners, L.P. 10. Liberty Cable Company, Inc 11. Lifetime Television 12. National Cable Television Association, Inc. 13. National Rural Telecommunications Cooperative 14. Netlink USA 15. Next Level Communications 16. OpTel, Inc. 17. Pacific Bell and Pacific Telesis Video Services 18. Primestar Partners L.P. 19. Ridgebury Township, Pennsylvania, and the Pennsylvania State Association of Township Supervisors 20. Scripps Howard Cable TV Company 21. Small Cable Business Association 22. State of Hawaii 23. Superstar Satellite Entertainment 24. Tele-Communications, Inc. 25. Time Warner Cable 26. Turner Home Satellite, Inc. 27. United States Satellite Broadcasting Company, Inc. 28. ValueVision International, Inc. 29. Viacom Inc. 30. Video Dialtone Association 31. Wireless Cable Association International, Inc. Miscellaneous Filings 1. Southwest Missouri Cable TV, Inc. (letter 7/31/95) APPENDIX B TABLE 1 Cable Television Industry Growth: 1989 - 1994 (in millions) U.S. Television Households ("TH") Homes Passed ("HP") Basic Cable Subscribers ("Subs") Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year National Saturation (HP/TH) TV Households Subscribing (Subs/TH) U.S. Penetration (Subs/HP) 1989 92.1 1.9% 82.8 7.3% 49.3 7.9% 89.9% 53.5% 59.5% 1990 93.1 1.1% 86 3.9% 51.7 4.9% 92.4% 55.5% 60.1% 1991 92.1 (*) -1.1% 88.4 2.8% 53.4 3.3% 96.0% 58.0% 60.4% 1992 93.1 1.1% 89.7 1.5% 55.2 3.4% 96.3% 59.3% 61.5% 1993 94.2 1.2% 90.6 1.0% 57.2 3.6% 96.2% 60.7% 63.1% 1994 95.4 1.3% 91.6 1.1% 59.7 4.4% 96.0% 62.6% 65.2% (*) Revised penetration figure based on 1990 Census Sources: - U.S. Television Households - A.C. Nielsen Co. as of January of the following year. Taken from Veronis, Suhler & Associates, Homes Passed by Cable and Incidence of Subscription, The Veronis, Suhler & Associates Communications Industry Forecast, July 1995, at 145. - Homes Passed - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. - Basic Cable Subscribers - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. TABLE 2 Premium Cable Services: 1993 - 1994 (in millions) Premium Cable Service Subscibers Premium Units Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year 1989 23.6 5.8% 41.1 5.9% 1990 23.9 1.3% 41.5 1.0% 1991 24 0.4% 39.9 -3.9% 1992 24.7 2.9% 40.7 2.0% 1993 26.4 6.9% 41.5 2.0% 1994 28.1 6.4% 45 8.4% Source: - Paul Kagan Associates, Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. TABLE 3 Channel Capacity of Cable Systems: 1993 - 1994 1993* 1994* 93-94 Change Channel Capacity Number of Systems Percent of Systems Number of Systems Percent of Systems 54 and over 1,306 13.1% 1,435 14.3% 9.9% 30 to 53 6,364 64.0% 6,376 63.7% 0.2% 20 to 29 1,197 12.% 1,167 11.7% -2.5% 13 to 19 364 3.7% 356 3.6% -2.2% 6 to 12 697 7.0% 653 6.5% -6.3% 5 or less 22 0.2% 17 0.2% -22.7% Not available 1,210 1,212 Total 11,160 11,216 Systems with capcities of 30 or more channels 7,670 77.1% 7,811 78.1% 1.84% Systems with capacities of fewer than 30 channels Channe 2,280 22.9% 2,193 21.9% -3.82% * Figures are as of November 1, 1993 and October 1, 1994. Sources: - 1993 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 62, 1994 Edition, at F-3. - 1994 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 63, 1995 Edition, at I-77. TABLE 4 Channel Capacity for Subscribers: 1993 - 1994 (in millions) 1993* 1994* 93-94 Change Channel Capacity Subscribers Percent of Subscribers Subscribers Percent of Subscribers 54 and over 20.91 38.4% 23.02 41.5% 10.1% 30 to 53 31.71 58.2% 30.75 55.4% -3.0% 20 to 29 1.48 2.7% 1.37 2.5% -7.4% 13 to 19 .12 0.2% .11 0.2% -8.3% 6 to 12 .26 0.5% .24 0.04% -7.7% 5 or less .00 0.0% .00 0.0% 0.0% Not available .64 .87 Total 55.12 56.36 Systems with capcities of 30 or more channels 52.62 94.8% 53.77 96.9% 2.2% Systems with capacities of fewer than 30 channels 1.86 3.4% 1.72 3.1% -7.5% * Figures are as of November 1, 1993 and October 1, 1994. Sources: - 1993 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 62, 1994 Edition, at F-3. - 1994 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 63, 1995 Edition, at I-77. TABLE 5 Growth By Network Type: 1993 - 1994 1993 1994 93-94 Change Network Type Number of Networks Percent of Networks Number of Networks Percent of Networks Basic/No-Charge 80 79.21% 94 73.44% 17.50% Premium 9 8.91% 20 15.63% 122.22% Pay Per View 7 6.93% 8 6.25% 14.29% Combination 5 4.95% 6 4.69% 20.00% Total 101 128 26.73% Source: - National Cable Television Association, National Cable Video Networks By Type of Service: 1976 - 1994, Cable Television Developments, Spring 1995, at 7. TABLE 6 Cable Industry Revenue and Cash Flow: 1992 - 1994 1992 1993 1994 Year- End Total % Change From Previous Year Year- End Total % Change From Previous Year Year- End Total % Change From Previous Year Average Subscribers (mil.) 54.3 - 56.2 3.5% 58.5 4.1% Revenue Segments (mil.) (mil. Regulated Tiers $13,436 - $15,169 12.9% $15,164 0.0% Pay Tiers $4,980 - $4,625 -7.1% $4,522 -2.2% Advertising $852 - $984 15.5% $1,077 9.5% Pay-Per-View $404 - $452 11.9% $484 7.1% Home Shopping $90 - $113 25.6% $127 12.4% Miscellaneous + Installations $1,282 - $1,412 10.1% $1,412 0.0% Total Revenue (mil.) $21,044 - $22,755 8.1% $22,786 0.1% Revenue Per Sub $387.55 - $404.89 4.5% $389.50 -3.8% Cash Flow (mil.) $9,700 - $10,100 4.1% $9,936 -1.6% Cash Flow per Sub $178.64 - $179.72 0.1% $169.85 -5.5% Cash Flow/Revenue 46.1% - 44.4% -3.7% 43.6% -1.8% Sources: - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5 and Paul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1995, at 92. TABLE 7 Annual Revenue and Cash Flow for Cable System Operators: 1992 - 1994 1992 1993 1994 Operator Year End Subsribers Cable Revenue (mil.) Cable Cash Flow (mil.) Year End Subscriber s Cable Revenue (mil.) Cable Cash Flow (mil.) Year End Subscriber s Cable Revenue (mil.) Cable Cash Flow (mil.) Tele-Communications 10,165,000 $3,574.0 $1,637.0 10,672,000 $4,143.8 $1,869.1 11,593,000 $4,182.9 $1,834.7 Time Warner 5,600,000 $2,091.0 $977.0 5,800,000 $2,208.0 $1,035.0 6,000,000 $2,242.0 $989.0 Comcast 2,583,000 $725.7 $356.3 2,648,000 $1,092.7 $552.0 3,307,000 $1,065.3 $517.5 Continental Cablevision 2,856,000 $1,113.5 $488.3 2,895,000 $1,177.2 $527.6 3,081,000 $1,198.0 $525.1 Cox Comm. 1,722,007 $652.1 $275.1 1,784,337 $708.0 $295.6 1,851,726 $736.3 $268.5 Cablevision Systems 1,262,000 $572.5 $247.7 1,379,000 $667.7 $252.2 1,768,000 $837.2 $334.0 Times Mirror 1,182,581 $423.1 $165.0 1,208,398 $470.4 $198.1 1,274,908 $497.7 $205.1 Viacom 1,116,000 $411.1 $190.5 1,049,000 $416.0 $181.7 1,139,100 $406.2 $155.2 Century Comm. 920,500 $294.8 $172.0 939,500 $311.2 $181.5 1,022,500 $321.7 $174.5 Cablevision Industries 904,648 $364.0 $175.7 957,508 $397.0 $191.6 1,001,927 $408.3 $189.5 Adelphia Comm. 845,640 $296.6 $169.9 868,195 $318.3 $177.7 957,954 $347.6 $184.4 Providence Journal 722,000 $199.7 $78.0 738,000 $281.6 $114.1 771,000 $285.0 $112.0 Telecable Corp 690,000 $268.4 $116.4 717,000 $286.7 $123.8 751,000 $302.0 $131.0 EW Scripps 673,100 $238.1 $101.2 701,000 $251.8 $105.3 739,200 $255.4 $97.1 KBLCOM 577,000 $235.3 $95.0 605,000 $244.1 $95.7 690,000 $255.8 $99.7 Lenfest Comm. 477,130 $166.1 $83.4 550,703 $197.6 $100.5 577,377 $212.8 $105.7 Washington Post 463,000 $174.1 $77.5 482,000 $185.7 $81.9 498,000 $182.1 $80.5 TCA Cable TV Inc 442,356 $141.9 $70.4 457,061 $154.9 $77.7 468,662 $166.3 $81.9 Multimedia Inc 410,000 $144.4 $73.1 417,000 $164.6 $85.5 432,000 $165.4 $84.1 C-TEC Corp 218,000 $85.3 $40.9 258,000 $93.6 $44.3 273,000 $95.1 $44.6 Marcus Cable 138,274 $38.3 $20.0 141,323 $52.3 $26.8 222,735 $64.7 $31.1 Gaylord Entertainment 166,800 $78.8 $32.0 175,800 $81.1 $32.9 182,800 $85.2 $35.5 Summit Comm. 150,400 $59.6 $35.8 157,000 $61.2 $37.4 165,000 $62.9 $37.4 Insight Comm. 133,816 $47.0 $20.5 142,327 $51.0 $24.5 153,523 $52.8 $25.6 Mercom Inc. 34,118 $12.0 $4.8 34,714 $12.6 $5.1 37,324 $12.9 $5.1 Total for Group 34,453,370 $12,407.2 $5,703.5 35,777,866 $14,029.0.7 $6,417.5 38,958,736 $14,441.60 1.1 $6,348.8 Total Per Subscriber $374.75 $172.27 $399.51 $182.75 $386.47 $169.90 Cash Flow Margin 46.0% 45.7% 44.0% Total for Industry 55,200,000 $20,349.19 $9,354.4 57,200,000 $22,452.5 $10,270.8 59,700,000 $22,588.9 $9,930.6 % Change From Previous Year 3.6% 10.3% 9.8% 4.4% 0.1% -3.3% Notes: - Operators are listed in descending order by size according to 1994 year end susbscribers. - The companies listed include 15 of the top 20 MSOs (According to Paul Kagan Assoc., Inc., Top 100 Cable System Operators, The Cable TV Financial Databook, July 1995, at 14) plus 9 of MSOs ranked 21st through 50th. Of the five, top 20 MSOs exlcuded, three (Newhouse Broadcasting, Sammons Communications, and Crown Media) were excluded because they do not provide publicly available information and two (Jones Intercable and Falcon Cable TV) were excluded because their corporate structure make it difficult to find the necessary data. - Except as noted, all data are for fiscal years ending on December 31 of each year. Century Communications' year end subscriber totals, and Adelphia Communications' year end 1992 subscriber totals are estimated. TCA Cable TV's revenue and cash flow data are for the 12 months ending on January 31 of each year. Century Communications's revenue and cash flow data are for the 12 months ending on November 30 of each year. Adelphia Communications revenue and cash flow data are for the 12 months ending on December 31 of each year. - Wherever possible, subscriber totals include both wholly owned and consolidated cable subscribers. - Total for Industry estimates for revenue and cash flow were calculated by multiplying the Total for Group of each figure by the ratio of average industry subscribers to average group subscribers. Sources: - Unless otherwise noted, all company data obtained from the companies' public filings at the United States Securities and Exchange Commission. - The subscriber totals for Telecable are from: Paul Kagan Assocs., Inc., Top 100 Cable System Operators, The Cable TV Financial Databook, July 1995, at 14; Paul Kagan Assocs., Inc., Top 100 Cable System Operators, The Cable TV Financial Databook, June 1994, at 14; and Paul Kagan Assocs., Inc., Top 100 Cable System Operators, The Cable TV Financial Databook, June 1993, at 12. - In order to adjust for Tele-Communications, Inc.'s DBS holdings, its revenue and cash flow data for 1993 and 1994 are from: Richard Bilotti, Tele-Communications - TCI Group Revenue and Operating Cash Flow Comparisons, Morgan Stanley, Cable Television Metamosphosis - The Arrival of DBS and RBOC Competition, September 15, 1995, at 61. - Total for Industry subscribers are from: Paul Kagan Assocs., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. TABLE 8 Quarterly Revenue for Cable System Operators: 1993 - 1995 ($ in million) 1993 1994 1995 Operator 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter Tele-Communications Inc $1,018.0 $1,042.0 $1,044.0 $1,049.0 $1,060.0 $1,081.0 $1,072.0 $1,105.0 $1,169.0 $1,262.0 Time Warner Inc $546.0 $560.0 $551.0 $551.0 $551.0 $560.0 $552.0 $579.0 $578.0 $760.0 Comcast $271.6 $278.9 $272.8 $269.3 $260.6 $267.0 $265.6 $272.0 $347.0 $362.5 Cox Communications $285.2 $295.4 $296.1 $302.6 $304.3 $307.4 $303.5 $319.1 $313.1 $328.1 Continental Cablevision $287.5 $297.2 $295.5 $296.9 $294.4 $295.0 $296.2 $312.4 $318.6 $331.5 Cablevision Systems $157.0 $168.2 $169.6 $172.0 $176.1 $192.1 $223.5 $245.5 $245.4 $263.7 Adelphia Comm. Communications $79.3 $79.7 $79.4 $79.9 $80.1 $84.0 $90.8 $92.7 $94.0 $96.9 Cablevision Industries $97.5 $100.4 $100.5 $98.6 $100.0 $101.7 $103.0 $103.7 $103.6 $106.4 Viacom $104.5 $107.5 $103.7 $100.3 $100.7 $103.5 $100.4 $101.6 $106.0 $110.0 Century Comm. $74.3 $77.3 $78.5 $81.1 $78.6 $80.3 $79.9 $82.8 $84.2 $84.5 EW Scripps $63.2 $63.7 $62.6 $62.3 $62.4 $63.3 $63.9 $65.8 $67.0 $69.8 TCA Cable TV Inc $37.8 $38.3 $39.5 $39.3 $39.8 $41.1 $42.1 $43.3 $44.0 $49.1 Multimedia Inc $41.0 $41.5 $41.0 $41.1 $41.2 $42.0 $40.9 $41.3 $41.9 $43.6 