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S- X #&a\  P6G;&P# S- 3 Federal Communications Commission`g(#FCC 97423 ă  yxdddy   @-  -@ӊ` `  ,hh^  S-` ` v #X\  P6G;P#Before the 4Federal Communications Commission  yOx}_Washington, D.C. 20554 #Xj\  P6G;9XP#у  S)-#&a\  P6G;&P#In the Matter of) )  S-Annual Assessment of the Status of)CS Docket No. 97141 Competition in Markets for the ) Delivery of Video Programming)  S -R# FOURTH ANNUAL REPORT d  S - Adopted: December 31, 1997 hh^ppReleased: January 13, 1998  Sq - L4By the Commission: Chairman Kennard and Commissioners Ness, FurtchgottRoth and Tristani issuing separate statements.  S-q" Table of Contents  d  S-`> (#Paragraphă X` hp x (#%'0*,.8135@8: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  S8-description of video programming.> 8 yO-ԍ47 U.S.C. 613(f).>  S- B.` ` Summary of Findings and Recommendations  S- : 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.  S -  : 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 12month period from July 1996 to July 1997.  S-  : 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 directtohome 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.  S-  : #9.` ` As discussed below, the Commission recently has taken a series of steps to minimize and  S- &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  &minterfere with a consumer's right to install the dishes and other equipment necessary to receive  &programming services from directtohome 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"J$X ,`(`(88%"  &0of that spectrum, for the benefit of wireless providers. The Commission also has encouraged the development of digital television which may provide new competition.  S- : # 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 headtohead competition, in the relatively  &few areas where such competition has developed. In such cases, cable operators have responded quickly  &Mwith 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  &lconsumer 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.  S - : ` 11.` ` The following paragraphs contain a more detailed summary of the findings in this 1997  S -Report:  S - OVERVIEW OF VIDEO PROGRAMMING DISTRIBUTION MARKET:  S\- (# Geographic and Product Markets: For purposes of analysis, competition in the delivery of video  &kprogramming 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,  &kpremium perchannel charge services, payperview 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.  S- (# MVPD Market Overview: A total of 73.6 million households subscribed to multichannel video  &jprogramming services as of June 1997, up 2.8% over the 71.6 million households subscribing to MVPDs  S- &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  &z1997. During this period, the number of cable subscribers continued to grow, reaching 64.2 million as  S2- &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  &zvideo 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  &zgrew from 8.1 million as of September 1996 to 9.5 million as of June 1997, an increase of almost 20%  SD-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"& ,`(`(88n("  &where it exists. MVPDs using other distribution technologies have not posted subscribership increases  &ycomparable to DBS increases, but are in the process of testing digital technology that has the potential to improve significantly the competitiveness of their services.  S`- MARKET PARTICIPANTS  S- (# 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 rightsofway for the purpose of offering  S- & 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  S - &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  S\-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  S- &increasing so rapidly and considers changes to its cable rate regulation formula.  {O^- &ԍImplementation of Sections of the Cable Act of 1992, Rate Regulation, Horizontal and Vertical Ownership  {O(- &Limits, Developments of Competition and Diversity of Video Programming Distribution and Carriage, MM Dkt. Nos.  & 92264, 92265, 92266, Petition to Update Cable Television Regulations and Freeze Existing Cable Television Rates,  &-filed Sept. 23, 1997, by Consumers Union and Consumer Federation of America ("Consumers Union Petition").  &Many of the issues discussed in the petition were reiterated by Gene Kimmelman representing Consumers Union at the December 18, 1997, Commission meeting. 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.   S.- (#DirecttoHome ("DTH") Satellite Service (DBS and HSD): Video service is available from high  &Lpower DBS satellites that transmit signals to small DBS dish antennas installed at subscribers' premises,  &kand 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" D ,`(`(88V""  &readily available. DBS service is available nationwide (although some households cannot receive it due  &mto 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 payper &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  &Mthe 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 overtheair antenna  S- &reception. DTH subscribership varies from 23.6% in Montana to 2.3% in New Jersey, with a share of  Sp-approximately 9.8% of national MVPD subscribership.  S - (#NWireless 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,  S - &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  S-had a 1.5% share of national MVPD subscribership.   Sj- (#SMATV Systems: SMATV systems use some of the same technology as cable systems, but do not  &Nuse public rightsofway, 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.   ST- (#Telephone Companies: The 1996 Act significantly expanded the opportunities for local telephone  &companies to compete in video programming distribution markets. Telephone company (local exchange  &lcarrier 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  &zdelivery 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 inregion MMDS systems. Others (US West, Bell Atlantic, and SBC) have minimized  &Mor abandoned further activities in multichannel video programming within their regions. TeleTV and  &Americast, two joint ventures organized by LECs to provide original video programming and packaging, have significantly scaled back their operations.  Sv#- (#|Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery  &yof video programming the open video system ("OVS"). Under these rules, a LEC or other entrant may  &/provide inregion distribution of video programming to subscribers, although the OVS operator must  &jprovide nondiscriminatory access to unaffiliated programmers on a portion of its channel capacity. The"& ,`(`(88'"  &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.  