******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** B efore the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Annual Assessment of the Status of ) CS Docket No. 97-141 Competition in Markets for the ) Delivery of Video Programming ) FOURTH ANNUAL REPORT Adopted: December 31, 1997 Released: January 13, 1998 By the Commission:Chairman Kennard and Commissioners Ness, Furtchgott-Roth and Tristani issuing separate statements. Table of Contents Paragraph I. Introduction 1 A. Scope of this Report . . . . .. . . 2 B. Summary of Findings and Reccommendations. . 6 II. Competitors in Markets for the Delivery of Video Programming .. . . 12 A. Cable Industry. . .. . . . . .. . . 12 B. Direct Broadcast Satellite Service . 54 C. Home Satellite Dishes. . . . .. . . 68 D. Wireless Cable Systems . . . .. . . 71 1. Multichannel Multipoint Distribution Service. . . . . .. . . 71 2. Local Multipoint Distribution Service 79 E. Satellite Master Antenna Television Systems 82 F. Broadcast Television Service. .. . . 90 G. Other Entrants. . .. . . . . .. . . 97 1. Internet Video . . . . .. . . 97 2. Home Video Sales and Rentals . 103 3. Interactive Video and Data Services . 107 H. Local Exchange Carriers . . .. . . 108 I. Electric and Gas Utilities. . .. . . 120 III. Market Structure and Conditions Affecting Competition . . . .. . . 122 A. Horizontal Issues in Markets for the Delivery of Video Programming. 122 1. Market Definition. . . .. . . 123 2. Concentration in Local Markets 126 3. Competitors Serving Multiple Dwelling Units.. . . . . .. . . 129 4. Regional Concentration of Cable Systems. . .. . . . . .. . . 140 5. Concentration in the National Market. 149 B. Vertical Integration and Other Programming Issues.. . . . . .. . . 157 1. Status of Vertical Integration 157 2. Other Programming Issues.. . . 166 C. Technical Advances.. . . . . .. . . 171 IV. Competitive Responses. . . . .. . . 178 A. New Case Studies. .. . . . . .. . . 178 B. Preliminary Findings . . . . .. . . 205 V. Issues Relating to Federal Laws and Regulations. .. . . . . .. . . 211 A. Over-the-Air Reception Devices.. . . 212 B. Inside Wiring . . .. . . . . .. . . 219 C. Pole Attachments. .. . . . . .. . . 222 D. Television Towers for DTV . . .. . . 227 E. Program Access Issues. . . . .. . . 229 F. Horizontal Ownership Issues . .. . . 239 G. Copyright Act . . .. . . . . .. . . 241 H. MVPD Carriage of Broadcast Signals . 248 I. Public Service Obligations for DBS . 253 J. Navigation Devices.. . . . . .. . . 256 VI. Video Description .. . . . . .. . . 258 VII. Administrative Matters . . . .. . . 272 Appendices A. List of Commenters B. Cable Industry Tables C. DBS and HSD Tables D. SMATV Tables E. Horizontal Issues Tables F. Vertical Integration Tables G. Program Access Matters Resolved I. INTRODUCTION 1. This is the Commission's fourth annual report ("1997 Report") to Congress submitted pursuant to Section 628(g) of the Communications Act of 1934, as amended ("Communications Act"). Section 628(g) requires the Commission to report annually to Congress on the status of competition in markets for the delivery of video programming. Congress imposed this annual reporting requirement in the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act") as a means of obtaining information on the competitive status of markets for the delivery of video programming. A. Scope of this Report 2. In this 1997 Report, we update the information in our previous reports and provide data and information that summarizes the status of competition in markets for the delivery of video programming. The information and analysis provided in this 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 ("Notice") in this docket. To the extent that information included in previous reports is still relevant, we do not repeat that information in this report other than in an abbreviated fashion, and provide references to the discussions in prior reports. 3. Throughout this year's report, we provide information regarding the implementation of the Telecommunications Act of 1996 ("1996 Act") and the effect that its provisions and those of the 1992 Cable Act have had on the status of competition in markets for delivery of video programming. The 1996 Act was intended to establish a "pro-competitive de-regulatory national policy framework" for the telecommunications industry. Consistent with this philosophy, the 1996 Act extends the pro-competitive provisions of the 1992 Cable Act by adding several provisions that focus on removing barriers to competitive entry and on establishing market conditions that promote competition. Among the 1996 Act's provisions that affect competition in video markets are the provisions that: (a) prohibit restrictions on the use of certain over-the-air reception devices; (b) change the definition of a cable television system; (c) permit cable operators to offer discounted bulk rates in multiple dwelling units; (d) provide for competition in multichannel video programming distribution ("MVPD") "navigation" equipment markets; (e) allow the entry of exempt public utility companies into video markets; (f) eliminate entry barriers for entrepreneurs and small businesses; and (g) establish open video systems ("OVS"). Recent activity brought about by these provisions is discussed in this report. 4. In Section II we examine the cable television industry, existing MVPD and other program distribution technologies, and potential competitors to cable television. Among the MVPD systems or techniques discussed are 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"), satellite master antenna television ("SMATV") systems and broadcast television service. We also consider several other existing and potential distributors of and distribution technologies for video programming including, the Internet, home video sales and rentals, and interactive video and data services ("IVDS"), local exchange telephone carriers ("LECs"), and electric and gas utilities. 5. In Section III of this report, we examine market structure and competition. We evaluate horizontal concentration of cable television systems and vertical integration between cable television systems and programming services. We also discuss competitors serving multiple dwelling unit ("MDU") buildings. We further discuss program access and technological advances. In Section IV, we examine evidence of competitive responses by industry players that are beginning to face competition from other MVPDs. Section V is a discussion of issues relating to federal laws and regulations concerning the emergence of a freely competitive MVPD marketplace. Finally, in Section VI, we report on video description of video programming. B. Summary of Findings and Recommendations 6. A comprehensive review of this nature necessarily entails a detailed examination of an enormous amount of data. The exposition and discussion that follows is intended to serve, among other things, as a useful basis for determining what, if any, regulatory or congressional actions are needed to promote competition in the MVPD marketplace and thereby bring to consumers greater choice and improved service at the lowest possible price. 7. At the broadest level, we note that 87% of MVPD subscribers receive service from their local franchised cable operator. While this represents a slight decrease from last year, it shows the cable industry continues to occupy the dominant position in the MVPD marketplace. Further, cable operators on average increased their rates 8.5% for regulated programming and equipment over the 12-month period from July 1996 to July 1997. 8. The cable industry's large share of the MVPD audience is a cause for concern, in large part, only to the extent it reflects an inability of consumers to switch to some comparable source of video programming. Below we identify and discuss alternative sources of multichannel video programming, as well as regulatory and technological developments that have enhanced, or soon may enhance the competitive significance of alternative providers. In each case, however, we note various factors that place the alternative provider at a competitive disadvantage. For example, legal and technical constraints limit the ability of direct-to-home satellite providers to carry the signals of local broadcasters that are a staple of a cable operator's programming fare. Likewise, pending the deployment of digital and compression technology, a wireless cable operator is limited to a total of 33 channels, while the capacity of cable systems is such that almost 60% of cable subscribers are served by a cable operator that has a channel capacity of at least 54 channels. 9. As discussed below, the Commission recently has taken a series of steps to minimize and eliminate obstacles to competition. On December 18, 1997, we adopted a Notice of Proposed Rulemaking that seeks to ensure that MVPDs are not foreclosed from obtaining, and offering to their subscribers, cable programming that is distributed by programmers that are vertically integrated with cable operators. We have adopted and enforced rules preempting governmental and private restrictions that unreasonably interfere with a consumer's right to install the dishes and other equipment necessary to receive programming services from direct-to-home satellite, wireless cable, and other alternatives to franchised cable. In October 1997, we adopted new rules that make it easier for the owners and residents of a multiple dwelling unit to change providers, by providing certainty to alternative MVPDs regarding their rights to use the internal wiring installed in the building by the incumbent provider. The Commission also has increased the amount of spectrum available for wireless uses, and eliminated restrictions on the use of that spectrum, for the benefit of wireless providers. The Commission also has encouraged the development of digital television which may provide new competition. 10. Initiatives such as these are critical to the development of a competitive marketplace that, one day, will render superfluous cable rate regulation and other rules. In Section IV, below, we note the significant steps that cable operators have taken when subject to head-to-head competition, in the relatively few areas where such competition has developed. In such cases, cable operators have responded quickly with a mix of increased programming choices, lower rates, and improved customer service. The exact combination of these responses has varied among operators, as it should in a competitive market where consumer demand -- not monopolist strategies or government regulations -- dictates the supplier's response. We will continue to strive to make a competitive marketplace a reality for all consumers. 11. The following paragraphs contain a more detailed summary of the findings in this 1997 Report: OVERVIEW OF VIDEO PROGRAMMING DISTRIBUTION MARKET: þ Geographic and Product Markets: For purposes of analysis, competition in the delivery of video programming involves local markets in which consumers can choose among particular multichannel or other video programming distribution services. The products that are sold in these markets consist of bundles of attributes -- antenna service, basic or optional tiers or packages of video programming channels, premium per-channel charge services, pay-per-view channels, and others. Providers of these services increasingly will participate in a broader telecommunications market that includes both video and nonvideo products as new communications services are added to their offerings. National, regional, and local markets are also involved in the video programming purchasing activities of these video providers. þ MVPD Market Overview: A total of 73.6 million households subscribed to multichannel video programming services as of June 1997, up 2.8% over the 71.6 million households subscribing to MVPDs in September 1996 reported in the 1996 Report. This subscriber growth accompanied a 2.9 percentage point increase in multichannel video programming's penetration of television households to 75.9% in June 1997. During this period, the number of cable subscribers continued to grow, reaching 64.2 million as of June 1997, up 1% over the 63.5 million cable subscribers in September 1996. Since the 1996 Report, cable's share of total MVPD subscribers, however, continued to decrease from 89% of all multichannel video subscribers as of September 1996 to 87% of all multichannel video subscribers as of June 1997. Conversely, noncable subscribers continued to grow, constituting 13% of all multichannel video subscribers as of June 1997, up from 11% last year. The total number of noncable MVPD subscribers grew from 8.1 million as of September 1996 to 9.5 million as of June 1997, an increase of almost 20% since the 1996 Report. Local markets for the delivery of video programming generally remain highly concentrated and are still characterized by some barriers to both entry and expansion by competing distributors. DBS service is widely available and constitutes the most significant alternative to cable television. The digital technology employed by DBS provides high channel capacity and high picture quality. However, DBS service is different from cable service in a number of respects, including: (1) local broadcast signals are not available by satellite; (2) up front equipment and installation costs; and (3) the need to purchase additional equipment to receive service on additional television sets. Competitive overbuilding by franchised cable systems remains minimal, but is increasing and appears to improve service and/or pricing where it exists. MVPDs using other distribution technologies have not posted subscribership increases comparable to DBS increases, but are in the process of testing digital technology that has the potential to improve significantly the competitiveness of their services. MARKET PARTICIPANTS þ Cable Systems: Incumbent franchised cable systems remain the primary distributors of multichannel video programming. A cable operator is typically franchised by a unit of local or state government to install and maintain cable facilities in public rights-of-way for the purpose of offering broadcast and satellite services throughout a community. Since the 1996 Report, the cable television industry has continued to grow in terms of subscribership (up to 64.2 million subscribers as of June 1997, a 1% increase from September 1996), channel capacity (average channel capacity increased 13.6% to 58.6 channels by June 1997), programming services distributed (17% increase in the distribution of national cable programming services), revenues (12.2% increase between September 1996 and June 1997), audience ratings (8.6% increase between September 1996 and June 1997 to an average 38 share for cable programming services), and expenditures on programming (an approximate 10.6% increase). Although cable subscribership continued to increase in absolute terms, its share of overall MVPD subscribership decreased from 89% to 87%, continuing the gradual decline in market share noted in the 1996 Report. Rates for cable services have increased over the last year. A Commission survey of cable industry prices indicates that the average monthly rate for programming services offered on basic and cable programming service ("CPS") tiers and equipment charges increased from $26.57 on July 1, 1996, to $28.83 on July 1, 1997, an increase of 8.5%. Cable operators participating in the survey state that the increase in cable rates is largely attributable to inflation, increased programming costs, channel additions, and system upgrades. Consumers Union and Consumers Federation of America filed a petition asking the Commission to freeze current rates for all regulated cable services while it investigates why rates are increasing so rapidly and considers changes to its cable rate regulation formula. The petitioners argue that these rate increases are due, in part, to the greater consolidation of the cable industry and other developments that have increased concentration in the cable industry and undercut competition in the video marketplace. þ Direct-to-Home ("DTH") Satellite Service (DBS and HSD): Video service is available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers' premises, and from medium and low power satellites requiring larger satellite dish antennas. It is estimated that there are in excess of 5.1 million DBS and medium power (Primestar) subscribers and between 3.8 and 4.0 million HSD users, although only about 2.1 million HSD subscribers actually purchase programming packages. DIRECTV and Primestar, which have the largest number of DBS subscribers, are again among the 10 largest providers of multichannel video programming service. Although the DBS share of the video market is continuing to expand, there are indications that its future growth may be slower than previously expected. The sale of large (HSD) dishes has declined as small (DBS) dish services have become more readily available. DBS service is available nationwide (although some households cannot receive it due to physical obstacles), employs an advanced digital transmission technology, has some unique programming distribution rights, and is not subject to a variety of regulatory burdens imposed on franchised cable operators (e.g., franchise fees). DBS service includes a significant number of pay-per- view programming options and is particularly competitive for high revenue producing cable subscribers. DTH satellite service, while it has certain advantages over traditional cable service, is not, by itself, a direct substitute for cable service given the continued popularity of broadcast television programming and the absence of local broadcast signals from satellite distribution. DBS service more closely replicates cable service in areas where access to local broadcast signals is possible through over-the-air antenna reception. DTH subscribership varies from 23.6% in Montana to 2.3% in New Jersey, with a share of approximately 9.8% of national MVPD subscribership. þ Wireless Cable Systems: As of June 1997, approximately 252 MMDS or wireless cable systems were in operation, mainly in urban areas. An MMDS operator transmits signals to microwave antennas installed at subscribers' residences. To function properly, wireless cable requires a clear line of sight from the transmitter to the point of reception and thus is more difficult to operate in areas where terrain, trees, or buildings block reception. Since September 1996, the wireless cable industry suffered an aggregate loss of 8.8% of its subscribers. In some markets, wireless cable providers intentionally stopped marketing their analog service in anticipation of the near term availability of digital transmission systems. Digital service, after a number of delays, has now been introduced in a number of markets and appears to produce dramatically better picture quality and increased numbers of channels. As of June 1997, wireless cable had a 1.5% share of national MVPD subscribership. þ SMATV Systems: SMATV systems use some of the same technology as cable systems, but do not use public rights-of-way, and focus principally on serving subscribers living in MDUs. SMATV subscribership increased 10.7% since the last report. Many SMATV operators are upgrading facilities, implementing digital transmission and microwave headend technologies, and expanding service offerings to include DBS programming, Internet access, telephone service, and security services. SMATV systems had a 1.6% share of the national MVPD subscribership as of June 1997. þ Telephone Companies: The 1996 Act significantly expanded the opportunities for local telephone companies to compete in video programming distribution markets. Telephone company (local exchange carrier or LEC) entry into this business, however, has proceeded sporadically and has been highly dependent on the business strategies of the individual companies involved. Virtually none of the video delivery by LECs at this time involves facilities that are technically integrated with existing telephone plant or that are used to distribute both video and telephone traffic. Some LECs (Ameritech, BellSouth, GTE, and SNET) have continued to expand franchised cable operations within their telephone service areas or to acquire in-region MMDS systems. Others (US West, Bell Atlantic, and SBC) have minimized or abandoned further activities in multichannel video programming within their regions. Tele-TV and Americast, two joint ventures organized by LECs to provide original video programming and packaging, have significantly scaled back their operations. þ 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 in-region distribution of 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 Bell Atlantic to operate an OVS system in Dover Township, New Jersey. The Commission also has certified five other OVS systems in eight areas. þ Video Cassette and DVD Sales and Rentals: Video cassettes provide feature films similar to those distributed by cable operators on premium channels and others involved in the distribution of video programming. The most recent available data (for 1996) show that 88% of U.S. television households have a video cassette recorder ("VCR"). The U.S. video cassette rental and sales market is estimated to receive $15.6 billion in annual revenues, an amount that significantly exceeds the combined total spending of $7.2 billion in 1996 for similar products distributed by cable television, satellite, and other MVPD pay television services. The introduction of Digital Versatile Discs ("DVD") and Disc Players, which became available to the public in 1997, could provide a significant alternative to VCRs and cassettes and to premium and pay-per-view channels with similar content distributed by MVPDs. þ Electric Utilities: Section 103 of the 1996 Act removed regulatory impediments to the entry of "registered" public utility holding companies, including in particular providers of electric power, into telecommunications and video markets. Over the last year, a number of publicly- and investor-owned utilities have announced plans or have commenced ventures involving multichannel video programming distribution. Utilities, however, are not yet actual participants in the market for the distribution of video programming. þ Internet Video: Video programming may be distributed over the Internet or other data channels for viewing on computer terminals. This is accomplished by using video compression technologies and through downloading of the video data for later playback or through video "streaming." Due to bandwidth and other limitations, this method of video distribution does not yet produce programming that is comparable in length, quality, or convenience to broadcast video. Before Internet distribution of video becomes competitive in the video distribution marketplace, significant improvement must be made in this form of delivery. þ Broadcast Television: Broadcast television is available to the public both through direct reception and through MVPD distribution and continues to be the public's primary source of video programming, regardless of transmission medium. The four major television broadcast networks still account for a 59% share of prime time television viewing for all television households. The number of television broadcast stations continued to increase (to 1561 in 1997 from 1550 in 1996). Television broadcasting remains a significant alternative to other means of video programming distribution for viewers, programmers and advertisers. However, viewership of broadcast station programming continued to gradually decline as viewership of cable and satellite network programming increased. Approximately 23% of all television households receive television programming entirely from over-the-air television broadcast reception. In the years ahead, fundamental changes in the nature of broadcast television will be taking place. The Commission has adopted rules for implementation of digital television ("DTV") and broadcasters have continued testing DTV as they plan for the use of DTV spectrum. Under the Commission's rules for DTV, digital encoding and transmission technology will permit stations to broadcast: one or perhaps two High Definition Television ("HDTV") signals; multiple streams of Standard Definition Television ("SDTV") signals; or a combination of the two. The first DTV stations will begin broadcasting in the top ten markets by November 1998, with the digital transition currently scheduled to be completed by 2006. LOCAL, REGIONAL, AND NATIONAL HORIZONTAL MARKET DEVELOPMENTS þ Multiple Dwelling Unit Buildings as a Separate Market: Video distribution competition within and for multiple dwelling unit buildings ("MDUs") appears to be developing as a distinct market separate from neighboring areas. Competitors for this market face different economics, technical applications, and regulatory issues. þ Local Market Competition for Video Subscribers: Local markets for the delivery of video programming generally remain highly concentrated and continue to be characterized by some barriers to entry and expansion by potential competitors to incumbent cable systems. Competitive overbuilding by franchised cable operators remains minimal but is increasing (particularly by LECs) and appears, to varying degrees, to improve service and/or pricing where it exists. It remains difficult to determine whether or when competition from closely substitutable multichannel video programming services will affect currently non-competitive markets. DBS service is available in almost all areas and constitutes the most significant alternative to cable television. Its major advantage is its ability to offer service which is significantly different from cable service with respect to signal quality and programming options. Its major disadvantages, however, include its inability to provide local broadcast programming and the expense of its equipment and installation. In addition, its current advantage in channel capacity may be transitory once cable systems deploy digital distribution technology. MVPDs using other distribution technologies have not posted subscribership increases comparable to DBS subscribership increases, but are in the process of testing digital technology that has the potential to improve significantly the competitiveness of their services. Consequently, it remains difficult to predict the extent to which competition from MVPDs using non-cable delivery technologies will constrain cable systems' ability to exercise market power in the future. þ Local Interservice Competition; Telephone Companies Offering Video and Cable Operators Offering Telephony: The 1996 Act repealed a statutory prohibition against an entity holding attributable interests in a cable system and a LEC with overlapping service areas. At the time of the 1996 Act's passage, members of the local telephone industry indicated that they would begin to compete in video delivery markets, and cable television operators indicated that they would begin providing local telephone exchange service. The expectation was that there would be a technological convergence that would permit use of the same facilities for provision of the two types of service. This technological convergence has yet to take place. Almost all of the video service being provided by LECs is being provided using conventional cable television technology or wireless cable operations that stand alone from the provider's telephone facilities. The provision of telephone service by cable firms over integrated facilities remains primarily at an experimental stage. The one area where many cable operators appear poised to compete head-to-head with local telephone companies is in the provision of Internet access. Technology in this area appears to be rapidly advancing and service is being deployed on a commercial basis in a large number of cable systems. þ Regional Clustering of Cable Television Operations: A trend toward regional clustering of cable television operations continued during the course of the last year. As a result, 139 cable systems serve in the aggregate over half of all cable subscribers. The consolidation of systems into regional clusters appears to have a number of technical and economic advantages for system operators. This trend also has marketing advantages for system operators and should accommodate their entry into broader telecommunications markets where other competitors are providing service throughout or across large regional areas. Regulatory controls attach to cable systems on a political subdivision basis, however, resulting in the application of non-uniform regulations at the local level throughout a larger region. þ Cable and MVPD Concentration at the National Level: Ownership patterns among cable multiple system operators ("MSOs") at the national level also have changed, in part because of the regional clustering phenomenon. Whether concentration at the national level is viewed as having decreased or increased is dependent on an analysis of certain transactions that have been announced but have not yet been consummated. In particular, TCI, the largest MSO, has announced a series of transactions whereby certain systems it currently owns will be owned or managed by other operators with a more significant regional presence in the markets where these systems are located. These transactions have been announced as system divestitures, although they will result in continuing financial or ownership relations between TCI and the entities acquiring management or control over the systems involved. Whether these transactions should ultimately be viewed as increasing the size of TCI depends in part on the specific details of the transactions involved which are not now before the Commission and that may not have been finalized. If the arrangements are such as to create attributable interests, the result could be a significant increase in TCI's attributable share of the national market and in the indices that have been used to measure concentration at the national level. PROGRAMMING AND VERTICAL OWNERSHIP MARKET DEVELOPMENTS þ The proportion of national programming services that are vertically integrated with cable operators declined slightly from last year's total of 46% to 40% this year. Eight of the 16 national programming services launched since the 1996 Report have been vertically integrated with an MSO. In local and regional markets, system operators are increasingly distributing local non-broadcast news channels, some of which are programmed by affiliates of the operator and a significant number of which are programmed by non-affiliated local television stations. The integration of regional sports programming with system ownership has taken place through the merger of eight TCI-affiliated Fox/Liberty regional sports networks with seven Cablevision-affiliated SportsChannel regional sports services. CASE STUDIES OF COMPETITIVE RESPONSES þ Competitive Response in Markets with Wireline Competition: Although there have not been a large number of instances in the past year, several new wireline providers have entered incumbent cable operators' markets. A review of a limited number of markets where an incumbent cable operator faces competition from one or more MVPDs also using wired delivery indicates that the incumbent operator is responding by offering new services and new products, providing better customer service and lowering prices. CHANGES IN TECHNOLOGY þ Technological Change: Advances in and development of digital technology will permit all distributors of video programming to increase the delivered quantity of service. Digital technology increases the number of programming channels that may be communicated over a given amount of bandwidth or spectrum space. MVPDs and broadcasters continue to pursue improved digital compression ratios and deployment of digital technology. REGULATORY ACTIVITIES AND ISSUES þ Over-the-air Reception Devices: Video delivery services that use the radio spectrum to deliver service, such as broadcast, DBS, and MMDS services, typically require consumers to install and make use of external antennas and other reception equipment. Pursuant to Section 207 of the 1996 Act, the Commission has issued regulations to prohibit restrictions that impair a viewer's ability to receive video programming services through devices designed for over-the-air reception of television broadcast signals, MMDS, or DBS services. This action gives more control and choice to consumers to select alternative sources of video programming without regard to certain restrictions imposed by local governments or community associations. The Commission has preempted a number of such restrictions in individual cases. Petitions for reconsideration of the rules are pending, as is a further proceeding addressing the applicability of Section 207 to antenna installations on property in which the viewer does not have an ownership interest and exclusive use or control, such as rental apartments. Depending on the outcome of those proceedings, additional antenna placement rights may be necessary if competition for individual MDU subscribers is to take place on a broader basis. þ Inside Wiring: The ability of video service providers to compete to provide service to MDUs or to serve the residents of MDUs often is dependent on who owns or controls the inside wiring in the buildings. In October 1997, the Commission adopted inside wiring rules designed to promote competition for and within MDUs. The rules provide certainty for alternative video programming providers and MDU owners regarding whether the existing inside wiring will be available for use when the incumbent's service is terminated. The rules adopted were limited in scope, applying only where the incumbent MVPD no longer has a legally enforceable right to remain on the premises. If the Commission had more explicit authority to address wiring transfer and compensation issues, competition for and within a building, could be enhanced. þ Pole Attachments: Wireline video and telecommunications competition is heavily dependent on the ability of market participants to obtain access to utility poles, conduits, and rights of way at reasonable rates. The 1996 Act directed the Commission, within two years, to issue new pole attachment and conduit rate formulas. A proceeding is in progress to undertake the necessary review of these rules. The pole attachment rate regulation function is one that is shared between the Commission and state and local governments, with state and local governments having priority in those situations where they choose to regulate. The initial congressional decision to exempt cooperatives and government entities appears to have been based, at least in part, on the implicit assumption that these entities were functioning not just as businesses providing utility pole and conduit space but as public representatives performing a regulatory or quasi regulatory function. Commenters suggest that when cooperatives and government entities are themselves engaged in the provision of communications services a conflict of interest may result such that the rates charged to competitors may no longer be cost based and that competition may accordingly be distorted. þ Program Access: The 1992 Cable Act contains provisions that are intended to foster the development of competition to traditional cable systems by regulating the access of competing MVPDs have to vertically integrated, satellite distributed cable programming services. As the Commission has consistently noted, exclusive arrangements can be used to deter entry and inhibit competition from other MVPDs in markets for the delivery of multichannel video programming. However, exclusive arrangements can also produce efficiency benefits for the parties involved, and may increase competition through product differentiation, which can produce increased choice for consumers in programming and distribution markets. The Commission has commenced a rulemaking proceeding to seek comment on a number of possible mechanisms for improving the effectiveness of the existing rules including: (1) establishing specific time deadlines for resolving program access cases; (2) improving the discovery process (e.g., some cable competitors propose that vertically-integrated programmers be required to disclose what they actually charge cable operators; (3) including monetary damages among the available enforcement tools to discourage program access violations; (4) possibly applying the program access rules to certain situations in which programming is moved from satellite delivery to terrestrial delivery; and (5) revising the manner in which the rules apply to program buying cooperatives. It is not clear to what extent, if any, the provisions of the 1992 Cable Act cover programming distributed by means other than satellite or by programmers unaffiliated with MSOs. This is an issue of concern for a number of MVPDs competing with incumbent cable operators. þ Cable Horizontal Ownership Regulation: The 1992 Act directed the Commission to set limits on the number of cable subscribers that could be reached by an individual MSO. In October 1993, the Commission adopted rules providing that, with limited exceptions, no MSO could pass more than 30% of the households passed by cable nationwide. The statutory provision involved, however, was found to be unconstitutional by a United States District Court and the Commission stayed the enforcement of its rules pending further judicial review. The appeal of the statutory provision has been consolidated with an appeal of the rules adopted by the Commission and the Court has indicated that it would not proceed with resolution of the matter prior to the Commission acting on pending petitions for reconsideration of the rules. As a result, the Commission will be required to complete its review of the rules while the issue of the constitutionality of the underlying statute remain unresolved. þ Mandatory Carriage of Local Broadcast Station Signals: Relations between local broadcast stations and MVPDs concerning carriage of broadcast programming are mediated in part by the mandatory broadcast signal carriage rules that were required by the 1992 Act and by related provisions in the 1996 Act regarding open video systems. In addition, the Commission was required to initiate a proceeding at the time it prescribed standards for advanced television, now referred to as digital television ("DTV"), to establish any changes in the signal carriage requirements of cable television systems necessary to ensure the carriage of broadcast signals of local commercial television stations that have been changed to conform with such modified standards. In the context of adopting digital television standards, the Commission sought comment on relevant must carry rules or policies that might be needed both during the transition to DTV and once DTV has replaced the current analog system. The Commission has indicated that it intends to seek further comment on this issue. þ Television Broadcast Station Tower Siting Regulation: The Commission has adopted an aggressive schedule for implementation of broadcast DTV. Digital television may provide a means for broadcast television stations to become more competitive in the market for delivery of video programming by permitting multiplexed services. In order to provide digital television service, broadcasters will need to modify their facilities, and, in many cases, to construct new transmitters and new towers. Of particular concern to broadcasters is the effect of local and state regulation on their ability to upgrade existing towers or to construct new towers in a timely manner. The Commission has initiated a proceeding to seek comment on whether any action is necessary in this regard to permit a rapid roll-out of DTV. þ DBS Public Service Obligations: Competitive relationships in markets for the distribution of video programming are dependent in part on how different regulatory requirements are applied to the various market participants. The 1992 Act directed the Commission to initiate a rulemaking to impose public interest or other requirements for providing video programming on DBS service providers and mandated that DBS providers reserve between 4% and 7% of their channel capacity exclusively for noncommercial programming of an educational or informational nature. Such a proceeding was initiated. However, the statutory requirement was found to be unconstitutional. That ruling has subsequently been reversed. The Commission has resumed its rulemaking and has sought updated comments relating to this requirement. þ Copyright: On August 1, 1997, the Copyright Office released a report on licensing regimes for broadcast signals. The report contains a number of legislative suggestions, including harmonization of cable and satellite carrier licenses (except to the extent that technological differences or differences in the regulatory burdens justify different copyright treatment); adjustment of license fees to reflect fair market value; and limiting or eliminating special provisions relating to small cable systems. The Copyright Office also recommends that the compulsory license for satellite retransmission be extended and that extensive changes be made to modify the "unserved household restriction." Changes in compulsory copyright license rates, structure, and coverage will have consequences for the competitive relationships among MVPDs. At present there is no mechanism for systematic coordination of copyright and communications policies and regulations. Under the Copyright Act, satellite compulsory copyright license fees for retransmission of broadcast signals are to be set at "fair market value," considering the competitive distribution environment and the economic impact of the fees on copyright owners, satellite carriers, and the continued availability of retransmissions to the public. On October 27, 1997, the Librarian of Congress, whose responsibility it is to adjust the fee, issued an order setting a rate of 27 cents per subscriber for satellite retransmission of distant superstation and broadcast network signals, an increase of 21 cents over the prior rate of six cents per subscriber. Legislation has been introduced that would delay the new fee structure pending a study of whether it would be an impediment to competition. DBS operators' current lack of local broadcast programming impairs DBS services' competitiveness with cable service. A consideration of satellite services' carriage of local or broadcast network programming would include a balance of the possibility of private negotiation for program rights, the scope of any compulsory satellite license or other copyright limitations, the scope of any must-carry or other carriage obligations, and the extent of statutory parity between cable and DBS. In considering possible changes in copyright, existing differences between the copyright treatment of cable transmissions and of satellite retransmissions of broadcast signals should be removed where possible so that the compulsory licenses do not affect the competitive balance between the satellite carrier and cable industries. þ Navigation Devices: Navigation devices are television set-top boxes and other equipment that consumers use to access video programming. Section 304 of the 1996 Act requires the Commission, in consultation with appropriate industry standard-setting organizations, to adopt rules to assure the commercial availability of navigation devices from manufacturers, retailers and other vendors not affiliated with any MVPDs. The rules, which will expire once the Commission determines that a competitive market for navigation devices has developed, may not jeopardize the security of video services or impede a video provider's ability to prevent theft of service. A proceeding is in progress to consider rules to implement this provision. þ Video Description: Video description is an aural description of a program's key visual elements that is inserted during natural pauses in program dialogue for the benefit of viewers with visual disabilities. It generally describes actions that are not otherwise reflected in the dialogue, such as the movement of a person in a scene. The 1996 Act required the Commission to report to Congress on appropriate methods and schedules for phasing video description into the marketplace and other technical and legal issues related to the widespread deployment of video description. On July 29, 1996, the Commission submitted to Congress its first report on video description pursuant to this requirement. In this proceeding, we requested information regarding video description to permit us to provide Congress with additional findings. The most widespread video description technology uses the second audio programming ("SAP") channel, a subcarrier that allows each video programming distributor to transmit a second soundtrack. It appears that economic barriers, technical limitations, and unresolved legal issues continue to limit the availability of the service at this time. The costs of providing video description are still quite high, significantly higher than those associated with closed captioning, and video description must compete with Spanish language audio tracks for use of limited SAP channel capacity. Continued public funding could foster the development of video description services to the point where widespread implementation of video description could become feasible, and could ultimately create a commercial market for video description. The advances of digital technology may allow the development and expansion of video description to occur more quickly than occurred in the case of closed captioning. II. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Industry 12. This section addresses the performance of franchised cable system operators in three areas: (1) general performance -- both the quantitative and qualitative measures of services provided, subscriber levels, and viewership; (2) financial performance -- revenue and cash flow status; and (3) capital acquisition and disposition -- the amount of funds raised and used to improve existing physical plant and acquire new systems. In addition, this section discusses other performance indicators, including system transactions, cable overbuilds, stock prices, rates charged by cable operators, and new services such as digital video services, cable data access, and cable telephony. 1. General Performance 13. Since our last report, the cable industry has grown in several ways including subscribership, homes passed, penetration, premium subscriptions, viewership, and channel capacity. In addition, during all of 1996 and the first half of 1997, the industry began to expand its service offerings to customers in certain areas to include digital video service, cable modems, and cable telephony. 