Marcus Cable $12.7 $13.3 $13.1 $13.2 $13.2 $12.8 $17.7 $20.9 $37.0 $38.5 Summit Comm. $15.1 $15.3 $15.3 $15.5 $15.6 $15.8 $15.6 $15.9 $16.2 $0.0 Insight Comm. $12.7 $12.8 $12.8 $12.7 $13.0 $13.1 $13.2 $13.5 $13.8 $14.3 Total for Group $3,103.5 $3,191.5 $3,175.4 $3,184.7 $3,191.0 $3,260.1 $3,280.4 $3,414.5 $3,578.7 $3,920.8 Total for Industry $5,512.0 $5,667.9 $5,639.7 $5,654.4 $5,570.3 $5,599.4 $5,626.9 $5,814.9 $5,883.9 $6,183.3 % Change From Previous Year's Quarter 1.1% -1.2% -0.2% 2.8% 5.6% 10.4% Notes: - Operators are listed in descending order by size according to: Paul Kagan Assoc., Inc., Top 100 Cable System Operators as of June 30, 1995, Cable TV Investor, August 31, 1995, at 9. - The companies listed include 12 of the top 20 MSOs (According to Paul Kagan Assoc., Inc., Top 100 Cable System Operators, The Cable TV Financial Databook, July 1995, at 14) plus four of MSOs ranked 21st through 50th. Of the eight, top 20 MSOs exlcuded, six (Newhouse Broadcasting, Sammons Communications, Crown Media, the Providence Journal, Telecable Corp, and Lenfest Communications) were excluded because they do not provide publicly available quarterly information and two (Jones Intercable and Falcon Cable TV) were excluded because their corporate structure make it difficult to find the necessary data. - Except as noted, all data are for quarters ending March 31, June 30, September 30, and December 31. TCA Cable TV's revenue and cash flow data are for quarters ending April 30, July 31, October 31, and January 31. Century Communications's revenue and cash flow data are for quarters ending February 28, May 31, August 31, and November 30. - Total for Industry estimates for revenue and cash flow were calculated by multiplying the Total for Group of each figure by the ratio of the total subscribers for the industry to the total subscribers for the group (not shown). - Cox Communication's data are pro forma data combining Cox Communications and Times Mirror's cable revenue and cash flow. - Tele-Communications, Inc.'s revenue and cash flow data from the second quarter of 1994 to the second quarter of 1995 are for TCI Communications, Inc.. Sources: - All company data obtained from the companies public filings at the United States Securities and Exchange Commission. TABLE 9 Quarterly Cash Flow for Cable System Operators: 1993 - 1995 ($ in million) 1993 1994 1995 Operators 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter TCI $467.0 $472.0 $464.0 $449.0 $450.0 $452.0 $423.0 $480.0 $498.0 $518.0 Time Warner Inc $255.0 $270.0 $268.0 $242.0 $244.0 $256.0 $242.0 $247.0 $256.0 $319.0 Comcast $136.8 $142.0 $137.5 $135.7 $127.0 $130.0 $129.0 $131.9 $165.0 $182.6 Cox Communications $123.0 $129.4 $125.1 $129.0 $121.8 $123.4 $109.3 $119.0 $122.8 $125.5 Continental Cable $129.5 $135.2 $130.2 $132.6 $133.2 $128.8 $127.7 $135.4 $136.5 $138.4 Cablevision Systems $63.8 $67.2 $68.7 $52.6 $75.9 $80.9 $93.5 $83.7 $96.4 $87.9 Adelphia Comm. $44.2 $44.5 $44.4 $44.5 $42.2 $44.4 $49.0 $48.7 $48.9 $51.5 Cablevision Industries $47.3 $48.9 $49.5 $45.9 $47.4 $47.5 $48.2 $46.4 $48.0 $49.7 Viacom $48.9 $49.4 $44.1 $39.3 $40.2 $40.8 $36.5 $37.7 $42.3 $45.0 Century Comm. $41.9 $46.4 $46.4 $46.8 $46.9 $44.2 $41.5 $41.9 $39.8 $38.3 EW Scripps $28.0 $27.2 $24.9 $25.1 $24.3 $23.1 $24.3 $25.5 $27.2 $29.0 TCA Cable TV Inc $19.6 $19.4 $19.1 $19.5 $19.1 $20.2 $20.8 $21.8 $21.8 $24.1 Multimedia Inc $21.3 $21.3 $21.2 $21.6 $21.3 $21.5 $20.2 $21.2 $20.8 $22.6 Marcus Cable $6.5 $7.0 $6.8 $6.5 $6.5 $5.8 $8.5 $10.4 $18.4 $19.3 Summit Comm. $9.3 $9.4 $9.3 $9.4 $10.7 $9.4 $9.2 $8.1 $9.7 $0.0 Insight Comm. $6.0 $5.9 $6.1 $6.5 $6.3 $6.2 $6.4 $6.7 $6.7 $7.0 Total for Group $1,447.9 $1,495.2 $1,465.5 $1,406.2 $1,416.7 $1,434.2 $1,389.2 $1,465.4 $1,558.2 $1,657.9 Total for Industry $2,571.6 $2,655.4 $2,602.7 $2,496.6 $2,473.1 $2,463.2 $2,382.8 $2,495.5 $2,561.9 $2,614.6 % Change From Previous Year's Quarter -3.8% -7.2% -8.4% 0.0% 3.6% 6.1% Notes: - Operators are listed in descending order by size according to: Paul Kagan Assoc., Inc., Top 100 Cable System Operators as of June 30, 1995, Cable TV Investor, August 31, 1995, at 9. - The companies listedare the same MSOs described in Table 8 above. - Except as noted, all data are for quarters ending March 31, June 30, September 30, and December 31. TCA Cable TV's revenue and cash flow data are for quarters ending April 30, July 31, October 31, and January 31. Century Communications's revenue and cash flow data are for quarters ending February 28, May 31, August 31, and November 30. - Total for Industry estimates for revenue and cash flow were calculated by multiplying the Total for Group of each figure by the ratio of the total subscribers for the industry to the total subscribers for the group (not shown). - Cox Communication's data from the first quarter of 1993 to the first quarter of 1995 are pro forma data combining Cox Communications and Times Mirror's cable revenue and cash flow. - Tele-Communications, Inc.'s revenue and cash flow data from the second quarter of 1994 to the second quarter of 1995 are for TCI Communications, Inc.. Sources: - All company data obtained from the companies public filings at the United States Securities and Exchange Commission. TABLE 10 Acquisition and Disposition of Capital: 1988 - 1994 ($ in million) Year Private Debt Public Debt Private Equity Public Equity Total Capital Raised From Financing Sources Sum Raised % of Total Sum Raised % of Total Sum Raised % of Total Sum Raised % of Total 1988 $5,078 67% $1,789 23% $678 9% $68 1% $7,613 1989 $6,494 80% $840 10% $726 9% $108 1% $8,168 1990 $4,637 81% $490 9% $597 10% $0 0% $5,724 1991 $689 16% $912 22% $1,290 30% $1,350 32% $4,241 1992 ($1,762) -69% $2,400 93% $1,710 67% $220 9% $2,568 1993 ($3,583) -186% $5,280 274% $62 3% $165 9% $1,924 1994 $4,772 71% $1,089 16% $409 6% $461 7% $6,731 Total: 1988-1994 $16,325 $12,800 $5,472 $2,372 $36,969 Share of 7 Year Total 44% 35% 15% 6% 100% Average Raised Per Year $2,332 $1,829 $782 $339 $5,281 Sources: - 1988 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, June 1992, at 88. - 1989 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, June 1993, at 86. - 1990 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, June 1994, at 92. - 1991 to 1994 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, July 1995, at 92. TABLE 11 System Transactions: 1993 - 1994 1993 1994 1/95 to 7/95 93-94 Change Number of Systems Sold 96 64 63 -33.3% Total Number of Subscribers 3,852,668 7,504,177 7,267,681 94.8% Average System Size 40,132 117,253 115,360 192.2% Number of Homes Passed 6,616,887 12,492,997 11,386,320 88.8% Avg. # of Homes Passed 68,926 195,203 180,735 183.2% Total Dollar Value $8,322.6 $14,025.3 $13,485.8 68.5% Average Dollar Value $86.7 $219.1 $214.1 152.8% Value Per Home Passed 1,258 1,123 1,184 -10.7% Dollar Value Per Subscriber 2,160 1,869 1,856 -13.5% Cash Flow Multiple 11.3 10.3 9.6 -8.8% Source: Paul Kagan Assoc., Inc., Year-To-Date Cable System Sale Summary, Cable TV Investor, January 31, 1995, at 8. APPENDIX C-1: Status of LEC Entry Status of LEC Entry Since the 1994 Report * The cities listed above represent the markets the LECs were planning to enter as VDT operators at the time of the 1994 Report; for some, current plans are different. The table on the following page lists the status of each LEC's plan in regard to the above applications. ** Four additional permanent VDT applications were filed by U S West since the 1994 Report. All were dismissed without prejudice to refile (due to lack of information) and are ignored above. APPENDIX C-2: Status of LEC Entry Company Location of VDT Applications Status of VDT Applications Mode of Entry: Homes Passed in Current Plan Bell Atlantic Dover Township, NJ Approved: System construction near completion; operation to begin before end of year. VDT: 38,000 NYNEX RI; Eastern MA Approved: Planning or just beginning VDT system construction; planning to use wireless technology for video delivery in near term. VDT: 397,000 PAC BELL San Fran., Orange Count., L.A., San Diego, CA Approved: Will complete San Fran. VDT construction in 1996. Slowing wire based build out in other 3 markets, to be completed in 1997. Will use wireless for video delivery in near term. VDT: 490,000 in San Fran.by 1996; to pass another 510,000 in other 3 areas by 1997 (total of 1 million, down from 1.3 million in applications). Wireless: Pass as many as 5 million by 1996. GTE Manassas, VA; Pinellas/Pasco, FL; Ventura, CA; Honolulu, HI Approved: Planning or just beginning system construction. VDT: 1,041,000 Ameritech Detroit, MI; Chicago, IL; Indianapolis, IN; Milwaukee, WI; Columbus/Clev., OH Approved: Abandoned granted applications. Signed cable franchise agreements in Plymouth and Canton Townships, Northville, and Plymouth, MI; Columbus, OH; and Glendale Heights, IL. Pursuing additional midwest cable franchises. VDT: None; under withdrawn applications, Ameritech was approved to pass 1,256,000. Cable: Unknown. Bell Atlantic Mid-Atlantic; Wash., D.C. LATA Withdrawn: Planning to use wireless for video delivery in northeast and mid-Atlantic markets in near term while studying wire based options. VDT: None; under withdrawn applications, Bell Atlantic proposed to pass 3.2 million. Wireless: 4,038,000. U S West Denver, CO; Portland, OR; Minn.-St. Paul, MN; Boise, ID; Salt Lake City, UT Suspended at Request of Applicant: Studying wire based options and awaiting results from Omaha, NE trial. VDT: Suspended applications sought approval to pass 1,126,000. Bell Atlantic Florham Park, NJ Pending. VDT: 11,700 SNET CT Pending. VDT: 1,541,000 APPENDIX D Local Exchange Carrier Proposals Date First Filed Telephone Company Location Homes Passed Type of Proposal Status 10/21/92 Bell Atlantic- VA Northern VA 2,000 technical/ market approved, 3/25/93; expanded, 1/20/95 10/30/92 NYNEX New York, NY 2,500 technical approved, 6/29/93 11/16/92 New Jersey Bell Florham Park, NJ 11,700 permanent pending 12/15/92 New Jersey Bell Dover Township, NJ 38,000 permanent approved, 7/18/94 4/27/93 SNET West Hartford, CT 1,600 technical/ market approved, 11/12/93 6/18/93 Rochester Telephone Rochester, NY 120 technical/ market approved, 3/25/94 6/22/93 U S West Omaha, NE 2,500 or 60,000 technical/ market approved, 12/22/93 12/15/93 SNET (amended) Hartford & Stamford, CT 150,000 technical/ market expansion approved, 11/22/94 12/16/93 Bell Atlantic Wash., D.C. LATA 300,000 permanent see 6/16/94 filing 12/20/93 Pacific Bell Orange Co., CA 210,000 permanent approved, 7/19/95 12/20/93 Pacific Bell So. San Francisco Bay, CA 490,000 permanent approved, 7/19/95 12/20/93 Pacific Bell Los Angeles, CA 360,000 permanent approved, 7/19/95 12/20/93 Pacific Bell San Diego, CA 250,000 permanent approved, 719/95 1/10/94 U S West Denver, CO 357,000 permanent suspended by applicant, 5/31/95 1/19/94 U S West Portland, OR 162,000 permanent suspended by applicant, 5/31/95 1/19/94 U S West Minneapolis/ St. Paul, MN 357,000 permanent suspended by applicant, 5/31/95 1/31/94 Ameritech Detroit, MI 232,000 permanent approved, 1/4/95; abandoned by applicant, June 27, 1995 1/31/94 Ameritech Columbus & Cleveland, OH 262,000 permanent approved, 1/4/95; abandoned by applicant, June 27, 1995 1/31/94 Ameritech Indianapolis, IN 115,000 permanent approved, 1/4/95; abandoned by applicant, June 27, 1995 1/31/94 Ameritech Chicago, IL 501,000 permanent approved, 1/4/95; abandoned by applicant, June 27, 1995 1/31/94 Ameritech Milwaukee, WI 146,000 permanent approved, 1/4/95; abandoned by applicant, June 27, 1995 3/16/94 U S West Boise, ID 90,000 permanent suspended by applicant, 5/31/95 3/16/94 U S West Salt Lake City, UT 160,000 permanent suspended by applicant, 5/31/95 4/13/94 Puerto Rico Tel. Co. Puerto Rico 250 technical approved, 12/5/94 5/23/94 GTE - Contel of VA Manassas, VA 109,000 permanent approved, 5/2/95 5/23/94 GTE FL Inc. Pinella and Pasco Co., FL 476,000 permanent approved, 5/2/95 5/23/94 