S- (# 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 payperview channels with similar content distributed by MVPDs.  S - (#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 investorowned  &utilities have announced plans or have commenced ventures involving multichannel video programming  &ydistribution. Utilities, however, are not yet actual participants in the market for the distribution of video  S4-programming.  S- & 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.  S- (#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,  &yregardless 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 overtheair 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  &kcontinued 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.  S&- "& ,`(`(88'"  S-LOCAL, REGIONAL, AND NATIONAL HORIZONTAL MARKET DEVELOPMENTS  S- (# 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.  S- (#P 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  &yentry 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  &jaffect currently noncompetitive 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 noncable delivery technologies will constrain cable systems' ability to exercise market power in the future.  S- (# Local Interservice Competition; Telephone Companies Offering Video and Cable Operators  S- &yOffering 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  &lyet to take place. Almost all of the video service being provided by LECs is being provided using  &yconventional 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  &headtohead 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.  S!- (#! 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  &ztelecommunications markets where other competitors are providing service throughout or across large"& ,`(`(88'"  &Mregional areas. Regulatory controls attach to cable systems on a political subdivision basis, however, resulting in the application of nonuniform regulations at the local level throughout a larger region.  S- (# 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  &ybeen 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.  S2- PROGRAMMING AND VERTICAL OWNERSHIP MARKET DEVELOPMENTS  & 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  S- &services launched since the 1996 Report have been vertically integrated with an MSO. In local and  &regional markets, system operators are increasingly distributing local nonbroadcast news channels, some  &[of which are programmed by affiliates of the operator and a significant number of which are programmed  &by nonaffiliated local television stations. The integration of regional sports programming with system  &ownership has taken place through the merger of eight TCIaffiliated Fox/Liberty regional sports networks with seven Cablevisionaffiliated SportsChannel regional sports services.  S|- CASE STUDIES OF COMPETITIVE RESPONSES  S,- (#O  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  &ycompetition 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.  S - CHANGES IN TECHNOLOGY  S!- (#n 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.  S&-  S&- "& ,`(`(88n("Ԍ S-REGULATORY ACTIVITIES AND ISSUES  S- (# Overtheair 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 overtheair 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  &kcommunity 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  &Lof those proceedings, additional antenna placement rights may be necessary if competition for individual MDU subscribers is to take place on a broader basis.  S - (# 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  &jowners 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.  S- (# 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.  S!- (#A 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  &Lconsistently 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"& ,`(`(88n("  &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 verticallyintegrated programmers be required to  S`- &[disclose what they actually charge cable operators; ` yO-ԍTestimony of Matthew Oristano, on behalf of WCAI, at the Dec. 18, 1997, Commission meeting. (3) including monetary damages among the available  &enforcement tools to discourage program access violations; (4) possibly applying the program access rules  &yto 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.  S - (# 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.  Sj- (# 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  &Lthe 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.  S- (# 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 rollout of DTV. "N$ X ,`(`(88%"Ԍ S- (#^ 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  &Lreversed. The Commission has resumed its rulemaking and has sought updated comments relating to this requirement.  Sr- (# 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  &jregulatory 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  &kof 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 mustcarry 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.  Sd- (#|Navigation Devices: Navigation devices are television settop 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 standardsetting 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.  S%- (# 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. "& ,`(`(88n("  &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  S`- &to Congress its first report on video description pursuant to this requirement.2 \` {O- &yԍClosed Captioning and Video Description of Video Programming, Implementation of Section 305 of the  {O- &iTelecommunications Act of 1996, Video Programming Accessibility, MM Dkt. No. 95176, Report, 11 FCC Rcd 19214 (1996).2 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  &Mappears 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.  SX- II.COMPETITORS IN MARKETS FOR THE DELIVERY  S0-XOF VIDEO PROGRAMMING (#  S- A.` ` Cable Industry  S- : B 12.` ` This section addresses the performance of franchised cable system operators yO- &-ԍA franchise is defined as an authorization supplied by a federal, state, or local government entity to own or  &construct a cable system in a specific area. Communications Act  602(9), 602(10), 47 U.S.C.  522(9), 522(10).  &A cable system operator is defined as "any person or group of persons (A) who provides cable service over a cable  &system, and directly or through one or more affiliates owns a significant interest in such cable system; or (B) who  &otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system."  602(5), 47 C.F.R.  76.5(cc). in three  &zareas: (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"d ,`(`(88"  S- &system transactions, cable overbuilds, {Oh- &ԍ1995 Report, 11 FCC Rcd at 2075  36. An "overbuild" occurs when two or more wireline cable television systems directly compete for subscribers in a local video programming delivery market. stock prices, rates charged by cable operators, and new services such as digital video services, cable data access, and cable telephony.  R-` `  1. General Performance  S8- : T 13.` ` Since our last report, the cable industry has grown in several ways including  S- &subscribership, homes passed, penetration, premium subscriptions, viewership, and channel capacity.8\" {O - &ԍSee App. B, Tbls. B1 and B2, Nielsen Media Research, Nielsen Television Index/Monitor Plus, 1997, and  {O - &Paul Kagan Assocs., Inc., Channel Capacity Projections By Technology, Marketing New Media, Sept. 16, 1996, at 1.8 In  &addition, during all of 1996 and the first half of 1997, the industry began to expand its service offerings  S-to customers in certain areas to include digital video service, cable modems, and cable telephony.OF {O-ԍSee paras. 47 and 51 infra.O  Sp- : P 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  S" - &of 1.1%, with no change as of the end of June 1997."  {O- &ԍSee App. B, Tbl. B1. A.C. Nielsen reports data on television households as of the beginning of the broadcast television season in September every year. 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  S - &to 93.7 million at the end of 1996, and 94.2 million by the end of June 1997.1 2  {O-ԍId.1 This represents about a  S - &1.1% increase between the end of 1995 and the end of 1996.1  {O-ԍId.1 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  SZ- &and June 1997.1ZV  {OP-ԍId.1 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  S -by the end of June 1997.1  {O -ԍId.1  S- : 415.` `  Subscribership and Capacity Usage. Cable subscribership grew from 62.1 million  S- &subscribers at the end of 1995 to 63.5 million subscribers at the end of 1996, an increase of 2.3%,1z {O$-ԍId.1 and  &Lto an estimated 64.2 million subscribers at the end of the first half of 1997, a six month increase of about"l ,`(`(88"  S- &1%.1 {Oh-ԍId.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  S- &half of 1997.1Z {O-ԍId.1 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  S-1997, another 5% increase.F {O -ԍId., See Tbl. B2.F  S- : 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  Sr- &systems, or 8,134 systems, and 83.9% of all cable systems, or 8,260 systems in October 1997.r~ {O- &ԍSee App. B, Tbl. B3. Use of October to October data is consistent with our 1996 Report, and is the method used by Warren Publishing, Inc., to report system statistics. 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  S - &1997.1  {Or-ԍId.1 The average cable system channel capacity grew from about 47 channels at the end of 1995 to  S -approximately 53 channels at the end of 1996, an increase of 12.7%.2 j  {O- &wԍPaul Kagan Assocs., Inc., Channel Capacity Projections By Technology, Marketing New Media, Sept. 16, 1996,  &Zat 1. Paul Kagan Associates began reporting a "weighted" average channel capacity for 1996 and beyond in their  &xAug. 31, 1997 issue of Cable TV Programming. NCTA uses these figures for cable channel capacity. Since there  &<is no corresponding "weighted" 1995 figure, we use the unweighted capacity here to show a 19951996 increase.  {O- &The weighted average channel capacity for the yearend 1996 was 68 channels. See Paul Kagan Assocs., Inc.,  {O-Weighted Cable Analog Channel Capacity Model, Cable TV Programming, Aug. 31, 1997, at 1.2  S - : 17.` ` In October 1996, the number of subscribers served by systems with capacities of 30  SZ- &Lchannels or more grew to 98.2% of subscribers.CZ {O-ԍSee App. B, Tbl. B4.C In October 1997, the number of subscribers served by  S2- &systems with capacities of 30 channels or more remained at 98.2% of subscribers2z {OL!- &-ԍId. The number of systems not reporting or not available for categorization increased almost 30% between October 1996 and October 1997. 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  S-subscribers.1  {O'-ԍId.1 "f ,`(`(88"Ԍ S- : ԙ18.` ` Viewership. Over the past decade, nonpremium cablep! yOh- &ZԍThe Nielsen Television Index reports nonpremium cable viewership as "Cable Origination" viewing shares,  &and premium cable viewership as "Pay" shares. According to Nielsen, Cable Origination includes the basic cable  &-tier and the cable programming service ("CPS") tier, also known as extended basic, and payperview (defined as  &payment on a perprogram basis). Nielsen separately reports "Pay" viewing shares as only premium tier (defined as payment on a perchannel basis for networks, such as HBO, Showtime).p viewership has grown  &jsignificantly, while viewership of broadcast television stations has steadily declined. The 24hour a day,  S- &7day a week audience of all nonpremium cable programming increased from an average 11.5 share "x yO- &ԍA share is the percent of all households using television during the time period that are viewing the specified station(s) or network(s). The sum of reported audience shares exceeds 100% due to multiple set viewing.  of  &=television viewing hours in the 19871988 broadcast year to an average 36.25 share of television viewing  Sb- &yhours in the 19961997 season.# b yO - &ԍNielsen Media Research, Nielsen Television Index/Monitor Plus, 1997. Shares reported here are from the end  &<of September through the beginning of the following September. Viewing hours are Monday through Sunday, 24  &jhours each day. Effective 1991, TBS' classification changed from independent station (part of the combined broadcast networks category) to cable basic service. Over the same period, the 24hour a day, 7day 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 19871988 season to an average 66.5 share of television  S- &viewing hours in the 19961997 broadcast season.1$  {OB-ԍId.1 The viewing shares of the 24hour a day, 7day a  S- &week audience of premium channels%J  yO- &ԍPremium service includes satellite delivered cable programming channels available for an additional monthly per network fee. has not changed over the last decade, with a average 6.92 share in  S-19871988 and 19961997.l& yO-ԍNielsen Media Research, Nielsen Television Index/Monitor Plus, 1997.l   SJ -  : 19.