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Federal Communications Commission
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This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).

January 14, 2000
Michelle Russo (202) 418-2358

(CS Docket No. 99-230)

Washington, DC Ė The Federal Communications Commission (FCC) has adopted its sixth annual report on competition in markets for the delivery of video programming. This report will be submitted to Congress in accordance with Section 628(g) of the Communications Act. The report provides updated information on the status of competition in markets for the delivery of video programming, discusses changes that have occurred in the competitive environment over the last year, and describes barriers to competition that continue to exist.

The report finds that competitive alternatives and consumer choices continue to develop but cable television still is the dominant technology for the delivery of video programming to consumers. As of June 1999, 82 percent of all subscribers to multichannel video program distributor (MVPD) services received their programming from a local franchised cable operator, compared to 85 percent a year earlier.

Much of the increase in the growth of noncable MVPD subscribers is attributable to the growth of direct broadcast satellite (DBS) service subscribers, which now represent 12.5% of all MVPD subscribers. Consumers have historically reported that their inability to receive local television broadcast signals from satellite operators may negatively affect their decision as to whether to subscribe to DBS service. The report notes that the recently enacted Satellite Home Viewer Improvement Act, which permits satellite carriers to transmit local TV broadcast signals into local markets, should have a significant and positive effect on MVPD competition and increased competition is the best way to keep cable rates reasonable.

The 1999 report details the status of competitors in markets for the delivery of video programming including: cable systems, direct-to-home satellite service (DBS and HSD), wireless cable systems, SMATV systems, broadcast television, local exchange carrier (LEC) entry, open video systems, internet video, home video sales and rentals, and electric utilities.

The report also examines market structure and competition by evaluating horizontal concentration in the MVPD marketplace and vertical integration between cable television systems and programming services; discussing competitors serving multiple dwelling unit (MDU) buildings; and addressing programming issues and technical advances.

A list of the key findings of the report is attached.

Action by the Commission, December 30, 1999, by Report (FCC 99-418). Chairman Kennard, Commissioners Ness, Powell and Tristani, with Commissioner Furchtgott-Roth dissenting and issuing a statement; and Commissioner Tristani issuing a statement.

-- FCC--

Cable Services Bureau contacts: Marcia Glauberman or Nancy Stevenson at (202) 418-7200.

TTY: (202) 418-7172

Key Findings of the 1999 Report on Video Competition:

Industry Growth:

In the 1999 Report, we examine the status of competition in markets for the delivery of video programming, discuss changes that have occurred in the competitive environment over the last year, and describe barriers to competition that continue to exist. Overall, the report finds that competitive alternatives and consumer choices continue to develop. Cable television still is the dominant technology for the delivery of video programming to consumers in the MVPD marketplace, although its market share continues to decline. As of June 1999, 82% of all MVPD subscribers received their video programming from a local franchised cable operator, compared to 85% a year earlier.

The total number of subscribers to both cable and noncable MVPDs continues to increase. A total of 80.9 million households subscribed to multichannel video programming services as of June 1999, up 5.5% over the 76.6 million households subscribing to MVPDs in June 1998. This subscriber growth accompanied a 3.2 percentage point increase in multichannel video programming distributorsí penetration of television households to 81.4% as of June 1999.

Since the 1998 Report, the number of cable subscribers continued to grow, reaching 66.7 million as of June 1999, up almost 2% over the 65.4 million cable subscribers in June 1998. The total number of noncable MVPD households grew from 11.2 million as of June 1998 to 14.2 million homes as of June 1999, an increase of 26%.

Much of the increase in the growth of noncable MVPD subscribers is attributable to the growth of DBS. DBS appears to attract former cable subscribers and consumers not previously subscribing to an MVPD. Between June 1998 and June 1999, the number of DBS subscribers grew from 7.2 million households to 10.1 million households. DBS subscribers now represent 12.5% of all MVPD subscribers. There also have been a number of additional cable overbuilds in the last year. While the Commission has certified new open video systems, some OVS operators have converted portions of their systems to franchised cable operations. Over the last year, the number of subscribers to and market shares of HSD and MMDS subscribers continued to decline. However, the number of SMATV subscribers has increased this year, reversing a decline exhibited the previous year.