14. Cable's Capacity to Serve Television Households. The number of U.S. homes with at least one television set grew from 95.9 million at the end of 1995 to 97 million at the end of 1996, an increase of 1.1%, with no change as of the end of June 1997. The number of homes capable of receiving cable programming on those television sets ("homes passed") increased from 92.7 million at the end of 1995 to 93.7 million at the end of 1996, and 94.2 million by the end of June 1997. This represents about a 1.1% increase between the end of 1995 and the end of 1996. The proportion of television homes passed by cable decreased slightly to 96.6% from January to December 1996, but grew to 97.1% between January and June 1997. The number of homes subscribing to cable has been increasing since December 1995, rising to 65.5% of all television households by the end of 1996, and to 66.2% of television households by the end of June 1997. 15. Subscribership and Capacity Usage. Cable subscribership grew from 62.1 million subscribers at the end of 1995 to 63.5 million subscribers at the end of 1996, an increase of 2.3%, and to an estimated 64.2 million subscribers at the end of the first half of 1997, a six month increase of about 1%. Cable penetration (the proportion of homes passed that actually subscribe) also grew, increasing from 67% at the end of 1995 to 67.8% at the end of 1996, and 68.2% penetration at the end of the first half of 1997. The number of homes subscribing to premium cable services increased by 5.7% in 1996 to 31.5 million homes from 29.8 million homes at the end of 1995, and the number of premium services to which homes are subscribing (known as "premium units") increased 5.6%, with 54.5 million premium units subscribed to by the end of 1996, and an estimated 57.2 million units subscribed to by year's end 1997, another 5% increase. 16. System Statistics. Average channel capacity for cable systems has continued to increase. In October 1996, cable systems with a capacity of 30 or more channels accounted for 77.1% of all cable systems, or 8,134 systems, and 83.9% of all cable systems, or 8,260 systems in October 1997. The percentage of systems with channel capacities of 54 channels or more accounted for 16.4% of all cable systems in October 1996, or 1,724 systems, and 19% of all cable systems or 1,886 systems in October 1997. The average cable system channel capacity grew from about 47 channels at the end of 1995 to approximately 53 channels at the end of 1996, an increase of 12.7%. 17. In October 1996, the number of subscribers served by systems with capacities of 30 channels or more grew to 98.2% of subscribers. In October 1997, the number of subscribers served by systems with capacities of 30 channels or more remained at 98.2% of subscribers The number of subscribers served by systems with capacities of 54 or more channels increased 6.4% between the beginning of October 1996 and the beginning of October 1997, from 55.3% of subscribers at the beginning of October 1996 to 58.4% of subscribers at the beginning of October 1997, or by 2.15 million subscribers. 18. Viewership. Over the past decade, non-premium cable viewership has grown significantly, while viewership of broadcast television stations has steadily declined. The 24-hour a day, 7-day a week audience of all non-premium cable programming increased from an average 11.5 share of television viewing hours in the 1987-1988 broadcast year to an average 36.25 share of television viewing hours in the 1996-1997 season. Over the same period, the 24-hour a day, 7-day a week audience of the broadcast television stations, whether delivered over the air or by an MVPD, declined from an average 87.7 share of television viewing hours in the 1987-1988 season to an average 66.5 share of television viewing hours in the 1996-1997 broadcast season. The viewing shares of the 24-hour a day, 7-day a week audience of premium channels has not changed over the last decade, with a average 6.92 share in 1987-1988 and 1996-1997. 19. Networks. The number of basic cable networks increased from 104 to 126, 21.2%, between 1995 and 1996. In the same period, the number of premium and pay-per-view networks decreased. The number of premium networks decreased by three channels, and the number of pay-per- view networks decreased by one channel. This fluctuation is considered normal by industry representatives, and is not assumed to be directly attributable to any particular event. 20. Programming Payments. License fees paid by cable system operators to basic cable network programmers increased by 16.3%, from approximately $2.683 billion in 1995 to $3.121 billion in 1996. Analysts estimate that in 1997, fees will increase by an additional 13.5% to $3.54 billion. A study of television programming costs submitted by the NCTA suggests that these increases are part of a trend toward increased programming costs in both the broadcast and cable television industries that reflects sharply increased payments to sports teams, leagues, athletes, film producers, distributors, talent, and syndicators of television programming. Copyright fees paid by cable system operators for broadcast signal carriage under Section 111 of the Copyright Act increased 6.5% from $165 million in 1995 to $176 million in 1996. From January 1, 1997, to October 21, 1997, $77.798 million in copyright fees have been collected from cable system operators. 2. Financial Performance 21. Data concerning cable industry revenue and cash flow indicats that the cable industry remained financially strong in 1996 and the first half of 1997. 22. Cable Industry Revenue. Financial analysts report annual cable industry revenue for 1995 was $24.898 billion, which grew 8.9% to $27.120 billion in 1996. For 1996, revenue per subscriber grew 5.6% to reach $431.85 per subscriber per annum by year's end. While total industry revenue data for the first part of 1997 are not available, analysts estimate 1997 year-end total revenue will be approximately $30 billion, an increase of 9.9% from the 1996 total year-end revenue. 23. When total cable system revenue is categorized by source, the greatest revenue growth as a percentage of total revenue in 1996 was in the pay-per-view sector, which increased 20.9% from $535 million annual revenue in 1995 to $647 million annual revenue in 1996. Industry analysts predict this will increase in 1997 to an annual revenue of $815 million. Advertising revenues retained by MSOs increased 16% in 1996 from $1.4 billion in annual revenue in 1995 to $1.7 billion in 1996. Industry analysts predict this will increase in 1997 to annual revenue of almost $2 billion. Advertising revenues retained by progammers increased by 18.4%, from $4.9 billion in 1996 to an estimated 1997 year-end figure of $5.8 billion. Home shopping and premium tier revenues grew the least in 1996. Revenue from home shopping services grew from $144 million in 1995 to $145 million in 1996, a 0.7% increase. Annual revenue from pay tiers grew from $4.8 billion in 1995 to $4.9 billion in 1996, an increase of 4%. 24. In addition, the Commission calculates its own estimate of annual industry-wide revenue. The Commission estimates that the cable industry's annual revenue increased between the end of 1995 and the end of 1996 by approximately 6.5% to approximately $26.05 billion dollars. This increase is similar to the increase the Commission calculated for last year when annual revenue increased by approximately 6% from $23.07 billion to $24.45 billion between December 1994 and December 1995. 25. Cable Industry Earnings Before Interest, Taxes, Depreciation, and Amortization. Measurement of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), commonly referred to as "cash flow" by the industry, is often used to value the financial position of cable firms. Financial analysts report that industry-wide cash flow increased by 9.1% between the end of 1995 and the end of 1996, from $11.161 billion to $12.177 billion. For the year ending December 31, 1996, the cable industry generated approximately $193.90 in annual cash flow per subscriber, about $10 higher than the $183.27 per subscriber generated for the year ending December 31, 1995. There are currently no data available on industry cash flow for the first half of 1997, and analysts have not yet made predictions for year-end cash flow. The ratio of cash flow to revenue ("cash flow margin") increased from 44.8% in 1995 to 44.9% in 1996. 26. The Commission generates its own estimate of industry-wide cash flow, and estimates that industry-wide EBITDA in 1996 was approximately $12.4 billion, a 9.3% increase over 1995. This is up from last year's estimated increase of 5.8% from approximately $10 billion in 1994 to $10.6 billion in 1995. 3. Capital Acquisition and Disposition 27. Cable Industry Financing. From January to December 1996, the cable industry secured more private debt financing, but less public debt financing, than between January and December 1995. In the first half of 1997, issuance of public debt by the cable industry rose, though the industry acquired less private debt. This change is likely due to the low interest rates available in the public market throughout 1997. 28. Cable Industry Financing -- January to December 1996. The cable industry has typically relied on combinations of private and public financing, with the exact distribution of these combinations varying greatly from year to year. In 1996, the cable industry acquired $2.6 billion of net new private debt financing (i.e., financing received by MSOs from banks, insurance companies, and other institutional investors). This represents a significant increase over 1995's negative net activity of $808 million in private debt financing. In 1996, $2.94 billion of public debt was issued and $1.586 billion was redeemed, yielding $1.354 billion in net new public debt financing. This represents 78% less public debt financing than in 1995. The remaining industry financing was obtained through a mixture of private equity (i.e., equity received by MSOs from individuals, private corporations, venture capital firms, and investment banks) and public equity offerings (i.e., stock markets), which yielded a combined $2.9 billion in total equity activity, compared to the $5 billion in total public and private equity activity during 1995. 29. Cable Industry Financing -- Recent Developments through June 1997. From January through June 1997, the cable television industry acquired less private debt than during the same period in 1996. Between January and June 1997 the industry acquired $735 million of private debt compared with $1.7 billion for the same period of 1996. However, considerably more public debt was issued between January and June 1997 than during the same period in 1996. Approximately $7.5 billion of net new public debt was issued for the first half of 1997 while approximately $2.7 billion was issued during the same time period in 1996. Again, this is likely due to attractive interest rates available in the public market throughout 1997. Public equity activity was $1.2 billion from January through June 1997 down from $3.5 billion of activity from January through June 1996. 30. Capital Expenditures. In 1996, the cable industry invested approximately $5.6 billion in construction of plant and equipment. This includes maintenance, new builds, rebuilds, converters, upgrades, and inventory, and is a 3.3% increase over last year's $5.4 billion expenditures. 31. Increased capital expenditures are expected to continue in 1997 and beyond. Many of the large cable MSOs have made commitments to capital improvements for their systems. For example, MediaOne is currently undertaking a multi-billion dollar capital expenditure program to upgrade or substantially rebuild all of its systems by the end of 2000 by deploying hybrid fiber-coaxial ("HFC") networks in combination with digital compression technology. In 1997, MediaOne spent approximately $650 million on these rebuilds, which, combined with expenditures of $829 million in 1995 and 1996, represents an investment of more than $300 per subscriber since 1994. In 1996, MediaOne completed many of its proposed upgrades and in 1997 these upgrades continue to be made. Cablevision Systems is in the process of upgrading its Long Island, New York, and select New Jersey systems to a 750 MHz HFC network in order to provide over 470,000 of its customers with better picture quality, reduction in power interruptions, and better overall quality control for the operator. Cablevision has completed its upgrades in numerous locales in its Long Island, New York, system and upgrades in numerous locales in New Jersey. Time Warner has agreed to upgrade all its cable systems to a capacity of at least 550 MHz with 50% of all subscribers having access to at least 750 MHz. Time Warner has plans underway to invest $4 billion in capital costs in connection with the upgrade of its cable systems, and at the end of 1996 had invested $1.4 billion. In 1997, Marcus Cable upgraded its Glendale, California, system to 750 MHz HFC, in order to provide its customers with increased channel capacity, enhanced picture and sound quality, and improved reliability. These upgrades will enable future delivery of services such as video conferencing and Internet access. Bresnan Communications upgraded 75% of its systems to 750 MHz, HFC architecture by the end of 1997, with upgrades of an additional 13% of its systems to 550 MHz. Bresnan, for example, spent over $5.35 million to upgrade its system in Marquette, Michigan, to 750 MHz capacity. One example of upgrades made by Comcast is its upgrade to a 750 MHz system in the Detroit metropolitan area, where Ameritech competes with Comcast. Jones Intercable's most notable expenditure in 1997 has been its approximately $36 million construction of a new HFC network in Alexandria, Virginia, and Prince George's County, Maryland. 4. Other Performance Indicators 32. Cable System Transactions. The number of mergers, acquisitions, and exchanges between MSOs has fluctuated greatly over the past few years. The number of systems sold doubled between 1994 and 1995 from 64 to 128 transactions, but between 1995 and 1996, there was 19.5% decrease in systems sold for a total of 103 transactions by year's end. Of these 103 transactions, 8 were system swaps, thus making up 16 of the 103 transactions. In 1995, approximately 20 of the 128 transactions were 10 different swaps. From January 1997 through June 1997, 44 transactions have been recorded with 11 swaps making up 22 of those transactions. Among systems changing hands, the total number of subscribers served and the average system size of these systems continue to vary greatly from year to year. Among 1996 transactions, the average system size decreased 11.4% from an average 85,450 subscribers per system in 1995 to an average 75,728 subscribers per system in 1996. Among transactions between January and June 1997, the average number of subscribers per system was 54,210. The total number of subscribers affected by system transactions decreased 28.7% from approximately 11 million subscribers in 1995 to approximately 8 million subscribers in 1996. Thus far in 1997, the total number of subscribers affected has been 2.4 million. The total dollar value of transactions decreased 19.1% between 1995 and 1996, following a 43.2% increase between 1994 and 1995. The average dollar value per subscriber of 1997 transactions has been approximately $1,700 through June. 33. Overbuilding. Head-to-head competition, where two or more wireline cable television systems compete for the same subscribers in the same local market, has increased over the past year. As of July 1997, cable franchises have been awarded to competitors to incumbent cable operators in 81 communities in 14 states covering 5.43 million homes. This activity results almost entirely from LECs entering the market as permitted by the 1996 Act. 34. Stock Prices. During the 3rd Quarter of 1997, market valuation of the cable industry experienced a sharp increase. Analysts attribute the increase to Microsoft's investment in Comcast, the dissolution News Corp.'s planned venture with EchoStar and subsequent alliance of its ASkyB assets with Primestar, and the rollout of the new cable data service, @Home. Analysts expect an increase in the market value of cable stocks to continue, and expect that future appreciation will be driven primarily by accelerating revenue and cash flow growth. 35. While the Standard and Poor's Index 500 ("S&P 500") has steadily increased since January 1992, with more significant increases beginning mid-way through 1995, the prices of cable stocks, as represented by the Kagan MSO Index, have also generally increased, though with some fluctuation. The Kagan MSO Index remained almost even with the S&P 500 throughout most of 1992, but rose sharply above it in November 1992 following enactment of the 1992 Cable Act. The Kagan MSO Index remained above the S&P 500 until shortly after the 1996 Act in February 1996, fell below the S&P 500 in April 1996, and remained below the S&P though June 1997. 5. Price Survey and Cable Rate Issues 36. Section 623(k) of the Communications Act requires the Commission to publish annually a statistical report on average rates for the delivery of basic cable service, other cable programming services, and equipment. Specifically, Section 623(k) directs the Commission to compare prices charged by cable systems facing effective competition with those not facing effective competition. 37. The Commission recently issued its annual report for 1997 based on results of a survey of cable industry prices conducted in the summer of 1997. The survey requested data as of July 1, 1995, July 1, 1996, and July 1, 1997. Cable operators were asked to provide price data on cable services and to explain any change in rates between July 1, 1995, and July 1, 1996, and between July 1, 1996, and July 1, 1997. After the data were collected, the Commission supplemented the survey data with information about the respondents' regulatory status to compare prices and channel capacity between noncompetitive regulated and unregulated cable operators as well as competitive and noncompetitive operators. 38. Based on 485 completed questionnaires, the Commission found: (a) the average monthly charge for programming services and equipment rose for both the competitive and noncompetitive groups, with the noncompetitive group charging higher average monthly rates than the competitive group in each of the time periods studied; (b) subscribers that purchase cable services from regulated operators typically pay less, on a per channel basis, for programming services and less for equipment than subscribers that purchase services from unregulated operators; (c) both competitive and noncompetitive operators attribute most of their rate increases to inflation, increased programming costs, channel additions, and system upgrades, although competitive and unregulated operators also attribute portions of their rate increase to increased equipment costs; (d) both competitive and noncompetitive operators increased their average channel capacity, now offering subscribers additional satellite channels, and had corresponding reductions in their average monthly rates per channel. 39. Comparison of Prices Charged by Cable, DBS, and MMDS. The Commission found that the average monthly rate charged by cable operators, as of July 1, 1997, was $26.33 for programming services (including basic and expanded basic services, but excluding New Product Tiers ("NPTs"), premium, and pay-per-view services) and $2.52 for equipment. The average monthly rate for programming and equipment combined was $28.83. On average, cable industry subscribers received 49.4 channels at an average monthly rate per channel of $0.63. 40. While it is difficult to make a direct meaningful comparison between rates charged by cable operators and other MVPDs, such as DBS and MMDS, because the offerings are not directly comparable, it is possible to make a rough comparison since there are similarities. A comparison of monthly charges for cable, DBS, and MMDS services is shown in Table B-10. The level of service from DBS that would be most comparable to typical cable service would be the basic service without premium channels. On average, that level of service from DIRECTV and Primestar, the two DBS providers with the largest number of subscribers, was $27.49 as of July 1997. This rate was for programming service only, not including equipment, and was for a basic programming package of 47 channels, for an average monthly cost of $0.66 per channel. The average monthly rate for MMDS service was $21.29 for an average programming package of 22.7 channels, or an average monthly cost of $0.94 per channel. This rate includes the cost of equipment. 41. It is difficult to compare the cost of equipment since service from DIRECTV requires the purchase of equipment. Service from Primestar and from MMDS providers includes $10 for the cost of equipment. Cable service does not involve purchasing equipment, but does include the rental of equipment. As of July 1997, the one time cost of equipment for DIRECTV was, on average, about $200. However, for purposes of making a comparison, if we assume the cost of equipment can be spread over five years (or 60 months) and without considering the time value of money, we can estimate an "equivalent" cost for equipment on a monthly basis of $3.33. This would result in a combined average cost for programming and equipment of $30.82 per month for DBS service, or $0.66 per channel. As indicated, however, this rate does not take into account the upfront installation costs associated with DBS and the cost for service to additional television sets which must be considered before making a comparison to the per channel rate for cable given above. 42. There are several caveats to consider when making this comparison. Cable service includes the retransmission of local broadcast channels, while DBS service typically does not include local channels. Depending on a number of factors including terrain and their location relative to the station's transmitter, subscribers to DBS service can receive local broadcast channels over-the-air without charge if they have an antenna, or if they prefer, they can subscribe to basic cable service as a way of receiving local broadcast channels. As of July 1997, cable basic-only service cost on average $11.20 per month. The comparison also does not include the cost of installation. On average, cable installation cost $39.59, as of July 1997, and DBS installation costs varied from $50 for a do-it-yourself kit to about $150 to $200 for professional installation. The average MMDS installation charge as of July 1997 was $35. When comparing MVPD prices, a number of other factors should be considered. Cable service is typically analog service while DBS service is digital, and the DBS digital-quality picture and sound are superior to analog cable transmission. MMDS service is also typically analog service and the number of channels that can be offered over analog MMDS service is limited. In addition, DBS subscribers usually do not take the basic-only service package because the level of service that most DBS subscribers are interested in includes the more complete programming packages with additional premium movie channels and sports programming channels. 43. Tier Adjustments. Year-to-year comparisons in cable, or in MVPD rates more generally, suffer from the fact that the nature of the service in question continues to evolve so that rates, rather than being for a constant level of service, are for somewhat different service offerings. Estimating a price per channel is one means of trying to take this change into account, although it is clear that all channels are not perceived to be equally valuable. Shifts in desirable programming from premium or pay channels to basic or CPS tier channels may also reflect a change in the quality of the service measured. NCTA, for example, states that sports is an area of competition among MVPDs, and that in response to sports channels carried in the DBS basic package, virtually all cable systems have migrated their regional sports networks from premium service tiers to basic and CPS tiers. According to NCTA, of the approximately 10,750 cable systems nationwide, regional sports networks are carried as a basic or expanded basic service on approximately 4,259 systems, as compared with 41 systems that carry them as premium services. Similarly, the Disney Channel, originally a premium service, is now carried as a basic or CPS tier channel on cable systems serving more than 22 million subscribers. MediaOne indicates that it has shifted premium channels, such as regional sports services and the Disney Channel, to CPS tiers. In the Northeast, MediaOne has moved SportsChannel New England from a premium tier to its expanded basic tier. In Michigan, it is repositioning Pro-Am Sports Service ("PASS") from partial premium carriage to full-time cable programming service tier carriage. On MediaOne's Stockton, Yuba City, and Fresno, California, systems, SportsChannel Pacific was formerly carried as a premium service, but is now carried as part of the CPS tier. 44. Regional sports programming channels and other premium service migration typically results in a price increase for tier service, but a rate decrease for those who subscribed to the channel prior to its migration. For example, in Montgomery County, Maryland, cable customers who previously purchased Home Team Sports ("HTS") as a premium service have experienced an overall reduction in their cable rates. Prior to the July 1, 1997, migration of HTS to the "preferred" tier, customers paid $42.35 monthly for preferred service plus HTS received as a premium service. Effective July 1, 1997, those same customers began paying $34.39 for the preferred service that included HTS. However, customers who had not subscribed to the HTS as a premium service experienced an increase in their rates from $31.39 for their preferred service to $34.39 for preferred service that now included HTS. Comcast's SportsNet is expected to be distributed to subscribers without their being assessed a separate charge and to replace services offered on a premium basis. System operators themselves will pay as much as a $1.50 a subscriber for this service, a cost they will either absorb or pass on to subscribers. 6. New Services 45. Several cable operators are beginning to provide digital video, data, and voice services over their cable systems. Cable operators have generally needed to upgrade their cable plant and equipment prior to providing digital video, cable modem, or cable telephony services, particularly the two-way services. Digital signal transmission, for example, is less tolerant of system interference than is analog signal transmission. Accordingly, cable systems previously providing only analog service may require upgrading to eliminate poor electronic connections and other sources of interference prior to carrying digital signals. In addition, operators may increase system capacity prior to commencing digital transmission. As an alternative to providing new services over existing cable plant, several cable operators are marketing non-video services, such as cellular telephone services, or leased-line telephone services, provided over non-cable facilities in addition to cable video services. 46. Digital Video Services. Compared to the analog signal transmission historically used in cable systems, digital signal transmission can provide superior video picture quality and, through digital compression techniques, increased channel capacity. Subscriber reception of digital video signals requires a set-top device to decompress and decode incoming signals and to translate the digital signals into the analog signals used by current television sets. MSOs beginning to offer digital video service include TCI, Cablevision Systems, Comcast, Cox, Time Warner, and US West's MediaOne. Adelphia and Jones also plan to begin offering digital video service in selected markets. TCI is using a 12:1 digital to analog compression ratio to provide 36 digital channels in its current digital video service. 47. Internet and High Speed Data Services. Internet and other data can be transmitted faster over some cable systems, using cable modems, than over current twisted-pair telephone systems, using telephone modems or integrated services digital network ("ISDN"), asymmetrical digital subscriber line ("ADSL"), or high-bit rate digital subscriber line ("HDSL") technology and equipment depending on the architecture. MSOs offering cable modem service in 1997 include U.S. West's MediaOne, TCI, Time Warner, Comcast, Cox, Jones Intercable, Cablevision Systems, and Adelphia. TCI provides cable modem service throughout its systems in Hartford, Connecticut, Arlington Heights, Illinois, and Fremont, California, providing both upstream and downstream data transmission over its two-way plant in these areas. TCI plans to offer cable modem service in six to twelve additional markets during 1998. US West's MediaOne offers data service marketed as "MediaOne Express," to approximately 10,000-20,000 customers in a widespread offering. Other MSOs conducting cable modem market trials include Century, Charter, Fanch, Marcus, Media General, and Prime Cable. There are currently about 50,000 cable modem subscribers as of October 1997, which is projected to grow to 197,000 next year as the service becomes more widely available. 48. Several systems are upgrading to improve their ability to provide these services. Indeed, cable systems' ability to transfer data at high speeds may give cable operators a strategic advantage in competing for revenues associated with Internet and other data services. Microsoft's $1 billion investment in Comcast this June in exchange for a 11.5% interest in the company may indicate the importance of cable operators to future competition in this area. Microsoft is reportedly considering investing in other cable companies as well. 49. Cable modem subscribers may benefit from numerous new services designed to take advantage of their high data transfer speeds. It is local and regional networks together that provide the high speed network to the subscriber and distinguish these systems from traditional dial-up on-line services which operate at much slower speeds. The @Home local network, for example, has its own routing and caching (storage) servers which allow the most frequently accessed material from its own content centers and from the Internet to be transferred from the source to these storage areas. @Home provides service for Comcast, Cox, TCI, InterMedia Partners, Marcus, and Cablevision Systems customers, as well as Canadian MSOs Rogers and Shaw. Service is currently available in numerous localities in Maryland, New Jersey, California, and Connecticut. The Road Runner service, rather than building its own national network backbone and customer service infrastructure, has formed a partnership with MCI to provide these services. MCI is providing the high speed Internet connections to the local cable system headends, managing a network operations center to monitor performance of local cable system data networks, and is operating a specialized help desk to provide technical support to subscribers. Road Runner provides service for Time Warner Cable and several MSO affiliates including Cablevision Systems Corp., Century Communications, and Fanch Communications. A number of other providers, such as WebTV, WorldGate, ICTV, NetChannel and Wink TV, are introducing services that will provide Internet content over television sets. 50. In September 1997, Cable Television Laboratories launched its "OpenCable" initiative to encourage development of interactive set top boxes. These boxes may include greater computing power, two-way capabilities, interactive programming guides, graphics acelerators and cable modems. As cable operators convert to digital technology, the industry has made a major commitment to establishing an open standard for the next generation of cable boxes. CableLabs received 23 responses from computer and consumer electronics companies and other vendors to its OpenCable request for information. The shift from proprietary technology to an open standard may lead to more manufacturers of the boxes, may spur a retail distribution market, and may prompt new high speed data and Internet service providers like those described here. 51. Cable Telephony. Cable telephony requires sizeable and expensive upgrades and presents a number of technical and regulatory obstacles. Because other services can provide greater immediate revenue streams, many cable operators have limited their telephony efforts. Some analysts predict that cable telephony is not expected to be a significant revenue source in most markets for the industry in the near future. Cable telephony, however, is currently being offered by a few operators in several test markets. Among the MSOs offering telephone service are: Cox, US West's MediaOne, Cablevision Systems, Jones Intercable, TCI, and Time Warner. Cox is currently offering voice telephone service over its own network to more than 24,000 residential customers in Orange County, California, and expects to offer residential voice telephony service to almost 225,000 households in various markets by the end of 1997 including Omaha, Nebraska. A number of public statements have been made by members of the cable industry indicating that a reassessment of the industry's ambitious proposals to enter the telephone business is taking place. Cox offers telephone service to business customers in Oklahoma City, Oklahoma, Hampton Roads, Virginia, and New Orleans, Louisiana, over leased telephone networks. Cablevision System's cable telephone trials are being marketed to 115,000 households on Long Island, New York, with 5,000 subscribers as of March 1997. Additionally, US West's MediaOne launched cable telephony to one-third of the households in its Atlanta cable franchise area during 1997. Although this rollout is being described as a "commercial launch," it appears to be more of a trial. TCI's telephone service over its own fiber network is currently available to 90,000 households in Hartford, Connecticut, Arlington Heights, Illinois, and Fremont, California. TCI plans to offer telephone service over its own plant to an estimated 250,000 households by the end of 1997. TCI currently has 1,000 telephone subscribers. Jones Intercable offers telephone service to 20,000 customers in Alexandria, Virginia, and in Maryland's Prince George's County. By the end of 1997, Jones Intercable plans to reach 30,000 customers. Currently, Jones provides telephone service over it own fiber network to MDUs and uses the existing copper twisted pair wiring inside the buildings to offer the service to customers. It plans to begin offering service over the coaxial cable already installed for their cable customers soon. 52. Multi-Service Offerings. Several MVPDs are beginning to combine their video service offerings with other services (e.g., offering video programming with local or long distance telephony, cable modem and Internet access, and digital video). Cox announced plans in September to launch one of the largest multiservice offerings, including cable video, telephone, and Internet access to 25,000 renters in Irvine, California, apartment communities. Additionally, Cox currently offers cable data service bundled (over one cable wire only) with their cable service to approximately 714,000 households in various markets, and expects to increase that number to over one million by the end of 1997. As indicated in the previous paragraph, TCI is currently offering cable television and cable telephone to in selected markets Jones Intercable currently offers Internet access to 41,000 of its cable television customers in Alexandria, Virginia. As indicated above, Jones also offers telephone service to its cable television customers in Alexandria and in Maryland's Prince George's County. 53. Some analysts maintain that the success of offering multiple services through broadband cable wires may be threatened by technological difficulties (e.g. software bugs, disconnects, bad connections). US West's MediaOne, for example, is reported to be having software problems adding telephone service to certain systems, although it states that the overall technical approach is still on track. Ameritech reportedly does not plan to use its cable systems to offer telephony, at least in the near term, because it is seen as prohibitively expensive and technically difficult. To the extent that bundling emerges as technologically feasible and economically desirable for MVPDs, it has the potential to affect competition in markets for the delivery of multichannel video programming. B. Direct Broadcast Satellite Services 54. DBS Service Providers. Direct broadcast satellite ("DBS") operators use satellites instead of broadband wires or terrestrial microwave stations to transmit their programming to subscribers, who must buy or rent a parabolic "dish" antenna that is approximately 18 inches in diameter, and pay a subscription fee to receive the service. Each DBS operator transmits its programming services to subscribers from specific orbital locations. Permissible orbital locations are established by international telecommunications regulations and Commission rules. DIRECTV, United States Satellite Broadcasting ("USSB"), and EchoStar currently offer DBS video programming. Primestar is a medium powered fixed satellite service ("FSS") that shares many of the attributes of DBS operators. As with DBS, subscribers to Primestar must buy or rent a parabolic dish antenna and pay a subscription fee to receive service, though the Primestar dish is approximately three feet in diameter. 55. Subscribership. DBS systems serve more subscribers than any type of MVPD other than franchised cable system operators. The four DBS providers furnished programming to nearly 5.1 million subscribers as of June 1997. This is an increase of more than 2.2 million subscribers since July 1996, and 400,000 more subscribers than the 1.8 million subscribers DBS providers gained in the previous 12 months, July 1995 to July 1996. Predictions vary regarding the continued growth of DBS. Some industry analysts expect the DBS industry growth to continue, reaching 15 million subscribers by 2001 (14.5% of the total television market). However, while DBS is gaining about 6,000 subscribers daily, some service providers have lowered their projections for the future, with at least one forecaster lowering its projection to 14.6 million subscribers by 2002. In addition, DIRECTV, which had projected that it would have 10 million customers by 2000, no longer expects to meet this figure. 56. DBS services offer many features which consumers rate highly, such as digital picture quality, compact disk sound clarity, increased channel capacity, near video on demand ("NVOD") movies and other interactive programming and data services. According to a Nielsen Media Research survey, on a scale of one to five (with five being the most satisfied), 80% of DBS subscribers rate overall satisfaction with their satellite service as a four or a five. By comparison, 45% of cable subscribers rate overall satisfaction with their cable service as a four or a five. The large number of channels and programming variety, especially sports and movies, are also cited as reasons for consumers choosing one of the DBS services. However, DBS's advantages may be minimized once cable systems install digital technology and can offer comparable programming features. 57. Among consumers' main concerns regarding DBS are (a) multiple pricing strategies for hardware and programming, (b) the inability to receive local broadcast stations, and (c) the need to purchase additional equipment to receive programming on additional television sets. A May 1997 study by USSB of 11,320 consumers found that 600 of those surveyed had shopped "recently" for digital satellite system, and 70% of those did not buy the service, which may , in part, explain the lowered projections for new subscribers. A recent study reports that only 68 of 647 cable subscribers surveyed indicated that they were "very likely" to switch to DBS. 58. Impediments to carriage of local broadcast signals by DBS services reduce the satellite services' ability to compete effectively with cable television. However, the DBS industry is working on at least a partial solution to this situation, and is developing antennas to improve over-the-air broadcast transmission reception for DBS subscribers. Also, the launch of Echostar III and IV, will increase channel capacity and, according to Echostar, facilitate the possibility of retransmission of local channels to some of Echostar's markets. Capitol Broadcasting Company, Inc. ("Capitol") has announced its "Local TV on Satellite" plan for retransmitting local signals by satellite. Capitol states that it will operate a satellite in the Ka-band with 61 spotbeams that will cover the continental United States, Alaska and Hawaii. Capitol intends to offer DBS providers a local station package of all over-the-air, full power, commercial television stations within a given station's designated market area. 59. The "upfront costs" to subscribers that DBS operators may charge are an additional disincentive for some consumers considering DBS service. The costs for the basic equipment, installation, and one month of programming range from $185 for Primestar service, where the consumer rents equipment, up to $379 for DIRECTV's service. There may also be a $300 cost for the additional integrated reception device ("IRD") antenna that is required in order to view different channels on other televisions in the household and an additional basic programming package for $5 per month per television. Industry observers expect the cost of IRDs to decline. This decline, however, may be offset by continued monthly charges for service to additional televisions in the household. 60. To overcome the "upfront costs," DBS providers also have developed a number of discount programs and equipment plans to increase demand for their programming services. In the 1996 Report, we noted that the prices charged for digital satellite system ("DSS") equipment used to receive programming from DIRECTV, USSB and Echostar declined, with the price of the basic mode DBS antenna dropping to just $199 in some cases, as also noted in Table C-3 of this report. This decline has continued. Discount retailers, such as WalMart, are selling equipment for $49 and some mail order firms are offering the equipment for as little as $25. In June 1997, Echostar dropped its requirement that new subscribers pay the $300 annual programming fee in advance to purchase the $199 DBS receiver and other equipment. Some DBS customers can now buy programming on a month-to-month basis. Echostar also plans to introduce a $129 "no frills" second-set receiver, and will provide customers with self-installation kits or offer $100 off the professional installation charge. In July 1997, DIRECTV eliminated its pre-paid programming requirement, but dropped its $200 equipment rebate. To attract new customers, DIRECTV offered a 50% discount off the $159 price for NFL Sunday Ticket to new subscribers. Video Magazine subscribers could buy a six-month subscription to DIRECTV's Total Choice Platinum programming package by October 15, 1997, and be eligible for the free equipment offer. Thomson Consumer Electronics, maker of the RCA DSS equipment, offered its own promotion, giving anyone who buys an RCA large-screen television the DSS equipment for free. Primestar announced a discount on installation and one month of free programming this fall. In addition to offering discounted equipment and programming prices, DBS providers are heavily marketing their services. The four DBS companies were expected to spend approximately $1 billion (including the cost of discounts) to promote their products in 1997. 61. Consumers can purchase DBS equipment from various sources, including electronics retailers, and individual DBS operators' toll free numbers and Web sites. Primestar also offers consumers the option of renting, rather than purchasing, equipment. Consumers can choose to install the equipment themselves, or can contact the DBS provider or an electrician to perform the installation. DBS programming service can generally be purchased from an authorized dealer such as Best Buy, Circuit City and WalMart, or can be purchased directly from the DBS provider. 62. Marketing Telecommunications with Information Services. In the 1996 Report, we indicated a trend toward marketing satellite video programming with telecommunications and information services. Results of this trend are mixed. For part of 1997, AT&T was marketing DIRECTV/USSB's satellite programming and equipment with its long-distance services. In December 1997, AT&T sold its interest in DIRECTV, stating that it was difficult to sell a relatively "big-ticket" item such as satellite equipment through telephone solicitations, and that it faced faster than expected reductions in DBS prices due to increased competition from other providers. However, Cincinnati Bell experienced a strong response to its DIRECTV sales campaign when it added a 36 month no-interest equipment purchase plan. Recently, Bell Atlantic and DIRECTV announced an agreement to market DIRECTV to Bell Atlantic's customers in the Northeast. Industry observers predict DBS may provide the means for Bell Atlantic to offer video programming quickly in its newly expanded northeastern territory. 63. DBS providers have announced plans to launch various new video and data access products. DIRECTV plans to develop a satellite-delivered PC-based video programming and Internet service ("DIRECPC"), with a telephone return path. Hughes Network Systems ("Hughes"), DIRECTV's affiliate, is retailing the DIRECPC's Internet service through consumer electronics stores to compete with the cable industry's deployment of high speed cable modems. In addition, Hughes recently announced the launch of DIRECDUO, a dual-functioning DBS antenna, which consumers can use to receive both DIRECTV video programming and DIRECPC Internet and interactive data access services. Echostar plans to launch interactive services by the end of this year, and is working with content providers CNN, MTV, ESPN, and Bloomberg Information TV to supply programming. Echostar also plans to carry Data Broadcasting Corp.'s Signal real-time quote service, which provides data directly from the equity, futures and options exchanges to the user's personal computer. In 1998, Echostar plans to add late night broadcasts of Internet content by satellite to interactive set-top boxes for morning access. 