` ` Networks. The number of basic cable'J 2 yO- &ԍWe refer to all cable programming networks offered as a part of program packages or tiers as "basic cable  &<networks." The primary level of cable television service is commonly referred to as "basic service" and must be  &=taken by all subscribers. The content of basic service varies widely among cable systems but, pursuant to the  &Communications Act, must include all local television signals and public, governmental and educational access  &Zchannels, and at the discretion of the cable operator, may include satellite delivered cable programming channels  &Zcarried on the system. One or more expanded tiers of service known as CPS tiers for purposes of rate regulation  &and often known as expanded basic, may also be offered to subscribers. These expanded tiers of service usually  &include additional satellite delivered cable programming channels and are available for additional monthly fees. 623(b)(7), 47 U.S.C.  543(b)(7) and  623(l)(2), 47 U.S.C.  543(l)(2). networks increased from 104 to 126, 21.2%,  S$ - &Mbetween 1995 and 1996.($X$  {O$- &ԍSee App. B, Tbl. B5. Some of the new networks in late 1996 and early 1997 include ESPNEWS, Fox News  &yChannel, and the Discovery Channel Group including Animal Planet, Discovery Civilization, Discovery Kids,  {OX&- &Discovery Science, and Discovery Travel & Living. NCTA, Directory of Cable Networks, Cable Television" '',`(`(y&"  &JDevelopments, Spring 1996, at 28100; Telephone interview with Gregory Klein, Director of Economic and Policy Analysis, NCTA, (Nov. 13, 1997) ("Klein Interview, Nov. 13"). In the same period, the number of premium and payperviewn)X$  yO- &;ԍMost cable television systems also offer premium services on a per channel basis for an extra monthly fee, and  &Lpayperview services on a per program basis.  623(b)(7), 47 U.S.C.  543(b)(7) and  62 (l)(2), 47 U.S.C.  543(l)(2). Nielsen also reports payperview in this figure.n networks"$ ),`(`(88 "  &decreased. The number of premium networks decreased by three channels, and the number of payper S- &^view networks decreased by one channel.C* {O -ԍSee App. B, Tbl. B5.C This fluctuation is considered normal by industry  S-representatives, and is not assumed to be directly attributable to any particular event.A+ yO -ԍKlein Interview, Nov. 13.A  S`- : 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  S- &in 1996.0,&*  {O- &ԍPaul Kagan Assocs., Inc., Economics of Basic Network Programming (19932006), Cable TV Programming,  &wApr. 30, 1997, at 7. Some attribute the increase primarily to progammers' increasing programming rates as opposed  {On- &to increases in subscribers or increases in the channels exhibiting additional programming. Price Colman, War Looms  {O8-Over Program Prices, Broadcasting & Cable, Dec. 16, 1996, at 11; and NCTA Comments at 2021.0 Analysts estimate that in 1997, fees will increase by an additional 13.5% to $3.54 billion.- {O- &ԍPaul Kagan Assocs., Inc., Economics of Basic Network Programming (19932006), Cable TV Programming, Apr. 30, 1997, at 7.  &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,  Sr- &and syndicators of television programming..rr {O- &ԍSubmitted by NCTA: Kagan Media Appraisals, Inc., TV Programming Costs: An Analysis of the Market Forces  {ON-Driving Entertainment and Sporting Rights Fees, Dec. 1997. Copyright fees paid by cable system operators for broadcast  SJ - &\signal carriage under Section 111 of the Copyright Act/J  {O- &MԍCopyright Act, 17 U.S.C.  111 et seq. Details of the major copyright issues affecting multichannel  {O- &programming distribution are discussed at paras. 241247 infra. Among the recommendations made by the U.S.  {OL- &[Copyright Office in its "A Review of the Copyright Licensing Regimes Covering Retransmission of Broadcast  {O - &-Signals," (Aug. 1, 1997), is a recommendation that Congress adopt a flat, per subscriber, per signal fee for cable similar to the fee structure already in place for satellite carriers. increased 6.5% from $165 million in 1995 to  S" - &$176 million in 1996. 0"  {OH#- &ԍ Copyright Office, Library of Congress, Licensing Division Report of Receipts, Oct. 21, 1997. The actual fees collected as of October 21, 1997, for 1995 are $165,139,301.58 and for 1996 are $176,039,869.01.  From January 1, 1997, to October 21, 1997, $77.798 million in copyright fees  S -have been collected from cable system operators.11  {Oz&-ԍId.1 " r1,`(`(88 "Ԍ R-` `  2. Financial Performance  S-  S- : 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.  S8- : A22.` ` Cable Industry Revenue. Financial analysts report annual cable industry revenue for 1995  S- &kwas $24.898 billion, which grew 8.9% to $27.120 billion in 1996.2 {Oz- &ԍSee App. B, Tbl. B6. Annual revenue grew 9.3% in 1995 from $22.786 billion total annual revenue in 1994 to $24.898 billion total annual revenue in 1995. For 1996, revenue per subscriber  S- &jgrew 5.6% to reach $431.85 per subscriber per annum by year's end.13" {O -ԍId.1 While total industry revenue data  &for the first part of 1997 are not available, analysts estimate 1997 yearend total revenue will be  S-approximately $30 billion, an increase of 9.9% from the 1996 total yearend revenue.14 {O -ԍId.1  Sr-   SJ - : B23.` ` When total cable system revenue is categorized by source, the greatest revenue growth  &as a percentage of total revenue in 1996 was in the payperview sector, which increased 20.9% from $535  S - &million annual revenue in 1995 to $647 million annual revenue in 1996._5 F {O- &ԍSee App. B, Tbl. B6. Despite the loss of one payperview network, the revenue generated by payperview  &Knetworks has increased. Some believe that this reflects increased use of payperview service since there has not  &Zgenerally been an increase in payperview programming prices. Payperview is priced according to the number  &of programs purchased, thus the number of networks is not necessarily linked to the amount of revenue generated by such networks. Klein Interview, Nov. 13._ Industry analysts predict this  S - &kwill increase in 1997 to an annual revenue of $815 million.N6\  {Oj- &ԍSee App. B, Tbl. B6. Paul Kagan Associates estimates yearend revenues for total revenue and for each  {O4- &revenue segment. Paul Kagan Assocs., Inc., Paul Kagan's 10Year Cable TV Industry Projections, Cable TV Investor, May 20, 1997, at 9.N Advertising revenues retained by MSOs  S - &\increased 16% in 1996 from $1.4 billion in annual revenue in 1995 to $1.7 billion in 1996.7  {Of-ԍMSOs retain advertising revenues from local advertising only. See App. B, Tbl. B6. Industry  S - &analysts predict this will increase in 1997 to annual revenue of almost $2 billion.N8\  {O- &ԍSee App. B, Tbl. B6. Paul Kagan Associates estimates yearend revenues for total revenue and for each  {O- &revenue segment. Paul Kagan Assocs., Inc., Paul Kagan's 10Year Cable TV Industry Projections, Cable TV Investor, May 20, 1997, at 9.N Advertising revenues  &zretained by progammers increased by 18.4%, from $4.9 billion in 1996 to an estimated 1997 yearend  S2- &figure of $5.8 billion.