Cable Rates:

During the period under review, cable rates rose faster than inflation, although the difference between the cable price index and the Consumer Price Index ("CPI") is not as great as in the previous year. According to the Bureau of Labor Statistics, between June 1998 and June 1999, cable prices rose 3.8% compared to a 2% increase in the CPI, which measures general price changes. Concurrently with these rate increases, capital expenditures for the upgrading of cable facilities increased (up 13.2% over 1998), the number of video and nonvideo services offered increased, and programming costs increased (license fees increased by 14.6% and programming expenses increased by 16.3%). In addition, the increase in labor costs in the communications industry is reported to exceed the increase in labor costs for all industries combined by almost 2%. We note that during this period, on March 31, 1999, rates for cable programming service tiers ("CPSTs") were deregulated by Congress. We also note that cable operatorsí pricing decisions may be affected where direct competition exists. Available evidence indicates that when an incumbent cable operator faces head-to-head competition, it responds in a variety of ways, including lowering prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming.

Convergence of Cable and Television Service:

The Telecommunications Act of 1996 ("1996 Act") removed barriers to LEC entry into the video marketplace in order to facilitate competition between incumbent cable operators and telephone companies. For example, the 1996 Act repealed a statutory prohibition against an entity holding attributable interests in a cable system and a LEC with overlapping service areas. At the time of the 1996 Actís passage, it was expected that local exchange telephone carriers would begin to compete in video delivery markets, and cable operators would begin to provide local telephone exchange service. Since the 1998 Report, there has been an increase in the amount of video programming provided to consumers by telephone companies, although the expected technological convergence that would permit use of telephone facilities for video service has not yet occurred. Ameritech now holds 111 cable franchises and reports that it serves approximately 250,000 subscribers. BellSouth has received cable franchises in 21 areas with the potential to pass 1.4 million homes in addition to its right to provide MMDS service to approximately 3.5 million homes. Other LECs, including GTE, SNET, and U S West, also provide cable television service in a number of areas. As reported last year, Bell Atlantic and SBC have joint marketing agreements with DirecTV in order to offer video service to their telephone customers in some areas. While the 1996 Act created the OVS framework as a means of entry into the video marketplace by LECs, few telephone companies have sought certification. Alternatively, only a limited number of cable operators have begun to offer telephone service and such service uses traditional telephone switching equipment rather than cable facilities. However, cable operators are beginning to develop and test Internet Protocol ("IP") telephony. The potential to provide telephone service prompted several large transactions over the past year, most notably AT&Tís purchase of Telecommunications, Inc. ("TCI").

Since the 1998 Report, the most significant convergence of service offerings has been the pairing of Internet service with other service offerings. There is evidence that a wide variety of companies throughout the communications industries are attempting to become providers of multiple services, including data access. Cable operators continue to expand their broadband infrastructure that permits them to offer high-speed Internet access. Currently, the most popular way to access the Internet over cable is through the use of a cable modem and personal computer. A small portion of cable Internet access is delivered through a television receiver rather than a personal computer. Many cable operators also are planning to integrate telephony and high-speed data access. Like cable, the DBS industry is developing ways to bring advanced services to their customers. For example, Hughes Network Systems, Inc., parent of DirecTV, offers a satellite-delivered Internet access service ("DirecPC") with a telephone return path. EchoStar and OpenTV, Inc., a company that produces interactive television technology, plan to offer e-mail, e-commerce, and on-line banking services in the next year. SMATV operators are also beginning to offer local and long distance telephone service and Internet access along with video service. In addition, a few MMDS operators are offering Internet service.

The data provided in this Report suggest that companies comprising several different segments of the communications industry are seeking to provide combinations of services to consumers, including video, voice, and data. In this context, we believe it is appropriate to compare the cable industry with other communications industry segments that currently provide, or plan to provide, such combinations of services. Specifically, we find that the cable television industry holds a relatively small market share compared to other communications industry segments that offer or intend to offer video, voice, and data services. For example, in 1998, the total revenue for these segments of the communications industry (i.e., cable television, MMDS, DBS, television broadcasting, long distance telephone, and local telephone) was $334 billion. Of this total, cable operators represented 12.3% of the communications industryís revenues.