64. Information technology companies are developing products for the DBS market. For example, Adaptec has developed software that gives DTH customers access to financial data, games and videos through their dish antenna, using a telephone "return path." Microsoft will incorporate a DIRECTV interactive link in its Windows 98 software. 65. Recent Developments Primestar began transmitting its programming from a new, GE2 satellite in April 1997, which enables Primestar to increase its service from 95 to 160 medium-powered channels. In June 1997, MCI agreed to assign the authorization for ASkyB's high-power DBS service at 110ø west latitude and two satellites to Primestar. Primestar has announced plans to use the 110ø west latitude position to offer a 225 channel service in 1998. Consummation of the agreement is subject to Commission approval. The parties have filed applications with the Commission, and a number of parties have filed objections to the applications. 66. Echostar plans to expand its services by offering more channels with the launch of two more satellites. EchoStar III was launched in October 1997 to provide service at 61.5ø west latitude. EchoStar IV's launch is planned for September 1998. As noted in paragraph 58 above, this expansion may facilitate retransmission of local broadcast channels to some of Echostar's markets. 67. Other DBS Entrants. Continental Satellite Corporation ("Continental"), and Dominion Video Satellite, Inc. ("Dominion") each hold licenses but have not launched any satellites. Tempo launched a satellite in March 1996 at 119ø west latitude and is authorized to provide 11 channels of service from that position and a second orbital location at 166ø west latitude (a total of 22 transponders); Continental is authorized to provide 11 channels of service from 61.5ø and 166ø west latitude (a total of 22 transponders); and Dominion is authorized to provide eight channels of service from 61.5ø and has an application pending to provide eight channels of service at 166ø west latitude (a total of 16 transponders). Of the three, only Tempo's 11 transponders at 119 west latitude are positioned at a full continental United States view ("CONUS") slot. In addition, the Commission has authorized Televisa International, LLC., to operate one million receive-only earth stations in the United States to receive DTH-FSS television services from Mexico's Solidaridad II satellite operating at 113ø west latitude, signaling the first stages of direct competition for the United States DTH market from foreign companies. C. Home Satellite Dishes 68. Programming. Unlike DBS and Primestar subscribers, home satellite dish ("HSD") subscribers must employ relatively large (4 to 8 foot) dishes and must often purchase programming through program packagers that are licensed by programmers to facilitate subscribers' receipt of programming transmitted from various C-band satellites. Typically designed to receive programming from satellites at several different orbital locations, most HSDs include motors that permit the receiving dishes to rotate and receive signals from more than one satellite. HSD owners have access to 500 channels of programming on C-band satellites, of which 350 channels are scrambled and approximately 150 are unscrambled. HSD owners can watch the unscrambled channels without paying a subscription fee, subject to section 705(b) of the Communications Act. To receive scrambled channels, an HSD owner must purchase an IRD from an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide, approximately 20 to 25 HSD program packagers assemble programming from individual program services which they make available in packages ("one-stop shop") to subscribers. Like DBS systems, however, HSD program packagers do not provide local broadcast signals. 69. Subscribership. As the Commission has reported in previous years, it is difficult to obtain accurate estimates of the total number of HSD users, which include: (a) viewers who subscribe to a packaged programming service that affords them access to most of the same programming provided to subscribers of other MVPDs; (b) viewers who receive satellite programming services illegally without subscribing; and (c) viewers who receive only non-subscription programming. Industry analysts estimate that there are approximately 3.8 to 4 million HSD users. The number of subscribers most relevant to an assessment of the MVPD market is the figure for authorized subscribers who receive much of the same programming generally provided to cable and other MVPD subscribers. HSD package programming subscribership has declined by 93,290, or 4.1%, from 2,277,760 reported in December 1996 to 2,184,470 subscribers reported on June 30, 1997. According to one report, sales of HSDs fell to below 200,000 last year from 642,000 in 1994. 70. Much of the decline in HSD subscribership results from owners switching to DBS services in order to receive digital programming. Not only have DBS equipment prices become less expensive than the typical HSD equipment, but DBS firms like DIRECTV have launched aggressive advertising and promotional campaigns encouraging consumers to switch to DBS service. Responding to consumers preference for digital programming, HSD provider General Instrument has introduced a digital receiver, the 4DTV, capable of receiving both digital and analog signals for HSD subscribers who want to upgrade their HSD systems to receive digital quality pictures. However, there are reports of delays in getting the 4DTV equipment, and some program packagers do not yet have access to programming for the digital equipment, though negotiations between programmers and programming packagers are currently underway. These concerns may be diminishing as at least one program provider recently announced that it is adding several digital channels of programming for HSD subscribers with the 4DTV receiver. D. Wireless Cable Systems 1. Multichannel Multipoint Distribution Service 71. MMDS systems, often referred to as "wireless cable," transmit programming to subscribers through 2 GHz microwave frequencies, using Multipoint Distribution Service ("MDS") and leased excess capacity on Instructional Television Fixed Service ("ITFS") channels. An MMDS system's transmission range is dependent upon the transmitter's power, the kind of receiving antenna, and the presence of a line-of-sight ("LOS") path between the transmitter or signal booster and the receiving antenna. MMDS operators have a maximum of 33 microwave channels available in each market, including 13 MDS channels and 20 ITFS channels. 72. The Commission authorized digital MMDS use in July 1996. Digital compression permits MMDS operators to provide six or more digital channels of programming, with an increased range of service, on what was previously a single analog channel. In addition to increased channel capacity, digital technology is expected to improve picture and audio quality, and to permit two-way data transmission services. The Commission has also proposed to amend its rules to facilitate the ability of MMDS operators to provide two-way transmission of Internet and other digital high-speed data services that may further enhance the competitiveness of wireless cable with other MVPDs. However, implementation of digital MMDS technology has been slow because of technical and financial considerations. 73. MMDS Service Areas. There were an estimated 252 MMDS systems in operation in July 1997 compared to the estimated 200 MMDS systems serving 900,000 subscribers in July 1996. The Commission awarded MMDS license rights to 493 Basic Trading Areas ("BTAs") in auctions completed in March 1996, and subsequently authorized auction winners to provide MMDS service in 465 of these BTAs. The MMDS auctions were designed to distribute unused spectrum through competitive bidding while protecting the service area of incumbent MMDS providers within the BTAs. 74. MMDS Capacity to Serve Television Households. The potential commercialization of digital MMDS technology noted in the 1996 Report has proceeded slowly. This has tended to limit MMDS operators' significance as alternative sources of MVPD services. The number of homes with a serviceable line of sight to an MMDS operator's transmission facilities grew from 58,900,000 at the end of 1995 to 60,300,000 at the end of 1996, an increase of 2.4%, and remained unchanged through the end of the first half of 1997. The number of homes capable of receiving an MMDS operator's signal (commonly referred to as "homes seen") grew from 29,200,000 at the end of 1995 to 31,500,000 at the end of 1996, an increase of 7.8%, but it has remained unchanged through the end of the first half of 1997. The proportion of television homes seen by MMDS increased from 30.4% at the end of 1995 to 32.5% at the end of 1996, and remained unchanged, at 32.5%, through the end of June 1997. These measures show MMDS operators' capacity to serve television households lags behind cable and DBS operators' capacity to serve those homes. 75. Subscribership and Capacity Usage. MMDS subscribership grew from 851,000 at the end of 1995 to 1,180,000 at the end of 1996, an increase of 38.6%, and declined to 1,100,000 at the end of June 1997, a decrease of 6.8%. MMDS penetration (the proportion of homes seen that actually subscribe) increased from 2.9% at the end of 1995 to 3.7% at the end of 1996, and decreased to 3.5% at the end of June 1997. Decreases in the number of MMDS subscribers and lack of growth in the number of homes seen by MMDS appear to result in part from MMDS operators' suspension of analog MMDS marketing in some markets in anticipation of the availability of digital MMDS transmission and reception equipment (thus allowing operators to avoid the expense of deploying analog MMDS reception equipment which operators may then be required to replace upon commencing digital transmission). The MMDS industry expects this trend to reverse itself when a number of the larger MMDS operators begin to launch digital wireless cable systems. 76. Financial Performance. The wireless cable industry's total revenues for 1996 were $420 million, a 38.8% increase from the $303 million that the MMDS industry earned in 1995. The industry's negative cash flow position worsened, however, from negative $3.9 million at the end of 1995 to negative $40.5 million at the end of 1996. MMDS operators have had difficulty raising capital, in part because MMDS stock prices have generally declined in 1997. 77. Digital MMDS Services. The introduction of digital MMDS technology should increase the ability of MMDS operators to compete better with cable systems. Digital technology, as noted above, increases channel capacity, thereby expanding potential programming features (e.g., a higher number of channels and more service offerings). Thus, digital technology will permit MMDS operators to provide additional programming features such as numerous pay-per-view channels to their subscribers. Digital technology also improves the audio and video components of programming transmission, giving the viewer increased picture clarity and compact disc quality sound. 78. Internet and High-Speed Data Services. In 1996, several MMDS companies began testing technology that would allow them to provide high-speed Internet access and other digital data services similar to high-speed data services offered by other MVPDs. The Commission has proposed to amend its rules to allow MDS and ITFS licensees to provide two-way communications services in both service frequencies in response to a petition for rulemaking filed by a group of over 100 participants in the wireless cable industry. The proposed rulemaking is intended to facilitate the most efficient use of the affected spectrum, to enhance the competitiveness of the wireless cable industry, and to provide benefits to the educational community through the use of two-way services. Although the primary use of MDS and ITFS frequencies has historically been the provision of video services, through this rulemaking use of these frequencies could be made available for other services. 2.Local Multipoint Distribution Service 79. LMDS is a technology that uses microwave channels in the 28 GHz band to deliver multichannel video programming as well as two-way voice and data service. With the exception of CellularVision's LMDS system in Brooklyn and Queens, New York, LMDS frequencies are not currently used to distribute video programming in the United States. Industry observers note that the LMDS industry is moving towards the provision of numerous services, including video programming and two- way services like Internet access, high-speed data transmission and telephony. 80. In July 1996, the Commission adopted a frequency band plan that allocated 1000 MHz of spectrum to LMDS and permitted LMDS systems, geostationary and non-geostationary Fixed Satellite Service ("FSS") systems, and feeder links for non-geostationary Mobile Satellite Service ("NGSO/MSS or Big LEO") systems to operate in the 28 GHz band. This action was intended to promote competition by permitting these various services to develop and offer consumer services such as video program distribution, two-way interactive video, teleconferencing, telemedicine, telecommuting and high- speed data services within the U.S. and internationally. 81. In the same order, the Commission proposed to allocate an additional 300 MHz of spectrum to LMDS at 31.0 - 31.3 GHz to provide greater technological flexibility for the industry. However, the Commission's order prohibits cable companies and LECs from acquiring in-region LMDS licenses for three years. The order is currently under appeal. The Commission plans to auction this LMDS spectrum block in February 1998. E.Satellite Master Antenna Television Systems 82. SMATV systems are MVPDs that primarily serve MDUs. SMATV systems do not use public rights-of-way and, thus, fall outside of the Communications Act's definition of a cable system, and can operate without being subject to franchise requirements. SMATV providers receive and process satellite signals directly at an MDU or other private property with an on-site headend facility consisting of receivers, processors and modulators, and distribute the programming to individual units through an internal hard-wire system in the building. SMATV operators often recover the relatively high fixed costs of operations (headend equipment, management, customer service, billing, installation and maintenance) through exclusive service contracts with the MDU owner. Under the 1996 Act, SMATV operators may use wires to connect separately-owned buildings so long as the wires do not use public rights-of-way. This statutory change may permit significant SMATV system growth in areas where different owners' respective residential buildings can be interconnected without crossing public streets. Some SMATV systems have begun to use microwave transmissions to serve multiple buildings that are not commonly- owned without using public rights-of-way. 83. SMATV systems have been the primary competitor to franchised cable systems for the MDU market. In 1991, regulatory changes made 18 GHz technology available for the point-to-point delivery of video programming services, thus permitting SMATV operators to enhance their systems and to become more efficient at the delivery of video programming to MDUs. Firms using 18 GHz technology are known as enhanced SMATV systems and do not require the large networks of coaxial or fiber optic cable and amplifiers that are used by traditional hard-wire cable television operators or the installation of a headend facility at each MDU as is required for earlier SMATV systems. Thus, SMATV operators using 18 GHz technology are able to provide services at attractive rates that make them competitive with franchised cable systems. 84. Growth. ICTA notes that the SMATV industry is composed of hundreds of small and medium size firms throughout the nation. The SMATV industry appears to have considerable growth potential and is becoming a more significant competitor to traditional cable service. There are approximately 28 million MDU units in the United States, housing more than one-fourth of the nation's total population. The number of SMATV residential subscribers as of June 30, 1997, was estimated to be 1,162,500. The number of SMATV subscribers in June 1997 represented a 3.2% increase over the 1,126,000 SMATV subscribers estimated in December 1996, while the December 1996 total represented a 17.1% increase over the 962,000 subcribers estimated in December 1995. Approximately 3,400 SMATV operators serve MDUs. According to industry sources the growth markets for SMATV firms are in Texas, Florida, California, and Arizona, and major urban centers with large numbers of MDUs, such as Atlanta, Chicago, New York, and San Francisco. Since our last report, system acquisitions have occurred in the SMATV industry. For example, OpTel, the largest SMATV operator, bought Phonoscope and TARA Systems, Inc., which raised OpTel's total subscribers from 121,100 to 147,500. 85. Technology. Many SMATV operators are upgrading existing systems to 750 MHz HFC broadband architecture. This architecture is capable of transmitting hundreds of channels using digital compression. In addition, several firms have technologies that permit SMATV systems to deliver DBS, local off-air television signals and security services. SMATV operators have employed enhanced microwave frequencies to link headends between widely separated MDUs. 86. Special Features. SMATV systems compete with the franchised cable operators to serve MDUs and MDU tenants. Increasingly, SMATV operators offer a comprehensive, "one-stop" video programming and telecommunications service for subscribers as a way of adding value to the video services. Video services may include expanded channel offerings, multiplexed premium and numerous pay-per-view channels, special sports and special events packages, and NVOD, which may be unavailable from the local cable system; telecommunications services may include high-tech security monitoring through closed circuit security cameras, interactive and Internet access, local and long-distance telephony along with voice mail, paging, calling cards, and other business services tailored to the particular needs of the building's tenants. 87. Programming Options. SMATV operators have two options for purchasing programming. Many SMATV operators purchase programming through retail program packagers/distributors, such as World Satellite Network ("WSNET"), Showtime Networks, Inc., 4 Com and others, that assemble packages of satellite transmitted programming and resell them to the SMATV operators. Other SMATV operators are contracting directly with satellite providers such as DIRECTV, Primestar, and Echostar to purchase video programming. 88. Combination Services. DBS and SMATV operators are beginning to use combined technology to create a DBS/SMATV delivery system. Satellite providers such as DIRECTV/USSB, Primestar, and Echostar offer SMATV operators a low-cost, technically-advanced, digital programming service that significantly increases channel capacity and adds special programming that is otherwise unavailable from cable systems or MMDS operators. Because of these features, even program packagers such as WSNET are contracting with DBS providers and then reselling these services to their SMATV subscribers. SMATV providers may realize significant savings by avoiding plant and equipment investment. In particular, this arrangement makes serving smaller MDUs with fewer than 100 units profitable. However, despite its advantages, some SMATV operators have expressed concerns that using a DBS provider may limit their programming choices and the flexibility to customize programming and other services for their tenants. 89. Real Estate Owners and Property Managers. In the last two years, Real Estate Investment Trusts ("REITS") and other national property management companies and ownership groups, with numerous interstate property holdings, have begun to negotiate programming and other MVPD services on a national basis. This recent trend has "nationalized" a traditionally community-oriented and often individualistic business environment. National bargaining for video programming services may permit real estate companies to negotiate advantageous programming arrangements and services for their properties. F.Broadcast Television Service 90. Broadcast networks and stations are competitors to other MVPDs in the advertising and program acquisition markets. Additionally, broadcast networks and stations are suppliers of content for distribution by MVPDs. During 1997, the broadcast industry experienced important changes, especially in the area of technological developments. 91. Since the 1996 Report, the broadcast industry has seen continued growth in the number of operating stations and in advertising revenues. The number of commercial and noncommercial television stations increased to 1561 as of July 31, 1997, from 1550 as of August 31, 1996. Broadcast total advertising revenues reached $31.3 billion in 1996, a 12% increase over 1995. Advertising revenues for the six broadcast networks alone reached $14.7 billion in 1996. In comparison, cable programming networks received an estimated $4.9 billion in advertising revenue in 1996, an increase of 21% over 1995. 92. Broadcast station share of total television viewing declined, however, as a result of cable and other MVPD competition, but it still attracts a large majority of the television audience. During the 1996-1997 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 59% share of prime time viewing among all television households (compared to 62% in the previous year); UPN and WB, the two newest networks, achieved a combined 9% share of prime time viewing, the same as last year. The most recent data available for households subscribing to cable service indicates that, even in cable homes, programming originating on local broadcast television stations accounted for a combined 60% share of all day viewing in the 1995-96 television season, while non- premium cable networks and pay cable services achieved a combined 51% share of all day viewing. 93. The 1996 Act directed the Commission to eliminate the restrictions on the number of television stations a person or entity may own or operate nationwide, and to increase the national audience reach limitations to 35%. The Commission did this in March 1996. Acquisitions subsequent to these rules resulted in consolidation of television station ownership. An initial wave of consolidation mainly involved stations in the top media markets. More recently, consolidations have occurred in small and mid-sized markets. Overall, the number of television station owners dropped 21% to 475 in 1996 from 600 in 1995. 94. Significant developments in the broadcast field concerning Digital Television ("DTV") also occurred during the past year. In December 1996, the Commission adopted a DTV standard, and, in 1997, issued two decisions concerning implementation of DTV service: (a) the Fifth Report and Order establishing service rules for DTV and limits on broadcasters' conversion to DTV; and (b) the Sixth Report and Order setting out a table of allotments for DTV channels and assignments of spectrum for DTV for each broadcast station. Under the DTV construction schedule set out in the Fifth Report and Order, which is intended to ensure the preservation of a universally available local television broadcasting service and the swift recovery of analog broadcast spectrum, affiliates of the top four networks in the top ten markets are required to be on the air with digital signals by May 1, 1999. Certain volunteer stations in the top ten markets will be on the air by November 1998. Affiliates of the top four networks in markets 11 through 30 must be on the air by November 1, 1999. This schedule provides that more than half of all television households could have access to DTV signals provided by multiple local stations by November 1, 1999. All other commercial stations are required to construct their DTV facilities by May 1, 2002, and all noncommercial stations must construct their DTV facilities by May 1, 2003. Subject to biennial review as required by Section 202(h) of the 1996 Act and Section 11 of the Communications Act, as amended, and to certain statutory exceptions, the current target date for all stations' return of their analog spectrum is 2006. 95. DTV has the potential to allow the broadcasters to become more effective competitors with cable companies in the MVPD market. Unlike the other delivery technologies discussed in this report, broadcast television stations currently provide one channel of video programming. Once broadcast television stations convert from analog to digital television, however, they will have an option to offer multiple channels of video service during all or part of the broadcast day. The Commission requires provision of one free, over-the-air broadcast signal of at least comparable resolution to today's service. Under the Commission's rules for DTV, digital encoding and transmission technology will permit stations to broadcast: one or perhaps two High Definition Television ("HDTV") signals; multiple streams of Standard Definition Television ("SDTV") signals; or a combination of the two. Some broadcasters have proposed that they combine the digital spectrum of all stations in a local television market to create a 40 to 50 channel service that could compete with MVPDs. At this time, however, it is unclear how DTV will develop as a broadcast service for consumers. Thus, at least for the near term, it appears unlikely that broadcast television will offer consumers a multichannel video programming service in competition with cable. 96. We reported on two experimental HDTV stations in the 1996 Report. These stations continue their tests. One station, KITV in Honolulu, announced that it planned to begin commercial DTV broadcasts on December 1, 1997, if all permits were received. These permits were received, but KITV has not announced that it has begun these broadcasts. KITV and its satellite stations in Hawaii will offer an as-yet undetermined mix of HDTV and multicast SDTV. WBTV in Charlotte, North Carolina, received a construction permit on October 2, 1997. As of December 31, 1997, seven DTV construction permits have been granted, including the four listed above. No station, however, has begun commercial DTV broadcasts. In previous reports, we also noted that low power television ("LPTV") stations can offer multichannel video programming services on a subscription basis and that such service exists in two areas. We also noted that such service remains extremely limited and does not appear to have a significant impact on competition in the video market. No further applications for LPTV multichannel video programming services construction permits or requests to begin service have been filed in the last year. G.Other Entrants 1.Internet Video 97. In the past two reports, we noted that software is currently available that makes real-time and downloadable audio and video from the Internet available to a personal computer. We also reported another mechanism for PC-based video delivery for Java-enabled browsers. Over the past year, additional technologies for Internet video have emerged. WebTV recently announced plans to provide television/Internet interactivity or "hyperlinking" and video viewing over the Internet through WebTV-specific technologies, and WorldGate has announced similar plans based on different technologies. Video over the Internet, however, is not comparable in quality to broadcast video provided by MVPDs, and it is unclear whether the needed improvements will be made to make video service over the Internet a viable competitor. 98. Last year we reported that delivery of video programming over the Internet was inhibited by the limited bandwidth and transmission delays of the Internet. This continues to be the case. While computer and Internet related hardware and software continue to improve, transmission rates vary depending on a number of factors, including bandwidth, speed of various servers on the Internet, number of users, and capacity of the equipment receiving the data. 99. Despite the relative weakness of PC-based video provision over the Internet, many companies are upgrading and marketing software that renders video delivery to a computer through an Internet connection. The primary purpose of most of these software packages is for business use (e.g., video conferencing and business promotion), although video programming use of the Internet is starting to emerge. The two primary modes of PC-based delivery are: (a) downloading a video file for later playback; and (b) streaming. 100. Downloading for future playback is one of the most widely used methods of providing video to the Internet user. While compression techniques used in this process significantly reduce the size of the video file, a typical consumer will expend considerably more time downloading the file than it will take to "play" it. The time to download a file depends on a number of factors, including: (a) the speed of the Internet connection; (b) how busy the server sending the video file is; and (c) the size of the video file. 101. "Streaming" is the other primary mode of receiving video from the Internet. Streaming eliminates both the wait time associated with downloading a video file and the storage of that file on the consumer's hard disk. Video using a streaming format can be viewed in real time by a consumer using a 28.8 Kbps telephone modem (or faster) connection; however, the quality of the video is not as good or as reliable as MVPD service. Currently there are 20,000 hours of audio and video streaming available on the Internet each week. 102. WebTV and WorldGate. WebTV and WorldGate are developing technologies for combining the use of Internet data and traditional video programming delivery service. In September 1997, WebTV announced plans to improve its current delivery of conventional Web pages to television sets to include a tuner that enables television shows to be viewed from within Web pages and circuitry and allows the tuner to receive digital data over cable or broadcast television signals. Until now, WebTV's digital data was transmitted over telephone lines, but the announced improvements will permit users to download digital data through existing cable or broadcast technology, though users must use phone lines to send messages. The RCA division of Thomson, SA has launched a product similar to WebTV which merges television, the World Wide Web, and e-mail features. Also, WorldGate has announced plans for a similar product which, instead of an upstream telephone connection, will use advanced analog or digital set-top boxes to provide full, two-way Internet and Web access over cable television networks using the television as a display device. 2.Home Video Sales and Rentals 103. Premium and pay-per-view cable services are not regulated because they are competitive. As discussed in previous reports, we consider the sale and distribution of feature film entertainment through video tape sales and rental outlets as part of the video programming market since they provide video services similar to the premium and pay-per-view services offered by MVPDs. It is estimated that 88% of all U.S. television households own at least one VCR. In 1996, the U.S. video cassette rental and sales market had an estimated $15.6 billion in revenue, having grown from $9.8 billion in revenue in 1990. This revenue stream is now the largest single source of revenue to movie studios, representing approximately $4.5 billion, or 45%, of the $9.9 billion of estimated domestic studio revenue in 1996. As a comparison, the combined total spending for similar products distributed by cable television, satellite, and other MVPD pay television services was $7.2 billion in 1996. 104. The video retail industry is highly competitive with supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail order operations and other retailers involved in video tape sales or rentals. In 1996, there were approximately 27,000 video specialty stores in the U.S. selling or renting video tapes. A large video tape store may carry as many as 10,000 titles, including multiple copies of the more popular titles. 105. To maximize revenue, studios have a strategy of sequential release, providing each distribution channel the rights to movies for a limited time before making them available to the next distribution channel. These distribution channels generally include, in release date order, movie theaters, video retail stores, pay-per-view television, including DBS and pay cable television, and, finally, network and syndicated television. The studios determine the sequential order in which they release movies to each distribution channel based upon the order they believe will maximize their total revenue from all distribution channels combined. For example, movie studios have generally licensed their films first to the broadcast television networks and then to basic cable television networks since the cable networks usually pay less than the broadcast networks. Recently, however, cable networks, such as TNT, have obtained the rights to show major movies prior to their distribution to broadcast television and are paying rates comparable to those paid by the broadcast networks. Changes in the manner in which movies are marketed, including the release cycle of movie titles to pay-per-view, DBS, cable television, or other distribution channels, could change the relative competitiveness of these technologies. Existing pay-per-view services, moreover, offer a limited number of channels and movies. Changes in technology, including digital compression technology, are expected eventually to permit cable companies, DBS companies, telephone companies, and other telecommunications companies to become more competitive with the home video sales and rental industry as they are able to transmit a larger number of movies to homes at more frequently scheduled intervals or on demand. 106. In the last year, Digital Versatile Disc ("DVD") technology has become available for consumers. DVD players are used in conjunction with a television set to view movies. DVD formatted movies can also be viewed on personal computers. The discs are similar in size to compact discs ("CDs"), offer better picture and audio quality than video cassettes, and are more durable than videotape. The additional information storage capacity of DVDs permits multiple screen formats, including the original theatrical widescreen version. An interactive on-screen menu allows DVD users to switch between multiple language tracks and subtitles, to watch the original theatrical trailer and to explore material about the cast, director and making of the film. DVD players entered the marketplace in February 1997, although DVD with recording capability is not expected until 1998. DVD players range in price from $499 to $5000. More than 50 titles have been released in this format at an approximate cost of $25 each. In September 1997, Circuit City announced plans to introduce Divx, a pay-per-view alternative for digital discs using a Divx-enabled DVD player that is connected to a phone line to forward playing and billing information to a central computer. Divx versions of movies are expected to cost $5. The consumer will be able to view the movie for a 48-hour period after it is first played. After that time, the consumer will have to pay an additional fee for another 48-hour viewing period. 3.Interactive Video and Data Service 107. The interactive video and data service ("IVDS") is a point-to-multipoint, multipoint-to- point, short distance communication service. An IVDS licensee may transmit information, product, and service offerings to its subscribers and receive interactive responses. Although the IVDS channel width is insufficient for the transmission of conventional full motion video, IVDS services were initially planned as interactive text-based supplements for the use of television viewers. Recently, however, non-IVDS technologies have developed some of these same supplementary, interactive, text-based services, and IVDS firms are considering using their IVDS spectrum rights to provide telemetry services, such as remote meter reading, vending machine inventory control, and cable television theft deterrence. IVDS licensees may develop other applications consistent with the Commission's rules without Commission approval. H. Local Exchange Carriers 108. In the 1995 and 1996 Reports, we noted that LECs did not yet represent a national presence in the MVPD market, and that they were weighing their options for entry. This is still true. To date, LECs represent a competitive presence in a small (although growing) number of markets for the delivery of video programming. LEC entry into video distribution, however, has proceeded sporadically and has been highly dependent on the business strategies of the individual companies involved. 109. As we noted in the 1996 Report, Section 302(b)(1) of the 1996 Act eliminated the restriction on LECs providing video service directly to subscribers in their telephone service areas. This statutory change permits telephone companies to provide video services under one of several options. The specific options set forth in the Communications Act provide that common carriers may: (1) provide video programming to subscribers through radio communications under Title III of the Communications Act; (2) provide transmission of video programming on a common carrier basis under Title II of the Communications Act; (3) provide video programming as a cable system under Title VI of the Communications Act; or (4) provide video programming by means of an open video system. 1. Current and Planned LEC Video Delivery 110. MMDS. SBC Communications, through its Pacific Bell Video Services subsidiary (herein referred to as "SBC"), and BellSouth are the largest LEC investors in MMDS licenses and systems. SBC announced its initial commercial rollout of digital MMDS, under the brand name "Pacific Bell Digital TV," in Los Angeles and Orange County in May 1997. The service offers more than 120 channels of digital video, with packages priced from $31.95 to $53.95, and currently serves 10,000 subscribers. Press reports indicate that SBC eventually will be able to offer digital MMDS service to five million line-of-sight homes. SBC also operates the 42,000 subscriber MMDS system in Riverside, California. In February 1996, BellSouth acquired Wireless Cable of Atlanta, Inc. ("WCA") and its MMDS operations for $46.9 million. WCA has 9,000 subscribers in the Atlanta region. BellSouth has also entered into or completed agreements to acquire MDS and ITFS channel rights covering 4.5 million homes in and around several large markets in Florida, including Miami, and in New Orleans, Louisiana, and Louisville, Kentucky. BellSouth launched its digital MMDS system in New Orleans on November 19, 1997. BellSouth states that it plans to launch digital MMDS service in Atlanta during the fourth quarter of 1997, in Jacksonville and Orlando, Florida during the first half of 1998, and in Miami/Ft. Lauderdale and Louisville during the second half of 1998. 111. LEC investment in MMDS has experienced some retrenchment as well. At the end of 1996, Bell Atlantic and NYNEX suspended investment in their MMDS systems. Early in 1997, SBC terminated PacTel's wireless cable service in San Diego. 112. In-Region Cable Franchises. In the 1995 Report and the 1996 Report, we reported that a number of LECs had pursued cable franchises in their service areas as a means of providing video services to their customers. The most aggressive of the LECs in this area was, and continues to be, Ameritech. Ameritech has acquired 63 cable franchises, primarily overbuilds, in Illinois, Michigan, Ohio, and Wisconsin, potentially passing more than 1.1 million homes, and continues to seek new franchises. Forty of these cable franchises were operational as of December 31, 1997. 113. BellSouth has acquired cable franchises in 18 areas in Alabama, Florida, Georgia, South Carolina, and Tennessee, passing 1.2 million cable households. GTE has ten competitive cable franchises, and one non-competitive franchise. SNET has received a state-wide cable franchise in Connecticut, potentially passing 1.3 million homes, where previously it had applied to provide video dialtone ("VDT") service. SNET has begun offering 80 channels of cable service to 2,000 customers in Uniondale, Connecticut, and says that it plans to reach one-third of the state's homes by the end of 1998, and all homes in Connecticut by 2007. US West has elected to pursue cable franchises for its former Omaha, Nebraska, VDT trial. Bell Atlantic is also constructing and testing an advanced Switched Digital Video ("SDV") system in the mid-Atlantic region, but rollout and service plans are unclear. 114. In contrast, Pacific Bell Video Services, which, before its merger with SBC in 1997, had obtained cable franchises for San Jose, and the surrounding Santa Clara County in California is now in the process of terminating these franchises. SBC is reportedly looking for a buyer for the incomplete system that Pacific Bell Video Services was constructing to serve these franchises. SBC performed an 18-month cable trial in Richardson, Texas, a suburb of Dallas, which ended on July 7, 1997. Sprint applied for cable franchises in Wake Forest and Wake County, North Carolina last year, where it had been operating VDT trials but later notified the Commission that it would not seek a cable franchise in this area and that it was terminating video service in Wake County. 115. Out-of-Region Cable Systems. We previously reported on out-of-region cable systems owned by LECs, and on US West's purchase of Continental Cablevision. In late October 1997, US West announced that it will split its telephone and cable operations into two separate companies, called US West, Inc., and MediaOne, respectively. The two companies will both be publicly traded, and will have separate boards. US West plans to complete this split by mid-1998. In addition, since the 1996 Report, SBC has sold its interest in cable systems in Montgomery County, Maryland, and in Arlington, Virginia. 116. OVS. Although OVS is one of four means for LEC entry into video, the OVS rules do not preclude other types of entities from using the OVS rules. Currently, most of the firms receiving certification from the Commission as OVS operators are not LECs. 117. The Commission has certified seven OVS operators to offer OVS service in ten areas: Bell Atlantic for Dover, New Jersey (its former VDT system); Digital Broadcasting Open Video Systems for Southern California; MFS for systems in Boston and New York City; Urban Communications Transport for systems in New York City and Westchester County, New York; RCN for systems in the Boston area (with Boston Edison Technology Group), and in New York City; Microwave Satellite Technologies, Inc., in New York City, and GST Telecom in Albuquerque, New Mexico. Currently, Bell Atlantic in Dover, and RCN in New York and Boston are the only operating open video systems. 2. Video Programming and Packaging 118. In the 1995 Report and the 1996 Report, we reported on two joint ventures for providing original video programming and packaging of existing and original video programming: Tele-TV, comprised of Bell Atlantic, NYNEX, and Pacific Telesis (now a subsidiary of SBC); and Americast, at the time comprised of Ameritech, BellSouth, SBC, GTE, and Disney Corporation. We also noted that trade press reports indicated that the viability of both ventures was precarious. Since the 1996 Report, Americast has lost two of its members, SBC and Pacific Telesis, and its plans for service have been scaled back. The remaining companies in Americast have announced that they will separately handle their own programming agreements and marketing. Program packages are being offered under the Americast brand name by BellSouth on its New Orleans digital MMDS system, and by Ameritech on its active cable franchises. Atpresent, except for operations relating to Pacific Telesis' (now part of SBC) MMDS operations, Tele-TV is not providing video programming or packaging services, and announcements of cuts in staff continue. 119. As noted in the 1996 Report and paragraph 108 above, LECs do not yet present a large, nation-wide competitive presence in the MVPD market. Some LECs continue to test various technologies and construct various types of systems for video delivery. Other LECs appear to have a diminishing interest in the video marketplace. It appears that LECs will adopt different approaches depending on their varying business strategies. LECs, to the extent that they have entered the MVPD market, have done so through most of the possible means available to them: MMDS, in-region and out-of-region cable franchises, and open video systems. Although it is unlikely that LECs will move beyond entry into selected markets for the foreseeable future, LEC video operations in these selected markets represent a notable competitive presence. I.Electric and Gas Utilities 120. Since the 1996 Report, several utilities have announced or commenced ventures involving multichannel video programming distribution. QST Communications, an unregulated affiliate of Central Illinois Light Co., is building a network for high-speed voice, data and video services in Peoria, Illinois. RCN and Potomac Electric and Power Company ("PEPCO") announced a venture to build a fiber network for local telephone and dial-up Internet access services and for eventual provision of cable television and high-speed data access services in the Washington, D.C., area. Access Communications First Coast, a partnership of Clay Electric Cooperative and UtiliCom Networks, plans to offer video, local and long distance telephony, Internet access, shopping, data services, energy management and home security monitoring services in Clay County, Florida. Some municipally-owned utilities are providing or plan to provide cable television service in their respective areas. 