GTE CA Inc Ventura Co., CA 122,000 permanent approved, 5/2/95 5/23/94 GTE HI Tel. Co. Honolulu, HI 334,000 permanent approved, 5/2/95 6/16/94 Bell Atlantic (amended) Wash., D.C. LATA 1.2 mil. permanent suspended by applicant, 4/25/95; withdrawn, 5/24/95 6/16/94 Bell Atlantic Mid-Atlantic 2 mil. permanent suspended by applicant, 4/25/95; withdrawn, 5/24/95 6/27/94 BellSouth Chamblee & DeKalb Co., GA 12,000 technical/ market approved, 2/8/95 7/8/94 NYNEX RI 63,000 permanent approved, 3/6/95 7/8/94 NYNEX MA 334,000 permanent approved, 3/6/95 9/9/94 Sprint/ Carolina Tel. & Tel. Co. Wake Forest, NC 1,000 technical/ market approved, 12/28/94 11/16/94 U S West Cedar Rapids, IA 63,000 permanent dismissed 11/16/94 U S West Colorado Springs, CO 161,000 permanent dismissed 11/16/94 U S West Des Moines, IA 120,000 permanent dismissed 11/16/94 U S West Albuquerque, NM 214,000 permanent dismissed 4/28/95 SNET CT 1.5 mil. permanent pending APPENDIX E Status of VDT Technical and Market Trials 218. This Appendix summarizes the various LEC filings concerning VDT technical and market trials. These filings include trial applications, trial compliance reports, permanent applications, and tariffs. Since the 1994 Report, there have been filed with the Commission two more six-month trial reports, three one-year reports, and four additional tariffs, including Bell Atlantic's tariff for permanent commercial service in Dover Township, New Jersey. Applications and Tariffs for Technical and Market Trials 219. Bell Atlantic -- Northern Virginia Technical and Market Trial. Authority for the first technical VDT trial was granted on March 25, 1993, to Chesapeake and Potomac Telephone of Virginia (now, Bell Atlantic - Virginia) for a one-year technical trial with up to 400 (employee) subscribers in Arlington, Virginia, to test Asymmetric Digital Subscriber Line ("ADSL") technology. Chesapeake and Potomac Telephone Company of Virginia, 8 FCC Rcd 2313 (1993). Bell Atlantic has filed two six-month reports on its technical trials, as required by its authorization. 220. The first six-month report covers the first phase of the technical trial, during which equipment was installed in a limited number of Bell Atlantic employee homes (61) in order to test technical viability and integration of the network. Some problems were experienced with the prototype video decoder, but all such problems were resolved by September 15, 1993. Six Month Compliance Report of Bell Atl. Co., Bell Atl. No. Va. VDT Application, File No. WPC-6834 (filed September 23, 1993). 221. The second six-month report covers phase two of the technical trial. During this phase, 268 Bell Atlantic employees participated in the trial, which tested the participants' reactions to the service and the technical feasibility of the service in a variety of network environments. Second Six Month Compliance Report of Bell Atl. Co., Bell Atl. No. Va. VDT Application, File No. WPC-6834 (filed October 24, 1994). Bell Atlantic reports that participants averaged 2.6 hours of use of the service per week. It also reports that the number of problems reported increased with the increased number of participants in the trial. However, the report indicates that participants believe that the service is better than comparable media (cable, VCR, and broadcast) and is easy to use. In addition, Bell Atlantic states that the number of technical problems will be reduced with new software and hardware, and with better training of installation technicians. Over the course of the trial, Bell Atlantic was able to reduce by two- thirds the number of problems reported by participants. Id. 222. Subsequent to the technical trial grant, Bell Atlantic requested and was granted (on January 20, 1995) permission to extend the technical trial into a market trial and to expand the market trial to 2,000 subscribers. See Chesapeake and Potomac Telephone Company of Virginia ("Bell Atlantic No. Va. VDT Application"), 10 FCC Rcd 2975 (1995). For the market phase of this trial, Bell Atlantic filed a tariff with the Commission on January 27, 1995. Bell Atlantic Tariff FCC No. 10, Transmittal No. 742. The tariff reports that the market trial will last for six months, subject to possible extension, and is designed to test ADSL, the costs associated with it, and the willingness of both customer-programmers and end-user subscribers to pay for it. Month-to-month and non-recurring charges for customer-programmers and for end-user subscribers are reported. 223. NYNEX -- Manhattan Technical Trial. Authority for the second technical trial was granted to New York Telephone ("NYNEX") on June 29, 1993, for a one-year trial to test an HFC network, video switching technologies and methods for storing and delivering video programming in three multiple-dwelling unit ("MDU") buildings serving 2,500 subscribers in New York City. New York Telephone Co. for Section 214 Auth. to Provide VDT Servs. in New York City ("NYNEX New York VDT Application"), 8 FCC Rcd 4325 (1993). 224. NYNEX has submitted two six-month reports to the FCC as required by its authorization. The first one reports "spirited competition" between its customer-programmers, particularly Liberty Cable and Time Warner Cable. Six Month Compliance Report of NYNEX, NYNEX New York VDT Application, File No. WPC 6836 (filed July 15, 1994). The second report states that the VDT platform was successful at delivering programming from customer- programmers to end-user subscribers, consisting of switched-access for delivering live video programming, and analog stored video for interactive programming. Analog stored video allows end-user subscribers to fast-forward, rewind, pause, and stop. Second Six Month Compliance Report of NYNEX, NYNEX New York VDT Application, File No. WPC 6836 (filed February 10, 1995). NYNEX blames its continued holdup in adding digital capacity to its system on equipment delays. NYNEX hopes to test digital equipment sometime this year. Id. 225. SNET -- West Hartford and Stamford Areas Technical and Market Trial. Southern New England Telephone Company ("SNET") was granted authorization on November 12, 1993, for a technical and market trial to serve between 200 and 1,600 customers in West Hartford, Connecticut and to test Fiber to the Node ("FTTN") architecture with coaxial facilities from the node to individual subscribers. Southern New England Telephone Co. for Section 214 Auth. to Provide CDT Servs. in West Hartford, Conn. ("SNET West Hartford VDT Application"), 9 FCC Rcd 1019 (1993). 226. Shortly after gaining approval for the technical and market trial, SNET requested an authorization to expand the trial to pass 151,000 homes (Southern New England Telephone Company, Order and Authorization, 9 FCC Rcd 7715 (1994)), which was approved on November 22, 1994. A tariff was filed because SNET intends to charge subscribers and customer-programmers for the service to test interest and willingness to pay for services available from the VDT platform. Southern New England Telephone Company, Tariff F.C.C. No. 40, Transmittal No. 641 (filed June 27, 1995). 227. According to the tariff, SNET intends to provide video service to two service areas, northern Connecticut (passing 76,000 homes in the cities of West Hartford, New Britain, Farmington, and Hartford) and southern Connecticut (passing 75,000 homes in the cities of Stamford, Norwalk, Darien, Westport, and Fairfield). Customer-programmers will be able to request service in either area or both, and will be charged monthly according to the average number of subscribers each month times the Broadcast Connect Rate per 6MHz channel. At first, SNET plans to offer 53 analog channels and 23 channels of analog Enhanced Pay-per-View ("EPPV"). In addition, in the northern service area, SNET proposes to provide Video-On- Demand ("VOD"), which will become available to both service areas when the digital upgrade is deployed. SNET's projection for digital services predicts zero digital channels in year one, 40 digital channels in year two, and 200 digital channels in year three and beyond. SNET plans to file a digital tariff during the third quarter of 1995. Id. 228. Despite the authorization to build out the system further, SNET's two six-month trial reports indicate that SNET has not yet expanded the VDT system. First Six Month Compliance Report of SNET, SNET West Hartford VDT Application, File No. WPC 6858 (filed December 22, 1994), Second Six Month Compliance Report of SNET, SNET West Hartford VDT Application, File No. WPC 6858 (filed June 1, 1995). Both report that the system is a Hybrid Fiber-Coaxial ("HFC") network which offers VOD, pay-per-view, and aggregated channel services to 1,250 homes. Id. As of March 31, 1995, 58 video information providers were supplying programming, and 340 end-user subscribers were connected to the system. SNET reports that it is pleased with the operation of the system and that the trial demonstrates that it is feasible to deliver video signals over an advanced telecommunications network. Second Six Month Compliance Report of SNET, SNET West Hartford VDT Application, File No. WPC 6858 (filed June 1, 1995). 229. U S West -- Omaha, NE Technical and Market Trial. On December 22, 1993, U S West was granted an authorization for technical and market trials in Omaha, Nebraska. The technical trial lasted six months and passed 2,500 homes. U S West Communications, Inc. for Section 214 Auth. to Provide VDT Servs. in Omaha, Neb., 9 FCC Rcd 184 (1993). The market trial will last for the twelve months following the technical trial and will pass 50,000 homes. U S West will use an advanced fiber-to-the-curb/coaxial cable network capable of providing 77 channels of analog video with forward-path-only signaling, and up to 800 channels of digital video with forward- and/or reverse-path signalling capability. Sixty-four analog channels will have interdiction capabilities, which means that the customer-programmers can use them to provide pay-per-view services. U S West Communications, Tariff FCC No. 5, Transmittal No. 657 (filed August 8, 1995), at Section 1.3. U S West will also allow customer-programmers to offer digital VOD services. Id. at Section 1.5.6. US West estimates a residential penetration rate of 28% for the trial. Id. at Section 2.1.2. 230. Rochester Telephone -- Rochester Technical Trial. Authority for the fifth authorized trial was granted on March 25, 1994, to Rochester Telephone Co., for six months, to conduct a tariffed field test to serve up to 120 subscribers using two architectures: a fiber-coax system within multi-unit and single-unit dwellings, and an ADSL system utilizing Discrete Multi-Tone technology within a defined two-mile area. Rochester Tel. Corp. for Section 214 Auth. to Provide VDT Servs. in Rochester N.Y. ("Rochester Tel. VDT Application"), 9 FCC Rcd 2285 (1994). Rochester Telephone filed a tariff prior to commencement of its trial because it intended to charge both customer-programmers and end-user subscribers for its VDT service. Rochester Telephone Corporation, Tariff FCC No. 3, Transmittal No. 224 (filed May 17, 1994). 231. Rochester Telephone also filed, on March 1, 1995, a compliance report on the status of the trial. Six Month Compliance Report of Rochester Telephone, Rochester Tel. VDT Application, File No. WPC 6867 (filed March 1, 1995). Rochester Telephone reported that, although it had received pro forma authorization to extend its trial for an additional three-month period until June 30, 1995, it and its sole customer-programmer, USA Video, had decided that continuation of the trial did not make financial sense. Thus, in January 1995, USA Video ceased providing service to end-user customers, but the VDT platform remained available for service until the tariff expired. Id. Rochester Telephone also stated that, due to technical constraints, it never performed the ADSL portion of its trial. Despite these difficulties, Rochester reported that the trial was a success in technical terms, and that it had gained substantial knowledge from the trial. Id. 232. Puerto Rico Puerto Rico Telephone Company -- Technical Trial. Authorization for the sixth authorized trial was granted, on December 5, 1994, to the Puerto Rico Telephone Company for a one-year technical trial authorization to serve 250 homes using Fiber-to-the-Curb ("FTTC") and 18 schools and 12 business offices using ADSL network architecture. Puerto Rico Telephone Co.., File No. WPC-6949 (1994). The trial proposed initial deployment of 64 analog video channels over the FTTC system, with future enhancement through digital compression to 384 channels. 