Promotion of Entry and Competition:

Noncable MVPDs continue to report that regulatory and other barriers to entry limit their ability to compete with incumbent cable operators and to thereby provide consumers with additional choices. Noncable MVPDs also continue to experience some difficulties in obtaining programming from both vertically integrated cable programmers and unaffiliated programmers who continue to make exclusive agreements with cable operators. In multiple dwelling units ("MDUs"), potential entry may be discouraged or limited because an incumbent video programming distributor has a long-term and/or exclusive contract. Other issues also remain with respect to how, and under what circumstances, existing inside wiring in MDUs may be made available to alternative video service providers.

In addition, consumers have historically reported that their inability to receive local signals from DBS operators may negatively affect their decision as to whether to subscribe to DBS. The Commission previously recommended that legislation be enacted to remove barriers to DBS carriage of local broadcast signals. On November 29, 1999, a revised Satellite Home Viewer Act ("SHVA") was signed into law, permitting satellite providers to distribute local broadcast signals within their local television markets. On that date, DBS operators began offering local broadcast stations in some markets, and reported plans to provide local broadcast stations to a significant portion of U. S. households within the next few months. The Commission hopes that the revised SHVA will have a significant and positive effect on MVPD competition. We expect that DBS operators will now offer a programming package more comparable to and competitive with the services offered by cable operators. We further believe that increased competition is the best way to keep cable rates reasonable and in check. Moreover, the Commission plans to aggressively implement the new SHVA in order to facilitate consumer choice in the MVPD marketplace.


Additional findings:

Our findings as to particular distribution mechanisms operating in markets for the delivery of video programming include the following:

  • Cable Systems: Since the 1998 Report, the cable television industry has continued to grow in terms of subscribership (up to 66.7 million subscribers as of June 1999, a 2% increase from June 1998), channel capacity (some operators now offer over 170 video channels), number of national satellite-delivered video programming services (up to 283 services by June 1999 from 245 in June 1998, a 16% increase), revenues (an approximate 8% increase between June 1998 and June 1999), audience ratings (non-premium cable viewership rose from a 39 share at the end of June 1998 to a 42 share at the end of June 1999), and expenditures on programming (an approximate 15% increase in program license fees paid by cable system operators).
  • The cable industry remains healthy financially, which has enabled it to invest in improved facilities, either through upgrades or rebuilding. As a result, there have been increases in channel capacity, the deployment of digital transmissions that provide better picture quality than can be offered through analog service, and nonvideo services, such as Internet access. Cable operators also offer telephony, although the use of integrated facilities remains primarily experimental with limited exceptions.
  • Direct-to-Home ("DTH") Satellite Service (DBS and HSD): Video service is available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers' premises, and from medium and low power satellites requiring larger satellite dish antennas. In the last year, DirecTV merged with United States Satellite Broadcasting Co., Inc. ("USSB") and acquired PrimeStar. There are over ten million DBS subscribers (EchoStar, DirecTV, and PrimeStarís subscribers being transitioned to DirecTVís service), an increase of approximately 39% since the 1998 Report. Between June 1998 and June 1999, the number of HSD subscribers, measured as the number of HSD users that actually purchase programming packages, declined from 2 million to 1.8 million, a decrease of 12%, that is likely due to subscribers switching to DBS. DirecTV and EchoStar are among the ten largest providers of multichannel video programming service. DBS represented a 12.5% share of the national MVPD market in June 1999 and HSD represented another 2.2% of that market.
  • Wireless Cable Systems: Currently, the wireless cable industry ("MMDS") provides competition to the cable industry in only limited areas. MMDS subscribership fell from 1.0 million subscribers to 821,000 subscribers between June 1998 and June 1999, a decrease of 17.9%. Analysts state that the advent of digital MMDS and the Commissionís authorization of two-way MMDS service will make high-speed Internet and telephony possible and have the potential to foster renewed MMDS growth. Wireless cable represented a 1% share of the national MVPD market in June 1999.