121. Utilities' provision of non-energy services may extend the value of utilities' existing network and non-network assets. Utilities, for example, use communications networks for load management, thereby saving energy and reducing capital investment. They may be able to use these networks to provide multichannel video and other services to derive additional revenue with proportionately little additional investment. Industry observers, moreover, consider utilities' reputations, long-term customer relationships and billing systems to equal those of telephone companies, thereby forming an appropriate foundation for the provision of non-energy services. Utilities, however, may benefit from teaming with other companies for extension into video and telecommunications businesses because utilities have little experience in consumer marketing or entrepreneurial entry into competitive markets. TeCom Inc.'s agreement with EchoStar is an example of potential production and marketing efficiencies. Under this agreement, TeCom plans to develop the capability to use EchoStar DISH Network set-top boxes in providing energy management services to customers who subscribe to the DISH Network. In addition, pursuant to its agreement with EchoStar, TeCom will offer to energy industry firms the right to market EchoStar's DISH Network DBS services to potential subscribers. III. MARKET STRUCTURE AND CONDITIONS AFFECTING COMPETITION A.Horizontal Issues in Markets for Video Programming 122. As in previous reports, we examine several issues concerning horizontal structure and rivalry in markets for video programming and particularly examine the issues in two separate video programming markets: the downstream (or "retail") market for delivery of video programming and the upstream (or "wholesale") market for acquisition of video programming. We first identify the market for the downstream delivered product and examine changes since the 1996 Report in concentration and the extent of competition in local markets. We then examine the upstream market and consider the changes in concentration at the national and regional levels, including the effects of some recent (or announced) cable mergers, acquisitions, partnerships, and joint ventures. 1. Market Definition 123. Our approach to market definition is the same as in prior reports. As we explained in the 1996 Report, the relevant market for examination of horizontal issues for both the downstream and upstream markets for video programming consists of two elements, a relevant product market and a relevant geographic market. In the downstream market, we use multichannel video programming services as a starting point for the definition of the relevant product. 124. In the 1996 Report, we found that, in the downstream market the relevant geographic area for assessing MVPD competition is local and its extent can be defined by the overlap of the "footprints" of the various service providers. This area of overlap determines the potential MVPD choices available to a typical household. For MDUs, the relevant geographic market may be defined as the city or a section of the city where: comparable MDU housing is available to MVPD customers, especially to potential customers moving into the area; landlords control access to the building (e.g., risers and hallways) and therefore determine the number of providers to each MDU; and bundled telecommunication services (e.g., video and telephony) tend to be offered since bundled unit costs are lower than the corresponding costs of serving residential customers. MVPDs able to offer service to MDUs in this area determine the potential choices available to MDUs. The relevant product market will depend on the substitutability or relative attractiveness (including the price) among the MVPD choices to the household or MDU. Alternative providers may offer a bundle of services including video programming, telephony, Internet, and security. Data limitations, however, limit our ability to define the markets more rigorously or to measure the market shares of non-cable MVPDs in each individual local market across the country. 125. In the upstream market for video programming, the buyers of video programming are cable operators and other video service providers, and the sellers are programmers. This market enables MVPDs to buy programming for packaging and delivery to consumers. One competitive issue is whether cable operators acting alone or acting together can exercise market power in the purchase of video programming. This upstream market tends to be regional or national, since programmers attempt to develop networks much broader than the local cable franchise area. Although cable operators usually do not compete to serve the same subscribers in local downstream markets, they may have an incentive to coordinate their decisions in the upstream market for the purchase of programming on a national or regional level. The use of buying cooperatives is an additional means of coordinating buying decisions. Concentration of ownership among buyers in this market is one indicator of the likelihood that coordinated behavior among buyers will be successful. The more concentrated the market, the more likely that buyers will possess some market power (or "monopsony" power). 2. Concentration in Local Markets 126. In previous reports, we concluded that local markets for the delivery of video programming (i.e., the downstream markets) were highly concentrated and characterized by substantial barriers to entry by potential MVPDs. In MDU markets, landlords may have a choice of more than one provider. However, potential entry into MDU markets may be discouraged or limited by incumbent video providers that have negotiated long-term exclusive contracts at a time when alternative service providers were not available. As a result, there may be a tendency for prices to rise above competitive levels and for product quality, innovation, and service to fall below competitive levels in both household and MDU markets. 127. In order to obtain a summary measure of concentration in local markets for the delivery of video programming, we first consider the market shares held by cable and non-cable MVPDs in a hypothetical local market. The use of this hypothetical local market paradigm is due to the lack of MVPD subscribership data for each local market. Using this approach, we assume that each local market is identical and reflects the market shares that each MVPD holds on a national basis. A second measure we use is the Herfindahl-Hirschman Index ("HHI"). Although cable operators are generally dominant providers in their respective local markets, we estimate the HHI in a hypothetical local market to measure the influence of a growing competitive fringe of non-cable MVPDs and to provide a point of reference for assessing competition among MVPDs over time. 128. Both measures of concentration suggest that downstream local markets for the delivery of video programming remain highly concentrated. This approach uses the nationwide total number of subscribers to cable and non-cable MVPDs found in Table E-1, a surrogate for measuring the availability and attractiveness of various options in the hypothetical local market. In this hypothetical local market, as of June 1997, the shares of the market participants, grouped by competing technologies, would be roughly: cable, 87.1%; DBS/HSD, 9.8%; SMATV, 1.6%; and wireless cable, 1.5%. Although some non-cable MVPDs have increased their customer base, it has not had a significant effect on cable subscribership. DBS continues its expansionary trend of gaining new subscribers, but the market share of cable only decreased slightly from 87.7% in December 1996 to 87.1% in June 1997. Using the market shares for each technology, the estimate of the HHI is 7567, a decrease from the HHI of 7898 for 1996. Nevertheless, an HHI of 7567 remains several times greater than the 1800 threshold at which a market may be considered "highly concentrated." 3. Competitors Serving Multiple Dwelling Unit Buildings 129. Technical, regulatory and programming supply developments appear to be contributing to the emergence of a distinct MDU market, which is more competitive than other MVPD markets. Several of the video distribution technologies described above are used, singly or in combination (e.g., SMATV/DBS service), to provide video programming to consumers residing in MDUs. The MDU market is substantial. As of 1990, there were almost 31.5 million MDUs in the U.S., comprising approximately 28% of the total housing units nationwide. The emergence of a distinct MDU market is reflected in Section 301(b)(2) of the 1996 Act, which excepts cable bulk discounts to MDUs from the uniform rate provision of Section 623(d) of the Communications Act, thereby allowing cable operators more flexibility in competing with other MVPDs for MDU subscribers. The Commission's recent Order concerning MDU inside wiring is designed to facilitate competition in this market. 130. Traditionally, cable and SMATV operators provided MVPD services to MDU subscribers. Recently, however, competitive strategies of a number of firms that are focusing on the MDU market illustrate what appears to be a developing competitive trend for this market. RCN, OpTel, Cable Plus and Cox, for example, offer or plan to offer MDUs a "suite" of services, including local, network and premium video programming delivered by satellite and through local reception; local and long distance telephone services; Internet access; and 24-hour apartment alarm monitoring service. Increasingly, competing suppliers offer combined services to MDU subscribers over partially or wholly unified distribution facilities, both outside and, except for telephone services, within the MDU. DBS services, moreover, are beginning to supply programming to MVPDs serving MDUs and to offer programming to MDUs directly. In addition, entities with large numbers of subscribers in multiple properties across different states, such as national property management firms, are beginning to negotiate for multichannel programming services on a nationwide basis, bringing additional bargaining power to their negotiations with MVPDs. 131. Firms Serving Primarily MDUs. RCN, OpTel and Cable Plus each serves high density areas and MDUs, generally using distribution systems that are not subject to cable franchise regulations. RCN is deploying fiber optic networks to deliver these services, and, as of June 1997, had connected 310 buildings in New York City and 52 buildings in Boston to its facilities. RCN currently has two video headends within its advanced fiber optic networks in New York City and Boston, and uses 750 MHz of each system's available bandwidth for a video distribution capability of up to 110 video channels. For voice services, RCN's fiber optic networks in New York City and Boston support both switched services and features, such as ISDN, Custom Calling and CLASS, and non-switched (private line) services, including DS-1 and digital data. 132. RCN typically enters into five to ten year access agreements with the owners/managers of MDUs. These agreements generally provide for non-exclusive access, but for exclusive marketing assistance from the building management. RCN may negotiate a payment to the building owner in the form of a percentage of revenue or a reduced rate for services. RCN also uses bulk service agreements to provide services (generally video services) at a flat subscription rate for all units in the residential building or institution as an entry tactic, although future agreements are likely to provide for the purchase of services on an individual basis. 133. OpTel supplies SMATV multichannel video programming and, increasingly, telephone services to residents of MDUs under building-entry agreements with MDU owners. As of August 1997, the company had 132,556 cable television subscribers, making OpTel the largest provider of private cable television services in the United States, and 6,825 telecommunications subscribers with 8,190 telephone lines. OpTel seeks to offer a complete package of MVPD and telecommunications services and intends to continue its investment in bi-directional fiber optic and microwave networks, believing this to be the optimal means for delivering both MVPD and telecommunications services. 134. OpTel provides video programming to MDUs through 18 GHz building-to-building microwave and fiber optic networks, and through non-networked SMATV systems, generally providing up to 72 channels of video programming. The company provides shared tenant services ("STS") telephone services through private branch exchange ("PBX") switches. OpTel intends to convert substantially all of its SMATV systems to 18 GHz or fiber optic networks by the end of fiscal 1999, to provide Competitive Local Exchange Carrier ("CLEC") telephone services in all of its markets by the end of fiscal 1999, and to convert all of its PBX switches to central office switches by the end of fiscal 2002. The company intends to modify its existing networks, currently used to provide video programming, to accommodate two-way digital telecommunications traffic so as to connect its MDUs to its planned central office switches in each of its markets. The company intends to use its existing network configuration if feasible and to supplement its microwave plant if necessary, including through the use of other available radio spectrum for telecommunications services. The company also plans to offer Internet access, intrusion alarm, utility monitoring, PCS, cellular and paging services. 135. OpTel provides services principally under long-term right-of-entry contracts with owners of national, regional and local MDU holdings, as well as with institutions (e.g., hospitals and hotels). The company's agreements with MDU owners typically have original terms of ten to fifteen years, prohibit tenants from installing receiving equipment on the exterior of the building, and, in the cases of telephone service agreements, provide that OpTel will be the exclusive provider of local telephone service to MDU residents, subject to the legal rights of the incumbent local exchange carrier and others to offer service, effectively making OpTel the exclusive multichannel video provider and the only wire-line alternative to the LEC for telecommunications services. 136. Cable Plus offers SMATV multichannel video programming services, telephone and security services to 180,000 customers in MDUs in 18 states, and also plans to offer Internet access services. Cable Plus typically provides 40 to 60 channels of video programming that are delivered by satellite or, sometimes, by microwave links to MDU headends, generally using broadcast antennas to receive the local broadcast signals. Cable Plus generally signs exclusive, long-term (approximately 15 year) agreements with apartment owners (many of whom have extensive real estate holdings), who then offer Cable Plus' services to residents. Cable Plus plans to serve primarily concentrated clusters of multifamily housing units in growing areas. 137. Cable Operator Services to MDUs. Traditional franchised cable firms continue to compete for MDU business, but appear increasingly to be combining other services with their multichannel video offerings to MDUs. One of the largest cable MSOs, for example, Cox Communications, planned to begin offering cable programming, local and long distance telephone, and cable-modem Internet access services to the first of 25,000 MDU residents in Irvine, California, in the Fall, 1997. Some cable firms offer price discounts for MDU service and enter into MDU service agreements providing various forms of exclusivity. 138. LEC Service to MDUs. Several LEC affiliates report that they are providing MVPD services to MDUs. For example, by the end of June 1997, Ameritech had reached agreements to provide cable television services to 673 MDUs (with 38,433 units) in communities in which it is a franchised cable operator. Of the 258 MDUs (with 40,698 units) in these communities that have declined Ameritech New Media's cable television service, 127 MDUs (with 22,215 units), or approximately one- half, have cited their exclusive agreements with other cable operators as the reason for failing to contract with Ameritech. Ameritech reports that incumbent cable operators have also impeded its ability to serve MDUs by refusing to make their existing wiring available to Ameritech in cases in whch an MDU owner objects to the installation of redundant wiring. 139. DBS Service to the MDU Market. DIRECTV, USSB, EchoStar and Primestar have recently begun to focus on the MDU market. For example, DIRECTV has entered into agreements to provide programming service directly to 150 private cable operators and has a non-exclusive agreement with WSNet, a distributor of satellite programming packages, to make DIRECTV programming available nationwide to WSNet's customer base. For private cable operators, such arrangements are expected to result in construction savings, the ability to offer more channels, and the ability to serve properties with fewer than 100 units. Primestar also plans to provide programming to SMATV operators and other interests, either as the sole program provider or as a supplementary program provider. 4. Regional Concentration of Cable Systems 140. Clustering, a process by which MSOs consolidate system ownership within separate geographical regions, can have both procompetitive and anticompetitive effects. In response to the Notice, commenters reiterated arguments in favor of clustering's procompetitive effects. Clustering systems provides mechanisms to reduce costs and to improve operating and management efficiencies, to eliminate system redundancies and to attract more advertising. The growing importance of advertising revenues for cable systems has emerged as a major factor promoting regional consolidation. By consolidating systems in major markets, MSOs can serve entire regions comprised of numerous local franchise areas. This assures advertisers that they will get extensive regional market coverage. Finally, regional clustering may also enhance MSOs' ability to compete successfully in the future with LECs and major electric utilities as providers of data transmission and local telephone services. Commenters suggest that clustered systems increase cable operators' ability to be more competitive across a range of markets and technologies (e.g., video programming delivery, telecommunications, Internet access services) as "full service providers" in these markets. 141. On the other hand, clustering raises certain anticompetitive concerns. Clustering eliminates operators of adjacent cable systems as potential overbuilders. These operators would be relatively low-cost potential wireline overbuilders -- because they could likely use their existing headend and parts of their existing trunk lines to serve the new markets -- compared to overbuilding a distant wireline system. The potential cost saving is significant because the headend and trunk lines comprise about 25% of the capital investment of a cable system. Overbuilding from adjoining franchise areas, however, has rarely been a significant means of entry into MVPD markets. In recent instances where overbuilding has occurred or is planned, the overbuilders (e.g., LECs) have not been the operators of existing adjacent cable systems. 142. System Mergers and Acquisitions. Since the last report, cable MSOs have undertaken or announced numerous system mergers, acquisitions and divestitures with the objective of creating regional "clusters" of contiguous cable systems. In 1996, there were more than 100 cable transactions. Most of these transactions resulted in the expansion of existing clusters of cable systems. These transactions totalled approximately $16.3 billion, and covered 7.8 million subscribers. A similar pattern seems to be emerging in 1997. In the first nine months of 1997, cable transactions have been proposed which, if consummated, will total more than $13.2 billion and cover approximately 6.9 million subscribers. TCI is involved in proposed transactions totalling $9.4 billion or 71.2% of the $13.2 billion total. 143. The number of clusters serving at least 100,000 subscribers increased from 137 at the end of 1995 to 139 at the end of 1996. In 1995, these clusters accounted for about 31.2 million or 50.2% of the 62.1 million cable subscribers. In 1996, these clusters included 33.6 million subscribers, and represented 52.9% of the 63.5 million cable subscribers. Among the five largest MSOs, Time Warner had 31 clusters, TCI had 30 clusters, MediaOne had 14 clusters, Comcast had nine clusters and Cox had nine clusters. Smaller MSOs continued to expand their clusters too. Jones Intercable (with 1.5 million subscribers) had four clusters of 100,000 or more subscribers, and Suburban Cable (with 1 million subscribers), Charter Communications (with 0.9 million subscribers), Marcus Cable (with 1.3 million subscribers) and FrontierVision (with 0.4 million subscribers) each had two clusters. 144. Although the total number of clusters did not increase significantly since the last report, there appears to be a trend for clusters to be increasing in size. This tendency toward larger clusters may reflect greater economies of scale. Between 1994 and 1995, the total number of clusters increased from 97 to 137, an increase of about 41%. The number of clusters in each of the five size categories increased by at least 30%. In contrast, the corresponding increase in the total number of clusters between 1995 and 1996 is only two, or an increase of 1.5%. The number of clusters with 100,00 to 199,000 subscribers remained unchanged. During this same time period, however, the number of clusters with 300,000 to 399,000 subscribers increased by 38% and the number of clusters with at least 500,000 subscribers increased by 20%. 145. The plans of TCI, Time Warner, and the other large MSOs to consolidate and cluster their systems, if realized, are likely to have a significant impact on the cable industry. TCI, in particular, has proposed a number of consolidations with several of the largest MSOs this year in furtherance of a clustering strategy. For example, TCI plans to sell its systems in the New York City area with 820,000 subscribers to Cablevision in exchange for a one-third equity interest in Cablevision. If consummated, the proposed transactions between TCI and Cablevision's New York area cluster will result in the nation's largest cluster, with 2.5 million subscribers. In another proposed transaction TCI would acquire a 40% interest in a joint venture with Falcon. The transaction would combine TCI's systems in six states with an aggregate 300,000 subscribers, with Falcon's 700,000 subscribers in 26 states. TCI and Adelphia are planning to create a major cluster in Pennsylvania, New York, and Ohio by consolidating their systems serving 466,000 subscribers in those three states. Mediacom, for example, is planning to purchase Cablevision's equity interest in US Cable. The proposed transaction would add 265,000 subscribers in ten states to Mediacom's system clusters in Florida, Missouri and North Carolina. This acquisition would raise Mediacom's present subscriber base from 95,000 subscribers to 360,000 subscribers, making it one of the top 20 cable MSOs. 146. Aside from the transactions of TCI and the other major MSOs, many industry analysts believe that a significant number of future mergers and acquisitions will involve systems located in communities outside of the major urban regions, including rural areas. Like the larger MSOs, the mid- size MSOs are focusing on specific markets. For example, CableVision Communications, formerly Rifkin & Associates, plans to acquire more systems with approximately 12,000 subscribers. Insight Communications ("Insight") is also acquiring cable systems in communities outside the major metropolitan markets. 147. System Trades. System-for-system "swaps" or trades between MSOs, both large and small, continue. Swaps enable MSOs to increase their regional clusters while minimizing the financial outlays and avoiding capital gains taxes. Since the 1996 Report, the largest proposed system-for-system swaps are between TCI and Time Warner, Time Warner and Cox, Time Warner and Marcus Cable, and Cox and Insight. These include TCI's proposal to trade systems in Florida for several Time Warner systems in Chicago, New Jersey and Pennsylvania, and to trade systems in Maine and Wisconsin for Time Warner systems in Illinois. Insight recently swapped its Phoenix area system with 36,000 subscribers for a Cox system with 40,000 subscribers in Lafayette, Indiana. Insight has agreed to purchase Cablevision's 65,000 subscriber system in Rockford, Illinois, as part of its strategy to expand holdings in second and third tier markets. If these acquisitions are consummated, Insight will have approximately 250,000 subscribers in eight states. 148. System Partnerships. TCI also proposes to form partnerships with other MSOs. TCI's announced objectives are to restructure its systems into regional clusters managed by proven cable operators to improve the management of local sales and customer services. TCI's strategy is to create partnerships with the regions' dominant cable MSO and rely on that MSO to manage the system. TCI hopes to benefit by improving the management of its systems, lowering its own operating costs and removing debt from its balance sheets. For example, TCI and Time Warner propose to form two partnerships, one in south Texas and the other in Kansas City, Kansas. The south Texas partnership, which Time Warner would manage, would comprise systems with about one million subscribers in Houston and parts of southern Texas. The Kansas City partnership would enlarge on an existing joint venture by adding 95,000 TCI subscribers. TCI has also agreed to form a partnership with TCA Cable TV. TCA would manage the partnership. In exchange for a 20% equity share, TCI would contribute 150,000 subscribers from systems in Texas and western Louisiana plus approximately $250 million in debt. TCA's contribution would include about 155,000 subscribers in New Mexico and $45 million in debt. 5. Concentration in the National Market 149. The 1992 Cable Act directs the Commission to place limits on the concentration of ownership of cable systems at the national level. This direction reflects concerns that such concentration could have anticompetitive effects on the supply of programming to MVPDs and reduce the diversity of content available. For example, if a cable MSO controlled a large fraction of multichannel video programming distribution capacity or subscribers on a national level, it might be able to control the development of new programming networks, influence the content and limit the diversity on existing networks, and might be able to exercise buying power that would restrict the upstream national market for the provision of programming networks to all MVPDs. 150. In assessing the impact that national concentration may have in the MVPD programming market, we believe that it is appropriate to consider the presence of all MVPDs and MVPD subscribers in national concentration figures, and not just cable MSOs and cable subscribers. As non-cable MVPD subscribership increases, the significance of DBS, MMDS, and SMATV operators in the MVPD program purchasing market also increases. Nevertheless, cable operators continue to be the main distributors of multichannel video programming, serving 87% of total MVPD subscribers. Significantly, the rapid growth of DBS systems, such as DIRECTV/USSB and Primestar, has resulted in both being among the top ten MVPDs nationwide. However, despite the inroads non-cable MVPDs have made in subscriber penetration, the largest cable MSOs remain the largest MVPDs. 151. The share of subscribers of the top four MVPDs (the four largest cable MSOs) of the upstream nationwide MVPD programming market has increased slightly over the past year. In 1996, the four largest cable MSOs (TCI, Time Warner, MediaOne, and Comcast) served 53.3% of all MVPD subscribers. These four firms now serve 54.3% of all MVPD subscribers nationwide. 152. To assess the potential for market power resulting from concentration in the upstream MVPD programming market, the reported MVPD shares can be appropriately translated into HHI figures because MVPD programming networks are often purchased on a "per-subscriber" basis. The nationwide purchaser MVPD or HHI is 1166 -- "moderately concentrated" under the Merger Guidelines. The HHI is 153 points higher than the HHI of 1013 reported in last year's report. 153. The above discussion and supporting tables to the report set forth data on concentration in the cable market and in the MVPD market without the inclusion of a number of transactions that have been announced but have not yet been consummated. The transactions involved are principally those discussed in the preceding section involving systems owned or controlled by TCI that will be transferred to or managed by another system operator with a large cluster of other systems in the region. These transaction have been articulated by TCI as being essentially a divestiture of systems, reducing TCI's level of system ownership by one-third. The transactions, however, generally involve TCI obtaining a financial interest in the MSO to whom the systems are transferred. For example, in the New York market TCI is transferring systems with 820,000 subscribers to Cablevision and is receiving in return a one-third equity interest in Cablevision. In a similar fashion, TCI is proposing to transfer management of a number of systems serving 300,000 subscribers to Falcon and will receive in return a 40% interest in the resulting joint venture. 154. Whether these transactions should be viewed as increasing or decreasing the size of TCI depends in part on the specific details of the transactions involved, which are not now before us and may not have been finalized. However, if the arrangements are such as to create attributable interests, the result would be a significant increase in TCI's share of the national market -- increasing its size by several million subscribers and giving it a market share that could exceed the "30 percent of homes passed" horizontal ownership rule adopted by the Commission pursuant to the 1992 Cable Act. This rule has been voluntarily stayed by the Commission in light of the decision in the Daniels case. Subsequently, the D.C. Circuit held in abeyance its review of the horizontal ownership provision of the Communications Act, and the Commission's rules promulgated thereunder, pending the Commission's reconsideration of its rules. 155. Conventional understanding in the cable industry appears to be that a successful launch of a new mass market, advertisers supported, national programming network -- that is, the initial subscriber requirement for long-term success -- requires that the new channel be available to at least fifteen to twenty million households. Non-cable MVPDs, i.e., DBS/HSD, SMATV, MMDS, and OVS, currently serve about 9.5 million subscribers nationwide, a figure that appears to be too small an audience in most circumstances to provide programmers a distribution mechanism that can substitute for cable. One limitation on non-cable MVPDs is that they may serve a substantial number of rural areas that may represent lower valued markets from the point of view of national advertisers. Notwithstanding this conventional understanding of what is required to support a new national service, clearly many local and regional services exist with a smaller subscriber base. Moreover, some programming, including in particular sports programming, that is offered by DBS operators is unique to the DBS market. As these non-cable distribution channels continue to grow, it is likely that they will mitigate to some extent the dependence of programming networks on cable MSOs. 156. Our reexamination of the upstream national MVPD concentration reveals a moderate but stable level of concentration for purchases of video programming channels. Continued non-cable MVPD growth, especially from DBS and wireless providers, however, may decrease national HHI concentration levels in the future. In downstream local markets for delivered video programming, however, our concentration estimates continue to suggest that local markets remain highly concentrated. B.VERTICAL INTEGRATION AND OTHER PROGRAMMING ISSUES 1. Status of Vertical Integration 157. This section addresses the extent to which video programming services are affiliated with cable operators. As we have noted in previous reports, although vertical relationships can have beneficial effects, under certain market conditions, strategic vertical restraints (achieved by exclusive distribution contracts or monopsonistic pressure) can also deter entry and competition in the video marketplace, and can limit the diversity of cable programming, reducing the number of voices available to the public. 158. During 1997, the number of both vertically and non-vertically integrated national satellite- delivered cable programming services increased. Of the 172 national satellite-delivered cable programming services, 68 (40%) are vertically integrated with at least one MSO, and 104 (60%) are not. In 1996, of the 147 national satellite-delivered cable programming services reported, 67 (46%) were vertically integrated and 80 (54%) were not. Thus, while the number of vertically integrated programming services has increased, the percentage of vertically integrated programming, relative to the total number of national, satellite-delivered programming services, declined from 1996 to 1997. This percentage has also declined in recent years; in the 1995 Report we reported that 51% (66 of 129) of national satellite-delivered cable programming services were vertically integrated, and the 1994 Report reported that 53% (56 of 106) of national satellite-delivered cable programming services were vertically integrated. 159. Overall, vertically integrated ownership interests have increased from 1996. In 1996, cable MSOs, either individually or collectively, owned 50% or more of 47 national cable programming networks. In 1997, cable MSOs own 50% or more of 50 networks. 160. In 1997, 26 of the 50 most subscribed to cable programming networks are vertically integrated. Two of the top 50 services (C-SPAN and C-SPAN 2), while not owned by cable operators, were developed with significant involvement by the cable industry. In terms of prime time ratings, eight of the top 15 cable programming networks are vertically integrated, as was the case last year. 161. Vertical integration in national cable programming continues to involve principally the largest cable system operators. The eight largest cable MSOs have a stake in all of the 68 vertically- integrated services. TCI, the largest MSO, holds ownership interests in 39 of the 172 national programming services, 23% of all national cable programming networks. In 1996, TCI also held interests in 23% of all national programming services (34 of 147 national programming services). Time Warner, the nation's second largest MSO, holds interests in 20 of the 172 national programming services, or 12% of all national programming services, a decrease from 1996 when Time Warner owned 22 of 147 (or 15%) of all national programming services. 162. The data set forth above generally identifies vertical ownership relationship by reference to the ownership attribution standards associated with the Commission's horizontal and vertical (channel occupancy) rules. For these purposes, equity interests that carry no present voting rights are not considered to be attributable. For other purposes, such as the program access rules, a more inclusive standard is employed so that any stock interest, voting or nonvoting, creates a cognizable ownership interest. Using this more inclusive attribution standard, the recently announced transaction to bring the Seagram (Universal Studios) cable networks under the control of HSN Inc. would apparently result in both the USA Network and the SCI-FI Network being considered vertically integrated. 163. In 1997, 77 services reportedly intended to begin offering new programming service, most of which do not have MSO affiliations. Many of these services were also included in the 1996 Report as planning program launches. In the 1996 Report, we reported that 63 prospective services intended to begin offering programming service. Of these 63, the Commission is aware of 16 programming service launches that have occurred since the release of the 1996 Report. Eight of the launched programming services are vertically integrated with an MSO, and eight are not. Although not vertically integrated with cable system operators, four of the eight non-vertically integrated programming networks are associated with other significant media owners. M2 Music TV is affiliated with Viacom, while Fox News Channel, CBS Eye on People, and CBS TeleNoticias are affiliated with their respective broadcast parent companies. 164. There is a general trend by existing service providers, regardless of whether they are vertically integrated with MSOs, to create additional programming services. For example, five recent network launches by The Discovery Channel, which is affiliated with TCI and Cox Communications, include Animal Planet, Civilization, Kids, Science, and Travel and Living. CNN, affiliated with Time Warner, recently launched CNN/SI. Viacom and the Walt Disney Company ("Disney") are each major program providers that do not hold interests in MVPDs. Viacom's MTV recently launched M2 and Disney's ESPN recently launched ESPNEWS. 165. New networks must make significant investments in order to build a network that will be attractive to MVPDs and to subscribers. The comprehensive costs of launching a new national cable network are estimated at approximately $100 to $125 million, or more. New programming networks generally operate at a loss for a number of years, and due to the direct link between revenue amounts and penetration levels, conventional wisdom is that new advertiser supported networks generally do not break- even until they are available to at least 15 to 20 million subscribers. 2. Other Programming Issues 166. Sports Programming. Sports programming is identified by a number of parties filing comments in this proceeding as warranting special attention. ESPN, a programming service of Disney, is one of the most successful cable programming service in terms of circulation and revenues and has been the principal supplier of sports programming for cable television and MVPD distribution. During 1997, the consolidation of a number of regional sports outlets under common ownership by Cablevision, TCI's Liberty Media Corp., News Corp., and Comcast, has created a potential rival to ESPN as a national source of sports programming. Specifically, Cablevision acquired from its partner, ITT Corp., the remaining half interest in Madison Square Garden, the MSG Network, and the New York Knicks and New York Rangers teams. Subsequently, the Fox Sports Net, a joint venture between TCI's Liberty Media Corp. and News Corp., purchased 40 percent of Cablevision's SportsChannel regional networks. The eight Fox/Liberty regional sports networks and the seven SportsChannel regional services together will reach 55 million cable subscribers in 17 major markets. In contrast to ESPN's national programming, Fox Sports Net intends to offer home games to viewers in local markets and supplement these with national material. Comcast, which is a major supplier of cable television service in the Philadelphia market, created a regional network that will be a major supplier of cable television sports in the Philadelphia area, which will have access to programming produced by Fox Sports Net. 167. Some commenters in this proceeding express concern that ownership of regional sports programming is becoming increasingly consolidated with cable MSOs and other significant media interests. Ameritech states that access to sports programming is so essential to the success of a cable system that many operators will pay exorbitant prices and agree to entertain other less attractive business arrangements just to obtain it. Bell Atlantic states that access to regional sports programming is vital to new entrants in order to compete with incumbent cable operators, and that more and more key programming is controlled by a few of the largest cable MSOs. WCAI states that Cablevision is vertically integrated from top to bottom, owning the facilities where programming is created (Madison Square Garden), the program content itself (the Knicks and the Rangers), the cable programming services that transmit that program content (the MSG and SportsChannel networks) and the cable systems that will retransmit that program content in the New York market. Some commenters note that new entrants, such as DIRECTV, have benefitted from sports programming, such as DIRECTV's exclusive NFL football package, that are not available to cable operators. NCTA believes that the high cost of sports programming contributes to higher cable television programming rates. 168. News Programming. Another form of regional programming that is experiencing growth is news programming. There are more than 25 local news networks in the United States, approximately 12 of which are cable channels programmed by local TV stations that offer regional news. Twenty-four hour local news services are competing for ratings with CNN and broadcast stations in their markets. A regional news channel in a major market can cost between $15 and $20 million a year to operate, and cable operator license fees and advertising revenues have recently begun to cover more of the channels' operating costs. New England News (a regional news channel), for example, receives 60% of its revenues from subscriber fees from cable operators, charging nearly as much as CNN. While some analysts believe that regional news programming has not yet reached "critical mass," many predict that regional news programs could become a significant competitive force in the video programming marketplace. 169. Regulatory Issues Related to Program Access, Carriage Rules. The Commission established rules pursuant to the 1992 Cable Act concerning programming arrangements between MVPDs and satellite-delivered programming vendors (the "program access" rules). These rules prohibit unfair competition and discriminatory practices by cable operators and certain vertically-integrated programmers that may deter competition from other MVPDs. The program access rules also prohibit exclusive distribution contracts for satellite cable or broadcast programming between vertically integrated cable operators and programmers, unless the parties can demonstrate to the Commission that the contract is in the public interest. 170. In addition, in response to the Notice, the Alliance states that local, noncommercial programming (often referred to as public, educational, and governmental ("PEG") programming) is often the only truly local programming received by subscribers. The Alliance states that such is the case in smaller and rural towns, and that in large urban areas, PEG access provides a variety and diversity of communication that is unavailable on commercial local stations. Cable operators do not have ownership interests in PEG programming, though under some franchise agreements, they may provide services, facilities and equipment to make such programming available. All PEG programming is therefore considered to be non-vertically integrated with MSOs. Alliance states that PEG programming channels are carried by 16% of the nation's cable systems and that PEG access centers throughout the nation produce more than 20,000 hours of original programming per week for cable system distribution. C.Technical Advances 171. In the 1996 Report, we discussed the two general strategies MVPDs were using to increase capacity: upgrading wired network architecture and deploying digital compression. While cable operators have not abandoned plant upgrades, many cable systems are now favoring digital compression as the means to provide additional channels and ancillary services. Since the last report, TCI, the largest MSO in the cable industry has elected to use digital compression as its predominant means of expanding channel capacity on most of its systems. TCI intends to allocate some of its existing analog video channel bandwidth for digital video as well as for data and Internet services. In November 1997, Adelphia Communications launched digital cable to nearly 70% of its 1.8 million subscribers. Comcast, Cox, and Buford Television also have launched digital cable service on a limited basis. In addition, MediaOne, Cablevision Systems, Jones Intercable, and Century Communications have initiated trials of digital cable and Time Warner and Marcus Cable are planning market tests. 172. Not upgrading or rebuilding existing cable plant has immediate cost advantages as well as increased speed of deployment. Relying solely on digital compression to add video channels will generally only require changing processing equipment at the cable system's headend and providing digital or hybrid analog/digital set-tops at the subscriber premises. Generally, those subscribers who want the new services will be provided with the new set-tops. Digital compression also does not incur the lengthy timetables needed for upgrading or replacing miles and miles of cable plant. With the advent of advanced digital compression techniques, cable operators now believe that the increases in bandwidth provided by rewiring and system upgrades may not be necessary to add a large number of channels. On the other hand, without the benefit of rewiring and rebuilding of existing systems which, in general, modify the architecture of many existing cable plants, telephony and two-way services may be difficult to implement. 173. In 1996, we reported that advanced compression techniques that could fit as many as 24 video channels in a 6 MHz analog channel (24:1 ratio) were being tested and that, in general, compression ratios had dramatically increased from the earlier 6:1 ratios that were prevalent. One of the more significant advancements that enabled such a high channel compression ratio has been the development and refinement of a compression and combining technique called statistical multiplexing. 174. TCI has embraced this advanced digital compression technique for its prepackaged programming service called Headend In the Sky ("HITS"), which allows cable operators to receive prepackaged digital video channels from a satellite and pass the signals directly through the cable plant to their subscribers. TCI is using NextLevel Systems Inc.'s statistical multiplexing technology which has a compression ratio of up to 14:1. This minimizes the need for expensive digital processing equipment in every cable system headend since the processing is done at TCI's satellite uplink facility, yielding economy of scale savings. However, new digital set-top boxes are required to receive HITS programming. Other cable operators, including MediaOne, Comcast, Cox, Adelphia, Jones Intercable, Century Communications and Buford Television are using or plan to use HITS. 175. The new digital programming and ancillary data services require new set-top boxes. In an attempt to reduce cost and promote uniformity in set-top devices, Cable Television Laboratories, Inc. ("CableLabs") and its members have attempted to create standards for interoperable set-top boxes and the provision of a platform for the offering of new interactive services to cable customers. Further, after evaluating nearly two dozen computer industry proposals for set-top box technology, CableLabs voted not to specify any single operating standard and recommended that interactive services over cable use open Internet specifications that would allow the use of any operating system. Further, pursuant to the 1996 Act, the Commission is in the midst of a rulemaking on the commercial availability of navigational devices, which may produce similar results. 