233. BellSouth -- DeKalb County and Chamblee, Georgia Technical Trial. Authorization for the seventh trial was granted, on February 8, 1995, to BellSouth for an 18- month trial to pass 12,000 homes in DeKalb County and Chamblee, Georgia for the purpose of testing an HFC network offering both traditional channel service with 60 analog channels and a digital VDT platform with approximately 300 channels utilizing both digital multi-cast and digital point-cast. BellSouth, File No. WPC-6977 (1995). Digital multi-cast entails distribution of a digital video signal to everyone who subscribes, while digital point-cast is switched digital distribution. BellSouth reported to the Commission, in an April 28, 1995 letter, that 14 customer-programmers had requested more channels than the platform's planned 70 analog broadcast channels, 160 digital broadcast channels, and 480 digital switched channels. BellSouth had tentatively decided, instead of expanding the capacity of the platform, to allocate channels to all applicants on a proportional basis and file a tariff for such allocation. See Letter from Michael A. Tanner to Kathleen M. H. Wallman (April 28, 1995). 234. Carolina Telephone and Telegraph Company -- Wake Forest, North Carolina Technical and Market Trial. Authorization for the eighth trial was granted on December 28, 1994 to Carolina Telephone and Telegraph Company for a two-year technical and market trial to 1,000 homes in Wake Forest, North Carolina. Carolina Telephone and Telegraph Co., File No. WPC-6999 (1994). In a subsequent letter, Carolina Telephone and Telegraph Company informed the Commission that three customer-programmers had requested more than the initial 75 analog channel capacity of the system, but that the customer-programmers were satisfied with dividing the 75 channels. See Letter from Warren D. Hannah to Kathleen M. H. Wallman (May 2, 1995). APPENDIX F Top 20 SMATV Operators (ranked by number of units passed*) Rank Company Number of Properties Units Passed 1 Interactive Cable Systems 700 230,000 2 OpTel 350 110,000 3 Telesat** 65 81,200 4 Cable Plus*** 170 61,291 5 ACS 225 54,000 6 Apollo 160 50,600 7 Mid-Atlantic Cable 74 47,176 8 Interface Communications 60 35,000 9 Eastern Cable Networks (formerly AMSAT)**** 70 34,000 10 Liberty Cable 175 30,000 11 Preferred Entertainment 190 30,000 12 Ed Rose & Sons 50 26,000 13 Future Communications 46 20,000 14 MultiTechnology Services 65 18,500 15 Telecom Satellite 50 17,500 16 Wireless Cable of Atlanta 30 12,000 17 Superior Cable 26 10,736 18 Sunshine TV Entertainment 8 10,000 19 Novner Enterprises 23 7,000 20 Coaxial Communications 22 5,800 Total 2,559 890,803 Notes: * Chart does not include data for hospitals, hotels and prisons. ** Includes franchised cable subscribers. *** Includes MSE Cable. **** Is now also a wireless cable licensee. Source: Paul Kagan Assocs. Inc., Private Cable Investor, Dec. 31, 1994, at 5. APPENDIX G TABLE 1 Assessment Of Competing Technologies* Subscribers Technology Used 1991 1992 1993 1994 Sept. 1995 TV Households (1) 92,100,000 93,100,000 94,200,000 95,400,000 95,900,000 Pct. Change 1.09% 1.18% 1.27% 0.52% MVPD Households (2)** 55,309,000 57,530,000 60,283,000 63,936,620 67,475,350 Pct. Change 4.02% 4.79% 6.06% 5.53% Pct of Households 60.05% 61.79% 63.99% 67.02% 70.36% Cable Subs. (3) 53,400,000 55,200,000 57,200,000 59,700,000 61,700,000 Pct. Change 3.37% 3.62% 4.37% 3.35% Pct. of MVPD Total 96.55% 95.95% 94.89% 93.37% 91.44% MMDS Subs. (4) 180,000 323,000 397,000 600,000 800,000 Pct. Change 79.44% 22.91% 51.13% 33.33% Pct. of MVPD Total 0.33% 0.56% 0.66% 0.94% 1.19% SMATV Subs. (5)*** 965,000 984,000 1,004,000 850,000 950,000 Pct. Change 1.97% 2.03% -15.34% 11.76% Pct. of MVPD Total 1.74% 1.71% 1.67% 1.33% 1.41% HSDs Subs. (6) 764,000 1,023,000 1,612,000 2,178,000 2,341,000 Pct. Change 33.90% 57.58% 35.11% 7.48% Pct. of MVPD Total 1.38% 1.78% 2.67% 3.41% 3.47% DBS Subs. (7) < 70,000 602,000 1,675,000 Pct. Change 760.00% 178.24% Pct. of MVPD Total 0.12% 0.94% 2.48% VDT (8) Subs. at Trial Sites**** 6,620 9,350 Pct. Change 41.24% Pct. of MVPD Total 0.01% 0.01% Subs. at Permanent Sites 0 0 Notes: * Totals for 1991-94 are year-end totals unless otherwise indicated. Figures for the earlier years which appeared in the 1994 Report have been revised. Some numbers have been rounded. ** The total of MVPD Households is likely somewhat lower than the given figure due to households subscribing to the services of more than one MVPD. See e.g. 1994 Report, 9 FCC Rcd. at 7480, Para. 74. The number of such households is likely low, however, so the given total can be seen as a reasonable estimate of the number of MVPD households. *** The SMATV subscriber count was revised downward to reflect revised totals produced by changes in the methodology used by Paul Kagan Associates, Inc. Paul Kagan did not revise back for earlier years. **** Total for Oct. 1994. Sources: (1) United States television households: 1991-94 from A.C. Nielsen Co. as of January of the following year cited by Veronis, Suhler & Associates, Homes Passed by Cable and Incidence of Subscription, The Veronis, Suhler & Associates Communications Industry Forecast, July 1995, at 145; 1995 estimate from Nielsen Media Research as cited in Broadcasting & Cable, Oct. 23, 1995, at 62. The 1995 figure is for September. (2) Total MVPD households were calculated by summing the total number of subscribers listed under each of the categories of the various technologies. Because there are no permanent VDT subscribers, the trial VDT subscriber totals were used. (3) Cable subscribers: 1991-94 from Paul Kagan Associates, Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; and 1995 from Paul Kagan Associates, Inc., Paul Kagan's 10-Year Cable TV Industry Projections, July 1995, at 7. The 1995 figure is for December. (4) MMDS subscribers: 1991 from Wireless Cable Investor, June 30, 1994, at 1; 1992-94 from Paul Kagan Associates, Inc., Wireless Cable Industry Projections, 1992-2002, The 1995 Wireless Cable Databook, Jan. 1995, at 23; and 1995 from WCAI Comments, at 2. The 1995 figure is for June. (5) SMATV subscribers: 1991-94 from Cable & Pay TV Census -- December, Marketing New Media, Dec. 19, 1994, at 4; and 1995 from John Mansell, Private Cable Investor, Oct 19, 1995. The 1995 figure is for September. (6) HSD subscribers: 1991-92 from the SkyTRENDS research staff and the number of General Instrument authorizations for receipt of scrambled programming; 1993 from Subscription Data from General Instrument (Chart), SkyREPORT, Oct. 1994, at 21; 1994 from 1994 Net Authorizations (Chart), SkyREPORT, Feb. 1995, at 9; and 1995 from DTH Subscribers, SkyREPORT, Oct. 1995, at 6. HSD subscriber figures were reduced by 1% to account for the estimated number of Canadian subscribers. The 1995 figure is for September. (7) DBS subscribers: 1993 from Let the Games Begin, SkyREPORT, May 1994, at 2; 1994 from Kent Gibbons, DBS: We're Walking the Walk, Multichannel News, Jan. 16, 1995, at 3, 52; and 1995 from DTH Subscribers, SkyREPORT, Oct.1995, at 6. The 1995 figure is for September. (8) VDT Trials figures from Section 214 Applications, ex parte letters and associated filings with FCC. The 1994 and 1995 figures are for October. TABLE 2 1995 Cable MSO Horizontal Concentration Nationwide Rank Company Pct. of Subs. 1 TCI 25.87 2 Time Warner 16.21 3 Continental Cablevision 6.85 4 Comcast 5.66 Top 4 54.59 5 Cox Cable 5.33 Top 5 59.92 6 Cablevision Systems 4.40 7 Adelphia 2.48 8 Cablevision Industries 2.32 9 Jones Intercable 2.20 10 Viacom 1.90 Top 10 73.22 Top 25 88.48 Top 50 95.21 HHI 1098 TABLE 3 Nationwide Concentration After Proposed Transactions Rank Company Pct. of Subs. 1 TCI 29.00 2 Time Warner 18.37 3 Continental 7.05 4 Comcast 6.89 Top 4 61.31 5 Cox 5.33 Top 5 66.64 6 Cablevision Systems 4.40 7 Adelphia 2.68 8 Jones Intercable 2.33 9 Marcus 2.11 10 Falcon 1.74 Top 10 79.89 Top 25 91.13 Top 50 96.62 HHI 1355 TABLE 4 Changes In Concentration Of The Cable Industry Based On Total Subscribers Post 1990 1991 1992 1993 1994 1995 Merger Top Share 24.0 24.5 25.2 24.3 24.8 25.9 28.8 Top 2 Share 36.7 37.1 37.9 36.9 37.3 42.1 47.4 Top 3 Share 42.0 42.3 43.2 42.3 42.4 48.9 54.4 Top 4 Share 45.6 46.0 48.2 47.2 47.2 54.6 61.3 Top 5 Share 48.8 48.9 51.9 50.9 51.0 59.9 66.6 Top 10 Share 61.6 61.4 64.6 63.2 63.3 73.2 79.9 Top 25 Share 80.8 80.2 84.5 83.1 83.4 88.5 91.3 Top 50 Share 91.2 90.9 94.5 93.1 92.4 95.2 96.6 HHI 866 872 928 880 898 1098 1355 Data for 1995 taken from, supra, Appendix G, Tables 2-3. Data for 1990 through 1994 were calculated from information contained in Paul Kagan Assocs., Inc., Cable TV Financial Databook 14 (1991); Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 12 (1992); Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 12 (1993); and Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 14 (1994). The data for the years 1990-94 have been recalculated after discussions with Paul Kagan Associates personnel concerning that company's methodology for including consolidated, non-consolidated and international subscribers. International subscribers have been deducted from TCI's subscriber totals in 1991-93 and the estimate of TCI's subscribers in 1994 was similarly modified assuming continuation of historical trends. The figure for TCI's subscribership in 1990 based on information contained in TeleCommunications, Inc., Form 10- K, Dec. 31, 1990, at I-2 to I-4. TABLE 5 Cable System Transactions in Principle That Have Been Announced: September 1994 - November 1995 Anncd. Buyer Seller System(s) Price (mil.) Basic Subs. Price/ Sub. Cash Flow Mult. Clustering Sep-94 Northland Cable Corsicana Cable Corsicana, TX $7.50 5,300 $1,405 9.1 Oct-94 Adelphia Tele-Media Investment Partnership PA-based MSO $90.00 63,800 $1,411 9.6 Oct-94 Century Communications/ Citizens Utilities Foothills Cablevision Chino & Glendora, CA $51.90 26,600 $1,951 8.0 Oct-94 Comcast Grosse Pointe Cable (Grosse Pointe Twp.) Grosse Pointe, MI $32.00 16,600 $1,928 10.7 Acquired remaining 75% of cable system. Oct-94 Falcon Communications Lost Hills Communications Calabasas, CA $2.70 1,200 $2,195 11.9 Oct-94 TCI Heritage Communications (Comcast has 19% ownership PA-based MSO $290.30 184,200 $1,576 8.5 Oct-94 WT Acquisition Corp. Time Warner Mooreland & Woodward, OK; Nixon & Flatonia, TX $8.85 6,200 $1,427 8.5 Nov-94 Adelphia Clear Channels Cable TV, Rifkin/WB Cable Association,Benjamin Terry Family Kittanning, PA Boca Raton/West Palm Beach, FL;Henderson/Vance Co., NC $122.30 69,200 $1,767 8.1 West Palm Beach/Boca Raton system adds to Adelphia's existing FL systems with 300,000 subs. Nov-94 Century Communications ML Media Partners Anaheim, Fairfield, Hermosa Beach/Manhattan Beach & Rohnert Park, CA $286.00 135,000 $2,119 10.5 Systems increase Century's subs. to 1.1 million. Nov-94 Charter Communications BiJo Cablevision Stockbridge & Henry County, GA $5.50 2,500 $2,208 11.5 Acquired system adds to Charter's Atlanta cluster. Nov-94 Continental Providence Journal Cable (Colony Communications)- partnership with Kelso & Co. systems also sold MN; RI; MA; Ft. Myers & Miami, FL; Los Angeles, Palm Springs, Riverside County, CA; Catskill Mountains, NY $1,400.00 775,000 $1,806 11.1 Systems add to Continental's clusters in MN; Providence, RI/Boston, MA; Ft. Myers & Miami, FL; LA, Palm Springs, Sacramento & Riverside Co., CA; & Catskill Mtns., NY. Nov-94 Cox American Cable TV Investors, LP (Ptnrs. 