~92 {O#-ԍNCTA, Cable Advertising Revenue, Cable Television Developments, Fall 1997, at 9.~ Home shopping and premium tier revenues grew the least in 1996. Revenue from"2d9,`(`(88;"  S- &home shopping services grew from $144 million in 1995 to $145 million in 1996, a 0.7% increase.C: {Oh-ԍSee App. B, Tbl. B6.C  S- &Annual revenue from pay tiers grew from $4.8 billion in 1995 to $4.9 billion in 1996, an increase of 4%.1;Z {O-ԍId.1  S- : 24.` ` In addition, the Commission calculates its own estimate of annual industrywide revenue.<,  yO- &\ԍThe Commission calculates its own estimate of industrywide annual revenue in order to supplement  &information obtained from industry analysts. To calculate the industrywide 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 total number of subscribers of these companies for that year. Second, we multiply this average revenue per  &subscriber figure by an estimate of the industrys average subscribership for the year. The same methodology was  {O - &followed to calculate the industrywide estimates of cash flow. The estimates in this 1997 Report differ from those  {O - &in the 1996 Report because secondary sources were used in many cases to obtain data, and only the firms with  yO - &subscribership of 500,000 or more were analyzed. U X` hp x f!(#%'0*,.8135@8:r {O-ԍId. Tbl. B7A.B  S-  : 25.` ` Cable Industry Earnings Before Interest, Taxes, Depreciation, and Amortization.  &.Measurement of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), commonly  &Mreferred to as "cash flow" by the industry, is often used to value the financial position of cable firms.  &Financial analysts report that industrywide cash flow increased by 9.1% between the end of 1995 and the  S - &yend of 1996, from $11.161 billion to $12.177 billion.;?  {O-ԍId. Tbl. B6.; 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  S - &$183.27 per subscriber generated for the year ending December 31, 1995.1@  {O!-ԍId.1 There are currently no data  &=available on industry cash flow for the first half of 1997, and analysts have not yet made predictions for  &yearend cash flow. The ratio of cash flow to revenue ("cash flow margin") increased from 44.8% in 1995  S2-to 44.9% in 1996.A2( {O%- &ԍSee App. B, Tbl. B6. Cash flow margin is a commonly used financial analysis tool for determining an MSO's operating efficiency, profitability, and liquidity. "2A,`(`(88;"Ԍ S- : ~ԙ26.` ` The Commission generates its own estimate of industrywide cash flow, and estimates  S- &that industrywide EBITDA in 1996 was approximately $12.4 billion, a 9.3% increase over 1995.DB {O@-ԍSee App. B, Tbl. B7A.D This  &Lis up from last year's estimated increase of 5.8% from approximately $10 billion in 1994 to $10.6 billion  S-in 1995.CZ {O-ԍSee fn. 60 supra for explanation of methodology and sources of information.  R8-` `  3. Capital Acquisition and Disposition  S- : 27.` ` Cable Industry Financing. From January to December 1996, the cable industry secured  S- &more private debt financing, but less public debt financing, than between January and December 1995.D {ON - &ZԍSee App. B, Tbl. B8. Refinancing activity increased over the previous year's activity. Paul Kagan Assocs.,  {O -Inc., Cable TV Financial SnapshotDecember, Cable TV Finance, Jan. 31, 1997, at 10.  &LIn the first half of 1997, issuance of public debt by the cable industry rose, though the industry acquired  Sr- &less private debt.CErH {OZ-ԍSee App. B, Tbl. B8.C This change is likely due to the low interest rates available in the public market throughout 1997.  S -  : 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  &ynew 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  S4- &zmillion in private debt financing.F4 {O-ԍId. In 1995, more private debt was redeemed than issued causing net negative activity of $808 million. In 1996, $2.94 billion of public debt was issued and $1.586 billion  S - &was redeemed, yielding $1.354 billion in net new public debt financing.G l  {O- &yԍSee App. B, Tbl. B8. and Paul Kagan Assocs., Inc., Cable TV Financial SnapshotDecember, Cable TV Finance, Jan. 31, 1997, at 10. This represents 78% less public  S- &debt financing than in 1995.H  {OJ- &ԍId. In 1996, there was considerably more refinancing by the industry. More than $20 billion was refinanced in 1996, while only $12 billion was refinanced the prior year. 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  Sl-in total equity activity, compared to the $5 billion in total public and private equity activity during 1995.1Il  {O,#-ԍId.1  S- : 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"I,`(`(883"  S- &>with $1.7 billion for the same period of 1996.J {Oh-ԍPaul Kagan Assocs., Inc., Cable TV Financial SnapshotMay, Cable TV Finance, Aug. 31, 1997, at 8. 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  S- &jthe same time period in 1996.1KZ {O-ԍId.1 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  S8-from $3.5 billion of activity from January through June 1996.1L8 {O -ԍId.1  S- : 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,  S-upgrades, and inventory, and is a 3.3% increase over last year's $5.4 billion expenditures.qM~ {O-ԍPaul Kagan Assocs., Inc. Cable TV Financial Databook, 1997, at 118.q  SJ -  : A31.` ` 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 multibillion dollar capital expenditure program to upgrade or  S - &substantially rebuild all of its systems by the end of 2000 by deploying hybrid fibercoaxial ("HFC")N  yO- &ԍHFC uses both fiber and coaxial cable, extending fiber optics from the cable system's headend to a fiber optic  &node in the neighborhood. A shared coax cable extends from that node to a group of 150 to 500 customers, with  &Keach customer sharing that cable. Fiber to the curb ("FTTC") provides a fiber interface within 1,000 feet of the  &premises. HFC eliminates most, if not all, the need for amplifiers because it uses only a short length of coaxial  {O-cable. Price Waterhouse, EMC Technology Forecast 1998, at 125.  