176. In the 1995 and 1996 Reports, we reported on limited LEC activity in the area of Asynchronous Digital Subscriber Line ("ADSL"), mainly for the purpose of Internet access. This ADSL activity consisted of technical trials. Current reports indicate that LECs have moved forward with these trials, so that each regional Bell company and GTE each has at least one trial in progress. Only US West and Pacific Bell (now owned by SBC) have announced definitive roll-out plans, however, and it is unclear how long it will be before there is widespread commercial deployment. SBC Communications launched its digital subscriber line service in San Francisco and Austin, Texas in November 1997. 177. Switched digital video allows a company to provide multiple services over a single network. In 1996, Bell Atlantic announced plans to upgrade its infrastructure to a switched broadband network in Philadelphia and southeastern Pennsylvania, with eventual digital broadband service to over 12 million homes and small businesses across the mid-Atlantic region over the next three years. Bell Atlantic announced at this time that service would begin in 1997. Service has not yet begun, but construction has begun in southeastern Pennsylvania with voice and data services to be offered first, and video to follow. IV. COMPETITIVE RESPONSES A.New Case Studies 178. During 1997, the Commission issued decisions finding that an additional 45 cable communities with approximately 300,000 subscribers faced effective competition. In the majority of these markets, the entrant was a LEC. A majority of incumbent cable operators responded by offering subscribers: (1) improved programming; (2) additional channels at the same monthly rate; (3) reduced rates for basic tier service; and (4) new services such as upgraded converter boxes with interactive programming guides. 179. In this section of the report, we analyze selected cable markets where the Commission found effective competition since the last report. We are particularly interested in competitive responses of both the incumbent and the new entrant. 1. Columbus, Berea, and Columbus Grove, Ohio 180. The 1996 Report described the entry by Ameritech into Time Warner's western Columbus market and Coaxial's eastern Columbus market in May 1996 and July 1996, respectively. In December 1996, the Commission issued an order finding effective competition in the area served by Time Warner. The Commission asked Coaxial to file a supplement to its original petition. On February 4, 1997, the Commission issued an order finding effective competition in the area served by Coaxial. The Commission found that Ameritech's cable system overlaps about fifty percent of Coaxial's system (which passes approximately 93,000 homes) and that Coaxial had lost subscribers who switched to Ameritech. 181. In June 1996, Ameritech was also awarded a cable franchise in the city of Berea, Ohio. Ameritech offered a 17 channel basic package called Localcast for $9.95 per month. Its expanded basic package offered 59 channels (which subscribers could access without a set-top box) at a rate of $27.95 per month. This service included all 17 channels from Localcast plus 42 other channels including TNT, SportChannels, MTV and the Disney Channel. These cable services and prices are very similar to those offered by Ameritech in the Columbus market. 182. Cablevision, the incumbent cable operator in Berea with approximately 4,500 subscribers, offers a total of 74 channels on its basic and expanded basic service tiers. Cablevision has responded to Ameritech by offering new expanded basic tier channels free for six months. Cablevision offered to maintain the discounted per channel rate for its expanded basic tier after the expiration of the free offering period. According to Ameritech, Cablevision's discount amounted to a 20% reduction per channel. In addition, Cablevision moved the Disney Channel from an a la carte service to the expanded basic tier, saving customers who had subscribed to the Disney Channel over $11 per month. 183. Cablevision s petition for determination of effective competition was granted in March 31, 1997. The Commission found that Ameritech is a LEC, provides comparable programming to Cablevision's services, and has completely overbuilt the city of Berea. In addition, the Commission found that Ameritech's actual offering of service combined with aggressive marketing efforts have resulted in a decline in Cablevision's subscribership. 184. In September 1996, Quality One Technologies ("Q1"), a wholly-owned subsidiary of Columbus Grove Telephone Company, was granted a cable franchise by the Village of Columbus Grove. In May 1997, Q1 began offering cable services in competition with Time Warner, the incumbent cable operator. Q1 offers four services: a 12 channel Basic Package for $7.95; a 15 channel Basic Plus Package for $10.95; a 29 channel Tier I Package for $18.90; and a 45 channel Tier II Package for $29.85 (including one converter box). 185. At the time that Q1 entered the market, Time Warner offered four service packages: a 12 channel Basic service for $7.98; a 15 channel Value Plus service for $9.65; a 39 channel CPST service for $27.14; and a 47 channel Cable Plus service $30.09. Q1 offered additional programming in each of its packages, except for the largest package which was priced the same as Time Warner's comparable package. In contrast to Time Warner's services, Q1 included, for example, the Learning Channel in its Basic service, the Disney Channel in its Basic Plus service, and ESPN, USA, Sci-Fi, Sports Ohio, and the Cartoon Network in its Tier I service. Thus, except for the largest service package which was comparable to Time Warner's, Q1 offered additional programming on its first three levels of service and lower prices on its Basic and Tier I services. 186. In response to Q1's competitive service, Time Warner changed its channel lineup on its two largest services and instituted a customer loyalty program. Time Warner moved the History Channel, Sportschannel, Cartoon Network, and TV Land from its highest priced Cable Plus service to its CPST service at no additional cost. Time Warner's new CPST service offered 43 channels for $27.14 compared to Q1's 29 channel Tier I Package for $18.90 and 45 channel Tier II Package for $29.85 (including one converter box). Time Warner also added three channels not available on Q1 (i.e., Animal Planet, Classic Sports and CNN SI) to its Cable Plus service at no additional cost. In addition, Time Warner promises not to increase its rates for one year and to allow customers to earn a monthly credit that can be used to pay their cable bill at the end of the year. 187. On July 15, 1997, Time Warner filed a petition for determination of effective competition in Columbus Grove. Time Warner claims that Q1 is affiliated with a LEC, offers comparable service, serves customers in Columbus Grove, and is an actual competitor in the market. On November 17, 1997, the Commission granted the petition. 2. Fairfield, Bridgeport, Stratford, Orange, Woodbridge, and Milford, Connecticut 188. In September 1996, Southern New England Telephone ("SNET") was awarded a cable franchise for the entire state of Connecticut. In May 1997, SNET started to offer cable services to about 7,200 residents in the city of Fairfield. By July 1997, SNET was planning to add the remaining 53,000 Fairfield households to its service area. SNET offers 65 channels for $26.50 a month, free installation and a 30-day guarantee (if new SNET subscribers are not happy with their service during the first 30 days, SNET will switch them back to their previous cable provider for free). In addition, SNET offered a $30 voucher to its cable subscribers redeemable on the purchase of any other SNET service, including the phone services. 189. Cablevision of Connecticut is the incumbent provider with a cable franchise comprised of six communities in Fairfield and New Haven counties: Fairfield City (15,000 subscribers), Bridgeport (35,000 subscribers), and Stratford (13,000) in Fairfield County; and Milford (17,000 subscribers), Orange (4,000 subscribers), and Woodbridge (3,000 subscribers) in New Haven County ("Fairfield-New Haven"). Cablevision charged $32.95 per month for 82 channels for its basic plus expanded basic package (its "Optimum TV" service, excluding pay per view channels). In response to SNET's entry, Cablevision offered discounts up to $15 or 45% on the $32.95 Optimum TV service package to its Fairfield City subscribers. In addition, Cablevision offered a free month of Optimum TV, a free four week subscription to "Total Magazine," and free installation (up to three television sets) to new subscribers in the Fairfield area. Cablevision also attempted to become more customer service oriented. According to SNET, Cablevision established a new customer service line for its Fairfield City subscribers and performed a "door to door customer satisfaction survey in Fairfield, followed by a gift package in return for completing the survey." Cablevision also started to build a state-wide fiber network (similar to SNET's fiber network) which is expected to be completed by the end of this year. 190. In June 1997, Cablevision filed a petition for determination of effective competition in the six Connecticut cable communities that comprise its franchise. In August of this year, SNET urged the Commission to deny Cablevision's petition, arguing that it was premature to deregulate an entire franchise area if only a portion of it is subject to head-to-head competition. In its petition, SNET explained that Cablevision serves six communities, but only offers a price discount in Fairfield City where SNET is currently providing competing cable services. Cablevision subscribers in the other five communities are not being offered a discount. The Connecticut Department of Public Utility Control supports SNET's position. The Commission is currently reviewing this petition. 3. Sterling Heights Area, Michigan 191. In 1996, Ameritech began to provide service in the Detroit suburbs of Sterling Heights (population 121,000), Fraser (population 14,000), Southgate (population 30,700) and Garden City (population 32,000). Ameritech offered new subscribers 80 channels on its basic and expanded basic tiers, adding free channels such as the History Channel, ESPN2, PASS, the Golf Channel and the Disney Channel to the expanded basic tier at no additional cost. In addition, it offered, for a limited time, free basic or expanded service for the first two months, free installation, and free premium channels including Showtime, The Movie Channel, Flix and Sundance Channel for two months. According to Comcast, Ameritech has at least 1,500 subscribers in Garden City, 500 subscribers in Southgate, 150 subscribers in Fraser, and 100 subscribers in Sterling Heights. 192. Following Ameritech's entry, Comcast, the incumbent cable operator, pledged to meet or beat any offer from another wired cable operator; offered HBO free for one year; guaranteed rates for one year and offered a $3 per month discount off the expanded basic rate; added up to 40 channels in some of its franchise areas; moved The Disney Channel and PASS (a regional sports programming channel) from premium service to the expanded basic tier; and introduced a new advanced converter box with Interactive Programming Guide capability. In Garden City, for example, Comcast increased its expanded basic tier service from 47 to 66 channels and increased its tier price by only 91 cents, a decrease in the per channel rate of 12 cents. In Southgate, Comcast added 16 channels to its expanded basic tier and raised the monthly rate by 62 cents, a decrease in per channel rate of 10 cents. In Sterling Heights, Comcast currently offers eight more channels on its basic expanded tier and has reduced its rate by $1.20. 193. Comcast's petition for determination of effective competition was granted in May 1997. The Commission found that Ameritech has completely overbuilt Fraser, Southgate, and Garden City and is providing service in these areas. Although Ameritech has not completed its overbuild in Sterling Heights, the Commission nevertheless found that Ameritech has activated plant and is providing service to subscribers in that area and that Ameritech has heavily marketed its services through local media and has initiated an extensive promotion campaign. 4. Thousand Oaks, California 194. The City of Thousand Oaks, California (with 45,000 cable subscribers) awarded a cable franchise to GTE in February 1996. GTE began offering its new cable service in September 1996 at $10.95 for 28 channels. GTE is competing with two incumbent cable operators that serve different parts of the city, Falcon and TCI. Falcon, with 4,000 subscribers in the city, offers a $22.45 basic tier service which includes 38 channels. TCI, with 32,000 subscribers in the city, is the larger incumbent. It operates Ventura County Television, which serves the entire county of Ventura including the city of Thousand Oaks. TCI charges $10.51 for 21 channel basic tier service. 195. Falcon, following GTE's entry, is now offering its subscribers an expanded satellite package of 12 channels for 45 cents instead of the original SatPac service of six channels for $6.36 and has cut its prices in half for premium channels (from $9.95 to $5 each). TCI, on the other hand, seems to be positioning itself to compete with GTE for new services such as "interactive television." The new service would allow viewers to customize a program. For example, while watching Prime Sports, the viewer can request game statistics, watch interviews with players, or follow a star player throughout the game. 196. Falcon Cablevision's petition for determination of effective competition was granted by the Commission in April 1997. The Commission noted that the entire franchise area will be overbuilt by GTE, which has a ten year franchise with Thousand Oaks, and that Falcon has lowered prices and added new channels. According to GTE, it now has more than 1,000 subscribers and more are being added every day. 5. St. Petersburg and Pinellas County, Florida 197. The entry by GTE into Clearwater in June 1996 and the Commission's subsequent finding of effective competition in Clearwater was discussed in the 1996 Report. While Clearwater is GTE's first cable franchise in Pinellas County, Florida, it obtained a second franchise to serve the City of St. Petersburg in August 1996 and a third franchise to serve the unincorporated areas of Pinellas County in September 1996. 198. In the City of St. Petersburg, GTE offers 78 channels of programming compared to 82 channels offered by Time Warner, the incumbent cable operator. GTE's 23 channel basic service is priced at $10.95 and its 60 channel basic plus enhanced basic service is $25.95. These two services and rates are very similar to those offered by GTE when it entered Clearwater. In addition, GTE offers St. Petersburg customers free basic service for two months, an interactive service that includes financial, educational, sports, news, games and travel services at $10.95 (free to subscribers of premium services), a cable modem service at $28.95 to GTE cable subscribers, a 45 day risk free guarantee (whereby GTE will pay the costs of switching the customer back to its old cable operator if not satisfied with GTE's service), free installation (up to two television sets), and an interactive program guide and free remote control. By January 1997, GTE was offering its services to about 800 homes and was undertaking substantial construction in the northern sections of the city. 199. In Pinellas County, GTE's service offerings are very similar to those offered in St. Petersburg and Clearwater. The basic 23 channel service is $10.95 and the 62 channel basic plus expanded basic service is $25.95. In addition, GTE offers expanded service customers the same risk free guarantee, and free electronic programming guide, video center and remote control that it offers its customers in St. Petersburg and Clearwater. 200. According to Time Warner, its response in the St. Petersburg market (with approximately 71,000 subscribers) is similar to its competitive response to GTE's entry in the Clearwater market. Time Warner has upgraded its plant and moved the Disney Channel to its expanded basic package at no additional cost. Time Warner states that its cable prices are the same or less than GTE's and that it offers more channels than GTE. For example, Time Warner offers 64 channels on its basic plus expanded basic service compared to GTE's 60 channel service. Further, Time Warner believes that GTE's innovative services (such as GTE's interactive service) are not very successful. Throughout Pinellas County, Time Warner is monitoring the success of its rivals. 201. Both of Time Warner's petitions for determination of effective competition in St. Petersburg and in the unincorporated areas of Pinellas County were granted by the Commission in March 1997. The Commission found that GTE was currently offering service in St. Petersburg and that its ten year franchise agreement appears to provide that GTE will construct its system throughout St. Petersburg. The Commission also found that Time Warner's loss of subscribers to GTE is further evidence of competition in the city. In Pinellas County, the Commission found that GTE's current service area covered about 15% of the County, with construction to be completed within three years. It also found that Time Warner's loss of subscribers to GTE was persuasive evidence that competition was present in the County. 6. Wayne, Michigan 202. The City of Wayne awarded a cable franchise to Ameritech in March 1996. Ameritech offered 80 channels on its basic and expanded basic tiers and included channels such as the History Channel, ESPN2, the Golf Channel and the Disney Channel at no additional cost. Its basic and expanded basic rates were $9.95 and $23.95, respectively. However, Ameritech offered free basic and expanded basic services for the first two months, free installation, and free Showtime, The Movie Channel, Flix and Sundance Channel for two months. Time Warner, the incumbent provider, offered a total of 60 channels on its basic and expanded basic service tiers. The rates were $11.26 and $20.90 for basic and expanded basic services, respectively. 203. Following Ameritech s entry to the cable market, Time Warner (with about 5,000 subscribers): (a) lowered the price of its expanded basic services; (b) introduced a subscriber retention program (which gives the subscriber the choice of two free months of cable service or free Cinemax for a year in return for a one-year subscription); (c) added 10 to 11 channels to its expanded basic service; (d) moved two premium channels, the Disney Channel and the sports PASS channel, to expanded basic at no additional charge; and (e) upgraded its plant to a 750 MHz system, with 550 MHz being used for analog and 200 MHz reserved for digital. 204. The incumbent cable operator's petition for determination of effective competition was granted in March 1997. The Commission found that Ameritech's overbuild of Time Warner's system is virtually complete in the City of Wayne and that Ameritech's services reduced Time Warner's subscribership. Further, Ameritech's franchise agreement requires Ameritech to provide numerous public benefits to the City of Wayne, such as free cable service to Wayne City Hall, police and fire stations, public schools, and public libraries. B.Preliminary Findings 205. The actual case studies detailed above address competition between incumbent cable systems and overbuilders, all of which are using similar wired delivery systems. In the current case studies as well as in the case studies in the last report, incumbent cable operators facing competition from MVPDs using wired delivery appear to be responding: (1) by offering better customer services, new services, and new products; and (2) by offering lower prices or some form of price discounting. MVPD entrants appear to be focusing on similar strategies in their efforts to win customers. 206. In the markets studied, some incumbents increased their service offerings in an attempt to protect or maintain customer bases in the face of entry. Operators added new channels in Berea, Columbus Grove, Fairfield-New Haven, Sterling Heights, and Wayne. Some of the new channels added were previously offered a la carte channels (such as the Disney Channel) and moved onto expanded service tiers at no additional cost. However, in Berea, Fairfield-New Haven, and Thousand Oaks, the channel line-up of the incumbent was equal or larger than that of the entrant. Thus, in contrast to the preliminary finding in the 1996 Report, the tendency for entrants to enter the market with a larger channel line-up than the incumbent is not as apparent in 1997. 207. There is also some evidence that incumbent cable operators continue to lower prices when competing with LEC and other wired cable overbuilders. Incumbent cable systems in Berea, Fairfield- New Haven, St. Petersburg, Thousand Oaks, and Wayne appear to be offering substantial discounts, between 20 and 50%, on basic or expanded basic services. Incumbents have attempted to limit such price reductions by discounting only for a limited period of time, to only those customers who can switch to a competing service, or only if additional services are taken. 208. Entrants also appear to be competing on the basis of price. Entrants in Connecticut and Thousand Oaks encouraged subscribers to switch to its services by offering lower prices -- not larger service tiers -- than those offered by incumbents. In addition, some entrants discount their rates further if the subscriber takes additional non-video services. In Connecticut, for example, SNET offered a $30 voucher good toward the purchase of any other service offered by SNET. 209. The incumbent operators in all six cases have already petitioned for relief from current cable rate regulations on the ground that they face effective competition. In Berea, Columbus Grove, Sterling Heights area, Thousand Oaks and Wayne, the incumbents' petitions have been granted. As we stated in the last report, we expect incumbents and entrants to compete differently where these petitions are granted by the Commission. Since the current rate regulations under certain circumstances prohibit cable operators from providing selective rate discounting, deregulated cable operators have a greater ability to provide selective rate discounts to maintain their subscriber base in the market. 210. We will continue to monitor the extent of competition as incumbent operators compete with new cable operators and other MVPDs to gain subscribership. Price discounts, improved services, and new services must be sustained over a longer time period before we can determine whether such consumer benefits are a transitory or permanent reaction to competition. We believe that implementation of the 1996 Act together with technological improvements (e.g., digital technology and enlarged channel capacity) could make new entrants more effective competitors. Such competition in the marketplace is just emerging, however, making it impossible for us to predict the extent to which competition will develop over time and constrain cable systems' exercise of market power. Because the cable industry is generally in the process of adding channels, upgrading facilities, and improving customer service, it remains difficult to determine changes responsive to competition and those taking place on a more general basis. V. ISSUES RELATING TO FEDERAL LAWS AND REGULATIONS 211. In this section, we discuss a variety of federal laws and regulations that affect competition in the video marketplace, including the Commission's progress to date in its continuing implementation of the 1996 Act. In particular, we describe developments related to over-the-air reception devices, inside wiring, pole attachments, television towers for DTV, program access issues, horizontal ownership issues, copyright act issues, MVPD carriage of broadcast signals, public service obligations for DBS, and navigation devices. A. Over-the-Air Reception Devices 212. Section 207 of the 1996 Act directed the Commission to "promulgate regulations to prohibit restrictions that impair a viewer's ability to receive video programming services through devices designed for over-the-air reception of television broadcast signals, multichannel multipoint distribution service, or direct broadcast satellite services." This provision is intended to provide consumers with access to a broad range of video programming services. The Commission adopted rules that prohibit inappropriate government and nongovernment restrictions on the installation, maintenance or use of reception devices located on property that is within the exclusive use or control of the viewer and in which the viewer has a direct or indirect ownership interest. The Commission sought comment in a pending Further Notice of Proposed Rulemaking on how to treat the placement of antennas on property in which the viewer does not have an ownership interest and exclusive use or control -- e.g., rental apartments and MDU common areas -- and on a proposal to allow an association to install a community antenna as an alternative to allowing individual antennas. 213. The over-the-air reception devices ("OTARD") rule applies to satellite dishes (including DBS and other DTH satellite dishes) one meter or smaller in diameter, or dishes of any size located in Alaska; MDS, MMDS and LMDS (i.e., wireless cable) antennas one meter or smaller in diagonal measurement, plus a mast if needed; and television antennas of any size. The rule prohibits governmental and private restrictions that impair the ability of antenna users to install, maintain, or use over-the-air reception devices or to receive acceptable quality signals, except where such restrictions are necessary "to accomplish a clearly defined safety objective" or "to preserve an historic district listed or eligible for listing in the National Register of Historic Places . . ." 214. Since the rules became effective on October 14, 1996, the Cable Services Bureau has received 38 Petitions for Declaratory Ruling and three Petitions for Waiver. Thirteen petitions have been resolved informally, and orders have been issued on six others. The Bureau has also facilitated informal resolution of numerous disputes between antenna users and restricting entities before they reached the petition stage. The Bureau frequently achieves informal resolution by informing the regulating entity, which is usually a homeowner's association, about the rule and explaining how the rule would apply in a particular situation. Where necessary, the Bureau consults with both the antenna user and the association to reach a resolution. 215. Of the six orders issued by the Bureau, five involved preemption of homeowner associations' regulations that unduly restricted consumers' ability to install reception devices. One homeowner's association claimed its restrictions were necessary to preserve an historic district and thus permissible under the OTARD rule, but the Bureau found inadequate evidence to support the claim. Another homeowner's association failed to offer sufficient evidence to support its claim that petitioners could receive acceptable quality signals by placing an antenna in their attic. Three other petitions involved regulations that completely prohibited the installation of exterior antennas without justification on either safety or historic preservation grounds, while another concerned regulations that prohibited antenna installation unless the homeowner complied with an unspecified prior approval process related to aesthetic factors. The sixth order preempted a governmental restriction in Meade, Kansas, requiring permits and prior approval for antenna installation and compliance with unspecified setback requirements under penalty of a $500 a day fine. 216. Commenters argue that the rules as presently crafted give local government authorities and homeowners associations many opportunities to block competition. For example, several commenters contend that the rules as adopted are unfair and not consistent with the intent of Congress because they do not extend to renters and other consumers who do not have exclusive use of areas suitable for antenna installation. BellSouth asserts that the rules do not go far enough to preempt permit or other advance approval requirements, and that they provide an incentive for the adoption of illegal antenna restrictions that have no legitimate public safety objective. These concerns will be considered by the Commission in connection with the pending OTARD reconsideration petitions and the Further Notice of Proposed Rulemaking. 217. ICTA and OpTel claim that many jurisdictions have restricted installation and construction of new antennas, limiting the deployment of more widely dispersed and cost- effective competitive video providers, while others have sought to create new fees or taxes for competing MVPDs due to concerns that increased competition will result in a reduction in franchise fees. They recommend that the Commission broaden its federal antenna preemption to include microwave and other antennas used to deliver video programming, and closely scrutinize local fees or taxes imposed on competitive MVPDs. We note, however, that Section 207 authorizes the Commission to preempt local regulations restricting reception devices, not transmission antennas or towers. Moreover, while the imposition of disparate taxes on competitors can have a distorting impact on competition, commenters have not presented probative evidence that such taxes and fees are a widespread occurrence that is adversely affecting competition and warrants Commission action or a recommendation that Congress address this situation. 218. The preemption of antenna placement restrictions contained in Section 207 eliminates some barriers to competition by spectrum-using video distributors. However, in some situations, the elimination of restrictions leaves unclear the question of whether MDU residents within a building can gain access to an acceptable receiving location. This issue will be addressed in the Further Notice of Proposed Rulemaking. Depending on the outcome of those proceedings, additional antenna placement rights may be necessary if competition for individual MDU subscribers is to take place on a broader basis. B. Inside Wiring 219. In previous Reports, the Commission noted that strategic behavior by incumbent firms can create impediments to entry and competition by rival service providers. Strategic behavior may be designed to raise rivals' costs or decrease their access to customers, and can deter would-be competitors' entry by creating a credible threat that entry would be unprofitable. Various commenters assert that exclusive contracts for MDUs and lack of access to inside wiring impede competition for multichannel video programming services to MDU residents. These commenters advocate moving the MDU demarcation point to the building entry or to the location at which the wire becomes dedicated to serving a specific subscriber unit, prohibiting incumbent cable operator and/or landlord limitation of competitive access, and prohibiting or limiting exclusive MDU service agreements. 220. On October 17, 1997, the Commission released a Report and Order and Second Further Notice of Proposed Rulemaking concerning inside wiring, which is designed to facilitate competition among MVPDs serving MDUs. The Order establishes procedures for the orderly disposition of MDU wiring (including home run wiring and home wiring) in the event the MDU owner wants to switch its entire building to an alternative service provider, or wants to permit an alternaive provider onto the premises to compete for the right to use inside wiring on a unit by unit basis. The Order also allows individual subscribers to install their own home wiring or to add to their service provider's home wiring. The Order adopts no rules relating to exclusive agreements for the provision of multichannel video programming services to MDUs. The Order, however, seeks comment concerning the possibility of the Commission's adoption of certain restrictions on such agreements. 221. The rules adopted were limited in scope, applying to MDU home run wiring only where the incumbent provider no longer has a legally enforceable right to remain on the premises. If the Commission had more explicit authority to address wiring transfer and compensation issues, policies could be adopted to further facilitate competition in MDUs, including ongoing building and unit-by-unit competition. C.Pole Attachments 222. In the 1996 Report, we noted that Congress had directed the Commission to issue new pole attachment formulas within two years of the effective date of the 1996 Act. The Commission is presently considering, in separate proceedings, issues related to elements of the pole attachment rate formula, the use of current presumptions, the use of gross versus net data, and the implementation of a methodology to ensure just, reasonable and nondiscriminatory rates for pole attachments, conduits, and use of rights of way. 223. In the Notice, we sought information that would demonstrate whether the rates charged for pole attachments by exempt cooperatives and governmental entities impede or promote competition, especially in rural areas. All pole attachment rates are subject to negotiation, but the pole rates charged by non-exempt utilities are subject to federal regulation where the parties are unable to resolve a dispute over such charges. Pursuant to a statutory exception, cooperatives' and governmental entities' pole attachment rates are not currently subject to regulation in the event of a dispute. 224. A few commenters contend that the cooperative exemption should be eliminated, arguing that unregulated pole owners have increased pole attachment rates significantly in recent years, often exceeding the national average. NCTA claims that although cooperative utilities were found to charge the lowest pole rates when the exemption was adopted in 1978, they now often charge the highest rates. Commenters relate several examples of significant pole attachment rate increases where cooperative or municipal entities had announced plans to enter the telecommunications service market. Similarly, both SCBA and NCTA assert that many cooperatives have become DBS retailers, and that this has provided cooperatives with the incentive to obstruct cable competition through unreasonable pole attachment conditions and rates. 225. In contrast, APPA maintains that the few examples of allegedly unreasonable rates offered by commenters represent only a fraction of the pole attachment agreements in existence, and do not justify elimination of the exemption. APPA also contends that it is of no consequence that some cooperatives' pole rates are above the national average since that average is derived from many values above and below it, and may reflect below-cost rates as well. APPA claims that eliminating the exemption that government entities, cooperatives and railroads have from federal pole attachment requirements would be harmful to small electric utilities, which generally lack the resources and databases necessary to comply with the Commission's complex pole attachment requirements. Commenters who support the exemption cite a survey of 525 NRECA members which found that: (a) more than 93% of cooperatives own poles that are jointly used by other utilities; (b) the average rate charged by cooperatives is $6.71 per pole; (c) 76% of cooperatives attach to poles owned by other entities, for which they are charged an average of $9.02 per pole; and (d) 75% of cooperatives do not recover the attaching entity's proportionate share of the full cost of the pole in their rates. NRECA also disputes claims that many cooperatives offer DBS service, noting that there are some 1,000 rural electric cooperatives in the U.S., but less than 10% participate in DBS. 226. The pole attachment rate regulation function is one that is shared between the Commission and state and local governments, with state and local governments having priority in those situations where they choose to regulate. The initial congressional decision to exempt cooperatives and government entities appears to have been based, at least in part, on the implicit assumption that these entities were functioning not just as businesses providing utility pole and conduit space but as public representatives performing a regulatory or quasi regulatory function. When these cooperatives and municipal entities are themselves engaged in the provision of communications services a conflict of interest may result such that the rates charged to competitors may no longer be cost based and that competition may accordingly be distorted. D.Television Towers for DTV 227. The Commission adopted an aggressive implementation schedule for DTV to ensure preservation of a universally available, free local television service and the swift recovery of broadcast spectrum. Digital television may provide a means for broadcast television to become more competitive in the market for delivery of video programming by permitting the use of HDTV or multiplexed services. In order to provide digital television service, broadcasters will need to modify their facilities, including often new transmitters, new digital production facilities and, in some cases, new towers. Of particular concern to broadcasters is the effect of local and state regulations on their ability to upgrade existing towers or to construct new towers in a timely manner. In the Fifth Report and Order, we noted that the difficulties in obtaining zoning and other approvals may interfere with a television station licensee's ability to meet construction schedule requirements. We are, however, also sensitive to the important state and local roles in zoning and land use matters and their longstanding interest in the protection and welfare of their citizenry. 228. The Commission has adopted a DTV Tower Notice to seek comment on whether any action is necessary in order to achieve a rapid roll-out of DTV. The DTV Tower Notice was issued in response to a "Petition for Further Notice of Proposed Rule Making" filed jointly by NAB and the Association for Maximum Service Television ("Petitioners"). In addition, the Commission is working with the Local and State Government Advisory Committee as a means of ensuring that municipal views are considered in this proceeding. E.Program Access Issues 229. The Commission established rules pursuant to the 1992 Cable Act concerning programming arrangements between MVPDs and satellite-delivered program vendors (the "program access" rules). These rules prohibit unfair competition and discriminatory practices by cable operators and certain vertically-integrated programmers that may inhibit competition. In addition, the program access rules prohibit exclusive distribution contracts for satellite cable or broadcast programming between vertically integrated cable operators and programmers, unless the parties can demonstrate to the Commission that the contract is in the public interest. 230. As the Commission has consistently noted, exclusive arrangements can be used to deter entry and inhibit competition from other MVPDs in markets for the delivery of multichannel video programming. We have also recognized, however, that exclusive arrangements can produce efficiency benefits for the parties involved, and may increase competition, which can produce lower prices and increased choice for consumers in programming and distribution markets. By targeting and eliminating those vertical restraints that can impair competition in markets for the distribution of multichannel video programming, the Commission's enforcement of its program access rules is designed to contribute to the long-term performance of both distribution markets and programming markets. Indeed, the program access rules have been credited as having been a necessary factor in the development of both the DBS and MMDS industries. 231. In the 1996 Report, the Commission recognized that improved technology and lower costs are improving the efficiency of terrestrial distribution of programming, particularly over fiber-optic facilities. We noted that, as a result, it appears that it may become possible for a vertically-integrated programmer to switch from satellite delivery to terrestrial delivery for the purpose of evading the Commission's rules concerning access to programming. In its comments, BellSouth asserts that Cablevision Systems Corp., which controls the rights to much of the sports programming in the New York City metropolitan area, will soon launch a fiber-based version of its popular SportsChannel New York service in order to avoid its program access obligations to competing DBS and wireless cable operators. BellSouth contends that marketplace developments have outpaced the original scope of the program access rules, which in their original form did not contemplate that programmers would eventually have the capability of delivering their services through fiber rather than through satellite transmission. 232. BellSouth urges the Commission to commence a rulemaking proceeding to either amend its rules or, where necessary, make recommendations to Congress which at a minimum (1) extend the program access rules to all programmers and broadcast television stations, regardless of whether they are vertically integrated or whether they are satellite-delivered, and (2) prohibit cable programming vendors and local broadcast television stations from requiring video distributors to carry any other programming channel as a condition of granting retransmission consent. 233. According to BellSouth, as horizontal concentration of the cable industry increases, a very small number of operators will control systems in most, if not all, of the largest markets in the country. According to BellSouth, this means that non-vertically integrated programming services will have unprecedented incentives to maintain exclusive distribution arrangements with large MSOs. BellSouth, in reference to Fox News/fX and MSNBC as "cable exclusive" programming, fully expects this trend to become more pronounced in the wake of recently announced joint ventures between non-vertically integrated programmers (e.g., Fox and Microsoft) and vertically integrated cable operators such as TCI, Time Warner, Cablevision and Comcast. 234. BellSouth states that a possible vehicle for amending the program access rules is the recent Petition for Rulemaking filed by Ameritech New Media, Inc. (RM-9097), in which Ameritech proposes that the Commission: (a) guarantee expedited review by imposing specific time deadlines for resolving program access cases; (b) institute a right of discovery to enable complainants to obtain information necessary to prove Section 628 violations; and (c) institute economic penalties in the form of fines or charges to create an economic disincentive discouraging Section 628 violations. WCAI and DIRECTV have asked the Commission to expand the scope of the Ameritech proceeding to include consideration of the issues raised above by BellSouth. DIRECTV alleges that MVPDs continue to experience difficulties in obtaining access to certain programming, such as sports programming, that is indispensable to their ability to compete with cable operators. DIRECTV requests that the Commission address the potential "loopholes" in its program access rules that enable those rules to be exploited by those MVPDs that wield market power. DIRECTV also suggests that, given that the program access rules will expire in the year 2002, the Commission should recommend to Congress that the rules be extended, and that the changes requested above be incorporated into the statute as necessary. In addition, on September 23, 1997, DIRECTV filed a complaint with the Commission, alleging that Comcast, a major cable television provider in the Philadelphia area, has refused to make Comcast SportsNet, its regional sports network, available to DIRECTV for its subscribers in the Philadelphia area. 235. WCAI asserts that the past year's joint ventures between programmers not traditionally considered to be vertically integrated and highly vertically integrated cable operators strongly suggests that the present definition of "vertical integration" is too narrow. WCAI states that the definition fails to encompass the broad variety of business relationships with the cable industry that clearly threaten the availability of programming to cable's competitors. In this regard, a number of the more notable cable programming services introduced over the past year are owned by entities that would not be viewed as vertically integrated under a traditional analysis of that term, e.g., MSNBC (Microsoft and NBC). This is argued to be a particular concern when services, such as NBC or Nickelodeon, promote and advertise services, such as MSNBC or TV Land, that are sold on an exclusive basis and are unavailable to some competitors. 236. Viacom notes that the Commission has determined that there may be circumstances in which exclusivity is appropriate, particularly as it applies to new programming, even where vertical integration exists. It suggests that exclusive agreements are part of the free market system and should only be regulated for specific reasons. Viacom argues that exclusivity agreements benefit both the non- vertically integrated program producers and the cable operators. These agreements can minimize some of the risk which cable operators take when they carry new programming produced by non-vertically integrated program providers. Otherwise, Viacom suggests that competing operators who do not take the risk gain a "free ride" as they do not assume any of the costs and risks by carrying the new, unproven programming. Without exclusivity, cable systems are often less willing to devote the same level of promotional effort and expenditures. Viacom believes that exclusivity benefits program producers in two ways. In the short term, exclusivity agreements enable the independent program producers to secure carriage on cable systems where their programming receives exposure. Because of exclusivity, cable operators will expend enormous efforts to advertise the programming to viewers to ensure its success. In the long run, the agreements provide a future market for new, costly and/or innovative programming. Furthermore, Viacom points out that those who argue for access to particular programming also want the right to refuse to carry packages of programming. 