4 & 5)--TCI Mgmt. Newport News, VA $122.00 48,000 $2,542 9.0 System adds to Cox's Hampton Roads cluster--197,000 subs. in Norfolk, Portsmouth, & VA Beach. Nov-94 Northland Communications Alabama TV Cable Co. Aliceville & Tuscaloosa, AL $9.20 6,850 $1,343 7.5 Systems add to Northland's adjacent MS cluster with 20,000 subs. Nov-94 NUSHAGAK Telephone Dillingham Cablevision Dillingham, AK $0.40 400 $1,000 6.0 Nov-94 Providence Journal King Cable (50%) CA, WA, & ID-based systems $265.00 124,300 $2,132 11.7 Dec-94 CCT Holdings (Charter Communication Corp./Kelso Co. joint venture) Gaylord Broadcasting (Gaylord Entertainment) Riverside County & Pasadena, CA; NC, & SC-based systems $370.00 175,000 $2,114 9.7 Dec-94 Galaxy Telecom, LP Galaxy Cablevision, LP IL & KY-based MSO $18.40 14,900 $1,235 8.1 Dec-94 Galaxy Telecom, LP Vantage Cable IA & NE-based MSO $38.40 30,500 $1,259 7.9 Dec-94 Sioux Falls Cable/ WT Acquisition Corp New Heritage/Meredith Time Warner Bismarck & Mandan, ND; Woodward, OK $48.90 24,000 $2,038 n/a Jan-95 Adelphia Henderson Community Antenna Henderson, Oxford, & Franklin County, NC $22.40 14,100 $1,589 10.2 Jan-95 Charter Communications CableSouth AL-based systems $49.00 28,700 $1,707 9.0 Jan-95 Continental Cablevision of Chicago Cook & Du Page Counties, IL $172.00 86,000 $2,000 11.1 Acquired systems add to existing Chicago cluster; Continental will have 340,000 subs. in 81 Chicago suburbs. Jan-95 Continental Cablevision of Jacksonville Bradford, Clay, & Nassau Counties, FL n/a 34,000 n/a n/a Jan-95 Fanch Communications Sammons Communications Johnstown, Gloversville & Cortland, NY $32.25 21,500 $1,500 11.4 Jan-95 Galaxy Management Chartwell Cable of CO Larimer & Weld Counties, CO n/a 825 n/a n/a Jan-95 Galaxy Telecom, LP Vista Communications AL, GA, FL, LA, & MS- -based systems n/a 30,000 n/a n/a Jan-95 Maclean Hunter Cable (80% ownership) Cable TV NJ (Arnold McKinnon/Samuel DeLuca--20% ownership) Jersey City, NJ n/a 31,000 n/a n/a MacLean Hunter now has 100% of system. Jan-95 Multimedia TCI Wichita, KS $90.63 50,400 $1,798 10.6 System acquired through trade of IL & OK systems with 40,600 subs. Jan-95 OpTel, Inc. International Richey Pac. Cable AZ, CA, & TX-based systems $17.50 17,500 $1,000 8.6 Jan-95 Robert McMillan Time Warner Fayetteville, et al., AR $65.00 34,300 $1,895 10.8 Jan-95 TCI Multimedia, Inc. IL & OK-based systems $82.60 40,600 $2,035 9.9 Systems acquired through trade of Wichita, KS system with 50,400 subs. Jan-95 Time Warner KBLCom (Houston Industries subsidiary) San Antonio & Laredo, TX; Minneapolis, MN; Portland, OR; Orange County, CA; Paragon Systems (+ 50% ownership)--AZ, CA, FL, ME, NH, NM, NY, OR, & TX $2,243.50 1,173,500 $1,912 9.5 Acquisitions add to Time Warner's existing clusters--249,000 subs in Houston; San Antonio & Laredo, TX; Minneapolis, MN; Portland, OR; & Orange Co., CA. Feb-95 C-TEC Higgins Lake Cable, Inc. Higgins Lake, MI $4.70 3,200 $1,469 n/a Feb-95 Charterhouse Group Crown Media KY, NC, & SC-based systems $112.00 63,000 $1,778 n/a Systems increase Charterhouse to 163,000 subs. Feb-95 Comcast (acquired 10% interest) Garden State NJ-Based MSO $27.50 19,461 $1,413 9.8 Comcast now owns 50% of Garden State. Feb-95 Greene County Partners, Inc InterMedia Partners (TCI affiliate) Central IL-based systems n/a n/a n/a n/a Feb-95 Greene County Partners, Inc United Video Central IL-based systems n/a n/a n/a n/a Feb-95 InterMedia Partners (TCI affiliate) TCI Athens, GA; Ashville, NC; Cleveland, TN $163.34 85,970 $1,900 8.7 Acquired systems through trade of systems in Santa Clara, Mountain View et al., CA with 70,000 subs. Feb-95 Jones Intercable Cable TV Fund 12-B LP Augusta, GA $141.72 66,000 $2,147 9.7 System will form cluster with existing adjacent system in northern Georgia/Augusta. Feb-95 Lenfest Communications (TCI 50% ownership) (acquired 10% interest) Garden State NJ-Based MSO $27.50 19,461 $1,413 9.8 Lenfest now owns 50% of Garden State. Feb-95 TCA Cable Time Warner Russellville, AR $26.99 14,994 $1,800 10.3 Feb-95 TCA Cable Time Warner Fayetteville, AR $37.10 19,306 $1,922 10.4 Feb-95 TCI InterMedia Partners (TCI Affiliate) Santa Clara, Mountain View et al., CA $139.09 70,000 $1,987 8.9 Acquired systems through trade of Athens & Milledgeville, GA; Ashville, NC; & Cleveland, TN systems with 86,000 subs. Feb-95 Time Warner Cablevision Industries (CI) NY-based MSO $2,719.00 1,395,750 $1,948 9.9 Acquired systems add to Time Warner's existing clusters--CI has 250,000 subs. in NY state; 138,000 subs. in Raleigh/Greensboro, NC; 243,000 subs. in Orlando/Tampa, FL; 95,000 subs. in San Fernando Valley, CA; & 92,000 subs. in Columbia, SC; Mar-95 Century Communications Rock Associates, Inc. Susanville & Burney, CA; Gunnison & Telluride, CO; Coeur d'Alene, Moscow & Bonners Ferry, ID; Libby, MT; Friday, WA $84.00 47,000 $1,787 9.7 Mar-95 Classic Cable American Cable Enterprise MO, KS, OK, & TX- based systems $13.30 9,800 $1,362 8.5 Mar-95 Fanch Communications Leonard Communications Bunkie, Ferriday, Jonesville, Oakdale & Sicily Island, LA; Atchison, KS $17.17 12,100 $1,419 8.4 Mar-95 Jones Intercable Cablevision of Manassas (Benchmark Communications) Manassas, Manassas Park, & Prince William County, VA $71.00 26,000 $2,731 9.0 Acquired systems add to Jones Intercable's 125,000 subs. in Baltimore- Washington, DC cluster. Mar-95 Lenfest Communications (TCI 50% ownership) Sammons Communications PA-based systems $533.26 293,000 $1,820 10.6 Sammons' PA systems not acquired by Marcus. Mar-95 Leonard Communications Fanch Communications KS & LA-based systems $17.20 12,100 $1,750 8.4 Mar-95 Marcus Cable Sammons Communications CA, TX, IN, & 13 other states $962.50 650,000 $1,481 9.5 Acquisitions add 11 systems to Marcus's 2 TX systems, including 140,000 subs in Dallas-Ft. Worth; & 5 systems to Marcus's 2 IL systems; Marcus largest cluster is 66 systems in WI; remaining Sammons systems scattered in 13 other states. Mar-95 Olympus Communications LP (Adelphia 2/3 ownership; Florida Power & Light 1/3 ownership) Telesat Cablevision Leesburg, Citrus, Hillsborough, Orange, & Osceola Counties, FL $127.50 50,000 $2,550 n/a Adds 460,000 subs to Adelphia's systems, mostly in Miami & Palm Beach. Mar-95 Rock Associates, Inc. Century Communications CA, CO, ID, MT & WA- based systems $84.00 47,000 $1,787 9.7 Mar-95 TCA Cable Marcus Cable San Angelo, Andrews, Ballinger, Miles, & Winters, TX; $65.10 32,800 $1,985 10.3 Adds to TCA's San Angelo cluster; TCA now has 540,000 subs. Mar-95 TCI/TKR of Houston Cable/Net Communication League City, TX $2.61 1,690 $1,543 9.5 Mar-95 TKR Cable/TCI (joint venture) Sammons Communications NJ-based systems $267.54 147,000 $1,820 10.3 Systems are those of Sammons not acquired by Marcus. Apr-95 Adelphia (50%) St. Mary's TV Fox, Ridgeway, & Elk County, PA $3.92 3,350 $1,169 7.7 Apr-95 Bresnan Communications Futurevision of Bruce Bruce, MS $1.34 1,165 $1,150 8.1 Apr-95 Continental N-COM Limited Partnership II Wayne, Oakland, Wastenaw, & Jackson Counties, MI $90.00 35,820 $2,513 10.5 Continental acquires 66% of N-COM it did not already own; acquisition gives Continental MI cluster with 339,000 subs. Apr-95 Galaxy Telecom, LP Galaxy Cablevision, LP Cameron, TX $3.55 3,535 $1,004 8.0 Apr-95 GS Communications PA Classic Cable Adams & York Counties, PA $16.70 12,850 $1,300 10.4 Apr-95 TCI of Florida N & K Industries, Inc. Ft. Pierce, FL $0.70 873 $800 7.2 Apr-95 Telmet of Preston V. Miller Charitable Trust Preston, IA $0.60 700 $967 9.0 May-95 Charter Communications Peachtree Cable TV Carrollton & Dublin, GA $24.42 12,240 $1,995 10.4 May-95 Classic Cable Time Warner Chanute, Emporia & Independence, KS; Chillicothe, Kennett, & Marshall, MO $69.88 32,500 $2,150 9.9 May-95 Classic Cable WK Communications KS & MO-based systems $65.10 31,000 $2,100 9.8 May-95 Fanch Communications (Mark Twain Cablevision, LP) Leonard Communications (Delta Cablevision I) MN, MO, MS, & WI- based systems $3.36 3,200 $1,050 8.4 May-95 Fanch Communications Gold Country Cablevision Cripple Creek, CO $0.41 400 $1,030 8.4 May-95 FMTC Mtg. (Fanch Communications) Mark Twain Cablevision, LP Espanola, NM; CO, MN, & MO-based systems $28.53 27,300 $1,045 8.5 May-95 InterMedia Partners (TCI affiliate) Time Warner Kingsport, TN $61.60 31,100 $1,981 10.1 May-95 Jones Intercable Columbia International, Inc. Dale City et al., VA (Prince William County) $123.00 50,000 $2,460 9.5 Acquired systems add to 125,000 subs to Jones's Baltimore-Washington, DC area cluster. May-95 Lenfest Communications (TCI 50% ownership) Time Warner Salem, NJ $14.22 7,400 $1,922 9.9 May-95 Mark Twain Cablevision LP Delta Communication, Inc. Alma, Buffalo, & Cochrane, WI $0.76 825 $918 8.2 May-95 News-Press Gazette Co. Cox Bullhead City & Mohave Co., AZ $20.00 13,000 $1,538 10.1 Cox acquired Bullhead, AZ system in Feb. 1995 Times Mirror Cable deal. May-95 OpTel, Inc. Action Cable TV Dallas, TX $2.47 4,000 $618 6.0 May-95 Rapid Communications Partners, LP Galena Cablevision Galena & Scales Mound, IL $0.72 700 $1,023 7.6 May-95 Rapid Communications Partners, LP Green River Cable Casey, Lincoln et al., KY $0.85 1,440 $587 4.9 May-95 Rapid Communications Partners, LP Renaissance CATV AR, KY, & MO-based systems n/a 4,600 n/a n/a May-95 Raystay Co. Time Warner Chamberburg & Shippensburg, PA $32.93 22,400 $1,470 10.7 May-95 TCA Cable Time Warner El Dorado, AR $19.40 10,400 $1,865 10.0 May-95 York Cable Time Warner Rankin, MS $2.66 1,650 $1,612 9.1 Jun-95 Adelphia/Olympus Communications Corp. Fairbanks Communications, Eastern Telecom, Robinson Cable TV, Leadership/First Carolina Cable TV (New England) FL, PA, & New England- based systems $177.90 108,000 $1,647 8.1 Acquired systems add to Adelphia clusters--Olympus Communications (Adelphia/FPL joint venture) owns systems. Jun-95 Continental Consolidated Cable Partners Reedley, CA $15.20 12,200 $1,252 8.4 Jun-95 Marcus Cable Cencom of Alabama, LP Birmingham, Fayetteville et al., AL $151.00 83,610 $1,806 9.2 Jun-95 TCI Chronicle Publishing (Western Communications) Camarillo, Concord, Hemet, Monterey Peninsula, Thousand Oaks, So. San Francisco & Ventura County, CA; Las Cruses, NM; & HI $565.00 328,000 $1,723 8.6 Acquired CA systems add to TCI's 1,000,000 subs. San Francisco cluster (includes affiliates--Lenfest's 118,094 subs. & InterMedia Partners' 66,910 subs.). Jun-95 TCI Columbia Associates, LP NV, OR, WA-based systems $304.00 147,000 $2,068 10.0 Columbia's 75,000 subs. in 17 Portland, OR suburbs add to TCI's Portland cluster. Jun-95 Torrence Cablevision USA Regional Cable TV USA AL & MS-based systems $0.81 1,400 $575 7.0 Jul-95 Cable USA (HH Cable) Classic Cable Axtell et al., NE $1.70 1,300 $1,262 8.5 Jul-95 Charter Communications United Video Cablevision St. Louis Co., MO; Nashoba Valley area, MA $90.00 45,300 $1,985 9.0 Acquired St. Louis Co. system adds to Charter's MO cluster. Jul-95 Gannett Co., Inc. Multimedia, Inc. KS, IL, IN, NC, & OK- based systems $861.00 450,000 $1,913 9.2 Jul-95 InterMedia Partners (TCI affiliate) TCI Nashville, TN $255.20 141,000 $1,810 9.2 Acquired system adds to InterMedia 200,000 subs. cluster in eastern TN (deal follows TCI/Viacom merger). Jul-95 PA Educational Employees/ Spectrum Equity (Trust Fund) (25% ownership) Adelphia (75% ownership) PA-based MSO $100.00 1,630 n/a n/a Jul-95 Sunshine State Cablesystems II Wildwood Partners Wildwood, FL $0.40 400 $936 8.2 Jul-95 TCI Journal World, The Ft. Collins, CO $59.60 30,000 $1,987 10.2 Jul-95 Tele- Communications, Inc. (TCI) Viacom CA, WA, OR, TN, & OH-based systems $2,250.00 1,159,600 $1,940 10.0 Acquired systems add to TCI clusters-- 388,000 subs. in San Francisco (90% of subs.); Seattle (90% of subs.); Portland/Salem, OR (60% of subs.); Nashville, TN; & Dayton, OH. Jul-95 Universal Cable