  • SMATV Systems: SMATV systems use some of the same technology as cable systems, but do not use public rights-of-way, and focus principally on serving subscribers living in multiple dwelling units ("MDUs"). SMATV subscribership has increased 54% since the last report, with the industry representing an approximately 1.8% share of the national MVPD subscribership as of June 1999. Upgraded facilities, and expanded service offerings to include DBS programming, Internet access, telephone service, and security services, have fostered SMATV growth.
  • Broadcast TV: Broadcast networks and stations are competitors to MVPDs in the advertising and program acquisition markets and supply video programming directly to the approximately 20% of television households that are not MVPD subscribers. Additionally, broadcast networks and stations are suppliers of content for distribution by MVPDs. Since the 1998 Report, the broadcast industry has continued to grow in the number of operating stations (from 1583 in 1998 to 1599 in 1999) and in advertising revenues ($34.6 billion in 1998, a 6.7% increase over 1997). While audience levels have declined in the last year, the four major television broadcast networks still account for a 52% share of prime time television viewing for all television households. Broadcast television stations continue to deploy digital television ("DTV") service. There are 111 television stations on the air broadcasting DTV signals and digital simulcasts of some programming have begun.

  • LEC Entry: The 1996 Act expanded opportunities for LECs to enter markets for the delivery of multichannel video programming. As noted in previous reports, LECs do not yet represent a national presence in the MVPD market. The competitive presence of LECs in specific video markets, however, is growing. In certain areas, especially in the midwest, LECs are already or are becoming significant regional competitors. Particularly notable are the efforts of Ameritech as a cable overbuilder and BellSouth as an overbuilder and MMDS operator. Ameritech has acquired 111 cable franchises, potentially passing more than 1.7 million homes. Ninety of these cable franchises are operational, in whole or in part, and they serve at least 250,000 subscribers. BellSouth has acquired cable franchises in 18 areas, with the potential to pass 1.2 million homes, and is launching digital MMDS service in a number of areas. In previous reports, we noted that, while LECs were not yet a national competitor, their competitive presence was growing. It now appears that their rate of entry into the MVPD marketplace may be slowing.

  • Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery of video programming -- the open video system ("OVS"). Under these rules, a LEC or other entrant may provide video programming to subscribers, although the OVS operator must provide non-discriminatory access to unaffiliated programmers on a portion of its channel capacity. The Commission has certified 13 OVS operators to serve 28 areas. RCN owns the only operating open video systems and currently serves areas surrounding Boston, New York City, and Washington, D.C. In several areas for which it holds OVS certifications, or portions of these areas, RCN has converted its systems to franchised cable systems. Between June 1998 and June 1999, the number of OVS subscribers went from approximately 66,000 to 60,000, a decline attributed to the conversion of some OVS operations to cable service. OVS subscribers now represent slightly less than 1% of all MVPD subscribers. As a result of litigation that was resolved in January 1999, one of the major advantages for an entity choosing the OVS mode of regulation Ė the absence of any need for a traditional cable television franchise Ė may no longer exist.

  • Internet Video: By June, 1999 there were an estimated 50 million households with personal computers and over 100 million Americans were Internet users. Previously, we reported on the availability of software technologies that make real-time and downloadable audio and video from the Internet accessible through a personal computer. We also noted that there are technologies available for the provision of Internet video over a television using set-top box Internet access. As of June 1999, investment and development of Internet video services was continuing, though video pictures offered by Internet video still remain less than broadcast quality. Media companies continue to offer increasing amounts of video over their Web sites in the expectation that the pictures will be acceptable for the intended use or eventually improve to broadcasting or VCR quality.