237. The Commission has resolved eight programming access cases since the 1996 Report. These cases are described in Appendix G. In addition, on December 18, 1997, the Commission released a Memorandum Opinion and Order and Notice of Proposed Rulemaking ("Program Access Notice") concerning the program access rules. In the Program Access Notice, we seek comment on: (a) whether the Commission should guarantee expedited review of program access complaints by imposing specific time deadlines for resolving program access cases; (b) whether the Commission should institute discovery as of right to enable complainants to obtain information necessary to prove program access violations; (c) whether the Commission should impose damages in order to discourage violations of section 628; (d) whether the program access rules apply to previously satellite-delivered programming which is converted to terrestrial delivery with the effect of constituting an "unfair method[ ] of competition or unfair or deceptive act[ ] or practice[ ], the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers."; and (e) whether the program access rules should be amended to provide that any cooperative buying group that maintains adequate financial reserves should not require its members to provide joint and several liability for commitments of the group. 238. On its face, Section 628 does not preclude a programmer from altering its distribution method from satellite-distribution to terrestrial-distribution. In the Program Access Notice, we noted that in its comments, DIRECTV seemed to suggest that it contravenes the spirit, if not the letter, of Section 628 if a vertically-integrated programmer moves from satellite-delivered programming to terrestrial-delivered programming for the purpose of evading the program access requirements. Such an action could arguably constitute an "unfair method[ ] of competition or unfair or deceptive act[ ] or practice[ ], the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers." The Program Access Notice seeks comment on appropriate ways to address such situations. It specifically asks commenters to address the statutory basis for any suggested remedial action and whether legislation is needed. It also seeks comment on whether programming that has been moved from satellite to terrestrial delivery can or should be subject to program access requirements based on the effect, rather than the purpose, of the programmer's action. F.Horizontal Ownership Limits 239. Section 11(c) of the 1992 Cable Act directed the Commission to set limits on the number of cable subscribers that can be reached by an MSO. In October 1993, the Commission adopted rules providing that no MSO could pass more than 30% of the households passed by cable nationwide. The cable systems attributable to an MSO are calculated by reference to the attribution rules that the Commission historically has imposed on broadcasters. The Commission's rules permit an MSO to pass an additional 5% of cable subscribers, where the cable systems passing the additional subscribers are minority controlled. In September 1993, the D.C. District Court held in Daniels Cablevision, Inc. v. United States that Section 11(c) violated the First Amendment. The court stayed further District Court proceedings pending an interlocutory appeal of its judgment but did not enjoin the Commission from adopting and enforcing rules limiting horizontal concentration. 240. The Commission voluntarily stayed the effective date of its rules until final judicial resolution of the Daniels decision. In December 1993, the Center for Media Education/Consumer Federation of America filed a Motion to Lift the Stay and a Petition for Reconsideration. Bell Atlantic also filed a separate Petition for Reconsideration. The following month, Time Warner challenged the stayed rules in the D.C. Circuit Court in Time Warner Entertainment Co., L. P. v. FCC, No. 94-1035 (D.C. Cir. 1994). In August 1996, the D.C. Circuit Court consolidated the Daniels appeal regarding the facial validity of the statute and the Time Warner challenge to the Commission's rules, and determined to hold court proceedings in abeyance while the Commission reconsidered its horizontal rules. Most recently, on September 23, 1997, the Consumers Union and Consumer Federation of America submitted a petition to the Commission requesting, among other things, that the Commission lift the stay on its horizontal ownership rules and reevaluate its current horizontal ownership limits. G. Copyright Act 241. The major copyright issues affecting competition in multichannel video programming distribution involve the compulsory licenses for, respectively, satellite and cable retransmission of broadcast signals. These issues include whether the licenses should continue to exist; the level of license fees; the degree of comparability between the satellite and cable compulsory licenses and fees, including whether the satellite license should allow satellite retransmission of local signals within broadcasters' local markets, which the cable compulsory license allows for cable operators; definition of local and distant broadcast signals for retransmission purposes; the applicability of the cable compulsory license to OVS systems and providers; and whether to extend compulsory licensing to Internet retransmission of broadcast signals. Recently, the Copyright Office issued a report, described below, concerning these and other broadcast retransmission issues and the Librarian of Congress issued an Order, also described below, concerning royalty rates for satellite retransmission of broadcast signals. 242. Several commenters advocated copyright law changes that would allow satellite carriers to provide broadcast network programming to all consumers, thereby enabling DBS distributors to compete effectively against other MVPDs. SBCA, NRTC, and PrimeTime24 contend that the satellite compulsory license to retransmit broadcast network signals is anticompetitive because the license is limited to retransmission to "unserved households." These commenters claim, among other things, that the current definition of an "unserved household" does not adequately capture all households that cannot receive clear television pictures from over-the-air broadcasts. In addition, NRTC and SBCA advocate a compulsory network broadcast retransmission license which would allow satellite retransmission to all subscribers, with satellite retransmitters compensating local stations. NRTC contends that the inability of satellite carriers to retransmit network signals to "served" households is contrary to the purposes of the 1996 Act and the nation's pro-competitive telecommunication policies. SBCA notes that the satellite compulsory license, embodied in Section 119 of the Copyright Act, is not permanent, while the cable compulsory license to retransmit network broadcast signals is permanent. In addition, Bell Atlantic seeks confirmation that open video systems meet the copyright statute's definition of a cable system, so that OVS operators and programmers may use the cable compulsory copyright license. 243. Copyright Office. On August 1, 1997, the Copyright Office released its Retransmission Report concerning copyright licensing of the retransmission of broadcast signals. The Retransmission Report contains several significant recommendations to Congress regarding cable and satellite retransmission of broadcast signals. The Copyright Office recommends equal treatment of multichannel video programming delivery systems (except to the extent that technological differences or differences in regulatory burdens justify different copyright treatment), including equalization of cable and satellite compulsory license fees (except for such fee differences as are justified by regulatory, technological or economic factors), continuation of the satellite compulsory retransmission license for as long as cable operators have a compulsory retransmission license, and inclusion of OVS systems as entities eligible for use of the cable compulsory license; eventual termination of compulsory licensing for retransmission of broadcast signals; adjustment of license fees to reflect fair market value; equalization of independent station and network signal retransmission fees and provision of cable retransmission royalty rights to owners of network programming (as exists for satellite retransmission royalties), simplification of the cable compulsory license rate structure; reduction of the small cable system subsidy; and retention of the minimum retransmission fee applicable to all cable systems. The Copyright Office also recommended postponing, as premature, any action concerning compulsory licensing of Internet retransmission of broadcast signals. 244. The Copyright Office recommends that section 119's compulsory license for satellite retranmission be extended to allow retransmission of all television broadcast station signals, commercial and noncommercial, within each station's local market, defining a commercial station's local market in accordance with the Commission's rules and defining a noncommercial station's local market as all communities wholly or partially within 50 miles of each station's community of license. The Office notes that technological advances may enable satellite carriers to retransmit local affiliates' network signals to subscribers within the stations' respective local markets, thus eliminating the need to import distant network signals. 245. The Copyright Office rejects the concept of defining unserved households by a picture quality standard instead of the current Grade B signal standard as "too subjective, legally insufficient, and administratively unworkable." The Copyright Office also finds the Grade B standard to be "less than precise and cost inefficient when applied to individual household determinations." The Copyright Office notes that future widespread use of over-the-air digital television may allow a clear standard for determining when a household receives a good quality television picture from an over-the-air signal. 246. Librarian of Congress. The 1994 amendments to the Copyright Act required satellite compulsory license fees for retransmission of broadcast signals to be set at "fair market value," considering the competitive distribution environment, the economic impact of the fees on copyright owners and satellite carriers, and the continued availability of retransmissions to the public. On October 27, 1997, the Librarian of Congress issued a final order setting a monthly rate of 27 cents per subscriber for satellite retansmission of distant signals. This is an increase of 21 cents, from 6 cents per subscriber, for distant network signals and an increase of 9.5 cents, from 17.5 cents per subscriber, for distant superstation signals. The Librarian's order also set a rate of zero for retransmission of local superstation signals and for local network signals retransmitted to unserved households. These rates are to become effective January 1, 1998. 247. DBS operators' current lack of local broadcast programming impairs DBS services' competitiveness with cable service. A consideration of satellite services' carriage of local or other network programming would include a balance of the possibility of private negotiation for program rights, the scope of any compulsory satellite license or other copyright limitations, the scope of any must carry or other carriage obligations, and the extent of statutory parity between cable and DBS. In considering possible changes in copyright, existing differences between the copyright treatment of cable retransmissions and of satellite retransmissions should be removed where possible so that the compulsory licenses do not affect the competitive balance between the satellite carrier and cable industries. H.MVPD Carriage of Broadcast Signals 248. The mandatory carriage or "must carry" provisions of the Communications Act and Commission's rules affect the mix of programming offered by cable and OVS operators as those entities are obligated to carry certain qualified local broadcast stations. Pursuant to the Communications Act, cable and OVS operators have an obligation to set aside a specified number of channels, based on their total channel capacity for the carriage of local broadcast signals. Under these statutory provisions and the Commission's rules, commercial broadcast television stations may elect whether they will be carried by local cable television systems or open video systems under the must carry or retransmission consent rules. A station electing must-carry rights is entitled to insist on cable carriage in its local market area, which the Commission currently defines in terms of Arbitron's areas of dominant influence. Under retransmission consent, the station and the cable or OVS operator negotiate a carriage arrangement and the station is permitted to receive compensation or other consideration in return for carriage. Broadcast stations are required to make this election every three years. Noncommercial educational broadcast television stations are entitled to request must carry status if they are licensed to a community within 50 miles of the cable system headend or they place a Grade B contour over the system's principal headend. They do not have the right to elect retransmission consent. 249. The Cable Services Bureau has acted on 452 must carry complaints since the passage of the 1992 Cable Act. Of these cases, 245 complaints were granted and 207 were either dismissed or denied. The Bureau also has acted on 206 market modification requests since the passage of the 1992 Cable Act. Of these cases, 145 requests were granted and 61 requests were either dismissed or denied. 250. As part of the must carry provisions of the 1992 Cable Act, Congress directed the Commission to initiate a proceeding at the time that we prescribe modified standards for advanced television, now referred to as digital television ("DTV"). This section required the Commission "to establish any changes in the signal carriage requirements of cable television systems necessary to ensure cable carriage of such broadcast signals of local commercial television stations which have been changed to conform with such modified standards." In the 1996 Act, Congress stated that no ancillary or supplementary broadcast service shall have must carry rights. In the legislative history clarifying this language, Congress also stated that it did not intend "to confer must carry status on advanced television or other video services offered on designated frequencies" and added that the "issue is to be the subject of a Commission proceeding under section 614(b)(4)(B) of the Communications Act." 251. In the context of adopting digital television standards, the Commission sought comment on relevant must carry rules or policies that might be needed both during the transition to DTV and once DTV has replaced the current analog system. While the Commission has received comments on DTV signal carriage issues, we intend to seek further comment. Depending on the rules that the Commission may ultimately adopt, if any, cable and OVS operators subject to the must carry rules would be required to allocate a portion of their channel capacity to the carriage of DTV signals. Must carry obligations would, therefore, affect the types and variety of services that cable and OVS operators could offer their subscribers in competition with other MVPDs. 252. The carriage of local broadcast signals by any other MVPD is subject to retransmission consent from the broadcast station licensee. In addition, under the Copyright Act, satellite providers are prohibited from delivering any broadcast television network signals, except in areas that are unserved by over-the-air signals. Satellite providers appear to believe that local signals are an important part of any programming package. As noted in last year's report, in response to a request for a declaratory ruling from ASkyB that DBS operators may, under the satellite carrier compulsory license, retransmit the signals of network affiliated television broadcast stations within their local markets, the Copyright Office stated that "inclusion of locally retransmitted network stations is not subject to challenge by the Copyright Office. Recent advertising by DBS entities emphasize that when combined with an indoor or outdoor antenna, a DBS dish can provide the same complement of local broadcast signals as cable television service. Earlier this year, EchoStar announced plans to distribute local broadcast signals in 22 local markets serving 43% of all U.S. television households. To add local broadcast signals to its service, EchoStar launched a satellite in October 1997 and plans to launch another satellite in the Spring of 1998. Another satellite service, Capitol, has announced that it intends to offer DBS providers a package that includes all commercial television stations within a given station's designated market area. However, if DBS or other satellite providers were permitted to retransmit local broadcast television signals, carriage requirements could become an issue relevant for the assessment of competition among MVPDs. I.Public Service Obligations for DBS 253. Section 335 of the Communications Act directed the Commission to initiate a rulemaking to impose public interest or other requirements for providing video programming on DBS service providers. Section 335(a) states, among other things, that any regulations shall, at a minimum, apply the political broadcasting rules of the Communications Act to DBS providers, including the access to broadcast time requirement of Section 312(a)(7) and the use of facilities requirements of Section 315. This section also requires the Commission to examine the opportunities that the establishment of DBS service provides for the principle of localism and permits the Commission to impose additional public interest obligations on DBS providers if they are warranted. Section 335(b) mandates that DBS providers reserve between 4% and 7% of their channel capacity exclusively for noncommercial programming of an educational or informational nature and states that DBS providers shall meet this requirement by making channel capacity available to national educational programming suppliers, upon reasonable prices, terms and conditions. 254. In March 1993, the Commission initiated a proceeding to implement Section 335. In September 1993, after the Commission had received comments in this proceeding, the U.S. District Court for the District of Columbia held that Section 335 was unconstitutional. This ruling effectively froze the proceeding. On August 30, 1996, the U.S. Court of Appeals for the District of Columbia Circuit reversed the District Court and held that Section 335 was constitutional. In January 1997, the Commission issued a Public Notice seeking to update and refresh the record in its proceeding implementing Section 335. 255. In response to the Notice, Alliance contends that the Commission should continue to protect the public interest and acknowledge the importance of the effective use of noncommercial channel capacity by DBS program providers as well as cable and OVS operators. Alliance suggests that set- aside channels are "functionally equivalent" to the public, educational and governmental ("PEG") requirements on cable systems and therefore create a "level playing field" for all MVPDs. Furthermore, Alliance believes that the set-asides allow the DBS providers to fulfill their public interest obligations by offering a platform for the public to express its diversity of opinions, to provide a forum for educational and noncommercial information, and to serve the DBS industry's concern for competitive fairness. SBCA states that the DBS public service requirements will be the first rules designed for a national subscription service. Because the programming that will be used to satisfy this obligation must be attractive to a national subscription audience, SBCA contends that the rules must give DBS providers flexibility in designing their public service program packages. The Commission is developing a full record in response to the Public Service Obligations NPRM. J.Navigation Devices 256. Section 629 of the Communications Act requires the Commission, in consultation with appropriate industry standard-setting organizations, to adopt rules to assure the commercial availability of navigation devices from manufacturers, retailers and other vendors not affiliated with any MVPDs. Navigation devices are television set-top boxes, converter boxes, interactive communications equipment, and other equipment that a consumer uses to access video programming. The most common navigation devices in use today are the boxes that sit on top of television sets to access cable television which typically include a decrambler and tuner. Section 629 provides that any rules the Commission adopts may not jeopardize the security of video services offered or impede a video programming provider's legal rights to prevent theft of service. Multichannel video programming providers may continue to offer equipment as long as they do not subsidize the equipment prices with the charges for their services. The rules will lapse when the Commission determines that the markets are competitive and that elimination of such rules would serve the public interest. 257. In February 1997, the Commission issued a Notice of Proposed Rulemaking to implement Section 629. In the Navigation Notice, the Commission sought comment on: (a) a tentative conclusion that Section 629 is broad in scope with respect to equipment and service providers; (b) a tentative conclusion that consumers have a "right to attach" enabling them to obtain equipment from retail outlets and to use it with their programming distributor's system; (c) a recognition that harm to distribution systems must be prevented; (d) a recognition of the need to protect the integrity of equipment designed to prevent unauthorized reception of service and of the continued validity of restrictions on the manufacture and sale of equipment intended to facilitate signal theft; (e) an examination of the feasibility of unbundling security functions from nonsecurity navigation equipment; and (f) an expressed desire to minimize government standard setting and to promote voluntary standard setting. VI. VIDEO DESCRIPTION 258. The 1996 Act required the Commission to report to Congress on appropriate methods and schedules for phasing video description into the marketplace and other technical and legal issues related to the widespread deployment of video description. In our Video Accessibility Report to Congress, we reported on the current status and possible future of video description service but concluded that the record before us was insufficient to assess appropriate methods and schedules for phasing in video description. Thus, in the Notice on video competition, we requested information regarding video description that will permit us to provide Congress with additional findings. We specifically solicited data on: the number of broadcast television stations and MVPDs currently capable of transmitting and decoding a secondary audio programming ("SAP") signal and the costs of adding this capability; the cost of providing video description and possible funding mechanisms; whether the implementation of digital technologies will provide additional audio channels that will increase the feasibility of video description; specific methods and schedules for ensuring that video programming includes descriptions; technical and quality standards; any current efforts to coordinate new technology standard-setting and funding mechanisms; and other relevant legal and policy issues. 259. Video description is an aural description of a program's key visual elements that is inserted during natural pauses in program dialogue. It generally describes actions that are not otherwise reflected in the dialogue, such as the movement of a person in a scene. Since consumers may find the additional narrative intrusive or distracting, programmers typically use technology designed to allow the viewer to choose whether or not to receive video description. The most widespread video description technology uses the SAP channel, a subcarrier that allows each video programming distributor to transmit a second soundtrack. Use of a SAP channel allows the viewer to choose between the primary soundtrack and an alternative soundtrack. Each SAP-equipped broadcast signal has only one SAP channel. 260. Video description using the SAP channel is only one of several methods that can be used to make video programming more accessible to persons with visual disabilities. Other methods include simultaneous transmission of the descriptive audio over a radio reading service and "open" video description, in which the descriptions are included in the primary soundtrack used by all viewers. 261. WGBH reports that 144 PBS member stations have SAP capability, reaching more than 78% of American households, and that SAP-based audio services are available to 44% of all television households through SAP-equipped affiliates of at least one of the major commercial networks. WGBH reports that the cost of installing SAP capability for PBS stations which have added SAP capability ranges from $5000 to $25,000 depending on the size of the station. RP reports that installation of SAP equipment would cost approximately $50,000 per broadcast station. RP also notes that cable operators would need to install equipment for each channel requiring SAP capability. NCTA notes that while many cable operators already carry SAP signals, SAP is being used to provide other services, including Spanish language audio. Cable operators that did not already have it would need to install SAP capable equipment at their headends in order to transmit the SAP channel to subscribers. WGBH estimates that the cost for MVPDs to add SAP capability ranges from $500 to $5,000. Any programmer providing video description would also have to have SAP capable equipment to deliver the video description to cable headends and other MVPDs. 262. According to the National Center for Health Statistics, 8.6 million persons in the U.S. have visual disabilities. Video description makes video services more accessible to these persons and allows the people with visual disabilities to more fully participate in the social and cultural benefits offered by video programming. ACB estimates that as many as 500,000 children with visual disabilities under the age of 18 may benefit from improved access to video service. Several commenters representing the people with visual disabilities assert that video description offers benefits beyond the visually disabled community, estimating that as many as 12 million people may benefit from video description, and that this figure may increase as the population ages. However, MPAA suggests that video description is of limited utility regardless of the number of persons with visual disabilities, and that some people with congenital blindness find video description to be a nuisance. Other commenters dispute this assertion, arguing that there is no evidence to support it and, even if true, video description can simply be turned off. RP argues that video description should not be subject to a cost-benefit analysis, asserting that such services are a civil right. 263. We previously reported that video description costs range from $1000 per program hour to $10,000 for a full length feature film. NCTA states that the cost of video describing a full length feature film can range as high as $10,000. MPAA cites Turner Classic Movies' estimate of $3,500 an hour, excluding the cost to synchronize and lay the video description onto the audio track, tape costs and edit room operator costs. WGBH states that the cost of video description has dropped from $4,000 per hour to $3,400 per hour, and that this cost amounts to as little as .26% of the budget of a single episode of a prime time program. Other commenters report that they have been able to produce accessible programming using in-house resources and alternative technologies. For example, Kaleidoscope asserts that the rates previously cited by the Commission are overstated due to reliance on outside contractors, noting that it is able to hold the cost of description down by in-house production. Kaleidoscope does not provide specific cost figures for video description noting that video description is incorporated into the production budget as part of the overall writing and editing figures, which it claims "do not amount to much more than a program without video description." NTN states that it routinely provides video description for between $1,000 and $1,200 an hour, a cost that NTN claims is likely to be reduced through the use of digital technology. The services provided by Kaleidoscope and NTN, however, use "open" video description. 264. According to National Coalition, the market will not provide adequate incentives for video description, and increased availability of the service is dependent upon action by the Commission. Similarly, WGBH notes that while SAP-capable television receivers are increasingly available, the market has failed to respond with increased availability of video description as promised by the programming industry. According to WGBH, no commercial television programming has offered video description without public funding. WGBH also asserts that there are currently sufficient video description resources in existence to begin a phase-in schedule. RP asserts that video description represents a virtually untapped potential market for both video producers and equipment providers. RP claims that video description represents between $5 billion and $21 billion in potential revenue for the cable industry alone. 265. In the Video Accessibility Report, the Commission found that any schedule for expanding the use of video description depends, in part, on implementation of advanced digital television, which may make the distribution of additional audio channels feasible and facilitate implementation of video description. Commenters recognize that, in the current analog environment, SAP channel capacity is a limited resource and video description must compete with other possible uses of the SAP channel. The video programming industry notes that it has developed a profitable niche market by providing second language audio to serve the Spanish-speaking community. We previously concluded that funding will also affect any schedule for the widespread use of video description, as it appears that advertising support alone is unlikely to be sufficient to fund this service given the costs involved. Funding remains a major concern. For example, MPAA notes that currently available sources of public funding for video description are becoming increasingly scarce. Other commenters suggest that public funding should not be the criteria for additional Commission action, because such funding was only intended to "prime the pump" by demonstrating the viability of the service and allowing a market to develop. 266. With respect to specific methods and schedules for video description, National Coalition proposes a seven-year implementation schedule for video description of prime time and children's programming, comparing this phase in period to the eight years schedule for closed captioning of prime time television. National Coalition places special emphasis on describing prime time and children's programming. Under this proposal, broadcasters would be required to provide at least four hours of prime time video description per week beginning in the fall of 1998, and another three hours per week would be added each year until all 22 hours of prime time were described. National Coalition further proposes that within two years television broadcasters be required to provide video description for the three hours per week of children's educational programming required by the children's educational television programming requirements. National Coalition also recommends that the Commission defer establishing implementation schedules for other types of programming to allow for the development of video description resources and vendors. For instance, National Coalition recognizes the special demands of describing live events, including news and sports. National Coalition also recognizes that in some cases programming such as sporting events are simultaneously carried on radio which may function as an effective substitute for a video described audio track. In developing video description requirements for programming other than prime time and children's programming, National Coalition recommends the Commission reserve sufficient regulatory flexibility to accommodate programming whose nature or financing does not lend itself to video description. National Coalition also suggests that the Commission develop an undue burden exemption similar to that developed for closed captioning. It further recommends that the Commission require public safety announcements to include an aural tone to alert the blind to turn on a radio or use the SAP channel for an aural message. 267. In the Video Accessibility Report, the Commission noted that copyright liability poses a significant hurdle to a widely applicable video description requirement. NCTA and other video programming industry commenters continue to cite potential copyright issues as an obstacle to more widespread deployment of video description. These commenters argue that video description requires the addition of original narration, thus creating a derivative work and copyright liability. Entities currently creating video description indicate that they have had no difficulty with copyright issues. WGBH, for example, claims that copyright holders have been quite willing to permit video description of their works because they continue to hold the copyright to the described version of the work, and the description adds value to the original work. Kaleidoscope provides video description for originally produced material or material already in the public domain in order to avoid any potential copyright problems. Kaleidoscope also suggests that if the Commission adopts mandatory video description requirements, copyright liability could be waived for a video programming provider if the provider could demonstrate that it had made good faith efforts to obtain the rights to video describe a particular product. 268. Based on the information received in response to this and earlier requests for information, it is certain that "closed" video description is feasible. The necessary technology exists, and, as noted by commenters, some video description is already being provided, both on cable and broadcast television. Many televisions are equipped with SAP capability, and the number continues to increase. With respect to digital television, we note that the provision of video description is entirely consistent with our regulations regarding digital television. As we previously stated, the DTV standard can accommodate video description, even though there is no data capacity reserved exclusively for video description. In that order, we found that the DTV standard provides a method of including video descriptions, and stated that, if, in the future, video description capability were to be required, we expect the Advanced Television Systems Committee ("ATSC") to consider appropriate changes to the ATSC DTV standard and that we would consider appropriate changes to our rules. In the digital environment, video description will not have to compete with foreign language audio for use of one SAP channel. 269. On the other hand, the costs of providing video description are substantial. Video description can cost $3,400 per program hour. In addition, each programming network must have SAP capable equipment in order to deliver the video description. MVPDs may need to add SAP capability to the headend equipment for each channel used to provide video description, which may cost from $500 to $5,000. A broadcaster wishing to produce programming that will have video description needs additional equipment. WGBH reports that for the public television stations which have added SAP capability, upgrading has cost between $5,000 and $25,000. The costs of providing video description are still quite high, significantly higher than those associated with closed captioning. 270. There is evidence that video description is a valuable addition to television programming for persons with visual disabilities and that it helps the viewer experience the totality of the programming. The research described in Who's Watching demonstrates that video description enables families to watch television together, and enhances their enjoyment. Continued public funding could foster the development of video description services to the point where widespread implementation of video description could become feasible, and could ultimately create a commercial market for video description independent of public funding. Closed captioning has been in existence longer than video description, and has had the benefit of a long history of government support, which has encouraged its growth and widespread implementation. The advances of the digital age, combined with continued federal funding, could allow the development and expansion of video description to occur more quickly than occurred in the case of closed captioning. 271. In response to Congress' request that we report on appropriate methods and schedules for phasing video descriptions into the marketplace, any requirements for video description should begin with only the largest broadcast stations and programming networks that are better able to bear the costs involved. The appropriate timeframe for any requirements might take into account DTV penetration and availability. For example, a minimal amount of video description could be required to be provided by the larger broadcast stations in the larger markets, and by the larger video programming networks. In any event, any requirement should have an exemption for smaller broadcasters, MVPDs, and programming networks. With respect to Congress' request for a definition of programming for which video descriptions would apply, we believe that priority should be given to programming where there is significant action not apparent to persons with visual disabilities. We note that National Coalition recommends beginning with prime time television and also emphasizes video description for children's educational programming. In Who's Watching, survey results showed that dramas or mysteries, nature or science, news and information, comedies, and music programs or videos topped the lists of television programs that respondents would like to have described. Whether funded through public sources or through a more direct regulatory requirement, a period of trial and experimentation would be beneficial so that more specific information would be available as to the types of programming that would most benefit from description, the costs of providing video descriptions, and other matters. VII. ADMINISTRATIVE MATTERS 272. This 1997 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). 273. It is ORDERED that the Office of Legislative and Intergovernmental Affairs shall send copies of this 1997 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. 274. It is FURTHER ORDERED that the proceeding in CS Docket No. 97-141 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Lis t of Commenters Comments Alliance for Community Media ("Alliance") American Council of the Blind ("ACB") Ameritech New Media, Inc. ("Ameritech") American Public Power Association ("APPA") Bell Atlantic and NYNEX ("Bell Atlantic") BellSouth Corporation, BellSouth Interactive Media Services, Inc. and BellSouth Wireless Cable, Inc. ("BellSouth") Cablevision Systems Corporation ("Cablevision") Clay Electric Cooperative, Inc. ("Clay Electric") DIRECTV, Inc. ("DIRECTV") Echostar Communications Corporation ("Echostar") Florida Electric Cooperatives Association, Inc. ("Florida Electric") General Instrument Corporation ("GI") Home Box Office ("HBO") Independent Cable & Telecommunications Association ("ICTA") Jackson Electric Membership Corporation ("Jackson Electric") Kaleidoscope Television ("Kaleidoscope") Little Ocmulgee Electric Membership Corporation ("Little Ocmulgee") Minnesota Rural Electric Association ("Minnesota Electric") Montana Electric Cooperatives' Association ("Montana Electric") Motion Picture Association of America, Inc. ("MPAA") National Cable Television Association ("NCTA") National Coalition of Blind and Visually Impaired Persons for Increased Video Access ("National Coalition") National Rural Electric Cooperative Association ("NRECA") National Rural Telecommunications Cooperative ("NRTC") Nebraska Rural Electric Association ("NREA") North Carolina Cable Telecommunications Association ("NCCTA") OpTel, Inc. ("Optel") Primetime 24 Joint Venture ("Primetime24") RP International & TheatreVision ("RP") Satellite Broadcasting and Communications Association of America ("SBCA") Small Cable Business Association ("SCBA") United States Telephone Association ("USTA") US WEST, INC. ("US West") UTC (formerly Utilities Telecommunications Council) WECA Division of the Wisconsin Federation of Cooperatives ("WECA") WGBH Educational Foundation ("WGBH") Wireless Cable Association International, Inc. ("WCAI") Reply Comments American Foundation for the Blind ("AFB") American Public Power Association ("APPA") Ameritech New Media, Inc. ("Ameritech") Bell Atlantic and NYNEX ("Bell Atlantic") BellSouth Corporation, BellSouth Interactive Media Services, Inc. and BellSouth Wireless Cable, Inc. ("BellSouth") CBS Inc. ("CBS") Echostar Communications Corporation ("Echostar") ESPN, Inc. ("ESPN") GTE Service Corporation ("GTE") Home Box Office ("HBO") Lifetime Television ("Lifetime") Metropolitan Washington Ear, The National Television Access Coalition ("Metropolitan Washington Ear") Narrative Television Network ("NTN") National Association of Broadcasters ("NAB") National Cable Television Association ("NCTA") National Rural Electric Cooperative Association ("NRECA") National Rural Telecommunications Cooperative ("NRTC") Network Affiliated Stations Alliance ("NASA") Rainbow Media Holdings, Inc. ("Rainbow") RCN Telecom Services, Inc. ("RCN") RP International & TheatreVision ("RP") Small Cable Business Association ("SCBA") United States Telephone Association ("USTA") US WEST, INC. ("US West") UTC (formerly Utilities Telecommunications Council) Viacom Inc. ("Viacom") WGBH Educational Foundation ("WGBH") Wireless Cable Association International, Inc ("WCAI") APPENDIX B TABLE B-1 Cable Television Industry Growth: 1990 - June 1997 (in millions) U.S. Television Households ("TH") Homes Passed ("HP") Basic Cable Subscribers ("Subs") TV Households Passed by Cable (HP/TH) TV Households Subscribing (Subs/TH) U.S. Penetration (Subs/HP) Year Total Change From Previous Year Total Change From Previous Year Total Change From Previous Year 1990 93.1 1.1% 86.0 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% 1995 95.9 0.5% 92.7 1.2% 62.1 4.0% 96.7% 64.8% 67.0% 1996 97.0 1.1% 93.7 1.1% 63.5 2.3% 96.6% 65.5% 67.8% Jan-Jun 97(e) 97.0 0.0% 94.2 0.5% 64.2 1.1% 97.1% 66.2% 68.2% (*) Revised penetration figure based on 1990 Census. (e) Estimated by Paul Kagan Associates. Sources:  U.S. Television Households: 1990 to 1994 - A.C. Nielsen Co. as of January of the following year. Taken from Veronis, Suhler & Associates, Subscribers to Subscription Video Services, The Veronis, Suhler & Associates Communications Industry Forecast, August 1996, at 128. 1995 - Paul Kagan Assoc., Inc., Paul Kagan's 10-Year Cable TV Industry Projections, The Cable TV Financial Databook, 1996, at 11. 1995 Revised - Paul Kagan Assoc., Inc., Paul Kagan's 10- Year Cable TV Industry Projections, Cable TV Investor, May, 1997, at 9. 1996 - Nielsen Media Research as cited by Broadcasting & Cable, Jan. 13, 1997 at 118. 1997 - Nielsen Media Research as cited in The TV Column, Washington Post, Aug. 26, 1997 at E4.  Homes Passed and Basic Cable Subscribers: 1990 to 1994 - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; 1995 to 1997 - Paul Kagan Assoc., Inc., Paul Kagan's 10-Year Cable TV Industry Projections, Cable TV Investor, May, 1997, at 9. TABLE B-2 Premium Cable Services: 1990 - 1997 (in millions) Premium Cable Service Subscribers Premium Units Year- end Year-end Total Change From Previous Year Year-end Total Change From Previous Year 1990 23.9 1.3% 41.5 1.0% 1991 24.0 0.4% 43.1 3.9% 1992 24.7 2.9% 44.4 3.0% 1993 26.4 6.9% 46.0 3.6% 1994 28.1 6.4% 51.1 11.1% 1995 29.8 6.0% 51.6 (*) 1.0% 1996 31.5 5.7% 54.5 5.6% 1997 N/A - 57.2 (e) 5.0% (*) Revised Data - updated by the source. (e) Year-end estimated as of May 20, 1997, by Paul Kagan Associates. Sources:  Premium Cable Service Subscribers: 1990 to 1994 - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. 1995 to 1996 - Paul Kagan Assoc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, Feb. 24, 1997, at 10.  Premium Units: Premium Units refers to the number of premium services subscribed to by a home, whereas Premium Cable Services Subscribers refers to the total number of homes subscribing to one or more premium services. 1990 to 1995 - Paul Kagan Assoc., Inc., Pay TV Subscriber History, The Cable TV Financial Databook, July 1996, at 8. 1996 to 1997 - Paul Kagan Assoc., Inc., Paul Kagan's 10-Year Cable TV Industry Projections, Cable TV Investor, May, 1997, at 9. TABLE B-3 Channel Capacity of Cable Systems: October 1995 - October 1997 1995(*) 1996(*) 95-96 1997(*) 96-97 Channel Capacity Number of Systems Percent of Systems Number of Systems Percent of Systems Percent Change Number of Systems Percent of Systems Percent Change 54 and + 1,558 15.6% 1,724 16.4% 10.7% 1,886 19.0% 9.4% 30 to 53 6,376 63.8% 6,410 60.8% 0.5% 6,374 64.1% -0.6% 20 to 29 1,104 11.0% 1,607 15.3% 45.6% 971 9.8% -39.6% 13 to 19 353 3.5% 337 3.2% -4.5% 309 3.1% -8.3% 6 to 12 588 5.9% 456 4.3% -22.4% 399 4.0% -12.5% 5 or less 14 0.1% 12 0.1% -14.3% 10 0.1% -16.7% Not Avail. 