S - &networks in combination with digital compression technology.BO  yO -ԍUS West Comments at 1415.B In 1997, MediaOne spent approximately  &k$650 million on these rebuilds, which, combined with expenditures of $829 million in 1995 and 1996,  SZ- &Lrepresents an investment of more than $300 per subscriber since 1994.PZR  {OL- &ԍId. at 1819; Continental Cablevision, Inc. Social Contract Annual Progress Report on Capital Spending for  {O-System Upgrades and Rebuilds 1996, Continental Cablevision, Inc., Mar. 31, 1997, at 1. In 1996, MediaOne completed  S2- &.many of its proposed upgrades and in 1997 these upgrades continue to be made.lQ2 {O - &JԍId. at 513. MediaOne completed many proposed rebuilds in 1996 including most of its Massachusetts rebuilds;  &rebuilds in the northern suburbs of New York City; Bow, New Hampshire; Oakland Park, Pompano Beach, Wilton  &YManors, Lazy Lake, and Broward County Florida; St. Paul, Minnesota; numerous locales in Illinois; and a few locales  &iin California, Nevada, Washington, and Idaho. The status of 1997 rebuild activity will be reported in MediaOne's annual progress report to the FCC to be filed Mar. 1998.l 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"`Q,`(`(88 "  S- &=power interruptions, and better overall quality control for the operator.R yOh-ԍCablevision Systems Long Island Corporation, FCC Form 1235, filed Mar. 28, 1997, at 12. Cablevision has completed its  &.upgrades in numerous locales in its Long Island, New York, system and upgrades in numerous locales in  S- &New Jersey.ISZX {O- &ԍId.; Cablevision of New Jersey, Inc., FCC Form 1235 filed Apr. 11, 1997, at Attachment I; Cablevision of  &wMonmouth, FCC Form 1235 filed Apr. 11, 1997, at Attachment II; Cablevision of Hudson County, FCC Form 1235 filed Apr. 11, 1997, at Attachment II; I Time Warner has agreed to upgrade all its cable systems to a capacity of at least 550 MHz  S- &with 50% of all subscribers having access to at least 750 MHz.Tz {O -ԍSocial Contract for Time Warner, Memorandum Opinion and Order, 11 FCC Rcd 2788, 2798 25 (1995). 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  S8- &1996 had invested $1.4 billion.U8  {O - &ԍId. They completed $1.4 billion in compliance with their commitment to the Social Contract. See Social  {O -Contract Progress Report 1996, Time Warner Cable, at 5. 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  S- &quality, and improved reliability.Vh  {O- &hԍMarcus Cable Associates, L.P., Complaints Regarding Cable Programming Services Tier Rate Increases, CUID No. CA0180, Order, DA 97983, 10 (rel. May 9, 1997). These upgrades will enable future delivery of services such as video  S- &conferencing and Internet access.1W  {O"-ԍId.1 Bresnan Communications upgraded 75% of its systems to 750 MHz,  S- &=HFC architecture by the end of 1997, with upgrades of an additional 13% of its systems to 550 MHz.XT  yO- &ԍTelephone interview with Daniel White, Manager of Planning and Compliance, Bresnan Communications (Nov. 5, 1997) ("Daniel White Interview, Nov. 5").  &-Bresnan, for example, spent over $5.35 million to upgrade its system in Marquette, Michigan, to 750 MHz  SH - &capacity.oYH  yO-ԍBresnan Communications, FCC Form 1235, filed December 28, 1995, at 12.o One example of upgrades made by Comcast is its upgrade to a 750 MHz system in the Detroit  S - &<metropolitan area, where Ameritech competes with Comcast.AZ < yO-ԍAmeritech Comments at 11.A Jones Intercable's most notable expenditure  &in 1997 has been its approximately $36 million construction of a new HFC network in Alexandria,  S -Virginia, and Prince George's County, Maryland.[  yO< - &ԍTelephone interviews with Dilpreet Jammu, Director of New Business Development, Jones Intercable (Oct. 27 and Dec. 3, 1997) ("Jammu Interviews, Oct. 27 and Dec. 3").  R -` ` 4. Other Performance Indicators   S0- : #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" $[,`(`(88I"  S- &and 1995 from 64 to 128 transactions,o\ {Oh-ԍSee App. B, Tbl. B9. This includes all systems bought and sold.o but between 1995 and 1996, there was 19.5% decrease in systems  S- &sold for a total of 103 transactions by year's end.1]Z {O-ԍId.1 Of these 103 transactions, 8 were system swaps, thus  S- &making up 16 of the 103 transactions.^ {O<- &ԍ1996 Report, 12 FCC Rcd at 45014507 App. F, Tbl. 5. See also App. E, Tbl. E5. Transactions include both the buyer and the seller, thus one swap counts as two transactions. In 1995, approximately 20 of the 128 transactions were 10  S- &different swaps.]_F {On -ԍ1995 Report, 11 FCC Rcd at 4501 App. G, Tbl. 5.] From January 1997 through June 1997, 44` yO - &ԍThis figure of 44 transactions differs from the figure of 46 transactions in App. E, Tbl. E5 because of inconsistencies in the reporting procedures of the source that our analysis has uncovered. transactions have been recorded with 11  S`- &swaps making up 22 of those transactions.a`0  {O0- &ԍSee App. E, Tbl. E6. A transaction recorded on this table may not actually take place, although it has been announced to the public. Most recorded transactions do take place, although a few each year fall through. 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  S- &January and June 1997, the average number of subscribers per system was 54,210.1b  {O-ԍId.1 The total number  &of subscribers affected by system transactions decreased 28.7% from approximately 11 million subscribers  Sp- &in 1995 to approximately 8 million subscribers in 1996.Ccp {O,-ԍSee App. B, Tbl. B9.C Thus far in 1997, the total number of  SH - &subscribers affected has been 2.4 million.1dH  {O-ԍId.1 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  S -per subscriber of 1997 transactions has been approximately $1,700 through June.e @ {O-ԍId. More detailed information regarding transactions is provided in paras. 140148 infra.  S - : 3 33.` ` Overbuilding. Headtohead competition, where two or more wireline cable television  S - &systems compete for the same subscribers in the same local market, has increased over the past year.qf  {O!