  • Home Video Sales and Rentals: Video cassettes, laser discs, and digital video discs ("DVDs") provide feature films similar to those distributed by cable operators on premium channels and others involved in the distribution of video programming. The number of homes with DVD players has grown rapidly in the two years since this technology was introduced. About two million homes have DVD players and about the same number have laser disc players, far less than the 82% of all households with VCRs. Most new home video programming available for sale or rental, including movies, documentaries and concerts, is released in VCR, laser disc, and DVD formats. Recently a new home video technology, the personal video recorder ("PVR") has been introduced. A PVR can pause, rewind, and perform slow motion and instant replay of a live program, thereby allowing a viewer to watch earlier portions of a program while later portions of the program are still being broadcast. A PVR is intended for use with a service that provides an onscreen programming guide service through a telephone connection. This technology can be used to create a personal menu and can learn to record in accordance with a viewerís television preferences.

  • Electric Utilities: Utilities are not yet major competitors in the telecommunications or cable markets, but they possess characteristics that could potentially help them become competitively significant in the cable market. Some may already possess fiber-optic networks throughout the public rights-of-way in the areas they serve. In the last year, several utilities have announced, commenced, or moved forward with ventures involving multichannel video programming distribution. Starpower, a joint venture between RCN and PEPCO, has begun to offer video, telephone, and Internet services in the Washington, D.C. area. Seren, a wholly-owned subsidiary of Minneapolis-based Northern States Power, is currently offering cable and high-speed data access as an overbuilder in several Minnesota communities and plans to expand its service. Others, including several municipal utilities in Iowa, the municipal utility in Lebanon, Ohio, and Millennium Telecom, which is partially owned by Tri-County Electric Cooperative in Texas, have begun or plan to begin video and other services to their customers.


The Commission also finds:

Consolidations within the cable industry continue as cable operators acquire and trade systems. The seven largest operators now serve almost 90% of all U.S. cable subscribers. However, in terms of one traditional economic measure, national concentration among the top MVPDs has declined since last year. DBS operators DirecTV and EchoStar rank among the ten largest MVPDs in terms of nationwide subscribership along with eight cable multiple system operators ("MSOs"). As a result of acquisitions and trades, cable MSOs have continued to increase the extent to which their systems form regional clusters. Currently, 40.4 million of the nationís cable subscribers are served by systems that are included in regional clusters. By clustering their systems, cable operators may be able to achieve efficiencies that facilitate the provision of cable and other services, such as telephony.

The number of satellite-delivered programming networks has increased from 245 in 1998 to 278 in 1999. Vertical integration of national programming services between cable operators and programmers, measured in terms of the total number of services in operation, declined from last year's total of 39% to 36% this year, continuing a five year trend. However, in 1999, one or more of the top six cable MSOs held an ownership interest in each of 101 vertically integrated national programming services. Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs. The Report identifies 75 regional networks, 26 of which are sports channels, many owned at least in part by MSOs. There are also 30 regional and local news networks that compete with local broadcast stations and national cable networks (e.g., CNN).

The program access rules adopted pursuant to the 1992 Cable Act were designed to ensure that alternative MVPDs can acquire, on non-discriminatory terms, vertically-integrated satellite delivered programming. We recognize that the terrestrial distribution of programming, including in particular regional sports programming, could eventually have a substantial impact on the ability of alternative MVPDs to compete in the video marketplace. We will continue to monitor this issue and the impact on the competitive marketplace.

Technological advances that will permit MVPDs to increase both quantity of service (i.e., an increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services) continue. In particular, cable operators and other MVPDs continue to develop and deploy advanced technologies, especially digital compression, in order to deliver additional video options and other services (e.g., data access, telephony) to their customers. To access these wide ranging services, consumers use "navigation devices." In the last year, on reconsideration, the Commission made some modifications to the rules and policies adopted to implement Section 629 of the Communications Act, which is intended to ensure commercial availability of these navigation devices. The cable industry reports that it is making steady progress towards the development of specifications to separate out security and non-security functions for the interoperability of digital set-top boxes by July 1, 2000, as required by the rules. Interface requirements and a certification process for the high-speed cable modems needed to access data services have also been developed. When these processes are complete, additional competition in the market for equipment used by subscribers should be possible.