1,133 - 937 - -17.3% 889 - -5.1% Total 11,126 - 11,483 - 3.2% 10,838 - -5.6% Sys. w/30+ channels 7,934 79.4% 8,134 77.1% 2.5% 8,260 83.9% 1.5% Sys. w/less than 30 channels 2,059 20.6% 2,412 22.9% 17.1% 1,689 17.0% -30.0% (*) Figures are as of October 1st, 1995/1996/1997. "Percentage of Systems" calculation excludes "not available" data. Sources:  1995 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 64, 1996 Edition, at I-81.  1996 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 65, 1997 Edition, at I-81.  1997 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 66, 1998 Edition. (to be released). TABLE B-4 Channel Capacity for Subscribers: October 1995 - October 1997 (in millions) 1995(*) 1996(*) 95-96 1997(*) 96-97 Channel Capacity Number of Subscribers Percent of Subscribers Number of Subscribers Percent of Subscribers Percent Change Number of Subscribers Percent of Subscribers Percent Change 54 and + 27.69 47.9% 33.58 55.3% 21.3% 35.73 58.4% 6.4% 30 to 53 28.56 49.4% 26.06 42.9% -8.8% 24.35 39.8% -6.6% 20 to 29 1.20 2.1% 0.81 1.3% -32.5% 0.85 1.4% 4.9% 13 to 19 0.13 0.2% 0.10 0.2% -23.1% 0.09 0.1% -10.0% 6 to 12 0.22 0.4% 0.19 0.3% -13.6% 0.19 0.3% 0.0% 5 or less 0.00 0.0% 0.00 0.0% 0.0% 0.00 0.0% 0.0% Not Avail. 1.50 - 0.09 - -36.0% 1.22 - 27.1% Total 59.30 - 61.7 - 4.0% 62.43 - 1.2% Sys. w/30+ channels 56.3 97.3% 59.6 98.2% 6.0% 60.1 98.2% 0.7% Sys. w/less than 30 1.6 2.7% 1.1 1.8% -29.0% 1.13 1.8% 2.7% (*) Figures are as of October 1st, 1995/1996/1997."Percentage of Systems" calculation excludes "not available" data. Sources:  1995 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 64, 1996 Edition, at I-81.  1996 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 65, 1997 Edition, at I-81.  1997 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 66, 1998 Edition. (to be released). TABLE B-5 Growth By Network Type: 1994 - 1996 1994 1995 94-95 1996 95-96 Network Type Number of Networks Percent of Networks Number of Networks Percent of Networks Change Number of Networks Percent of Networks Change Basic/No 94 73.4% 104(*) 74.8% 10.6(*) 126 77.8% 21.2% Premium 20 15.6% 21 15.1% 5.0% 18 11.1% -14.3% Pay Per View 8 6.3% 8 5.8% 0.0% 7 4.3% -12.5% Combination 6 4.7% 6 4.3% 0.0% 11 6.8% 83.3% Total 128 139 8.6%(*) 162 16.5% (*) Revised Data - updated by the source. Source:  1994 - 1996: National Cable Television Association, National Cable Video Networks By Type of Service: 1976 - 1996, Cable Television Developments, Spring 1997, at 6. TABLE B-6 Cable Industry Revenue and Cash Flow(*): 1993 - 1997 1993 1994 1995(**) 1996 1997 Total Total % Change From Previous Year Total % Change From Previous Year Total % Change From Previous Year Estimated Year-End Total Average Number of Basic Subscribers (mil.) 56.2 58.5 4.1% 60.9 4.1% 62.8 3.1% 64.1 Revenue Segments (mil.) Regulated Tiers $15,169 $15,164 0.0% $16,860 11.2% $18,395 9.1% $20,008 Pay Tiers $4,625 $4,522 -2.2% $4,775 5.6% $4,966 4.0% $5,153 Advertising $984 $1,077 9.5% $1,433 33.1% $1,662 16.0% $1,912 Pay-Per-View $452 $484 7.1% $535 10.5% $647 20.9% $815 Home Shopping $113 $127 12.4% $144 13.4% $145 0.7% $152 Miscellaneous+Installation s $1,123 $1,412 25.7% $1,151 -18.5% $1,305 13.4% $1,774 Total Revenue (mil.) $22,466 $22,786 1.4% $24,898 9.3% $27,120 8.9% $29,814 Revenue Per Avg. Sub $399.75 $389.50 -2.6% $408.83 5.0% $431.85 5.6% $465.12 Cash Flow (mil.) $10,100 $9,936 -1.6% $11,161 12.3% $12,177 9.1% N/A Cash Flow per Sub $179.72 $169.85 -5.5% $183.27 7.9% $193.90 5.8% - Cash Flow/Total Revenue 45.0% 43.6% -3.1% 44.8% 2.8% 44.9% 0.2% N/A Note: All figures are calculated using average number of subscribers (first row). (*) Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"), commonly referred to as "cash flow,from operations" is often used to value the operations of a communications firm without regard to the firm's capital structure. Cash flow from operations is the net result of cash inflows from operations (revenue) and cash outflows from operations (expenses), thus ignoring non-cash charges to net income such as depreciation and amortization. Cash flow from operations indicates a firm's operation's ability to meet the firm's net finance and investment obligations. (**) Revised Data - updated by the source Sources:  1993 and 1994 - 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.  1995 to 1997 - Paul Kagan Assoc., Inc., Paul Kagan's 10-Year Cable TV Industry Projections, Cable TV Investor, May 20, 1997, at 9; Paul Kagan Assoc., Inc., "Cable TV's Growth Chart," Cable TV Investor, March 27, 1997 at 4. TABLES 7A & 7B Annual Cable Industry Revenue, Cash Flow, and Subscriber Information Year-end 1995 - Year-end 1996 The following tables detail the data and the calculations used in the Commission s estimates of the cable industry s annual revenue and cash flow. To calculate the industry-wide estimates of revenue, we first calculate an average revenue per subscriber figure for each year by dividing the total revenue of the companies in the group by the average subscribers of these companies for that year. Second, we multiply this average revenue per subscriber figure by an estimate of the industry s average subscribership for the year. The same methodology was followed to calculate the industry-wide estimates of cash flow. The estimates in this 1997 Report differ from those in the 1996 Report because secondary sources were used in many cases to obtain data, and only the firms with subscribership of 500,000 or more were analyzed. Sources:  1995: Unless otherwise noted, the data used in these tables are from the companies public filings with the Securities and Exchange Commission, their press releases, or discussions with company personnel. Some of the data taken from these sources have been adjusted to take into account acquisitions which occurred during each year. These adjustments are described in the notes for each table. Due to lack of data, adjustments have not been made for all acquisitions.  1996: Data collected from numerous sources. See footnotes.  The year-end industry subscriber estimates for 1995 and 1996 were taken from Table B-1 of this Appendix. General Notes:  Unless otherwise noted, all Year-End Subscribers numbers are as of December 31 of the year in question. All Average Subscribers, Cable Revenue, and Cable Cash Flow numbers are for the fiscal year ending December 31 of the year in question.  Unless otherwise noted, all data are for the companies consolidated, domestic cable operations. Some data have been adjusted to remove subscribers, revenue, and cash flow from other sources (e.g. satellite operations.)  Each company s Average Subscribers figure is from one of the three following sources: a company reported figure, an average of quarterly subscribership information, or the mid-point of two year-end subscriber numbers.  In each of the tables, the company referred to as Enstar Partnerships represents the combined results of ten separate partnerships associated with Falcon Holding Group. The partnerships are: Enstar Income Growth Program Five-A, Enstar Income Growth Program Five-B, Enstar Income Growth Program Six-A, Enstar Income Growth Program Six-B, Enstar Income Program 1984-1, Enstar Income Program II-1, Enstar Income Program II-2, Enstar IV-1, Enstar IV-2, Enstar IV-3.  In each of the tables, the company referred to as Jones Partnerships represents the combined results of 21 separate partnerships associated with Jones Intercable. The partnerships are: Cable TV Fund 11-A Ltd, Cable TV Fund 11-B Ltd, Cable TV Fund 11-C Ltd, Cable TV Fund 11-D Ltd, Cable TV Fund 12-A Ltd, Cable TV Fund 12-B Ltd, Cable TV Fund 12-C Ltd, Cable TV Fund 12-D Ltd, Cable TV Fund 14-A Ltd, Cable TV Fund 14-B Ltd, Cable TV Fund 15-A Ltd, IDS/Jones Growth Partners 87-A Ltd, IDS/Jones Growth Partners 89-B Ltd, IDS/Jones Growth Partners II LP, Jones Cable Income Fund 1-A Ltd, Jones Cable Income Fund 1-B Ltd, Jones Cable Income Fund 1-C Ltd, Jones Growth Partners LP, Jones Growth Partners II LP, Jones Intercable Investors LP, Jones Spacelink Income Growth Fund 1-A.  In the table for 1995, the company referred to as Northland Partnerships represents the combined results of 5 separate partnerships associated with Northland Communications Corporation. The partnerships are: Northland Cable Properties Four LTD Partnership, Northland Cable Properties Five LTD Partnership, Northland Cable Properties Six LTD Partnership, Northland Cable Properties Seven LTD Partnership, and Northland Cable Properties Eight LTD Partnership. TABLE 7A 1995 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications, Inc. 12,494,000 12,183,000 $4,936.000 $33.76 $2,081.800 $170.88 42.2% Time Warner 9,769,000 9,545,500 $3,743.440 $32.68 $1,549.000 $162.28 41.4% Continental Cablevision 4,066,795 4,002,805 $1,695.263 $35.29 $705.272 $176.19 41.6% Comcast 3,407,000 3,357,000 $1,454.932 $36.12 $718.455 $214.02 49.4% Cox Communications 3,248,759 3,215,878 $1,287.016 $33.35 $510.998 $158.90 39.7% Cablevision Systems 2,061,200 1,904,425 $905.155 $39.61 $392.416 $206.05 43.4% Viacom 1,179,500 1,165,000 $444.400 $31.79 $182.900 $157.00 41.2% Marcus Cable 1,154,718 1,110,352 $325.414 $24.42 $173.597 $156.34 53.3% Century Communications 1,100,000 1,046,000 $349.641 $27.86 $177.210 $169.42 50.7% Cablevision Industries 1,041,768 1,028,942 $423.212 $34.28 $203.133 $197.42 48.0% Adelphia Communications 1,002,760 993,284 $390.413 $32.75 $204.145 $205.53 52.3% Jones Partnerships 902,345 904,834 $391.772 $36.08 $122.852 $135.77 31.4% EW Scripps 766,400 756,850 $279.482 $30.77 $118.074 $156.01 42.2% Lenfest Communications 596,366 586,872 $232.155 $32.97 $115.361 $196.57 49.7% TCA Cable TV, Inc. 574,473 529,512 $200.867 $31.61 $99.982 $188.82 49.8% Intermedia Partners IV 554,000 539,100 $211.800 $32.74 $87.000 $161.38 41.1% Media One (US West) 527,000 513,500 $215.000 $34.89 $100.000 $194.74 46.5% Washington Post Co. 518,000 508,000 $194.142 $31.85 $81.988 $161.39 42.2% Multimedia Inc (Gannett) 458,000 452,250 $174.941 $32.24 $89.703 $198.35 51.3% Jones Intercable, Inc. 439,400 374,350 $135.350 $30.13 $49.428 $132.04 36.5% Falcon Holding Group 419,288 379,985 $142.608 $31.27 $95.442 $251.17 66.9% C TEC Corp 333,920 286,061 $127.079 $37.02 $57.858 $202.26 45.5% Charter Comm. SE, LP 249,106 245,615 $88.624 $30.07 $42.842 $174.43 48.3% Bresnan Communications 209,459 206,048 $70.389 $28.47 $28.555 $138.58 40.6% Garden State Cablevision 200,086 198,026 $92.815 $39.06 $51.176 $258.43 55.1% Insight Communications 163,923 159,293 $57.108 $29.88 $28.115 $176.50 49.2% Galaxy Telecom 162,400 161,663 $57.459 $29.62 $22.800 $141.03 39.7% Falcon Cable Systems 135,475 134,362 $52.935 $32.83 $23.915 $177.99 45.2% Rifkin Acquisition Partners 132,271 128,165 $50.208 $32.65 $23.429 $182.80 46.7% Northland Partnerships 102,766 99,061 $35.181 $29.60 $14.579 $147.17 41.4% Helicon Group 87,632 86,615 $35.225 $33.89 $17.141 $197.90 48.7% Enstar Partnerships 85,342 84,780 $31.405 $30.87 $13.022 $153.60 41.5% Falcon Classic Cable 47,957 47,435 $18.363 $32.26 $8.263 $174.20 45.0% Cencom Inc. Cab. Prtnrs 44,500 43,750 $17.046 $32.47 $7.245 $165.59 42.5% Mercom, Inc. 38,853 38,089 $13.939 $30.50 $5.191 $136.29 37.2% Total For Group 48,274,462 47,016,397 $18,880.779 $33.46 $8,202.886 $174.47 43.4% Total For Industry 62,100,000 60,900,000 $24,456.137 $33.46 $10,625.139 $174.47 43.4% Percent Change From Previous Year 4.02% 4.19% 5.97% 1.71% 5.75% 1.50% -0.21% 1995 Notes: - TCI - On January 26, 1995, TCI acquired Telecable. TCI s results have been adjusted as though the transaction took place on January 1, 1995. This increased TCI s revenue by $25 million and its cash flow by $10.8 million (calculated by applying Telecable s 1994 cash flow margin to the $25 million.) TCI s average subscribership was calculated assuming that this acquisition occurred at the beginning of the year. TCI s revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $207 million and its cash flow by $10 million. TCI s cash flow was increased by $38 million to account for special strategic initiatives and a customer retention program. - Time Warner - During 1995, Time Warner (TW) completed four acquisitions. TW s revenue, cash flow, and average subscribers were all adjusted as though these acquisitions had taken place at the beginning of the year. On April 1, 1995, TW entered into a partnership with Advance/Newhouse which had 1.5 million subscribers at the time of the deal. This added $137 million to TW s 1995 revenue and $46 million to its 1995 cash flow. On May 2, 1995, TW acquired Summit Communications which had 165,000 subscribers at the end of 1994. This added $22 million to TW s 1995 revenue and $11 million to its cash flow. On July 6, 1995, TW acquired KBLCOM, a subsidiary of Houston Industries Inc., which had 690,000 subscribers at the end of 1994. This added $139 million to TW s 1995 revenue and $72 million to its cash flow. On July 6, 1995, TW acquired from Houston Industries the half of Paragon Communications which TW did not already own, which had 967,000 subscribers at the end of 1994. This added $179 million to TW s 1995 revenue and $45 million to its cash flow. - Continental - On October 5, 1995, Continental acquired the cable holdings of the Providence Journal Company. In addition, Continental made several other smaller acquisitions during the year (Cablevision of Chicago, Columbia Cable of Michigan, Consolidated Cablevision of California, and N-COM). Continental s data have been adjusted as though these transactions took place at the beginning of the year. This increased Continental s revenue by $289.919 million ($221.998 million for Providence and $67.921 million for the other acquisitions) and its cash flow by $104.421 million ($79.107 million for Providence and $25.314 million for the other acquisitions.) Continental s average subscribership was calculated assuming that these acquisitions had occurred at the beginning of the year. This increased Continental s 1994 year-end subscriber number by 1,000,265 (771,000 for Providence and 229,265 for the other acquisitions.) When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1995 year-end subscriber number (123,364). Therefore, the 1994 average subscribers number has been adjusted as well. Continental s revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $37.048 million and its cash flow by $4.3 million. - Cox - On February 1, 1995, Cox acquired Times Mirror s cable holdings. Cox s results have been adjusted as though this transaction took place at the beginning of the year. Cox s revenue and cash flow assume the acquisition had occurred at the beginning of the year. Cox s average subscriber number was calculated assuming that it had controlled the Times Mirror subscribers for the entire year. Cox s revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $41.084 million and increased its cash flow by $0.598 million. - Marcus - On January 1, 1995, Marcus acquired cable systems from Crown Media, Inc., which added 193,300 subscribers to its 1994 year-end subscriber figure. On November 1, 1995, Marcus acquired cable systems from Sammons Communications, Inc. Marcus results have been adjusted as though this transaction took place at the beginning of the year. Marcus revenue was increased by $129.32 million ($116.388 million for the first nine months of the year plus one-ninth of that number for October) and its cash flow was increased by $77.327 million ($69.594 million for the first nine months of the year plus one-ninth of that number for October.) Marcus year-end 1994 subscriber figure was increased by 650,000 subscribers (the subscribership of the acquired systems on March 30, 1995). - Century - Revenue and cash flow data are for the 12 months ending November 30, 1995. Its year-end subscriber number is as of May 31, 1995. - Adelphia - Adelphia s average subscribers, revenue, and cash flow are for the 12 months ending December 31, 1995. Its year-end subscriber number is as of that date. - TCA - TCA s average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1996. Its year-end subscriber number is as of that date. TABLE 7B 1996 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications (1) 13,900,000 13,197,000 $5,860.00 $37.00 $2,230.00 $168.98 38.1% Time Warner (2) 12,300,000 11,034,500 $4,760.00 $35.94 $2,012.00 $182.33 42.3% US West (Media One) (2) 4,354,287 4,210,541 $1,051.19 $20.81 $1,473.00 $349.84 40.1% Comcast (1) 4,280,000 3,843,500 $1,914.00 $41.49 $919.00 $239.10 48.0% Cox Communications (1) 3,259,384 3,254,072 $1,460.00 $37.38 $556.90 $171.14 38.1% Cablevision Systems (1) 2,445,000 2,253,100 $1,096.63 $40.56 $448.00 $198.84 40.9% Adelphia Commctns (1) 1,824,000 1,413,380 $473.00 $27.87 $242.00 $171.22 51.2% Marcus Cable (1) 1,275,000 1,214,859 $435.00 $29.84 $204.00 $167.92 46.9% Century Communications (1) 1,250,000 1,175,000 $457.00 $32.41 $253.00 $215.319 55.4% Lenfest Group (2) 1,110,703 853,535 $354.56 $34.61 $182.91 $214.28 51.6% Falcon Cable TV(2) 1,017,000 1,079,041 $217.32 $16.78 $120.14 $111.34 55.3% TCA Cable TV, Inc. (1) 627,000 600,736 $253.31 $35.14 $120.00 $199.75 47.4% InterMedia Partners (2) 573,655 563,828 $106.42 $15.73 $48.49 $86.00 45.6% Post-Newsweek Cable (1) 588,000 553,000 $230.00 $34.66 $98.00 $177.22 42.6% Jones Intercable (2) 585,000 512,200 $248.63 $40.45 $100.50 $196.21 40.4% Total For Group 49,089,029 45,608,293 $18,917.060 $32.05 $9,007.938 $189.97 47.6% Total For Industry 63,500,000 62,800,000 $26,044.416 $34.56 $12,403.628 $197.51 47.6% Percent Change From Previous Year 4.02% 3.03% 6.51% 3.18% 9.33% 11.67% 8.82% (1) Paul Kagan Assoc., Cable TV Investor, December, 1996 - May, 1997. (2) Information derived from company 10-K or direct correspondence with the company. 1996 Notes: - Adelphia - Fiscal year-end March 31, 1997. - Century - Fiscal year-end May 31, 1997. - Comcast - Comcast acquired Scripps on November 1, 1996. Comcast numbers are pro forma Scripps acquisition. - Continental - When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1995 year-end subscriber number (123,364). Therefore, the 1996 average subscribers number has been adjusted as well. Continental s revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue. - Falcon Cable TV - The Partnership reports subscribers for the Systems on an equivalent subscriber basis and, unless otherwise indicated, the term "SUBSCRIBERS" means equivalent subscribers, calculated by dividing aggregate basic service revenues by the average basic service rate within an operating entity. Consistent with past practices, subscribers is an analytically derived number which is reported in order to provide a basis of comparison to previously reported data. The computation of subscribers has been impacted by change in service offerings made in response to the 1992 Cable Act. On July 12, 1996, the Partnership acquired the assets of Falcon Cable Systems Company ("FCSC") and, as a result, the systems of FCSC became owned systems; previously they were reported as Affiliated Systems. As a result, comparisons of 1996 to prior years must take this change into account. At December 31, 1996, the FCSC systems had approximately 239,431 homes passed, 135,550 homes subscribing to cable service, 44,199 premium service units and 170,561 Subscribers. At December 31, 1995 and 1994, the corresponding totals for the FCSC systems were 233,304 and 228,522 homes passed, 135,475 and 133,249 homes subscribing to cable service, 52,694 and 59,732 premium service units and 219,269 and 193,008 subscribers, respectively. - TCA Cable - TCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1997. Its year-end subscriber number is as of that date. - US West (MediaOne) - US West acquired Continental Cablevision on November 15, 1996, and became "MediaOne." The US West numbers represented here are pro forma Continental Cablevision acquisition. TABLE B-8 Acquisition of Capital: 1989 - June 1997 ($ 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 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 1995 $(808) -9% $4,500 51% $1,109 13% $3,976 45% $8,777 1996 $2,616 38.% $1,354 20% $49 1% $3,450 41% $7,469 Jan - Jun 1997 $735 9% $6,972 84% $12 0% $1,200 7% $8,919 Total: 1989-June 1997 $13,790 $1,622 $23,837 $2,804 $ 5,964 $702 $17,215 $2,025 $60,806 Average Raised Per Year $7,153 * Total Capital Raised From Financing Sources = Private Debt + Public Debt + Private Equity + Public Equity. Sources:  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 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, July 1995, at 92.  1992 to 1995 -Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, July 1996, at 115.  1996 - Paul Kagan Assoc., Inc., Cable Financing Snapshot, Cable TV Finance, Jan. 31, 1997 at 10.  1997 - Paul Kagan Assoc., Inc., Cable Financing Snapshot, Cable TV Finance, July 31, 1997 at 8. TABLE B-9 System Transactions: 1994 - June 1997 1994 1995 94-95 Change 1996 95-96 Change Jan - Jun 1997 Number of Systems Sold 64 128 100% 103 -19.5% 44 Total Number of 7,504,177 10,937,65 45.8% 7,800,000 -28.7% 2,385,232 Average System Size 117,253 85,450 -27.1% 75,728 -11.4% 54,210 Number of Homes Passed 12,492,99 17,216,96 37.8% 12,610,000 -26.8% 3,713,965 Avg. # of Homes Passed 195,203 134,507 -31.1% 122,427 -9.0% 84,408 Total Dollar Value (mil.) $14,025 $20,083 43.2% $16,254 -19.1% $3,998 Average Dollar Value (mil.) $219 $156 -28.4% $157 0.6% $904 Dollar Value Per Home $1,123 $1,166 3.8% $1,246 6.9% $1,077 Dollar Value Per Subscriber $1,869 $1,836 -1.8% $2,065 12.5% $1,677 Cash Flow Multiple 10.3x 9.7x -5.8% 11.0x 13.4% 7.7x Sources:  1994 and 1995 - Paul Kagan Assoc., Inc., Year-To-Date Cable System Sale Summary, Cable TV Investor, Feb. 24, 1997, at 12.  Jan 1997 to June 1997 - Paul Kagan Assoc., Inc., Year-To-Date Cable System Sale Summary, Cable TV Investor, July 9, 1997, at 10. TABLE B-10 Price Comparison - Cable vs. DBS and MMDS Average Monthly Rate, As of July 1997 Cable DBS MMDS Programming Service (Basic Service Tier and Cable Programming Services Tier) $26.33 $27.49(*) $21.29 Equipment $ 2.53 $ 3.33(**) n/a (***) Total (Programming and Equipment) $28.83 $30.82 $21.29 Average Number of Channels 49.5 47 22.7 Average Monthly Rate per Channel $0.63 $0.66 $0.94 Installation (One time Charge) $39.56 $175.00(****) $35.00 (*)The service package most comparable to cable programming services; does not include local broadcast channels. (**) Average equipment cost for DBS service is a one time charge of $200. If we assume this can be spread over a five year period (60 months), this is equivalent to $3.33 per month (excluding any allowance for the time value of money). The costs associated with service to additional television sets is not included in these equipment charges. (***) Equipment changes are included with the charge for programming services. (****) Average cost of a professional installation. A "do-it-yourself" installation kit is also available at an average cost of $50. Sources:  Cable: 1997 Cable Industry Price Survey  DBS: SCBA. Average of DIRECTV and Primestar, the two largest DBS providers.  MMDS:WCA's 1997 U.S. Wireless Cable Industry Directory. Average of 136 wireless cable operators reporting monthly service charge and number of channels offered in Directory. Table B-11 Cable Modem Deployment as of May 15, 1997 MSO City(ies) Modem Supplier Monthly Rate Install Charges Adelphia Palm Beach County, FL Ocean County, NJ Coudersport, Lansdale & Mt. Lebanon, PA Amherst, Tonawanda, & Grand Island, NY Plymouth, Adams & N. Adams, MA General Instrument and LAN City (Bay Networks) $34.95 - $44.95 $39.95 $99.95 Cablevision Systems N. Oyster Bay, NY LANCity (Bay Networks) $45.00 $150 Comcast Towson & Baltimore, MD Sarasota, FL Union, NJ Motorola $39.95 - $59.95 $175 U S West Media One Boston, MA area Detroit, MI area Jacksonville, FL Omaha, NE LANCity (Bay Networks), and General Instruments $34.95 - $59.95 $99.95 Cox Orange County, Mission Viejo, Poway & San Diego, CA Phoenix, AZ Meridian, CT Motorola $44.95 - $54.95 $175 Jones Intercable Alexandria, VA LANCity (Bay Networks) $39.95 $99.95 TCI Arlington Heights, IL E. Lansing, MI Fremont & Sunnyvale, CA Hartford, CT Seattle, WA Zenith, LANCity (Bay Networks), and Motorola $34.95 - $44.95 $69 - $150 Time Warner Akron & Canton, OH Corning, Elmira, Binghamton, Albany, Troy & Saratoga, NY San Diego, CA Portland, ME Motorola, Hewlett Packard, and Toshiba $24.95 $200 Sources:  Fred Dawson, Cable Modems Pass 2M Mark; MSOs Turn to Next Phase, Multichannel News, March 17, 1997 at 119 and 135.  Michael Harris, Cable Modem Commercial Launches and Trials in North America, Kinetic Strategies, May 15, 1997. See http://CableDatacomNews.com/cmic7.htm. Appendix C Table C-1 Satellite Orbital Positions Licensees Total Channels Western Positions Eastern Positions "Full CONUS" (a) 175§ 166§ 157§ 148§ 119§ 110§ 101§ 61.5§ DIRECTV 54 27 27 USSB 16 8 3 5 Echostar 35 (b) (b) 24 (c) 11 Directsat 22 11 10 1 DBSC 22 11 11 MCI 28 28 (d) Tempo/ Primestar(g) 22 11 11 Continental (Rainbow/ Loral DBS) 22 11 11 Dominion 8 (f) (e) 8 Unassigned 27 10 10 5 2 Total 256 32 32 32 32 32 32 32 32 Notes: (a) "Full CONUS" indicates that the signal transmissions from satellites in these orbital slots are capable of reaching all parts of the continental United States. (b) Echostar has petitioned the Commission for 11 channels at 166§ and 175§ west latitude. (c) Echostar won the auction for the 24 channels at 148§ west latitude. (d) MCI won the auction for the 28 channels at 110§ west latitude. (e) Dominion has petitioned the Commission for 8 channels at 166§ west latitude, (f) Dominion has a second petition pending before the Commission for 11 channels at an unspecified orbital position. (g) Tempo is a wholly-owned subsidiary of TCI Satellite Entertainment. Source: Number of DBS Channels by Ownership and Orbital Locations Table, FCC, 1997; USB Securities, Jun. 1996, at 26. Table C-2 DBS Industry Licensed Number of Transponders and Their Ranges Company Full CONUS(1) Other Positions Total Full CONUS(1) Total Positions DIRECTV 27 27 54 28% 21% USSB 8 8 16 8% 6% Echostar 11 24 35 11% 14% Directsat 11 11 22 11% 9% DBSC 0 22 22 0% 9% MCI 28 0 28 29% 11% Tempo/ Primestar (2) 11 11 22 11% 9% Continental (Rainbow/ Loral DBS) 0 22 22 0% 9% Dominion 0 8 8 0% 3% Unassigned 0 27 27 0% 11% Total 96 160 256 100% 100% DBS Providers Orbital Positions Full CONUS(1) Other Positions Total Full CONUS(1) Total Positions DIRECTV/USSB 35 35 70 36% 27% Echostar 11 24 35 11% 14% Tempo/ Primestar (2) 11 11 22 11% 9% NOTES: (1) "Full CONUS" indicates that the signal transmissions from satellites in these orbital slots are capable of reaching all parts of the continental United States. (2) Tempo is a wholly-owned subsidiary of TCI Satellite Entertainment. SOURCES: Number of DBS Channels by Ownership and Orbital Locations Table, FCC, 1997; Rick Westerman, Direct Broadcast Satellite, Outlook, UBS Securities, Mar. 4, 1997, at 9. Table C-3 DBS Providers DBS STATISTICS DIRECTV(1) USSB Primestar Echostar Launch Date June 1994 June 1994 January 1994 March 1996 Subscribers Sept. 1997 Sept. 1996 Change Growth 2,892,000 1,920,000 972,000 50.6% (included with DIRECTV(2)) 1,809,000 1,475,000 334,000 22.6% 820,000 190,000 630,000 331.6% Channels(3) 175 HP 29 HP 165 MP 140 HP Basic Programming Package "Total Choice" 44 basic channels "The Basics" 9 basic channels "Prime Value" 50 basic channels "DISH Pix" 10 basic channels Monthly Cost $29.99 $7.95 $24.99 (4) $15.00 Most Complete Programming Package "Total Choice Platinum" 75 basic channels, 29 sports channels, 14 premium movie channels "Entertainment Plus" 8 basic channels, 18 premium movie channels "Light Up the Sky" 66 basic channels, 14 premium movie channels "America's Top 50" 50 basic channels, 1 regional sports channel Monthly Cost $47.99 $34.95 $65.99 $26.99 (5) DBS STATISTICS DIRECTV USSB Primestar Echostar System Costs(6) Single Receiver Dual Receiver $199 $350 $199 $350 $199(7) $398 $199 $300 Professional Installation Self-Installation $150-$200 $50 $150-$200 $50 $149(8) N/A $179 $70 Equipment Sources Electronics/TV retailers, AT&T, DSS equipment manufacturers (e.g. RCA, Hitachi, Sony) Electronics/TV retailers and AT&T MSO partners, Radio Shack, Key America and Associated Volume Buyer's Electronics/TV retailers Notes: (1)DIRECTV and United States Satellite Broadcasting Company, Inc. ("USSB") are complementary DBS services. They use the same technology, jointly market the same equipment, and together provide 200 channels of mutually exclusive programming. 1996 Report,12 FCC Rcd at 4378  41 n. 90. (2)DIRECTV and USSB subscribers are reported together in DTH Subscribers, SkyREPORT, Nov. 1997, at 10. SkyREPORT's count of the number of DIRECTV/USSB subscribers is based on households that subscribe to either of these services to avoid "double-counting" subscribers that subscribe to both services. (3)"HP" - "High Power" Ku-Band Direct Satellite Service (DSS) uses an 18" dish. "MP" - "Medium Power" Ku- Band Fixed Satellite Service (FSS) uses a 27" or 36" dish (depending upon the subscriber's location). (4)Primestar's subscribers have the option to purchase equipment or rent it for an additional $10 monthly charge. (5)Echostar charges subscribers $300, or the equivalent of $25 per month, if they purchase one year of the "America's Top 50" programming package in advance. (6)The cost of equipment varies depending upon discounts and other incentives offered by equipment retailers. The basic antenna dish receiver system is capable of providing satellite programming to one television channel at a time on multiple television sets. The dual antenna dish receiver system can provide multiple channels of satellite programming to two to three television sets simultaneously. (7)Primestar subscribers can also purchase used equipment for $149. (8)Primestar mandates that subscribers that rent must have their equipment professionally installed, but the company is giving these customers a $100 rebate off the installation cost through Jan. 1998. Sources: DTH Subscribers, SkyREPORT, Nov. 1997, at 10; 1996 Report, 12 FCC Rcd at 4378-4381  41; http://www.PrimeStar.com/ezget/whatsnew/sept.htm; http://www.dishnetwork.com/prog/quick.htm; http://www.dishnetwork.com/need/premium.htm; http://www.USSB.com/package.html; http://www.directv.com/programming/compare.html; http://dishonline.com/4dtv_1.htm; www.dishonline.com/rca.htm. Table C-4-A Di rect-To-Home Satellite Services To tal Subscribers PROVIDERS July 1, 1994 July 1, 1995 July 1, 1996 July 1, 1997 DBS 70,000 1,150,000 2,950,000 5,047,000 HSD 1,922,810 2,321,350 2,336,930 2,184,470 Total 1,992,810 3,471,350 5,286,930 7,231,470 Ta ble C-4-B An nual Subscriber Growth PROVIDERS 1994-1995 1995-1996 1996-1997 DBS 1,080,000 1,800,000 2,097,000 HSD 398,540 15,580 -152,460 Total 1,478,540 1,815,580 1,944,540 Ta ble C-4-C Su bscribers Growth Rate (P ercentage Change) PROVIDERS 1994-1995 1995-1996 1996-1997 DBS 1,542.9% 156.5% 71.1% HSD 20.7% 0.7% -6.5% Total 74.2% 52.3% 36.8% Source: SBCA Comments at Appendix A; DTH Subscribers, SkyREPORT, Nov. 1997, at 10. Ta ble C-5 DT H Subscribers Date HSD DIRECTV/ USSB* Prime- Star Echo Star Alpha Star Monthly Total Month- to-Month Change Oct-96 2,314,950 2,028,000 1,550,000 235,000 12,000 6,139,950 Nov-96 2,302,770 2,135,000 1,580,000 285,000 20,000 6,322,770 182,820 Dec-96 2,277,760 2,300,000 1,600,000 350,000 35,000 6,562,760 239,990 Jan-97 2,255,860 2,370,000 1,610,000 396,000 37,000 6,668,860 106,100 Feb-97 2,234,600 2,420,000 1,630,000 437,000 40,000 6,761,600 92,740 Mar-97 2,224,810 2,470,000 1,662,000 480,000 45,000 6,881,810 120,210 Apr-97 2,215,210 2,520,000 1,700,000 513,000 51,000 6,999,210 117,400 May-97 2,194,380 2,575,000 1,738,000 545,000 51,000 7,103,380 104,170 Jun-97 2,184,470 2,639,000 1,767,000 590,000 51,000 7,231,470 128,090 Cumulative Tot al 1,091,520 Notes: *SkyREPORT's count of the number of DIRECTV/USSB subscribers is based on households that receive either of these services to avoid "double-counting" subscribers that subscribe to both services. Source: DTH Subscribers, SkyREPORT, Nov. 1997, at 10. Ap pendix D Ta ble D-1 To p Ten SMATV Operators Serving MDUs (R anked by Number of Units Passed) 1997 Ra nk (19 96 Ra nk) Company Properties Units Passed Retail Subs. Bulk Subs. 1 (2) OpTel (i) 943 284,260 101,460 46,000 2 (1) ICS (Interactive Cable Systems) 450 132,000 65,000 5,000 3 (3) Cable Plus 324 115,000 55,000 18,000 4 (4) Mid-Atlantic Cable 155 75,000 38,500 3,500 5 (6) Liberty/RCN 235 68,000 32,000 16,000 6 (7) MTS (MultiTechnology Services) 117 60,000 36,000 0 7 (5) CAI Wireless (ii) 211 57,410 23,510 10,020 8 (8) Edward Rose & Sons 63 34,580 23,540 0 9 (10) Wireless Cable of Atlanta (ii) (iii) 35 14,500 8,600 400 10 (iv) Ultronics 104 7,700 3,650 1,450 TOTALS 2,637 848,450 387,260 100,370 Notes: (i) Information on OpTel has been revised to reflect its acquisition of Phonosope and TARA Communications Systems, Inc. this year. (ii) Some CAI Wireless and Wireless Cable of Atlanta subscribers also receive MMDS service. (iii) BellSouth signed an agreement to acquire Wireless Cable of Atlanta on Feb. 12, 1997. (iv) Ultronics was not among the top ten SMATV operators last year. Sources: Paul Kagan Associates, Inc., Private Cable Census, Private Cable Investor, Dec. 31, 1996, at 2; News, CEA Announces Sale of Private Cable Systems, Private Cable & Wireless Cable, Jun. 1997, at 89; Joe Estrella, Private Cable Giant Buys Houston MDUs, Multichannel News, Sep. 8, 1997, at 47; BellSouth Acquires Wireless Cable of Atlanta, Video Services to be Available to 900,000 Households, BellSouth News Release, Feb. 12, 1997. Ap pendix E Ta ble E-1 As sessment of Competing Technologies (i) Tec hnology Used Dec. 1993 Dec. 1994 Dec. 1995 Dec. 1996 Jun. 1997 (1) TV Households(ii) Pct. Change 9 4,200,000 95,400,000 1.2 7% 95,900,000 0.5 2% 97,000,000 1. 15% 97,000,000 0.0 0% 97, 000,000 0.0 0% (2) MVPD Households(iii) Pct. Change Pct. of Households 60,283,000 63.99% 6 3,936,620 6.0 6% 67. 02% 68,487,750 7.1 2% 71. 42% 7 2,370,950 5.6 7% 74. 61% 73,646,970 1.7 6% 75. 92% (3) Cable Subs. Per Cent Change Pct. of MVPD Total 57,200,000 94. 89% 5 9,700,000 4.3 7% 93. 37% 62,100,000 4.0 2% 90. 67% 6 3,500,000 2.2 5% 87. 74% 64,150,000 1.0 2% 87. 10% (4) MMDS Subs. Pct. Change Pct. of MVPD Total 397,000 0.6 6% 600,000 51. 13% 0.9 4% 851,000 41. 83% 1.2 4% 1,180,000 38. 66% 1.6 3% 1,100,000 -6. 78% 1.4 9% (5) SMATV Subs. Pct. Change Pct. of MVPD Total 1,004,000 1.6 7% 850,000 -15 .34% 1.3 3% 962,000 13. 18% 1.4 0% 1,126,000 17. 05% 1.5 6% 1 ,162,500 3. 24% 1.5 8% (6) HSD Subs. Pct. Change Pct. of MVPD Total 1 ,612,000 2.6 7% 2,178,000 35. 11% 3.4 1% 2,365,400 8.6 0% 3.4 5% 2,277,760 -3. 71% 3.1 5% 2,184,470 -4. 10% 2.9 7% (7) DBS Subs. Pct. Change Pct. of MVPD Total < 70,000 0.1 2% 602,000 760 .00% 0. 94% 2,200,000 265 .45% 3.2 1% 4,285,000 94 .77% 5.9 2% 5 ,047,000 17. 78% 6.8 5% (8) OVS Subs. (iv) Pct. Change Pct. of MVPD Total 2,190 0.0 % 3 ,000 36. 99% 0.0 0% (9) VDT Subs. (Trials) (v) Pct. Change Pct. of MVPD Total 6,620 0.0 1% 9,350 41. 24% 0.0 1% 0 -10 0.00% 0.0 0% 0 0.00% 0.0 0% NOTES: (i) Some numbers have been rounded. (ii) The year-end 1996 and June 1997 figures are the same because Nielsen's annual update does not take effect until September, the beginning of the new television season. (iii) The total number of MVPD households is likely to be somewhat less 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  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. See (2) under Sources. (iv) This system was formerly Bell Atlantic's VDT system in Dover Township, New Jersey, which has been converted to an OVS system. See note (v). (v) The 1996 Act repealed the VDT framework. For details, see  109, 113 and 117 supra. These trials were converted to an OVS format and cable franchises. See note (iv). SOURCES: (1) Television households: 1992-94 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 from Nielsen Media Research as cited in Broadcasting & Cable, Jan. 8, 1996, at 50; 1996 from Nielsen Media Research as cited in Broadcasting & Cable, Jan. 13, 1997 at 118; and 1997 from Nielsen Media Research as cited in The TV Column, Washington Post, Aug. 26, 1997, at E4. (2) Total MVPD households: The sum of the total number of subscribers listed under each of the categories of the various technologies. See note (ii) above. Because there were no permanent VDT subscribers, trial VDT subscriber figures were used in 1994-95. (3) Cable subscribers: 1992-94 from Paul Kagan Associates, Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; 1995-97 from Paul Kagan Associates, Inc., Paul Kagan's 10-Year Cable TV Industry Projections, The Cable TV Investor, May 20, 1997, at 9. (4) MMDS subscribers: 1992-1994 from Paul Kagan Associates, Inc., Wireless Cable Industry Projections,1992-2002, The 1995 Wireless Cable Databook, Jan. 1995, at 23; 1995-1996 from Paul Kagan Associates, Inc., Wireless Cable Futures, Wireless Cable Investor, Dec. 31, 1996, at 10-11; and 1997 from WCAI Comments at 8. (5) SMATV subscribers: 1992-1994 based on discussion with John Mansell, Senior Analyst, Paul Kagan Associates, Inc. and reference to Cable & Pay TV Census -- December, Marketing New Media, Dec. 19, 1994; 1995-1996 from Private Cable Growth, Private Cable Investor, Jul. 1997, at 3. The 1997 subscribers have been estimated by the FCC based on data from Paul Kagan Associates, Inc., Private Cable Growth, Private Cable Investor, Jul. 1997, at 3. (6) HSD subscribers: 1992 from C-Band Subscriptions in the Sky, SkyREPORT, 1st Q 1994 at 12, and information provided by the SkyTRENDS research staff based on the number of General Instrument authorizations for receipt of scrambled programming; 1993 from Subscription Data from General Instrument VC II+ Authorizations, SkyREPORT, Oct. 1994, at 21; 1994 from 1994 Net Authorizations, SkyREPORT, Feb. 1995, at 9. (The 1992-94 HSD subscriber figures were reduced by 1% to account for the estimated number of Canadian subscribers.) 1995 from DTH Subscribers, SkyREPORT, Jan. 1997, at 8 and SBCA Comments at Appendix A; and 1996-1997 from DTH Subscribers, SkyREPORT, Nov. 1997, at 10. (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; 1995 from DTH Subscribers, SkyREPORT, Jan. 1997, at 8; and 1996-1997 from DTH Subscribers, SkyREPORT, Nov. 1997, at 10. (8) OVS subscribers: 1996 from Bell Atlantic Comments at 5. The 1997 subscribers have been estimated by the FCC. (9) VDT trial subscribers: 1994-95 from Section 214 Applications, ex parte letters and associated filings with the FCC. TABLE E-2 Number and Subscriber Size of Major Cable System Clusters (Cumulative Figures) Range of Clustered Subscribers (thousands) 1994 1995 1996 Clusters Subs. (millions) Clusters Subs. (millions) Clusters Subs. (millions) 100-199 58 8.0 76 10.4 76 10.3 200-299 26 6.0 35 8.4 34 8.3 300-399 6 2.0 8 2.8 11 3.7 400-499 3 1.3 10 4.5 8 3.6 > 500 4 2.8 8 5.1 10 7.7 Total 97 20.1 137 31.2 139 33.6 Sources: Paul Kagan Associates, Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook, 1995, at 38-39; 1996, at 38-40; 1997, at 39-41. TABLE E-3 1997 Cable MSO Horizontal Concentration Nationwide Rank Company Per Cent of Subscribers 1 TCI 29.32 2 Time Warner 18.33 3 MediaOne 7.98 4 Comcast 6.71 Top 4 62.34 5 Cox 5.10 6 Cablevision 4.50 7 Jones 2.30 8 Century 1.86 9 Marcus 1.85 10 Adelphia 1.83 Top 10 79.77 Top 25 91.81 Top 50 96.93 HHI 1379 TABLE E-4 Changes In Concentration Of The Cable Industry 1990-1997 1990 1991 1992 1993 1994 1995 1996 1997 Top Share 24.0 24.5 25.2 24.3 24.8 25.9 28.0 29.3 Top 2 36.7 37.1 37.9 36.9 37.3 42.1 46.9 47.7 Top 3 42.0 42.3 43.2 42.3 42.4 48.9 54.6 55.6 Top 4 45.6 46.0 48.2 47.2 47.2 54.6 61.4 62.3 Top 10 61.6 61.4 64.6 63.2 63.3 73.2 80.2 79.8 Top 25 80.8 80.2 84.5 83.1 83.4 88.5 91.5 91.8 Top 50 91.2 90.9 94.5 93.1 92.4 95.2 96.6 96.9 HHI 866 872 928 880 898 1098 1326 1379 The information provided in this Table is for purposes of comparison to corresponding tables in past reports. Data Sources: Data for 1997 from Table E-3 above. Data for 1996 from The Kagan Media Index, August 31, 1996 at 8, 14; Paul Kagan Assoc., Top 100 Cable System Operators as of March 31, 1996, Cable TV Investor, June 20, 1996; Paul Kagan Assoc., Top Private Cable Operators, Private Cable Investor, December 31, 1995 at 2; Paul Kagan Assoc., Apollo Cable Sale Complete, Private Cable Investor, May 31, 1996, at 5 and SEC documents. Data for 1995 from 1995 Report, 11 FCC Rcd 2184 at Appendix G, Table 4. 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), Paul Kagan Assoc., Inc. 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 is based on information contained in TeleCommunications, Inc., Form 10-K, Dec. 31, 1990, at I-2 to I-4. TABLE E-5 1997 MVPD Horizontal Concentration Nationwide Rank Company Per Cent of Subscribers 1 TCI 25.54 2 Time Warner 15.97 3 MediaOne 6.95 4 Comcast 5.84 Top 4 54.30 5 Cox 4.44 6 Cablevision 3.92 7 DirecTV/USSB 3.58 8 Primestar 2.40 9 Jones 2.00 10 Century 1.62 Top 10 72.26 Top 25 84.94 Top 50 89.92 HHI 1166 Table E-6 TCI Announced Acquisitions and Joint Ventures Type of Transaction Managing Partner TCI Subs. Contributed (thousands) TCI Equity Interest Taken Geographic Areas of TCI Subs. Contributed Acquisition Cablevision 820 30.0% NY, NJ Joint Venture Time Warner 555 50.0% Houston,TX Joint Venture Time Warner 95 50.0% Kansas City, KS Joint Venture Adelphia 166 minority Great Lakes Area Limited Partnership Falcon 300 40.0% AL,CA,MO,OR,WA Limited Partnership Intermedia 425 49.5% KY Joint Venture TCA 150 20.0% TX, LA Total Subs. Contributed 2,511 Source: Table E-7. TABLE E-7 Consummated and Announced Cable System Transactions November 1996 - September 1997 DATE BUYER SELLER SYSTEMS PRICE** (Mil.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. Nov-96 State Cable TV Pegasus Cable central/ northern NH $7.2 4,600 $1,572 9.5 Dec-96 Various (6) Booth American FL; CA; MI; NC; SC; VA $287.1 144,200 $1,991 10.0 Dec-96 Charter Communications Masada Cable MO; TN; AL; MT $55.0 31,300 $1,757 9.1 Dec-96 New Path Communications Regional Cable IN; OH; MO; KY; IL; MI $8.2 12,100 $671 5.5 Dec-96 (c) Friendship Cable of AR Douglas Communications, MidSouth AR; MS $7.1 8,800 $809 7.0 Dec-96 Star Vision (Genesis Cable Communications) Milestone Communications Roseboro/ Salemburg, NC $0.7 800 $888 7.0 Jan-97 Mediacom Saquaro Cable TV Nogales, AZ $12.0 8,000 $1,498 7.9 Jan-97 Mediacom Valley Center Cable Valley Center (San Diego), CA $2.8 2,000 $1,407 7.4 Jan-97 St. Joseph Cable Mark Twain Cablevision Oak Creek/ Kachina, AZ $4.5 3,100 $1,444 8.5 Jan-97 Rapid Communications Cablevision of TX III western OK $3.7 4,300 $866 6.9 Jan-97 FrontierVision Partners Deep Creek Cable TV Deep Creek Lake, MD $2.9 2,300 $1,240 8.1 Jan-97 Helicon Corp. Mid-South Cable TV Hamilton/ Roane/ Meigs, TN $2.3 2,000 $1,150 8.0 Jan-97 Cooney Cable Association Bath Cable TV Hot Springs, VA $1.2 1,000 $1,182 7.9 Jan-97 TCA TCI Jonesboro, AR $41.0 21,000 $1,952 9.8 DATE BUYER SELLER SYSTEMS PRICE** (Mil.) BASIC SUBS. PRICE / SUB.*** CASH FLOW MULT. Jan-97 Friendship Cable of AR TCI Osceola, AR $7.6 8,500 $900 7.0 Jan-97 Century Telephone Pecoco Dodge/ Columbia Cos., WI $3.9 3,300 $1,183 8.5 Jan-97 (c) Post-Newsweek Verde Valley CATV Cornville, AZ $0.7 700 $987 7.0 Feb-97 (c) Charter Communications Prime Cable Hickory, NC $68.1 35,000 $1,946 9.8 Feb-97 Mid Atlantic Cable Cecilton CATV Cecil/ Kent Cos., MD $3.0 2,000 $1,500 9.4 Feb-97 (c) Adelphia Small Cities Cable Shelburne, VT $10.6 6,400 $1,660 10.5 Feb-97 Jones Intercable Jones Investors/MLP Independence, MO $171.2 85,400 $2,005 9.6 Mar-97 Marcus Cable Harron Cable Dallas, TX area $34.9 21,800 $1,600 9.1 Apr-97 FrontierVision Milestone Communications Apple Valley, OH $3.0 2,200 $1,395 8.0 Apr-97 (c) Time Warner* Marcus Cable* W. Allis, De Pere, WI $98.0 55,000 $1,782 9.1 Apr-97 Marcus Cable* Time Warner* Eau Claire, WI $98.0 70,000 $1,400 9.0 Apr-97 Florida Cable Performance Cable Altoona, FL $0.6 700 $893 7.0 May-9 7 Charter Communications US West/MediaOne Minneapolis, MN $600.0 290,000 $2,069 10.0 May-9 7 Time Warner Entertainment* Adelphia* Mansfield, OH $96.5 67,600 $1,428 8.8 May-9 7 Adelphia* Time Warner Entertainment* VA; VT; NH; NY $65.2 37,500 $1,740 9.3 DATE BUYER SELLER SYSTEMS PRICE** (Mil.) BASIC SUBS. PRICE / SUB.*** CASH FLOW MULT. May-9 7 Time Warner/ Advance/ Newhouse* Adelphia* Syracuse/ Henderson, NY $88.9 61,000 $1,458 9.0 May-9 7 Adelphia* Time Warner/ Advance/ Newhouse* Lynchburg/ Dubois, VA $86.9 49,700 $1,748 9.3 May-9 7 FrontierVision Cablevision Bangor, ME $78.0 53,000 $1,471 9.0 May-9 7 Adelphia* Time Warner* Danville, VA $49.9 26,300 $1,895 9.5 May-9 7 Time Warner* Adelphia* Columbus area, OH $12.6 9,100 $1,387 8.5 May-9 7 Gans Multimedia American CATV 5 St. Mary's Co., MD $27.4 19,400 $1,414 7.8 May-9 7 Charter Communications II Cencom Partners Lincolnton, NC $21.4 15,200 $1,414 7.8 May-9 7 TCI US West Media Twin Falls, ID $20.9 16,000 $1,303 7.8 May-9 7 Rifkin Acquisition Partners American CATV 5 Shelbyville, TN $14.4 11,600 $1,242 7.5 May-9 7 Mediacom LLC Cox Communications Sun City, CA $13.4 10,000 $1,342 8.5 May-9 7 TCI US West Media Ellensburg, WA $7.6 6,000 $1,261 7.5 May-9 7 West Communications LLC TriStar Cable KS; MO; NB; OK $1.4 3,000 $433 6.5 Jun-97 Cablevision TCI NY/NJ metro area $1,268.8 820,000 $1,547 6.1 Jun-97 Falcon Holdings TCI CA; OR; WA $504.9 300,000 $1,683 10.0 Jun-97 Adelphia/TCI jv TCI Buffalo, NY Erie, PA $350.0 166,000 $2,108 10.0 Jun-97 Mediacom American Cable 5 Dagsboro, DE $43.1 29,300 $1,471 8.9 Jun-97 FrontierVision Triax Waterville, OH, et. al $30.2 20,800 $1,452 9.3 Jun-97 Charter Communications II Cencom Partners II Pelzer, SC $27.4 21,300 $1,283 7.5 Jun-97 Charter Communications Cencom Partners Sanford, NC $17.0 12,800 $1,325 7.5 DATE BUYER SELLER SYSTEMS PRICE** (Mil.) BASIC SUBS. PRICE / SUB.*** CASH FLOW MULT. Jun-97 ETAN Industries Cencom Partners II Cleveland/ Jasper, TX $7.1 6,900 $1,037 7.0 Jun-97 Adelphia Mercom Port St. Lucie, FL $3.8 1,900 $2,000 10.7 Jun-97 Charter Communications II Cencom Partners Abbeville, SC $3.3 2,600 $1,296 7.5 Jun-97 Northland Communications Cencom Partners II Marlin, TX $2.9 3,600 $810 6.8 Jul-97 Intermedia Partners TCI KY $946.0 425,000 $2,226 10.1 Jul-97 TCI/TCA jv TCI TX; LA $310.0 150,000 $2,068 9.2 Jul-97 TCI/TCA jv TCA Cable TX; LA; NM $285.0 155,000 $1,839 8.7 Jul-97 G Force LLC InterMedia Kauai, HI $24.0 12,000 $2,065 8.6 Jul-97 Genesis Cable McDonald Investment Jackson Co., GA $45.0 21,000 $2,035 8.9 Jul-97 G Force LLC Rifkin & Associates Kauai, HI $14.0 8,000 $1,744 8.7 Jul-97 Fanch Communications Leonard Communications Hendricks, IN $6.0 5,000 $1,328 7.7 Jul-97 Triax Midwest Triax Association Roselawn, IN $50.0 33,000 $1,509 7.3 Aug-97 Mediacom Cablevision 10 States $315.0 265,000 $1,189 8.9 Aug-97 Jones Intercable Jones Fund Albuquerque, NM $223.0 113,000 $1,977 8.6 Aug-97 Charter Sonic Logan, UT; Santa Cruz, San Luis Obispo, Riverbank, West Sacramento & Feather River, CA $183.0 117,000 $1,562 8.0 Aug-97 FrontierVision Cox Cambridge, Coshocton, Newark, Marion, Logan & New Philadelphia, OH $144.0 85,000 $1,694 9.0 Aug-97 Insight Communications Cablevision Rockford, IL $97.0 65,000 $1,492 9.5 DATE BUYER SELLER SYSTEMS PRICE** (Mil.) BASIC SUBS. PRICE / SUB.