Communications Cable Video Entertainment MO, OK, & TX-based systems $16.00 12,200 $1,311 8.5 Aug-95 Bresnan Communications Bye Cable Crosby, MN $2.90 2,000 $1,440 8.3 Aug-95 C-TEC Mercom MSO systems $6.90 n/a n/a n/a Aug-95 Century Communications Century Venture Corp. (TimeWarner/Century Communications joint ownership) Colorado Springs et al., CO $155.00 100,000 $1,550 9.7 Acquired systems add to Century's Colorado cluster; traded systems in Milwaukee, WI; Owensboro, KY; & Brunswick, GA with 100,000 subs. Aug-95 Century Venture Corp. (TimeWarner/Century Communications Corp. joint ownership) Century Communications Milwaukee subs, WI; Owensboro, KY; & Brunswick, GA $149.60 100,000 $1,496 9.9 Systems acquired through trade of Colorado Springs, CO system with 100,000 subs. Aug-95 Chambers Communications Cableview, Inc. ID-based system $0.80 700 $1,191 9.5 Aug-95 Charter Communications Premier Cable (Masada subsidiary) Atlanta, GA $36.00 18,000 $2,000 9.6 Acquired system adds to Charter's Atlanta cluster. Aug-95 Fanch Communications GH Cable Arizona Columbia & Foxworth, MS $4.00 3,200 $1,280 8.0 Aug-95 Galaxy Telecom, LP Douglas Cable Communications KS, IL, IA, MO, & NE- based systems $65.50 60,000 $1,092 8.4 Aug-95 Hector Communications Lake Cable Partnership MN-based system $2.20 1,900 $1,158 7.8 Aug-95 Jones Intercable Cable TV Fund 12-BCD Tampa, FL $110.40 62,500 $1,766 9.1 Aug-95 Jones Intercable IDS/ Jones Growth Partners Carmel et al., IN $44.20 18,500 $2,391 10.7 Aug-95 Jones Intercable Jones Cable, Inc. Fund 1-B Orangeburg & Cordova, SC $18.30 12,000 $1,529 8.8 Aug-95 Jones Intercable Time Warner Prince George's County, MD & Reston, VA $176.50 85,000 $2,076 9.0 Acquired systems increase Jones' Baltimore-Washington cluster to 300,000 subs; traded systems in Tampa, FL; Orangeburg & Cordova, SC; & Boone County et al., IN with 93,000 subs. Aug-95 Lynch Corp. Douglas Cable Communications KS-based systems $5.20 5,000 $1,037 8.9 Acquired KS systems add to Lynch's JBN Telephone Co. cluster. Aug-95 Mark Twain Cablevision LP GH Cable Arizona Payson et al., AZ $11.80 9,300 $1,271 8.0 Aug-95 Post-Newsweek Cox Texarkana, AR & TX $50.00 24,000 $2,083 12.3 System acquired in Times Mirror takeover--adds to Post-Newsweek's 573,000 subs. clusters in Midwest, West & South. Aug-95 Post-Newsweek TCI Biloxi/Ocean Springs, MS; Moorhead, MN; OK-based systems $89.00 63,100 $1,410 8.2 Systems acquired through trade of Burlingame & Union City, CA & north Chicago, IL suburban systems with 39,400 subs. Aug-95 Post-Newsweek Time Warner Prescott, AZ; Cleveland, MS $70.00 41,000 $1,707 10.2 Aug-95 TCA Cable Star Cable Association Winston-Salem, NC; Columbia, SC $176.50 29,000 $6,086 10.1 Aug-95 TCA Cable Time Warner Alexandria & Pineville, LA $61.00 29,000 $2,103 10.5 Acquired systems add to adjacent Natchitoches/Ruston, LA system cluster; traded Winston-Salem, NC & Columbia, SC systems with 29,000 subs. Aug-95 TCI Colton Cablevision (American Cable TV Investors, LP) Colton, CA $11.90 7,300 $1,645 9.7 Aug-95 TCI Post-Newsweek Burlingame & Union City, CA; north Chicago, IL suburbs $89.00 39,400 $2,259 10.6 Systems acquired through trade of Biloxi/Ocean Springs, MS; Moorehead, MN; & OK systems with 63,100 subs. Aug-95 Time Warner Jones Intercable Tampa, FL; Orangeburg & Cordova, SC; Boone, Hamilton, Hancock, & Madison Counties, IN $172.90 93,000 $1,859 9.4 Acquired systems increase Time Warner clusters to 700,000 subs. in Tampa; 145,000 subs. in Orangeburg, SC; & 118,000 subs. in Indianapolis, IN; traded Pr. George's Co, MD & Reston, VA systems with 85,000 subs. Aug-95 Time Warner TCA Cable Winston-Salem, NC; Columbia, SC $59.10 29,000 $2,038 10.1 Part of Time Warner's acquisition of 3 Summit systems, which adds 160,000 subs to Time Warner's Winston-Salem & Atlanta clusters; traded systems in Alexandria & Pineville, LA with 29,000 subs. Aug-95 Time Warner American Cable TV Investors, LP HI-based system $28.70 17,000 $1,688 9.8 Sep-95 C-TEC Twin County Trans-Video Allentown/Bethlehem, PA (Lehigh Valley area) $100.50 74,000 $1,358 8.0 Acquired systems add to C-TEC's PA & NJ clusters. Sep-95 CATV Service, Inc. Universal Communications of PA White Deer et al., PA $0.60 600 $1,000 10.5 Sep-95 Cox Susquehanna Cable East Providence, RI $36.40 15,500 $2,346 9.2 Acquired system adds to Cox's existing Providence area; traded system in Williamsport, PA with 24,500 subs. Sep-95 Cox TCI Bellevue/LaVista, NE; Chesapeake, VA;Scottsdale, AZ; N.Attleboro/Taunton, MA;Lincoln, RI;St.Bernard, LA;& Council Bluffs, IA; $590.00 295,600 $1,961 10.0 Acquired systems are contiguous to Cox's existing clusters--add 57,000 subs. in Phoenix, 17,000 subs. in New Orleans, & 127,000 subs. in MA & RI; traded systems in PA, WA, IL, MI, & IA with 319,200 subs. Sep-95 E. W. Scripps (Scripps Howard) Mid-Tennessee CATV Knoxville & Chattanooga, TN-based systems $62.50 34,000 $1,838 9.0 Acquired systems increase eastern TN cluster to 264,000 subs. Sep-95 Jones Intercable Jones Spacelink/ Cable TV Wi & OH-based systems $51.50 31,100 $1,659 9.4 Sep-95 Jones Intercable Time Warner Savannah, GA $130.00 63,500 $1,985 10.1 Acquired system through trade of systems in WI, HI, & OH with 77,500 subs. Sep-95 "local operator" Airview CATV, Inc. York County, PA $3.10 2,000 $1,550 9.6 Sep-95 Susquehanna Cable Cox Williamsport, PA $36.40 24,500 $1,484 9.0 Cox acquired Williamsport, PA system in Time-Mirror Cable takeover; traded system in East Providence, RI with 15,500 subs. Sep-95 TCI All Points Association King County, WA $5.20 3,900 $1,315 9.9 Sep-95 TCI Cox Pittsburgh, PA; Spokane, WA; Springfield, IL; Saginaw, MI; Cedar Rapids & Quad Cities, IA-IL $590.00 319,200 $1,836 10.0 Systems acquired through trade of NE, VA, AZ, MA, RI, LA, & IA systems with 295,600 subs. Sep-95 Time Warner Jones Intercable Kenosha, Lake Geneva, Manitowoc & Ripon, WI; Hilo, HI; & Lodi, OH $130.00 77,500 $1,677 8.3 Acquired systems increase Time Warner's existing clusters to 290,000 subs in Milwaukee; 135, 000 subs. in Appleton/Green Bay; 300,000 subs. on Isle of Hawaii; & 225,000 subs. in NE Ohio; traded system in Savannah, GA with 63,500 subs. Sep-95 V Cable US Cable AL, FL, IL, KY, MO, & NC-based systems $219.00 252,500 $867 6.4 Sep-95 Vision Communications. Savage Communications Luck & Balsam Lake, WI $3.20 2,600 $1,257 8.4 Oct-95 Casco Cable (Susquehanna Cable) American Cablecom Wiscasset et al., ME $4.50 3,500 $1,286 7.6 Oct-95 Comcast E. W. Scripps (Scripps Howard) CA, CO, FL, GA, KY, TN, & WV $1,575.00 798,300 $1,973 10.9 Merger does not add to Comcast existing clusters (major Scripps Howard clusters--230,000 subs. in Sacramento, CA; 252,000 subs. in Knoxville/Chattanooga, TN; & smaller clusters in CO, FL, GA, IN, KY, SC, & VA are not near Comcast's major clusters). Oct-95 Continental Columbia International, Inc. Ann Arbor & Brighton, MI $155.00 74,000 $2,095 11.4 Adds 16 communities to Continental's MI cluster. Oct-95 Global Acquisition Partners, LP (Adelphia) Cable TV Fund 11-B LP (Jones Intercable) Lancaster, NY $84.00 39,000 $2,154 11.5 Oct-95 Prime Cable Interface Communications Las Vegas, NV $1.60 1,300 $1,218 8.2 Oct-95 Rapid Communications Partners, LP Cumberland River Cable Whitley & Knox Counties, KY $1.00 905 $1,075 7.0 Oct-95 Raystay Co. Mid-South Cable Berkeley Co., WV $4.60 2,800 $1,643 9.2 Oct-95 TCI Prime Cable Ft. Bend, TX (Houston) $230.00 125,000 $1,840 10.0 Acquired systems add to existing TCI's 200,000 subs. cluster in Houston metroplex (Ft. Bend & Harris Counties). Nov-95 Charter Communications Mineral Area Cablevision (Omega Communications subsidiary) South Central MO n/a 5,700 n/a n/a Acquisition gives Charter 200,000 subs. in MO. Nov-95 Charter Communications Omega St. Louis, MO $7.40 5,700 $1,298 6.8 Nov-95 Media One(US West) National Cable Systems Association Atlanta, GA $2.20 2,900 $763 6.0 Nov-95 Summit Communications Cascade Cablevision Lakebay, WA $1.10 900 $1,248 8.0 Nov-95 TCI Woodlands Communications (50%) Woodlands, TX $18.00 7,000 $2,580 10.0 TCI acquired remaining 50% of Woodlands system. Nov-95 Time Warner Hawaiian Cablevision Maui, HI $24.20 10,800 $2,244 11.0 Sources: - Paul Kagan Assocs., Inc., Cable TV Finance: First-Half 1995 Anounced/Proposed Cable System Sales Ranked By Price, Jul. 31, 1995, at 4-5; Oct. 17, 1995, at 10. - Paul Kagan Assocs., Inc., Cable TV Investor: The 1994 M&A March: Visions of the Late-'80s, Sept. 30, 1994, at 6; Announced/Proposed Cable System Sales, Oct. 31, 1994, at 7; Jones Intercable, Spacelink Amend Merger Terms, Nov. 28, 1994, at 4; Cable Deals Gaining Speed Toward the New Year, Dec.15, 1994, at 9; Cable System Sales: 1994 was 2nd-Best Year; 1995 Could Break Record, Jan. 31, 1995, at 8; Cable System Sales: The Momentum Builds, Feb. 28,1995, at 8; Cable System Sales: Breakthrough To Come, Mar. 24, at 5; Cable System Sales: $8.75 Bil. in 1st Quarter, Apr. 30, 1995, at 8; Cable Deal Flow Quickens in June, Jun. 30, 1995, at 8; TCI/Viacom: How Shrewd Financiers Create a Win-Win Deal, Jul. 31, 1995, at 4; Cable System Sales: Record 1st Half; Look What's Next, Jul. 31, 1995, at 6; C-Tec Swallows Mercom in Below-Market Bites, Aug. 31, 1995, at 5-6; MSOs Swapping Their Way to ADI Dominance, Sept. 18, 1995, at 4; Swap Happy MSOs Lead $2.2 Billion Month, Oct. 17, 1995, at 10; Announced/Proposed Cable System Sales, Nov. 22, 1995, at 13. - Paul Kagan Assocs., Inc., Cable TV System Sales 1994, The Cable TV Financial Databook, Jul. 1995, at 139-143. - Paul Kagan Assocs., Inc., Media Mergers & Acquisitions: Feb. 28, 1995, at 4; Mar. 31, 1995, at 4; Apr. 30, 1995, at 4; Jun. 30, 1995, at 4; Jul. 31, 1995, at 4; Sept. 30, 1995, at 7, 10. - Broadcasting & Cable: Cable's Summer of Major League Clustering, Cable, Oct. 2, 1995, at 46-47; Comcast Buying Scripps System for $1.6 Billion, Nov. 6, 1995, at 98; Continental/Columbia Deal Done, Oct. 23, 1995, at 60; TCI Primes for More Growth, Oct. 30, 1995, at 55. - Time Warner and Cox to Sell 3 Cable Systems, Wall Street Journal, Aug. 9, 1995, at B 5. - Post Co. to Pay $120 Million for Three Cable TV Systems, The Washington Post, Aug. 9, 1995, at F 2. - 1994 Competition Report, Table 10, at C-8. - TimeWarner Cable Press Releases: Aug. 1, 1995; Aug. 14, 1995; Sept. 6, 1995; Oct. 4, 1995. - Communications Daily, Oct. 4, 1994; Oct. 5, 1995; Oct. 14, 1994; Oct. 19, 1994; Oct. 26, 1994; Nov. 3, 1994; Nov. 7, 1994; Nov. 10, 1994; Nov. 18, 1994; Nov. 22, 1994; Nov. 23, 1994; Nov. 25, 1994; Dec. 5, 1994; Dec. 9, 1994; Dec. 15, 1994; Dec. 21, 1994; Dec. 23, 1994; Dec. 27, 1994; Dec. 28, 1994; Dec. 30, 1994; Jan. 4, 1995; Jan. 12, 1995; Jan. 13, 1995; Jan. 17, 1995; Jan. 19, 1995; Jan. 20, 1995; Jan. 30, 1995; Jan. 31, 1995; Feb. 3, 1995, Feb. 7, 1995; Feb. 8, 1995; Feb. 24, 1995; Feb. 27, 1995; Feb. 28, 1995; Mar. 2, 1995; Mar. 7, 1995; Mar. 14, 1995; Mar. 17, 1995; Mar. 24, 1995; Mar. 27, 1995; Mar. 21, 1995; Mar. 24, 1995; Mar. 28, 1995; Mar. 31, 1995; Apr. 3, 1995; Apr. 4, 1995; Apr. 6, 1995; Apr. 19; Apr. 24, 1995; May 4, 1995; May 8, 1995; May 11, 1995; May 17, 1995; May 18, 1995; May 19, 1995; May 23, 1995; May 31, 1995; Jun. 13, 1995; Jun. 28, 1995; Jun. 30, 1995; Jul. 3, 1995; Jul. 7, 1995; Jul. 20, 1995; Jul. 26, 1995; Jul. 28, 1995; Jul. 31, 1995; Aug. 2, 1995; Aug. 8, 1995; Aug. 9, 1995; Aug. 14, 1995; Aug. 15, 1995; Aug. 29, 1995; Aug. 30, 1995; Sept. 1, 1995; Sept. 7, 1995; Sept. 8, 1995; Sept. 12, 1995; Sept. 18, 1995; Sept. 21, 1995; Sept. 26, 1995; Oct. 2, 1995; Oct. 3, 1995; Oct. 4, 1995; Oct. 10, 1995; Oct. 13, 1995; Oct. 23, 1995; Oct. 24, 1995; Oct. 31, 1995; Nov. 1, 1995; Nov. 2, 1995; Nov. 3, 1995. Appendix H TABLE 1 MSO Ownership in National Programming Services (Rank by Ownership Percentage) Programming Service Launch Date Ownership Percentage Jones Computer Network 1/ Sept-94 Jones (100) Mind Extension University 1/ Nov-87 Jones (100) Home & Garden 1/ Dec-94 Scripps-Howard (100) tv! Network 1/ Sept-94 TCI (100) Cinemax 1/ Aug-80 Time Warner (100) HBO 1/ Dec-75 Time Warner (100) Flix! 1/ Apr-91 Viacom (100) The Movie Channel 1/ Dec-79 Viacom (100) MTV 1/ Aug-81 Viacom (100) MTV Latino 1/ Oct-93 Viacom (100) Nick at Nite 1/ Jul-85 Viacom (100) Nickelodeon 1/ Apr-79 Viacom (100) VH-1 1/ Jan-85 Viacom (100) Showtime 1/ Jul-76 Viacom (100) Encore 1/ Apr-91 TCI (90) Encore Love Stories 1/ Jul-94 TCI (90) Encore Westerns 1/ Jul-94 TCI (90) Encore Mysteries 1/ Jul-94 TCI (90) Encore Action 1/ Sept-94 TCI (90) Encore True Stories and Drama 1/ Sept-94 TCI (90) Encore WAM! America's Youth Network 1/ Sept-94 TCI (90) Home Shopping Network 1/ Jul-85 TCI (80.4) Home Shopping Network II 1/ Sept-86 TCI (80.4) AMC 1/ Oct-84 Cablevision Systems (75) QVC 1/ Nov-86 Comcast (57.4) TCI (42.6) Q2 1/ Sept-94 Comcast (57.4) TCI (42.6) Bravo 1/ Feb-80 Cablevision Systems (50) Much Music USA 1/ Jul-94 Cablevision Systems (50) GEMS Television 1/ Apr-93 Cox (50) Catalog 1 1/ Apr-94 Time Warner (50) Comedy Central 1/ Apr-91 Time Warner (50) Viacom (50) All News Channel 1/ Nov-89 Viacom (50) Sci-Fi Channel 1/ Sept-92 Viacom (50) USA Network 1/ Sept-80 Viacom (50) E! Entertainment 1/ Jun-90 Time Warner (50.0) Continental (10.3) Comcast (10.3) Cox (10.3) TCI (10.3) Independent Film Channel 1/ Sep-94 Cablevision Systems (50) Starz! 