-ԍPaul Kagan Assocs., Inc., Cable TV Regulation, July 31, 1997, at 1.q  &As of July 1997, cable franchises have been awarded to competitors to incumbent cable operators in 81"Zdf,`(`(88"  S- &communities in 14 states covering 5.43 million homes.fg {Oh-ԍId. This includes all franchises currently in operation.f This activity results almost entirely from LECs  S-entering the market as permitted by the 1996 Act.hhZ {O-ԍThis is discussed in more detail at paras. 112115 infra. h  S-  : !34.` ` Stock Prices. During the 3rd Quarter of 1997, market valuation of the cable industry  Sb- &experienced a sharp increase. Analysts attribute the increase to Microsoft's investment in Comcast,{ib {O-ԍSee para. 48 infra for more details on Microsoft's investments in MSOs.{ the  &dissolution News Corp.'s planned venture with EchoStar and subsequent alliance of its ASkyB assets with  S- &jPrimestar,j|~ yO0 - &xԍAfter News Corp's proposed $1 billion acquisition of EchoStar Communications Corp. failed to materialize,  &News Corp. decided to sell its satellite assets to PrimeStar for $1.1 billion and, in turn, PrimeStar, a partnership  &Kcontrolled by six media companies, will reorganize its ownership structure to become a public entity. ASkyB (of  &which News Corp. owns 80%, MCI owns the other 20%) will own 20%, nonvoting stake in PrimeStar. As for the  &ownership structure of PrimeStar, TCI's Satellite Entertainment subsidiary will control about 38%; Time Warner Inc.,  {O- &y30%; Comcast, 10%; US West's MediaOne, 10%; Cox, 10%; and GE Co., 2%.  See Robert Liu, Murdoch Sells  {O-Satellite Ops, CNNfn at http://cnnfn.com/hotstories/deals/9706/11/primestar/html and the rollout of the new cable data service, @Home.k  {Ot- &ԍRichard Bilotti, et al., Morgan Stanley, Dean Witter, Discover & Co., Thirdand Fourth Quarter 1997 Cable  {O>-Television Preview: Recent Rally May be Just the Tip of the Iceberg, Oct. 10, 1997, at 1. Analysts expect an increase in the  &.market value of cable stocks to continue, and expect that future appreciation will be driven primarily by  S-accelerating revenue and cash flow growth.1l {O-ԍId.1  Sr- : _"35.` ` While the Standard and Poor's Index 500 ("S&P 500") has steadily increased since January  &/1992, with more significant increases beginning midway through 1995, the prices of cable stocks, as  S" - &zrepresented by the Kagan MSO Index, have also generally increased, though with some fluctuation.m"  yOr- &ԍSome of the events that have coincided with sharp increases in the Kagan MSO Index include the enactment  &of the 1992 Cable Act which caused the Kagan MSO Index to rise sharply above the S&P 500, the September 1993  &announcement of a proposed Bell Atlantic/TCI merger, and Microsoft's $1 billion investment in Comcast earlier this  &iyear. Some of the events that have coincided with dramatic decreases in the Kagan MSO Index include the 1992  &Cable Act benchmark order (first) rate rollback of 10%, the (second) rate rollback of 7% pursuant to the same benchmark order, the Bell Atlantic/TCI Breakup, and the 1996 Act.  &The Kagan MSO Index remained almost even with the S&P 500 throughout most of 1992, but rose  &=sharply above it in November 1992 following enactment of the 1992 Cable Act. The Kagan MSO Index  &remained above the S&P 500 until shortly after the 1996 Act in February 1996, fell below the S&P 500  S -in April 1996, and remained below the S&P though June 1997.n ( yOJ$- &ԍAlthough the Kagan MSO Index was below the S&P 500 between April 1996 and June 1997, it has begun mimic S&P trends around March 1997.  S2- ` ` (#` "2n,`(`(88;"  S-` ` 5. Price Survey and Cable Rate Issues  S-  S- : #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  Sa- &services, and equipment.oa yO-ԍSection 623(k) was added to the Communications Act by the 1992 Cable Act, 47 U.S.C.  534(k). Specifically, Section 623(k) directs the Commission to compare prices charged  S9-by cable systems facing effective competition with those not facing effective competition.p9X yO1- &;ԍUnder the 1992 Cable Act, effective competition exists in these three situations: (1) where the franchise area  &his served by at least two unaffiliated multichannel video programming distributors, each of which offers comparable  &video programming to at least 50% of households, and at least 15% of households subscribing to programming  &services offered by an MVPD subscribe to services other than those offered by the largest MVPD; (2) where fewer  &than 30% of the households in the franchise area subscribe to the cable service of a cable system; or (3) where a  &Jmunicipal cable system offers service to at least 50% of the households in the franchise area.  623(l)(1)(A)(B)(C),  &w47 U.S.C.  543(l)(1)(A)(B)(C). The 1996 Act added a fourth test for effective competition: when a local exchange  &<carrier or its affiliate (or any MVPD using the facilities of such carrier or its affiliate) offers video programming  &services (other than directtohome satellite services) in the franchise area of an unaffiliated cable operator, but only  &if the services so offered are comparable to the services provided by the cable operator. 623(l)(1)(D), 47 U.S.C.  543(l)(1)(D).  ` `  S-  : $37.` ` The Commission recently issued its annual report for 1997 based on results of a survey  S- &\of cable industry prices conducted in the summer of 1997.zq\  {O- &ԍImplementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992,  {O- &;Statistical Report on Average Rates for Basic Service, Cable Programming Services, and Equipment, MM Dkt. No. 92266, Report on Cable Industry Prices, FCC 97409 (released Dec. 15, 1997).z The survey requested data as of July 1,  S- &1995, July 1, 1996, and July 1, 1997.r yO-ԍThis report represents the fifth survey of cable rates conducted by the Commission since 1992. 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  S -operators.s l yO- &ԍRegulated cable operators are those whose rates are regulated under the Commission's rules. Unregulated  &;operators are operators that are not regulated because local regulatory authorities have not obtained certification to  &regulate rates pursuant to 47 C.F.R.  76.910, and no complaint has been filed with the Commission concerning their  &cable programming services tiers. (The category of unregulated operators in this report excludes operators that are not regulated because they are subject to effective competition.)   