*** CASH FLOW MULT. Aug-97 Cox Communications* Insight Communications* Phoenix, AZ $77.0 36,000 $2,131 9.1 Aug-97 Insight Communications* Cox Communications* Lafayette, IL $77.0 38,000 $2,018 9.6 Aug-97 Genesis Milestone Hoke Co., NC $2.0 2,000 $1,145 7.0 Sep-97 TCI/TW jv TCI TX $1,326.0 520,000 $2,550 9.1 Sep-97 TCI/TW jv TW TX $1,176.0 510,000 $2,306 12.5 Sep-97 TCI* Time Warner* IL; NJ; PA $360.0 170,000 $2,118 10.3 Sep-97 Time Warner* TCI* FL $360.0 200,000 $1,800 10.0 Sep-97 TCI* Time Warner* Portland, OR $270.0 126,000 $2,143 10.2 Sep-97 Time Warner* TCI* HI; OH; NY $270.0 133,000 $2,030 10.2 Sep-97 KC Cable TCI Overland, KS $258.0 93,000 $2,777 12.3 Sep-97 TCI* Time Warner* TX $203.0 117,000 $1,735 8.7 Sep-97 Time Warner* TCI* TX $203.0 126,000 $1,607 8.2 Sep-97 TCI* Time Warner* IL $144.0 72,000 $2,000 10.3 Sep-97 Time Warner* TCI* ME; WI $144.0 77,000 $1,870 9.1 Sep-97 TCI* Time Warner* PA; WY; MO $80.0 55,000 $1,455 8.1 Sep-97 Time Warner* TCI* NY $80.0 62,000 $1,290 6.2 Sep-97 Bresnan/TCI jv TCI MN; MI; NE; WI $800.0 445,000 $1,798 8.6 Sep-97 Prime Cable SBC Corp. VA; MD $637.0 268,000 $2,377 8.2 Sep-97 Post Newsweek* TCA Cable* Blackwell, OK $28.0 17,000 $1,679 8.9 Sep-97 TCA Cable* Post Newsweek* Lufkin, TX $28.0 16,000 $1,819 8.9 Sep-97 MediaCom Jones Fund 1B C Clearlake, CA $21.0 17,000 $1,237 7.4 Total 01/97-9/97 $13,199.0 6,949,300 Total 11/96-9/97 $13,564.3 7,151,100 NOTES: * System swaps ** The transaction prices are from Kagan. The transaction price is dependent upon the terms of each transaction and may or may not include debt. *** The calculations of Price/(Basic)Subscriber are from Kagan. These calculations are stated to be subject to rounding and reporting inconsistencies. (c) Indicates a "consummated transaction." (jv) Indicates a joint venture. SOURCES: Paul Kagan Associates, Inc., First-Half 1997 Cable System Sales, Cable TV Finance, Jul. 31, 1997, at 8; Paul Kagan Associates, Inc., Announced/Proposed Cable System Sales, Cable TV Investor, Dec. 3, 1996, at 11; Jan. 7, 1997, at 12; Feb. 24, 1997, at 14; Mar. 10, 1997, at 13; Apr. 30, 1997, at 11; May 20, 1997, at 14; Jul. 9, 1997, at 10; Aug. 22, 1997, at 8; Sep. 10, 1997, at 4; Oct. 9, 1997, at 14. Kent Gibbons, Finance, MSO's Clustering Efforts Extend Beyond Top 10, Multichannel News, Sep. 1, 1997, at 31. Regina Matthews, System Sales, Cable World, Sep. 1, 1997, at 28. Regina Matthews, Swaps and Partnerships, Cable World, Aug. 25, 1997, at 45. Mass Media Issues, Communications Daily, Sep. 25, 1997, at 5; Dec. 2, 1997, at 5. Table F-1 MSO Ownership in National Programming Services Programming Service Launch Date Ownership Percentage Action Pay-Per-View Sept-90 TCI (22) AMC (American Movie Classics) Oct-84 Cablevision Systems (75) Animal Planet Oct-96 TCI (49), Cox (24.5) BET (Black Entertainment Television) Jan-80 TCI (22) BET on Jazz Jan-96 TCI (22) BET Movies Feb-97 TCI (22) The Box Worldwide Dec-85 TCI (80) Bravo Feb-80 Cablevision Systems (50) Cartoon Network Oct-92 Time Warner (100) Catalog 1 Apr-94 Time Warner (50) Cinemax Aug-80 Time Warner (100) CNN Jun-80 Time Warner (100) CNNfn (The Financial Network) Dec-95 Time Warner (100) CNNI (formerly CNN International) Jan-95 Time Warner (100) CNN/SI Dec-96 Time Warner (100) Comedy Central Apr-91 Time Warner (50) Court TV Jul-91 TCI (33.3), Time Warner (33.3) Discovery Channel Jun-85 TCI (49), Cox (24.5) Discovery Civilization Oct-96 TCI (49), Cox (24.5) Discovery Kids Oct-96 TCI (49), Cox (24.5) Discovery Science Oct-96 TCI (49), Cox (24.5) Programming Service Launch Date Ownership Percentage Discovery Travel and Living Oct-96 TCI (49), Cox (24.5) E! Entertainment Jun-90 Comcast (34.5), Cox (10.4), MediaOne (10.4), TCI (10.4) Encore Jun-91 TCI (80) Encore Love Stories Jul-94 TCI (80) Encore Westerns Jul-94 TCI (80) Encore Mysteries Jul-94 TCI (80) Encore Action Sept-94 TCI (80) Encore True Stories and Drama Sept-94 TCI (80) Encore WAM! America's Youth Network Sept-94 TCI (80) Fox Sports Americas (formerly Prime Deportiva) Dec-93 TCI (25) fX Oct-94 TCI (50) fXM: Movies from Fox Nov-94 TCI (50) GEMS International Television Apr-93 Cox (50) The Golf Channel Jan-95 MediaOne (20.2) Great American Country Dec-95 Jones (89) HBO (Home Box Office) Nov-72 Time Warner (100) HBO 2 Dec-75 Time Warner (100) HBO 3 Oct-93 Time Warner (100) Headline News Jan-82 Time Warner (100) Independent Film Channel Sep-94 Cablevision Systems (75) The International Channel Jul-90 TCI (45) Knowledge TV (formerly Mind Extension University) Nov-87 Jones (89) The Learning Channel Nov-80 TCI (49) Cox (24.5) Programming Service Launch Date Ownership Percentage MuchMusic USA Jul-94 Cablevision Systems (50) Odyssey (formerly Faith and Values) Oct-93 TCI (49) Outdoor Life Network Jul-95 Cox (45), Comcast (22.5), MediaOne (22.5) Ovation: The Arts Network Apr-96 Time Warner (50) Prevue Channel Jan-88 TCI (40.5) Prime Network Jan-93 TCI (33) Cablevision Sys. (25) Product Information Network (PIN) Apr-94 Cox (50) QVC Nov-86 Comcast (57) TCI (43) Q2 Sept-94 Comcast (57) TCI (43) Request Television Nov-85 TCI (40) Request 2 Jul-88 TCI (40) Request 3-5 Sept-93 TCI (40) Romance Classics Jan-97 Cablevision Systems (75) Speedvision Dec-95 Cox (45), Comcast (22.5), MediaOne (22.5) Starz! - encore 8 Feb-94 TCI (100) Starz!2 - encore 8 Mar-96 TCI (100) TBS Dec-76 Time Warner (100) TNT (Turner Network Television) Oct-88 Time Warner (100) The Travel Channel Feb-87 TCI (34), Cox (17) Turner Classic Movies Apr-94 Time Warner (100) TV Food Network (TVFN) Nov-83 MediaOne (10), Cox (1.9) Programming Service Launch Date Ownership Percentage Viewers Choice Nov-85 Cox (20), Time Warner (17), MediaOne (12), Comcast (11), TCI (10) Viewers Choice: Hot Choice Jun-86 Cox (20), Time Warner (17), MediaOne (12), Comcast (11), TCI (10) Viewers Choice: Continuous Hits 1,2,3 Feb-93 Cox (20), Time Warner (17), MediaOne (12), Comcast (11), TCI (10) Sources: NCTA Comments at Tbl. A3. EchoStar Reply Comments at Ownership Chart. NCTA, National Video Services, Cable Television Developments, Spring 1997, at 28-95. Paul Kagan Assocs., Inc., Multiple Network Owners, Cable TV Programming, May 31, 1997, at 2-5. TCI Shareholder Report, 1997, at 14-15. Jones Intercable Prospectus Supplement, August 1, 1997, at S-24. Merrill Lynch & Co. Investment Report for Cablevision Systems, June 12, 1997, at 4. Table F-2 Existing National Programming Services Not Affiliated With a Cable Operator Programming Service Launch Date Adam & Eve Channel Feb-94 Adultvision Jul-95 All News Channel Nov-89 America's Health Network Mar-96 ANA Television Network Dec-91 Arts & Entertainment (A&E) Feb-84 Asian American Satellite TV Jan-92 Bloomberg Information Television Jan-95 CBS TeleNoticias 1997 CNET: The Computer Network Jan-95 C-SPAN* Mar-79 C-SPAN 2* Jun-86 Cable Video Store Apr-86 Canal Sur Aug-91 Channel America Television Network Jun-88 Children's Cable Network May-95 Cine Latino Dec-94 (in U.S.) Classic Sports Network May-95 Classic Arts Showcase May-94 CMT: Country Music Television Mar-83 CNBC Apr-89 Consumer Resource Network Dec-94 Crime Channel Jul-93 Programming Service Launch Date Deep Dish TV Jan-86 Disney Channel Apr-83 The Ecology Channel Nov-94 Employment Channel Feb-92 ESPN Sep-79 ESPN2 Oct-93 ESPNEWS Nov-96 Ethnic-American Broadcasting Co. 1992 EWTN: Global Catholic Network Aug-81 Eye on People Mar-97 The Family Channel Apr-77 Fashion Network Jul-96 The Filipino Channel Apr-91 FiT TV Dec-93 Flix Aug-92 Foxnet Jul-91 Fox News Channel (FNC) Oct-96 Galavision Oct-79 Game Show Network Dec-94 Gay Entertainment Television Nov 95 The History Channel Jan-95 Home & Garden Television Dec-94 Home Shopping Network** Jul-85 Home Shopping (Spree!)** Sept-86 HTV Aug-95 The Inspirational Network (INSP) Apr-78 Programming Service Launch Date Jackpot Channel Oct-96 Jewish Television Network 1981 Kaleidoscope Sep-90 Ladbroke Racing Channel Nov-84 Las Vegas Television Network Nov-91 Lifetime Television Feb-84 The Movie Channel (TMC) Dec-79 Mor Music TV Aug-92 MSNBC Jul-96 MTV: Music Television Aug-81 MTV Networks Latin America (formerly MTV Latino) Oct-93 M2: Music Television Aug-96 The Music Zone Apr-95 My Pet TV Sep-96 NASA Television Jul-91 National & International Singles Television Network Apr-95 NBC News Channel (formerly Canal de Noticias NBC) Mar-93 NET - Political NewsTalk Network Dec-93 Network One Dec-93 Newsworld International Sep-94 Nickelodeon/Nick at Nite Apr-79 Nick at Nite's TV Land Apr-96 Nostalgia Channel Feb-85 Outdoor Channel Apr-93 Planet Central Television May-95 Playboy TV Nov-82 Programming Service Launch Date Praise Television Dec-96 The Recovery Network Feb-97 Sci-Fi Channel** Sept-92 SCOLA Aug-87 Shop at Home Jun-86 Showtime Jul-76 SingleVision Jun-94 Spice May-89 Student Film Network Nov-94 Sundance Channel Feb-96 Telemundo Jan-87 TNN: The Nashville Network Mar-83 Total Communications Network Nov-95 Trinity Broadcasting Network Apr-78 TRIO Sep-94 Tropical Television Network Aug-96 TV Asia Apr-93 TV Japan Jul-91 U Network Oct-89 Univision Sep-76 USA Network** Apr-80 ValueVision Oct-91 VH-1 Jan-85 Via TV Network Aug-93 Video Catalog Channel Oct-91 The Weather Channel May-82 WorldJazz Jul-95 Programming Service Launch Date The 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 provide funding to C-SPAN and are represented on the board of directors as voting members. ** TCI (Liberty Media) will reportedly have a 15% non-voting interest if the announced merger with Home Shopping Network is completed. (See Chris Parkes, HSN in $5bn Universal Studios Deal, Financial Times, Oct. 21, 1997, at 19.) Sources: NCTA Comments at Tbl. A4. EchoStar Reply Comments at Ownership Chart. National Cable Television Assoc., Inc., National Video Services, Cable Television Developments, Spring 1997, at 28-95. Paul Kagan Assocs., Multiple Network Owners, Cable TV Programming, May 31, 1997, at 2-5. TCI Shareholder Report, 1997, at 14-15. Jones Intercable Prospectus Supplement, August 1, 1997, at S-24. Merrill Lynch & Co. Investment Report for Cablevision Systems, June 12, 1997, at 4. TABLE F-3 Planned National Programming Services Affiliated With a Cable Operator Programming Service MSO Affiliation Expected Launch Date American Sports Classics Cablevision Systems TBA BBC America TCI, Cox Early 1998 International Channel Networks Encore Media Group, International Media Group End of 1997 The Parents Channel Malofilm Communications TBA World African Network Time Warner 1998 * "Ownership Interest" refers to a 5% or greater interest in the programming service. TBA - To Be Announced. Sources: National Cable Television Assoc., Planned Services, Cable Television Developments, Spring 1997, at 124-137. 1997 Programming Guide, Private Cable & Wireless Cable, May 1997, at A1. Kim McAvoy and Carolyn West, Cable's Contenders, Broadcasting & Cable, May 12, 1997, at 63. Database, Cablevision, Oct. 6, 1996, at 46. TABLE F-4 Planned National Programming Services Unaffiliated With a Cable Operator Programming Service Expected Launch Date The ABZ Channel Early 1998 Air & Space Network TBA American Legal Network TBA American Political Channel TBA American West Network TBA Anthropology Programming and Entertainment Early 1998 Anti-Aging Network TBA Applause Networks 1998 Arena - The Classic Music Channel TBA Arts & Antiques Network TBA The Auto Channel December 1997 Automotive Television Network TBA The B-Movie Network 1998 The Benefit Network 1998 The Biography Channel TBA Black Women's TV TBA Boating Channel TBA Booknet TBA Career & Education Opportunity Network March 1998 Catalogue TV TBA Celtic Vision 1998 CEO Channel TBA Channel 500 TBA Chop TV TBA Programming Service Expected Launch Date Collectors Channel Mid 1998 Computer Shopping Channel TBA Conservative Television Network TBA The Creative Channel TBA The Enrichment Channel TBA FAD TV (Fashion & Design Television) 1997 Fashion Network TBA Fitness Interactive 4th Qtr 1997 The Football Channel 1998 GETv Network TBA Global Village Network TBA Golden American Network 4th Qtr 1997 The Gospel Network 1997 Hobby Craft Network TBA Home Improvement TV Network TBA Jock Talk TV 1997 Little Leaguers Sports/News Network TBA The Love Network December 1997 M1 - The Museum Channel TBA The MBC Movie Channel TBA Martial Arts Network 1998 The Military Channel 1st Qtr 1998 NationTalk TBA Native American Nations Program Network TBA New Science Network 1997 Oasis TV TBA Orb TV 1998 The Outlet Mall Network 1997 Programming Service Expected Launch Date Parent Television 4th Qtr 1998 Parenting Satellite Television Network 1st Qtr 1998 Performance Showcase 4th Qtr 1997 The Pet Television Network TBA Premiere Horse Network 1st Qtr 1998 Prime Life Network 1998 Real Estate Network TBA Seminar TV Network February 1998 Sewing and Needle Arts Network TBA Soap Channel TBA Space Television Network TBA The Success Channel TBA Talk TV Network 1998 The Technology Channel TBA The Theater Channel 4th Qtr 1997 Therapy Channel Network TBA Toon Disney April 1998 TRAX Television Network TBA TV Games Network 4th Qtr 1998 ZDTV: Your Computer Channel 1st Qtr 1998 TBA - To Be Announced. Sources: National Cable Television Assoc., Planned Services, Cable Television Developments, Spring 1997, at 124-137. 1997 Programming Guide, Private Cable & Wireless Cable, May 1997, at A1. Kim McAvoy and Carolyn West, Cable's Contenders, Broadcasting & Cable, May 12, 1997, at 63. Database, Cablevision, Oct. 6, 1996, at 46. TABLE F-5 Top Eight MSO Ownership in National Programming, MSO Rank in Order by Subscribers Services Subs. (Mil.) TCI Time Warner Media One Comcast Cox Cable- vision Systems Adelphia Jones Cable Action Pay- Per-View 8.0 22% AMC 67.0 75% Animal Planet 27.6 49% 24.5% BET 51.6 22% BET on Jazz 2.5 22% BET Movies .3 22% The Box Worldwide 24.5 80% Bravo 30.0 50% Cartoon Network 1/ 45.8 100% Catalog 1 * 50% Cinemax 8.9 100% CNN 1/ 72.4 100% CNNfn - The Financial Network 1/ 8.4 100% CNNI 1/ 6.5 100% CNN/SI .6 100% Comedy Central 45.3 50% Court TV 32.4 33.3% 33.3% Discovery Channel 72.7 49% 24.5% Services Subs. (Mil.) TCI Time Warner Media One Comcast Cox Cable- vision Systems Adelphia Jones Cable Discovery Civilization * 49% 24.5% Discovery Kids * 49% 24.5% Discovery Science * 49% 24.5% Discovery Travel and Living * 49% 24.5% E! 46.0 10.4% 10.4% 34.5% 10.4% Encore 10.0 80% Encore Love Stories 12.0 80% Encore Westerns ** 80% Encore Mysteries ** 80% Encore Action ** 80% Encore True Stories ** 80% Encore WAM! ** 80% Fox Sports Americas 3.7 25% fX 32.7 50% fXM: Movies from Fox 5.3 50% GEMS International Television 6.0 50% Services Subs. (Mil.) TCI Time Warner Media One Comcast Cox Cable- vision Systems Adelphia Jones Cable The Golf Channel 11.0 20.2% Great American Country 1.2 89% HBO 20.8 100% HBO 2 * 100% HBO 3 * 100% Headline News 1/ 66.9 100% Independent Film Channel 8.0 75% International Channel 7.4 45% Knowledge TV 26.0 89% Learning Channel 61.2 49% 24.5% MuchMusic 9.2 50% Odyssey 30.9 49% Outdoor Life 8.0 22.5% 22.5% 45% Ovation 3.0 50% Prevue Channel 49.8 40.5% Prime Network 50.8 33% 25% Product Information Network 8.0 50% Services Subs. (Mil.) TCI Time Warner Media One Comcast Cox Cable- vision Systems Adelphia Jones Cable QVC 63.0 43% 57% Q2 10.9 43% 57% Request Television: Request 1 35.0 40% Request Television: Request 2 * 40% Request Television 3-5 * 40% Romance Classics 8.0 75% Speedvision 11.0 22.5% 22.5% 45% Starz! 4.8 100% Starz!2 * 100% TBS 1/ 71.6 100% TNT 1/ 72.3 100% The Travel Channel 20.5 34% 17% Turner Classic Movies 1/ 18.3 100% TV Food Network 2/ 27.7 10% 1.9% Services Subs. (Mil.) TCI Time Warner Media One Comcast Cox Cable- vision Systems Adelphia Jones Cable Viewers Choice 38.0 10% 17% 12% 11% 20% Viewers Choice: Hot Choice *** 10% 17% 12% 11% 20% Viewers Choice: Continuous Hits 1, 2, 3 *** 10% 17% 12% 11% 20% Sources: Sources for subscriber counts: Paul Kagan Assocs., Inc., September 30 Network Census, Cable TV Programming, Oct. 31, 1997, at 12. National Cable Television Assoc, National Video Services, Cable Television Developments, Spring 1997, at 28-95. Sources for ownership percentages: Paul Kagan Assocs., Inc., Multiple Network Owners, Cable TV Programming, May 31, 1997, at 2-5. EchoStar Reply Comments at Ownership Chart. TCI Shareholder Report, 1997, at 14-15. Jones Intercable Prospectus Supplement, Aug. 1, 1997, at S-24. Merrill Lynch & Co. Investment Report for Cablevision Systems, Jun. 12, 1997, at 4. Ownership interests reported for earlier periods may not reflect current ownership. Notes: * Indicates subscriber amount is not available. ** Subscribership of 12.0 million includes all of Encore's six Thematic Multiplex channels (See National Cable Television Assoc., Cable Television Developments, Spring 1997, at 48). *** Subscribership of 16.0 million includes all six Viewers Choice channels (See National Cable Television Assoc., Cable Television Developments, Spring 1997, at 92). 1/ Previously a Turner Broadcasting programming service. 2/ Scripps Howard has a majority interest in TV Food Network. See Mass Media Comm. Daily, Sept. 5, 1997. Others having less than 5% interest are Adelphia Communications, Times Mirror and C-TEC. TABLE F-6 Top 50 Programming Services by Subscribership Rank Programming Network (Top 50) Number of Subscribers (Millions) MSO Ownership Interest in Network 1 TBS 73.2 Time Warner (100%) 2 ESPN 72.9 None 3 The Discovery Channel 72.7 TCI (49%), Cox (24.5%) 4 USA 72.5 None 5 CNN 72.4 Time Warner (100%) 6 TNT 72.3 Time Warner (100%) 7 C-SPAN 71.8 None 8 Nickelodeon/Nick at Nite 71.3 None 9 The Family Channel 70.9 None 10 TNN (The Nashville Network) 70.6 None 11 Arts & Entertainment (A&E) 70.2 None 12 Lifetime Television 69.6 None 13 The Weather Channel 68.8 None 14 MTV 68.0 None 15 AMC (American Movie Classics) 67.0 Cablevision Systems (75%) 16 Headline News 66.9 Time Warner (100%) 17 CNBC 63.4 None 18 QVC 63.0 Comcast (57%), TCI (43%) Rank Programming Network (Top 50) Number of Subscribers (Millions) MSO Ownership Interest in Network 19 The Learning Channel (TLC) 61.2 TCI (49%), Cox (24.5%) 20 VH-1 60.1 None 21 Home Shopping Network 54.4 None 22 ESPN2 51.8 None 23 BET 51.6 TCI (22%) 24 Prevue Channel 49.8 TCI (40.5%) 25 C-SPAN II 48.4 None 26 E! Entertainment 46.0 Comcast (34.5), Cox (10.4), Media One (10.4), TCI (10.4) 27 Sci-Fi Channel 46.0 None 28 Cartoon Network 45.8 Time Warner (100) 29 Comedy Central 45.3 Time Warner (50) 30 The History Channel 42.5 None 31 CMT: Country Music Television 41.7 None 32 MSNBC 38.0 None 33 fX 32.7 TCI (50) 34 Court TV 32.4 TCI (33.3), Time Warner (33.3) 35 Disney Channel 31.0 None 36 Odyssey (formerly Faith and Values) 30.9 TCI (49) 37 Bravo 30.0 Cablevision Systems (50) 38 TV Food Network 27.7 MediaOne (10), Cox (1.9) 39 Animal Planet 27.6 TCI (49), Cox (24.5) 40 Knowledge TV 26.0 Jones (89) 41 The Box Worldwide 24.5 TCI (80) 42 Fox News Channel 23.0 None 43 The Travel Channel 20.5 TCI (34), Cox (17) Rank Programming Network (Top 50) Number of Subscribers (Millions) MSO Ownership Interest in Network 44 Nick at Nite's TV Land 19.6 None 45 Turner Classic Movies 18.3 Time Warner (100) 46 The Inspiration Network 11.2 None 47 The Golf Channel 11.0 MediaOne (20.2) 48 Speedvision 11.0 Cox (45), Comcast (22.5), MediaOne (22.5) 49 Q2 10.9 Comcast (57), TCI (43) 50 Classic Sports Network 10.4 None * Superstations included in the source data are not included in this ranking. Source: Paul Kagan Assocs., Inc., September 30 Network Census, Cable TV Programming, Oct. 31, 1997, at 12. TABLE F-7 Top 15 Programming Services by Prime Time Rating* Rank Programming Service MSO with Ownership Interest 1 TNT Time Warner (100%) 2 Nickelodeon/Nick at Nite None 3 TBS Time Warner (100%) 4 USA Network None 5 Lifetime Television None 6 Arts & Entertainment (A&E) None 7 ESPN None 8 The Discovery Channel TCI (49%), Cox (24.5%) 9 The Cartoon Network Time Warner (100%) 10 The Family Channel None 11 TNN (The Nashville Network) None 12 CNN Time Warner (100%) 13 Sci-Fi Channel None 14 The Learning Channel TCI (49%), Cox (24.5%) 15 fX TCI (50%) * Superstations included in the source data are not included in this ranking. Source: Paul Kagan Assocs., Inc., Second Quarter 1997 Prime-Time Ratings, Cable TV Programming, Aug. 31, 1997, at 6. APPENDIX G Program Access Matters Resolved 1. In a program access complaint decided in 1997, Cross Country Cable, Inc. ("Cross Country") alleged that C-TEC Cable Systems of Michigan, Inc. ("C-TEC") violated both the geographic uniformity requirement and the program access provisions of the Communications Act. Cross Country alleged that C-TEC provided cable service in Cross Country's franchise area, and that discounts offered to subscribers by C-TEC resulted in non-uniform pricing and impeded Cross Country's ability to provide satellite cable programming to consumers. The Cable Services Bureau ("Bureau") found that C-TEC was subject to effective competition in the area at issue and therefore the uniform rate requirement did not apply to C-TEC. The Bureau denied the program access complaint, finding that Cross Country had not made a showing that the discount was an unfair method of competition or deceptive practice that prevented the distribution of programming. 2. In a program access complaint dismissed in 1997, OpTel, Inc. ("OpTel") alleged that Continental denied OpTel access to Prime Ticket programming services pursuant to an exclusivity agreement that was not grandfathered pursuant to 47 U.S.C.  548(h) and 47 C.F.R.  76.1002(e). In the alternative, OpTel claimed that Continental unreasonably refused to sell programming to OpTel in violation of 47 U.S.C.  548(c)(2)(B). Subsequent to the complaint, Continental waived its exclusive right to Prime Ticket's programming with respect to all other multichannel video programming distributors, including, but not limited to, OpTel. OpTel and Continental then filed a joint stipulation for dismissal, in which they requested that the Bureau dismiss OpTel's complaint with prejudice and without costs. The Bureau dismissed the proceeding pursuant to the joint stipulation for dismissal. 3. In 1997, Corporate Media Partners d/b/a Americast ("Americast") and Ameritech filed an Application for Review of a program access complaint involving exclusivity that was decided in 1996. In the 1996 complaint, Americast and Ameritech alleged that they had been denied access to HBO programming as a result of Continental's and HBO's exclusive contract. In denying the complaint, the Bureau concluded that parties to an exclusive contract may enforce an exclusivity provision with respect to newly-acquired systems, where the contract included an after-acquired systems provision that was made part of the contract prior to June 1, 1990. The Commission affirmed the conclusions of the Bureau, and denied the Application for Review. 4. RCN Telecom Services of Massachusetts, Inc. ("RCN") moved to withdraw its Petition For Partial Reconsideration and Request for Expedited Decision ("Petition") of Interface Communications Group, Inc., Digital Broadband Applications Corp. and RCN v. Cablevision Systems Corp., Rainbow Programming Holdings, Inc. and American Movie Classics Company, and requested that the Petition be dismissed with prejudice. In its Petition, RCN stated that it had been afforded access to the programming at issue in the proceeding. The Bureau dismissed the complaint with prejudice. 5. Bell Atlantic Video Services Company ("BVS") filed a program access complaint against Rainbow Programming Holdings, Inc. ("Rainbow") and Cablevision alleging discrimination by Rainbow in the sale of satellite cable programming and the exercise of undue influence by Cablevision in violation of Sections 628(b) and (c) of the Communications Act, and Section 76.1002 of the Commission's rules. The Bureau found that Rainbow discriminated against BVS in the sale of satellite video programming in violation of Sections 628(c)(2)(B) of the Communications Act, and Section 76.1002 of the Commission's rules. The Bureau did not address BVS's claim that Cablevision had exercised undue influence over Rainbow or whether Rainbow's actions constituted unfair methods of competition. 6. In a program access complaint dismissed in 1997, British American Communications, Inc. ("BAC") alleged that Prime Ticket Network, et al., denied BAC access to Prime Ticket programming services pursuant to an exclusivity agreement that was not grandfathered pursuant to 47 U.S.C.  548(h) and 47 C.F.R.  76.1002(e). In the alternative, BAC claimed that Prime Ticket unreasonably refused to sell programming to BAC in violation of 47 U.S.C.  548(c)(2)(B) and 47 C.F.R.  76.1002(b). Subsequent to the complaint, the Trustee for Prime Ticket and BAC entered into an agreement pursuant to which BAC would be able to distribute Prime Ticket's programming in certain of BAC's systems. BAC and Prime Ticket, et al., then filed a joint stipulation for dismissal, in which they requested that the Bureau dismiss the complaint with prejudice. The Bureau dismissed the proceeding pursuant to the joint stipulation for dismissal. 7. Americast and Ameritech filed a program access complaint pursuant to 47 U.S.C.  548(b) and 548(c)(2)(B) and 47 C.F.R.  76.1002(b) alleging that Rainbow engaged in price discrimination and discrimination in marketing requirements and other terms and conditions in agreements between Rainbow and Americast. Rainbow answered denying discrimination and asking that the complaint be dismissed with prejudice. Americast and Ameritech replied asking for relief without further fact-finding or procedural steps. The Bureau granted the complaint with respect to claims of price discrimination and discrimination in marketing requirements and dismissed the complaint with respect to claims of discrimination in other terms and conditions. 8. In a program access complaint dismissed in 1997, Wizard Programming, Inc. ("Wizard") alleged that Superstar/Netlink Group, L.L.C. ("SNG") and TCI engaged in unfair methods of competition or unfair or deceptive acts or practices in the sale of satellite broadcast programming in violation of Section 628(b) of the Communications Act. Wizard claimed that SNG has discriminated against Wizard in the prices, terms, and conditions of sale or delivery of programming in violation of Section 76.1002(b) of the Commission's rules. Wizard named TCI as a co-defendant based on TCI's alleged indirect ownership interest in SNG and claimed that TCI has unduly and improperly influenced the acts of SNG in violation of Section 76.1002(a) of the Commission's rules. The Bureau dismissed the claim with prejudice, finding that Wizard did not show that it had standing to bring a program access complaint. SEPARATE STATEMENT OF CHAIRMAN WILLIAM E. KENNARD In t he Matter of Annual Assessment of the Status of Comp etition in Markets for the Delivery of Video Programming When Congress passed the Telecommunications Act of 1996, it mandated the sunset of cable rate regulation on March 31, 1999 for all but the basic service tier. Congress predicted that in another three years, cable rate regulation would be a relic of a bygone era. Seemingly major legal barriers to competition were removed. An alphabet soup of new entrants -- RBOCs, DBS, MMDS, SMATV -- seemed poised to compete aggressively in the multichannel marketplace. Policymakers heralded the dawn of significant new competition to cable television, and the American people were promised lower prices and more competitive alternatives. But less than 15 months away from the sunset of most cable rate regulation, it is clear that broad-based, widespread competition to the cable industry has not developed and is not imminent. Eighty-seven percent of those who subscribe to multichannel video programming receive service from their local cable operator. While this is certainly an improvement from the Commission's first report in 1994, it is largely attributable to the growth of direct broadcast satellite services (DBS). DBS, however, remains primarily a high-end product or a way to receive multichannel video service in areas cable does not reach. And while at least one local exchange carrier is beginning to provide cable service, telephone companies have not, on the whole, entered video markets on a widespread basis. Rates for regulated cable programming and equipment rose 8.5% in the 12-month period ending July, 1997. Although increased prices have been accompanied by additional programming, consumers have no real opportunity to choose a range of programming at varying prices. Our Report indicates that the presence of true, head-to-head competition to cable has a substantial downward effect on cable rates. Prices, not surprisingly, appear lower where there is competition than where there is none. But the much anticipated competition has yet to arrive. The loser is the American public. They must pay the higher cable prices yet they have few competitive choices. Policymakers should no longer have high hopes that a vigorous and widespread competitive environment will magically emerge in the next several months to reverse the troubling increase in cable rates. I fear it will not. Although the Communications Act mandates that we substantially loosen rate controls next year, there are actions we have taken, and some we can take in the interim, that can foster more competition. We recently proposed ways to improve the effectiveness of our program access rules. New entrants seeking to compete against incumbents must have a fair opportunity to obtain and market programming, and the Commission's program access rules must be enforced swiftly and effectively. Today's Report notes our preemption of undue limitations on a viewer's ability to install dishes and antennas on property they own and control. It describes our new rules giving certainty to alternative video distributors with respect to their right to use wiring installed by the incumbent cable operator in apartment buildings and other multiunit dwellings, and our provision for the rollout of digital television. These are valuable contributions toward competition. Still, when confronted with allegations of price gouging, cable operators reflexively point to additional programming costs. The Commission's own rules and policies may be a source of this problem. We need to examine whether there are targeted adjustments that should be made to our rate rules. For example, our rules allow programming cost increases to be passed on to subscribers. But is this right? Should the consumer shoulder all the increased costs of programming, instead of sharing these costs among other revenue sources, such as advertising, commissions, and in some circumstances, payments from programmers themselves, especially where these other revenue streams may have grown since the benchmark rates were set? Moreover, there are affiliations between cable operators and those who create and sell programming that add complexity to analyzing rates. I am therefore directing the Cable Services Bureau to commence a focused inquiry into programming costs to determine the sources of these increases, the variance in costs among various distributors, whether existing relationships impact the prices charged, and if programmers restrict consumer choice. This inquiry will require the cooperation and forthrightness of the industry. We will also pursue the cable industry's own suggestion, that we explore ways that the cable industry can provide consumers a wider range of choice in programming and prices, such that a consumer need not purchase programming that he or she does not want to watch. I look forward to the industry's recommendations in this regard. I am interested in examining the extent to which programmers restrict the cable operator's ability to market their programming, such as by requiring that programming be placed on a particular tier with other programming. Further, are most cable systems technically equipped to offer more customized programming packages, or would customization require settop boxes and other equipment, the cost of which would nullify the gains? I am also instructing the Bureau to renew its enforcement efforts, giving particular emphasis and scrutiny not only to operators that do not commit an entire rate increase to the consumer's benefit, but also to examining closely all revenue received by the cable operator and the impact on the rate charged. I also intend to ensure that the Commission concludes its rulemaking with respect to the state of horizontal concentration in the cable industry and its effects on competition. We must finish carrying out the law's requirement that we analyze the industry in this regard and put in place rules to restrain any anticompetitive effects of excessive concentration. There are areas where enhanced competitive opportunities depend more upon changes in the law than on additional regulatory action. Direct broadcast satellite providers are largely prohibited from carrying local broadcast signals. Moreover, in obtaining the rights to network broadcast programming, DBS operators must pay more in copyright fees than cable pays for the same programming. With respect to program access, there is significant debate regarding our statutory authority, even where programming is unfairly or anticompetitively withheld from distribution in a way that frustrates the growth of competition. Further, competition in apartment buildings is limited because our statutory authority to allow use of the transmission wires by competitors extends only to circumstances where the incumbent has lost its right to remain in a building. Tenants would see more choice and better prices if an incumbent faced a competitive environment sooner. Similarly, dependent upon the outcome of a pending proceeding, the right of access by apartment dwellers and others to competitive video providers should be examined. I would like to work with the Congress to evaluate these and other statutory proposals to eliminate barriers to competition. Congress is the final judge of the wisdom of proposals such as these. But I hope that the Commission will be called upon to assist Congress in assessing these legislative proposals. Maintaining regulation as a surrogate for competition, and only until such time as competition arrives, is consistent with the historical underpinnings of federal regulation of cable television and reaffirmed by the Telecommunications Act of 1996. Yet I do not believe that, come March 1999, the consumer will be able to rely on a competitive market to ensure reasonable prices and choice. Therefore, I look forward to pursuing the initiatives I have described above to give the American public as much choice and value as can be achieved in the market that today's Report describes. Statement of Commissioner Susan Ness Re: Video Competition Report The Fourth Report to Congress provides both good news and bad news for advocates of robust multichannel video competition. It concludes that competition is developing but is not as vibrant as we had hoped it would be by now. Direct Broadcast Service (DBS) and other competitors have made solid gains in subscribership, but their presence has not been felt broadly enough to hold the line on cable television rates. Where telephone companies have overbuilt cable systems, prices generally have been driven down. The emergence of wire-based competitors is important since DBS is not a perfect substitute to cable service, limited by its present inability to deliver local signals, significant fees for service to additional TV sets, and upfront equipment costs. Consumers continue to be pinched by double digit rate increases in many -- but not all -- systems. Some cable rate hikes may legitimately be attributed to added channels that viewers want, infrastructure upgrades, and improvements in customer service. But cable companies imposing major rate increases need to be sensitive to the value customers place on additional channels or upgrades, weighed against the additional cost of service. The skyrocketing cost of programming -- especially sports programming -- poses a new set of issues. First, I am increasingly concerned about the lack of program packaging choices available to subscribers. Today, all subscribers who want more than a basic package are forced to share the high cost of sports programming whether they watch it or not. It is time to weigh the pros and cons of cable tiering, with a view towards increasing the options without diminishing the ability of new networks to gain critical exposure. Second, since networks have the dual revenue stream of advertising support and distribution fees, are advertisers bearing at least the same proportion of increased programming costs as are captive subscribers? Third, the substantial interlocking collaborations among a handful of giant media companies, characterized so vividly as "American Keiretsu" by Ken Auletta, warrant attention to ensure that market power does not result in abuse. The marketplace of ideas should function just as other competitive product markets do. Market failure may occur when consumers do not have an effective alternative to their cable provider, or it may occur when a bottleneck develops in the programming distribution chain so that viewers are denied access to independent voices that would be heard in a competitive market. Cable television and other multichannel video systems provide enormous service to the American public. We must be vigilant, however, to ensure that market power does not impair consumer access to these valued services. SEPARATE STATEMENT OF COMMISSIONER HAROLD W. FURCHTGOTT-ROTH In re: Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming I am pleased to join in today's action, the issuance of the Commission's Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming. I believe that the report does a fine job of detailing for Congress the current state of competitive affairs in the video delivery industries, as required by section 628(g) of the Communications Act. I wish to make clear that while I therefore support the report generally, I do not endorse the specific legislative proposals, save those based on section 713(f) of the Act, that it contains. SEPARATE STATEMENT OF COMMISSIONER GLORIA TRISTANI In the Matter of Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming Much in this year's Report on the status of multichannel video competition has a familiar ring: there are pockets of head-to-head competition to cable, and some additional gains by DBS, but overall the cable industry retains its overwhelming dominance. Cable still controls 87% of multichannel video programming subscribers nationwide. All of cable's competitors -- e.g., DBS, MMDS, SMATV, HSD -- account for only 13% combined. Perhaps the most troubling aspect of these figures is that they do not reflect any quickening in the pace of competition. This year's modest 2% drop in the percentage of multichannel video subscribers controlled by cable was similar to the reductions tracked in the Commission's reports for 1994, 1995 and 1996. This is not the dramatic change in the competitive landscape that was hoped for and expected with the passage of the Telecommunications Act of 1996. In particular, the 1996 Act freed telephone companies to compete head-to-head with cable operators in their telephone service areas. It was expected that telephone companies would seize the opportunity to enter the video market and provide consumers with a real alternative to the incumbent cable operator. But, with a few exceptions, this type of broad-based entry has yet to occur and there is little evidence that such competition is in the offing. To the contrary, some telephone companies seem to be actively withdrawing from previous efforts to explore full-scale entry into the video marketplace. I am not convinced that DBS can fill that competitive vacuum. First, of course, DBS services do not carry local broadcast stations. Second, the current "up front" costs associated with DBS are substantial and place it out of reach for many Americans. As the Report indicates, the up front costs for DBS equipment and installation can amount to several hundred dollars. Moreover, in order to receive service on more than one television set -- not an unreasonable assumption in most homes -- a consumer must incur an additional substantial equipment charge and a monthly charge for each additional set. Because it fails to adequately reflect these costs, I expressly do not join in the comparison of cable and DBS prices in paragraphs 39-42 of the Report. While the comparisons do include a DBS equipment cost of $200, the Report spreads that cost over a five-year period without any adjustment for the fact that these costs must be paid in advance. And while the Report does note that installation costs and the costs of providing service to additional sets should be considered, I believe that omitting any numerical analysis renders the comparisons virtually meaningless. Consumers cannot assume away up front costs, or spread out such costs over five years interest-free. Consumers do not want to know whether it is possible to construct cable and DBS packages with similar per channel costs. They want to know how much each service is going to cost them and when. The comparison of cable and DBS prices would have been far more helpful had it attempted to answer that question. My concerns about concentration in the video programming distribution marketplace also apply to concentration within the cable industry itself. Since 1990, the top MSO's percentage of cable subscribers has risen from 24% to 29.3%; during that period, the percentage claimed by the top four MSOs combined has risen from 45.6% to 62.3%. Even these figures may not reflect the entire story. As detailed in the Report, some of the largest MSOs are entering into joint ventures and other business arrangements with each other on an unprecedented scale. None of these transactions are at issue here and I express no opinion on their respective merits. I do believe, however, that the Commission owes it to the parties and to the public to remove the current confusion surrounding our horizontal ownership rules as soon as possible. As the Report notes, those rules were voluntarily stayed in October 1993 in light of the D.C. district court's decision that the 1992 Cable Act's horizontal ownership provisions were unconstitutional. In August 1996, the D.C. Circuit held in abeyance any further review of the horizontal ownership provisions, and the Commission's rules promulgated thereunder, until the Commission completed its reconsideration of its rules. Thus, in effect, the Commission was waiting for the D.C. Circuit to rule, and now the D.C. Circuit is waiting for the Commission. This situation has now become particularly untenable, since depending how the recent transactions among large MSOs are treated, it appears that the horizontal limits originally issued by the Commission may be breached. I hope that the Commission will act to clarify this situation as quickly as possible. My concern about concentration issues is heightened by rising cable rates. As the Report indicates, cable bills rose by an average of 8.5% last year, several times the rate of inflation. The cable industry has argued that much of these rate increases are due to increases in programming costs. I express no opinion on the existence of these additional costs, but I would make a few observations. First, it is difficult to make rational judgments about the effect of rising programming costs without accurate information. To that end, I believe that the Commission should consider some type of survey or reporting requirement so that actual programming costs can be reported, without revealing any confidential information, in next year's Report. Second, cable operators have two choices for recovering programming cost increases -- they can increase subscriber rates or they can increase advertising rates. Our current rules provide the cable industry little incentive to charge these costs to advertisers (not a captive audience), since we permit all of the costs to be passed on directly to consumers. Third, the Report describes several situations in which cable operators face actual head- to-head competition. Generally, the operators' responses were to offer customers new and improved services at similar or reduced prices. I am aware of no evidence that these operators are in financial difficulty or are unable to offer an attractive programming package to their customers. Part of the answer to the dilemma of rising cable rates may not involve rates at all, but simply expanding consumer choice. One of the general underpinnings of our rate rules is that consumers should pay about what they would pay in a competitive video programming marketplace. I am coming to the conclusion, however, that consumers are being forced to pay for packages of programming that they would not buy in a competitive market, even at a reasonable price. In other words, even if our per channel prices were consistent with the per channel prices that would be charged in a competitive market, consumers may still be paying too much because they are being forced to purchase additional channels that they did not ask for and do not want. This may not have been a significant problem in a 30 or 40 channel universe, but in a 70, 80 or 100 channel universe, these unwanted channels can have a dramatic effect. As loudly as consumers complain about rates, they complain just as loudly about having to pay for additional programming services that they do not want and did not ask for. This does not necessarily mean that all cable programming should be offered a la carte. It simply means that the cable industry can and should afford consumers more choice. In a competitive market, consumers would be able to choose from a range of video products because consumers have different needs and different resources. Some would choose the basic "Chevy" service; others would choose the fully-loaded "Cadillac"; others would choose a model in between. The cable industry's current position seems to be that all Chevy owners must upgrade to a Cadillac or do without a car. That is not the way a competitive market would act. This is not an argument about price -- the Cadillac may be worth every penny the cable operator is charging -- but about consumer choice. While we all hope that one day competitive factors will hold cable rates in check, wishful thinking will not fulfill our statutory mandate to keep rates reasonable. I do not believe it is enough to simply tell consumers that competition is "just around the corner." Consumers need protection now. I challenge the cable industry to provide consumers with the additional choice that they want and deserve. And I urge my colleagues to take our statutory mandate to protect consumers seriously by continuing to take a hard look at this issue.