4/ Feb-94 TCI (49.9) The Discovery Channel 2/ Jun-85 TCI (49) Cox (24.7) Faith & Values 4/ Jun-84 TCI (49) The Learning Channel 2/ Nov-80 TCI (49) Cox (24.7) The International Channel 4/ Jul-90 TCI (45) Outdoor Life Channel 2/ Jul-95 Cox (45)Continental (22.5) Comcast (22.5) Request Television 4/ Nov-85 TCI (40) Request 2 4/ Jul-88 TCI (40) Request 3-5 4/ Sept-93 TCI (40) Prime Sports Channel 2/ Jan-89 TCI (34) Cablevision Systems (25) Court TV 2/ Jul-91 TCI (33.3) Time Warner (33.3) Continental (33.3) Sega Channel 2/ Dec-94 TCI (33) Time Warner (33) Newsport 4/ Feb-94 Cablevision Systems (25) Cartoon Network 3/ Oct-92 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) CNN 3/ Jun-80 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) CNN International 3/ Jan-95 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) Headline News 3/ Jan-82 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) TNT 3/ Oct-88 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) Turner Classic Movies 3/ Apr-94 TCI (22.6) Time Warner (18.6) Comcast (*) Continental (*) Viewers Choice 2/ Nov-85 Cox (20) Time Warner (17) Continental (12) Comcast (11) Viacom (11) TCI (10) Viewers Choice: Continuous Hits 1,2,3 2/ Feb-93 Cox (20) Time Warner (17) Continental (12) Comcast (11) Viacom (11) TCI (10) Viewers Choice: Hot Choice 2/ Jun-86 Cox (20) Time Warner (17) Continental (12) Comcast (11) Viacom (11) TCI (10) Cable Health Club 4/ Oct-93 TCI (18.6) The Family Channel 4/ Apr-77 TCI (18.6) Action Pay-Per-View 3/ Sept-90 TCI (17.5) Time Warner (15) BET 3/ Jan-80 TCI (17.5) Time Warner (15) The Box 4/ Dec-85 TCI (5.5) The Golf Channel Jan-95 Continental, Comcast, Cablevision Systems, Adelphia, Cablevision Industries (**) Product Information Network Apr-94 Cox, Jones (**) Television Food Network Nov-83 Continental, Adelphia, Cablevision Industries, Scripps-Howard, C-TEC (**) * Denotes ownership percentage of less than 5%. ** Ownership percentage not available. 1/ Service is owned by an MSO that holds a 50% or greater interest. 2/ Service is owned by multiple MSOs whose combined interests are 50% or greater. 3/ Service is owned by multiple MSOs whose combined interests are less than 50%. 4/ Service is owned by a single MSO whose interests are less than 50%. Sources: Paul Kagan Assocs., Inc., Cable Network Ownership, Cable TV Programming, Oct. 25, 1995 at 4; Rich Brown, The Tele-Communications Inc. Empire: The Long reach of John Malone and TCI, Broadcasting & Cable, Oct. 16, 1995, at 38-45. TABLE 2 Existing National Programming Services Without A Cable Operator Holding An Ownership Interest Programming Service Launch Date National Access Television Network, Inc. Mar-94 Adam & Eve Channel Feb-94 A&E Television Network Feb-84 America's Talking Jul-94 Asian American Satellite TV Jan-92 Cable Video Store Apr-86 Canal de Noticias NBC Mar-93 Canal Sur Aug-91 Channel America Television Network Jun-88 CineLatino Dec-94 (in U.S.) Classic Sports Network May-95 Classic Arts Showcase May-94 CMT: Country Music Television Mar-83 CNBC Apr-89 C-SPAN* Mar-79 C-SPAN 2* Jun-86 Consumer Resource Network Dec-94 The Crime Channel Jul-93 Deep Dish Jan-86 Disney Channel Apr-83 Employment Channel Feb-92 ESPN Sep-79 ESPN2 Oct-93 EWTN: The Catholic Network Aug-81 The Filipino Channel Apr-94 Foxnet Jul-91 fx Jun-94 FXM Oct-94 Galavision Oct-79 The Game Show Network Dec-94 The History Channel Jan-95 The Inspirational Network (INSP) Apr-78 Jewish Television Network Jan-81 Kaleidoscope: America's Disability Network (incorporating the Silent Network) Jun-90 Lifetime Television Feb-84 Mor Music TV Aug-92 NASA Television Jul-91 NET - Political NewsTalk Network (formerly National Empowerment Television) Dec-93 Network One Dec-93 NewsTalk Television (formerly The Talk Channel) Oct-94 Newsworld International Sep-94 The 90s Channel Nov-89 Nostalgia Channel Feb-85 Playboy Network (formerly Playboy Channel) Nov-82 Prevue Feb-88 SCOLA Aug-87 SingleVision Jun-94 Spice May-89 Telemundo Jan-87 TNN: The Nashville Network Mar-83 The Travel Channel Feb-87 Trinity Broadcasting Network Apr-78 Trio Sep-94 TV Asia Apr-93 TV-Japan Jul-91 U Network Oct-89 Univision Sep-76 ValueVision Oct-91 Via TV Network Aug-93 Video Catalog Channel Oct-91 The Weather Channel May-82 Worship Network Sep-92 Z Music Mar-93 * Currently, there are no MSO ownership interests in C-SPAN and C-SPAN 2. However, several MSOs support C- SPAN and are represented on the board of directors as voting members. 1994 Report, 9 FCC Rcd at 7528  171; see also id. at 7599, Appendix G, Table 7 n.1. Sources: NCTA Comments, June 30, 1995, Appendix E, Table 4; Paul Kagan Assocs., Inc., Cable Network Ownership, The Economics of Basic Cable Networks:1994, Nov. 1994, at 42-43. TABLE 3 Planned National Programming Services With Ownership Interests Held by a Cable Operator Programming Service Expected Launch Date Animal Planet 1995 Applause Networks 1996 BET on Jazz Jan-96 Jones Health Network 1996 Jones Language Network TBA Living 1995 The Parents Channel 1996 Planet Central TV 1st Quarter 1996 Quark! N/A Romance Classics 1996 The Singles Network 1996 Speedvision 1996 Sundance Film Channel 1996 TCI/Microsoft Channel 1996 Television Shopping Mall 1996 TV Macy's 1996 Women's Sports Network (TX) TBA World African Network 1996 N/A - Not Available Sources: NCTA Comments, Appendix E, Table 5, June 30, 1995; Cablevision, A Who's Who of New Nets, New Network Handbook: A Comprehensive Guide to Tomorrow's Cable Programming, Apr. 1995, at 33A-47A; Channel Surfing - Cable's New Nets, Broadcasting & Cable, Nov. 27, 1995, at 76-86; Database: Announced Services, Cablevision, Aug. 21, 1995, at 60. TABLE 4 Planned National Programming Services Without A Cable Operator Holding An Ownership Interest Programming Service Expected Launch Date Action America TBA American Independent Network N/A American West Network 1995 America's Health Network 1995 Art & Craft Network 3rd/4th Quarter 1996 Arts & Antiques Network 1996 The Auto Channel 1996 Automotive Television Network/ATN 1996 Benefit Network 1997 Booknet 1996 Career & Education Opportunity Network 4th Quarter 1996 Catalogue 1996 CEO Channel 1996 Channel 500 Jan-96 Children's Cable Network 1995 CHOP TV TBA Classic Music Channel 1996 Collectors Channel 1996 Conservative Television Network 1996 daVinci Time & Space 2nd/3rd Quarter 1996 The Ecology Channel 1996 The Enrichment Channel TBA Entertainment Prosperity Insight Channel 1996 FAD TV (Fashion & Design Channel) 1995 Fashion & Style Network 1996 Fitness & Interactive Television (formerly FXTV Fitness and Exercise Television) 4th Quarter 1996 Gaming Entertainment Television TBA Global Entertainment Television 1995 Global Village Network TBA Golden American Network 4th Quarter 1996 The Gospel Network 4th Quarter 1996 The Health Channel Postponed indefinitely Hip-Hop Television 2nd Quarter 1996 Hobby Craft Network 1996 Horizons Cable Network 1st Quarter 1996 The Jackpot Channel Oct-96 Las Vegas TV Network N/A The Lottery Channel 1995 The Love Network 1996 MBC Movie Network TBA Merchandise Entertainment Television N/A National & International Singles Television Network 1995 New Science Network 1997 ORB TV 1995 Ovation 1995 Parent Television 1995 Parenting Satellite TV Network 1st Quarter 1996 The Pet Television Network May 96 Popcorn Channel 1995 Premiere Horse Network 1st Quarter 1996 Prime Life Network 1st Quarter 1996 Real Estate TV Network 1995 Recovery Net/The Wellness Channel 1996 The Seminar Channel 1996 Sewing & Needles Arts Network TBA The Success Channel 1995 Talk TV Network 1997 The Technology Channel 2nd Quarter 1996 Telecompras Shopping Network 1995 TRAX Television Network 1995 TV 5 1995 Women's Sports Network (NY) TBA N/A - Not Available Sources: NCTA Comments, Appendix E, Table 5; A Who's Who of New Nets, Cablevision, Apr. 1995, at 33A-47a; Channel Surfing - Cable's New Nets, Broadcasting and Cable, Nov. 27, 1995, at 76-86; Database: Announced Services, Cablevision Aug. 21, 1995, at 60. TABLE 5 Major MSO Ownership in National Programming MSO Rank in Order by Subscribers Services Subscribers (in Millions) TCI Time Warner Continental Comcast Cox Cablevisio n Systems Adelphia Cablevisio n Industries Jones Viaco m Action Pay-Per-View 2/ 7.0 17.5% 15.0% All News Channel * 50.0% AMC 55.0 75.0% BET 43.0 17.5% 15.0% The Box 18.7 5.5% Bravo 22.8 50.0% Cable Health Club 4.9 18.6% Cartoon 3/ 20.3 22.6% 18.6% x x Catalog 1 * 50.0% Cinemax 8.1 100% CNN 3/ 66.2 22.0% 18.6% x x CNN International 3/ * 22.6% 18.6% x x Comedy Central 35.9 50.0% 50.0% Court TV 23.1 33.3% 33.3% 33.3% Discovery 1/ 65.4 49.0% 24.7% E!Entertainment 33.0 10.3% 50.0% 10.3% 10.3% 10.3% Encore 5.0 90.0% Encore Love Stories * 90.0% Encore Westerns * 90.0% Encore Mysteries * 90.0% Encore Action * 90.0% Encore True Stories & Drama * 90.0% Encore WAM! America's Youth Network * 90.0% Faith & Values Channel 24.1 49.0% The Family Channel 62.7 18.6% Flix! 13.3@ GEMS Television 3.2 50.0% The Golf Channel 4/ * 4/ 4/ 4/ 4/ HBO 19.2 100.0% 100.0% Headline News 3/ 58.2 22.6% 18.6% x x HSN 40.9 80.4% 4/ HSN II 28.9 80.4% Independent Film Channel 3.0 50.0% International Channel 7.2 45.0% Jones Computer Network 1.2 Learning Channel 40.0 49.0% 24.6% Mind Extension University 25.9 Movie Channel 12.2@ 100.0% MTV 61.0 100.0% MTV Latino * 100.0% MuchMusic * 50.0% Newsport * 25.0% Nick at Nite 6/ 63.6 100.0% Nickelodeon 6/ 63.6 100.0% Outdoor Life 1.0 22.5% 22.5% 45.0% Prime Sports Channel 41.5 34.0% 25.0% Product Information Net * 7/ 7/ QVC 53.0 42.6% 57.4% Q2 11.9 42.6% 57.4% Request Television 24.5 40.0% Request 2 * 40.0% Request 3-5 * 40.0% Sci-Fi Channel 24.6 50.0% Sega Channel * 33.0% 33.0% Showtime 13.3@ 100.0% Starz! 1.8 49.9% TV Food Network 5/ 13.3 5/ 5/ 5/ TNT 3/ 64.7 22.6% 18.6% x x Turner Movie Classic 3/ 5.6 22.6% 18.6% x x tv! Network 5/ * 100.% USA 65.7 50.0% VH-1 52.0 100.0% Viewers Choice 14.2 10.0% 17.0% 12.0% 11.0% 20.0% 11.0% Viewers Choice: Continuous Hits 1, 2, 3 * 10.0% 17.0% 12.0% 11.0% 20.0% 11.0% Viewers Choice: Hot Choice * 10.0% 17.0% 12.0% 11.0% 20.0% 11.0% Sources: Subscriber count was obtained from: Paul Kagan Assocs., Inc., Network Census: July 31st, Cable TV Programming, Aug. 31, 1995, at 12. Ownership percentages were obtained from: MSO public filings at the Securities and Exchange Commission; Mega Media Top 13, Broadcasting and Cable, Aug. 7, 1995, at 6; Rich Brown, The Tele-Communications Inc. Empire: The Long Reach of Jonhn Malone and TCI, Broadcasting & Cable, Aug. 16, 1995, at 45; Paul Kagan Assocs., Inc., Cable Network Ownership, The Economics of Basic Cable Networks: 1994, Nov. 1994, at 42-43. Ownership interests reported for earlier periods may not reflect current ownership. @ Subscribers include Movie Channel, Flix, and Showtime. * Indicates subscriber amount is not available. 1/ Newhouse Broadcasting interest in the Discovery have been consigned to Time Warner. 2/ A programming service of BET Holdings, Inc. See BET Holdings, Inc., 7/31/94 Annual Report at 34. 3/ A programming service of Turner Broadcasting System. Interests marked by an "x" represent other cable companies having 5% or less ownership interest in Turner. See NCTA Comments, Appendix E, Table 8. 4/ Official ownership percentages in The Golf Channel are not available. However, according to Cablevision, A Who's Who of New Nets, New Network Handbook: A Comprehensive Guide to Tomorrow's Cable Programming, April 24, 1995 at 38-A, Adelphia Communications, Cablevision Industries, Comcast, Continental, and Cablevision Systems hold ownership interests in The Golf Channel. 5/ Voting partners in Television Food Network & percentages of ownership include Scripps Howard (13.17%) and Landmark (12.00%). Others having less than 5% interest are: Cablevision Industries, Adelphia Communications, Times Mirror, and C-TEC. Percentages provided by Mr. John Davis of Wiley-Rein, Sep 21, 1995. 6/ Subscriber counts for Nickelodeon and Nick at Nite are not available separately. 7/ Percentage of ownership is not available. TABLE 6 Vertical Integration: Top 25 Programming Services by Subscribership Rank Programming Network (Top 25) Number of Subscribers (Millions)** MSO Ownership Interest in Network 1 ESPN 66.8 None 2 CNN 66.6 TCI, Time Warner, & others with 5% or less 3 TBS* 66.5 TCI, Time Warner, & others with 5% or less 4 USA Network 65.8 Viacom 5 Discovery 65.8 TCI & Cox 6 TNT 65.2 TCI, Time Warner, & others with 5% or less 7 C-SPAN 64.3 1/ 8 Nickelodeon/Nick at Nite 63.6 Viacom 9 TNN (The Nashville Network) 63.4 None 10 The Family Channel 63.2 TCI 11 Lifetime 62.6 None 12 Arts & Entertainment 62.4 None 13 MTV 61.0 Viacom 14 The Weather Channel 58.8 None 15 Headline News 58.6 TCI, Time Warner, & others with 5% or less 16 CNBC 55.2 None 17 AMC (American Movie Channel) 55.0 Cablevision Systems 18 QVC 53.5 Comcast & TCI 19 VH-1 52.0 Viacom 20 BET 43.2 TCI & Time Warner 21 The Learning Channel (TLC) 41.1 TCI & Cox 23 HSN 40.9 TCI 24 Prevue Channel 40.8 None 25 WGN* 38.9 None Sources: MSO public filings at the Securities and Exchange Commission; Paul Kagan Assocs., Inc., Cable Network Ownership, The Economics of Basic Cable Networks: 1994, Nov. 1994, at 42-43; Mega Media Top 13, Broadcasting & Cable, Aug. 7, 1995, at 6-7. * Although Paul Kagan's analysis of A.C. Nielsen data rate superstations TBS & WGN as cable networks for the purpose o f ratings, they are, in actuality, broadcast licensees. ** For services offered on a per channel or per program basis, the number of subscribers are the number of units paying for the individual programming service. For other programming services, the number of subscribers represent the number of cable subscribers to whom the service is available on a programming tier. 1/ Cable affiliates provide 95% of funding but have no ownership or program controlling interests. TABLE 7 Vertical Integration: Top Fifteen Programming Services By Prime Time Rating Rank Programming Service MSO with Ownership Interest 1 USA Network Viacom 2 TBS TCI, Time Warner (others have 5% or less) 3 TNT TCI, Time Warner (others have 5% or less) 4 Lifetime None 5 ESPN None 6 Cartoon Network TCI, Time Warner (others have 5% or less) 7 CNN TCI, Time Warner (others with 5% or less) 8 Discovery TCI, Cox 9 Arts & Entertainment None 10 The Family Channel TCI 11 TNN (The Nashville Network) None 12 BET TCI, Time Warner 13 Sci-Fi Channel Viacom 14 The Learning Channel TCI, Cox 15 E! Entertainment Time Warner, TCI, Continental, Comcast, Cox Sources: NCTA Comments, June 30, 1995, Appendix E, Table 8; Paul Kagan Assocs., Inc., Prime-Time Ratings, July 1995, Cable TV Programming, Aug. 31, 1995, at 10. APPENDIX I Comments on Program Access Issues 1. Expansion of Program Access Rules to Non-Vertically Integrated Programming Providers. Several satellite packagers support expansion of the program access rules to non-vertically integrated programming providers. Satellite Receivers, Ltd., ("SRL") states that programmers have engaged in price discrimination against HSD systems and submits that the Commission must provide a remedy for violations of the program access rules, such as permitting recovery of unjustified overpayments. Satellite service providers argue in favor of extending the program access rules to non- vertically integrated programming providers as the only way independent HSD distributors will have fair access to all programming. 2. The MMDS industry also supports expansion of the program access rules to non- vertically integrated programming providers. Wireless Cable Association International, Inc., ("WCAI"), argues in favor of extending the program access rules to non-vertically integrated programming providers because "the power that wired cable exerts over programmers stems not only from vertical integration, but also from its status as the current local distribution monopoly." WCAI states that several non-vertically integrated programmers charge wireless cable systems higher rates than similarly situated franchised cable systems, conduct which they argue would be unlawful by vertically-integrated programmers. WCAI includes an attachment to its comments an article by David Waterman, Vertical Integration and Program Access in the Cable Television Industry, which concludes that the program access rules should apply equally to all program suppliers, because both vertically integrated and non- integrated firms tend to engage in the same pattern of behavior with respect to program pricing and availability. 3. The National Cable Television Association, ("NCTA"), opposes expansion of the program access rules to non-vertically integrated programmers and believes that these rules have already established the ability of MVPDs to compete in the market with cable television. NCTA calls expanding the program access rules "proposing a solution in search of a problem." NCTA argues that the 1992 Cable Act's legislative history indicates that Congress only intended to apply the program access rules to vertically integrated cable systems, that there is no evidence that non-vertically integrated programmers have failed to provide access to MVPDs at reasonable, marketplace rates, and that the Commission and Congress have stressed their preference for marketplace solutions rather than government regulation. 4. However, the National Cable Television Cooperative, Inc., ("NCTC"), a buying cooperative of small cable operators, differs with NCTA, arguing that there is little distinction between the competitive impact of discrimination by vertically and non-vertically integrated program providers. Accordingly, NCTC asserts that several non-vertically integrated video programming providers charge NCTC's small system operators a rate "meaningfully higher" than rates charged to larger MSO's. The Satellite Broadcasting and Communications Association of American ("SCBA") agrees, arguing that "[t]he unjustified price discrimination by non-vertically integrated programming providers refusing to deal with NCTC remains a serious impediment to small operators [sic] ability to compete." 5. Programmers generally oppose extending the program access rules to non-vertically integrated programmers. They argue that doing so would needlessly burden independent programmers, that "there is no evidence that non-cable [MVPDs] have been denied access to programming by non- vertically integrated programmers," and that the rationale for the program access rules -- limiting the perceived ability of cable operators to impede competitors by withholding access to programming by programming services they control -- does not apply in this circumstance. ESPN argues that the Commission has no administrative record or legislative history to support an extension of the program access rules to non-vertically integrated programmers. Indeed, ESPN believes that the Commission should look for a way to limit the intrusiveness of the current program access rules and should recommend to Congress that they be "eliminated entirely." HBO, however, argues that while government regulation of program access is unnecessary, as long as such regulation exists, it should apply equally to all program suppliers, regardless of their affiliation with cable operators. HBO does not see a legitimate distinction between vertically integrated and non-vertically integrated programmers. It also believes that "[i]f there continues to be a concern that cable operator-owned programmers could discriminate against non-cable MVPDs, the same logic would compel the application of similar program access rules to the LEC/programmer ownership arrangements." 6. Expansion of the Program Access Rules to Non-Satellite Delivered Programming. Liberty Cable argues that as the major MSOs cluster their systems and escalate their use of fiber optic network to virtually unlimited transmission capacity, it is no longer necessary to rely upon satellites to deliver video signals. Thus, argues Liberty Cable, "as satellites become an increasingly inefficient means to deliver video signals, the current program access provisions . . . will lose their effectiveness." WCAI also supports expansion of the program access rules to non-satellite delivered programming and submits that the Commission should recommend that Congress "extend the program access provisions of the 1992 Cable Act so that they are applicable to not only satellite-distributed programming services, but all programming services regardless of the means of distribution." In contrast, Time Warner argues against applying the program access rules to non-satellite delivered programming. 7. Application of the Program Access Rules to Customer-Programmers of LEC Facilities and to Programming Affiliates of LECs. Commenters raise two concerns about the potential application of the program access rules to LEC activities and affiliates. The first concern is whether the program access regime extends to non-LEC affiliated programmers who provide service over a VDT platform. 8. Two LECs strongly support the application of the program access rules to VDT platforms. Bell Atlantic argues that packagers offering programming over a VDT system should be entitled to the benefit of the program access rules. Bell Atlantic points out that this issue is currently the subject of a pending program access complaint. Similarly, GTE urges the Commission to aggressively enforce its existing program access rules in order to protect alternative programming providers. 9. The second concern is whether the program access regime should apply to programming of LEC affiliates that provide programming over VDT platforms. NYNEX argues that since in its view Title VI does not apply when programming is provided by an affiliate of a common carrier VDT provider, the program access rules, which are part of Title VI, do not apply. NYNEX states that when a LEC is a cable operator, the program access rules would apply. This issue is the subject of a pending Commission proceeding. Viacom specifically opposes extending the program access rules to LECs, arguing among other things that it would discourage LEC investment in programming. GTE also opposes expansion of the program access rules to LEC affiliated content providers. Comcast Cable Communications ("Comcast") argues to the contrary, that when LECs provide video programming, they should not be relieved of the rules that apply to cable operators and that "there is no basis for requiring cable operators, pursuant to the program access rules, to make their program services available to telco distributors of video programming while allowing the telcos to deny their own programming to competing cable operators."