S - : %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,  &Lwith the noncompetitive group charging higher average monthly rates than the competitive group in each  S - &of the time periods studied;t  yO&-ԍWhen "low penetration" systems are omitted from the competitive group, that disparity grows even wider. (b) subscribers that purchase cable services from regulated operators" t,`(`(88"  &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  S-reductions in their average monthly rates per channel..u  yOx- &ԍHowever, regulated operators offer more channels than unregulated operators, and subscribers of regulated  &operators pay substantially less on a per channel basis than subscribers purchasing services from unregulated operators. .  S- : #&39.` ` Comparison of Prices Charged by Cable, DBS, and MMDS. The Commission found that  &kthe average monthly rate charged by cable operators, as of July 1, 1997, was $26.33 for programming  &lservices (including basic and expanded basic services, but excluding New Product Tiers ("NPTs"),  &Opremium, and payperview services) and $2.52 for equipment. The average monthly rate for  &yprogramming 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.  S - : '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 B10. 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.  S-  : (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 $0.66 per channel. As  &indicated, however, this rate does not take into account the upfront installation costs associated with DBS  &and the cost for service to additional television sets which must be considered before making a comparison to the per channel rate for cable given above.  S - : )42.` ` There are several caveats to consider when making this comparison. Cable service  &includes the retransmission of local broadcast channels, while DBS service typically does not include local  &channels. Depending on a number of factors including terrain and their location relative to the station's""u,`(`(88$"  &transmitter, subscribers to DBS service can receive local broadcast channels overtheair 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 basiconly 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 doityourself kit to about $150 to $200  S8- &for professional installation. The average MMDS installation charge as of July 1997 was $35.Dv8 {O-ԍSee App. B, Tbl. B10.D When  &/comparing MVPD prices, a number of other factors should be considered. Cable service is typically  &zanalog service while DBS service is digital, and the DBS digitalquality 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 basiconly 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.  S - : *43.` ` Tier Adjustments. Yeartoyear 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  S- &networks from premium service tiers to basic and CPS tiers.<wZ yO-ԍNCTA Comments at 27.< According to NCTA, of the approximately  &10,750 cable systems nationwide, regional sports networks are carried as a basic or expanded basic service  SB- &[on approximately 4,259 systems, as compared with 41 systems that carry them as premium services.1xB {O-ԍId.1  &[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  S- &premium channels, such as regional sports services and the Disney Channel, to CPS tiers.>y| yO-ԍUS West Comments at 1.> In the  &jNortheast, MediaOne has moved SportsChannel New England from a premium tier to its expanded basic  &tier. In Michigan, it is repositioning ProAm Sports Service ("PASS") from partial premium carriage to  &fulltime cable programming service tier carriage. On MediaOne's Stockton, Yuba City, and Fresno,  &jCalifornia, systems, SportsChannel Pacific was formerly carried as a premium service, but is now carried  S-as part of the CPS tier.1z  {O#-ԍId.1  S- : +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"bz,`(`(88"  &zpurchased 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,  S- &Mthose same customers began paying $34.39 for the preferred service that included HTS.<{ yO-ԍNCTA Comments at 28.< However,  &ycustomers who had not subscribed to the HTS as a premium service experienced an increase in their rates  S8- &from $31.39 for their preferred service to $34.39 for preferred service that now included HTS.|8X {O0-ԍManuel PerezRivas, Cable Rates Not a Hit in Montgomery, Washington Post, May 22, 1997, at A1.  &=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  S-as a $1.50 a subscriber for this service, a cost they will either absorb or pass on to subscribers.} {OJ -ԍMike Bruton, Comcast Scores Big With Sports Network, Philadelphia Inquirer, July 22, 1997, at 1.  Rp-` `  6. New Services(#`  SH -  S - : ,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 S - &way services.L~ | {O-ԍSee paras. 3031 supra. L 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  &Lcarrying 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 nonvideo services, such as cellular telephone services, or leasedline telephone services, provided over noncable facilities in addition to cable video services.  Sh- : o-46.` ` Digital Video Services. Compared to the analog signal transmission historically used in  SB- &cable systems, digital signal transmission can provide superior video picture quality and, through digital  S- &compression techniques, increased channel capacity.B yO- &<ԍIn allocating bandwidth to digital video, an MSO must determine the number of analog or otherwise unused  &channels to devote to digital video. In attempting to maximize the number of digital program channels per available  &Zbandwidth, MSOs have tried to maximize digital compression ratios. Some MSOs including TCI and Adelphia  &ԩ appear to be settling on a 12:1 digital to analog compression ratio which, for these MSOs, appears to provide  {O - &adequate picture quality. Joel Brinkley, Cable TV in Digital Push to Get in More Channels, New York Times, Nov.  &10, 1997, at D7. The picture quality provided by a 12:1 digital to analog compression ratio may be approximately  &<equal to that provided by analog cable service, but is not as good as that provided by DBS systems' digital service or by lower compression ratios on other cable systems. Subscriber reception of digital video signals  &requires a settop 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",`(`(88"  S- &yinclude TCI,az yOh- &ԍHartford, Connecticut; Arlington Heights, Illinois; Fremont, Richmond, Perris, Pinole, Newbury, Pittsburgh,  &and Castro Valley, California; Bellvue, Washington; Corvallis, Oregon; Greely, Denver, Avon, and Ft. Collins,  &Colorado; Topeka, Kansas; Richmond, Indiana; and Mamaroneck, New York. TCI's digital video service passes 2.2  &million homes covering most or all of the TCI homes passed in these markets. Telephone interview with Colleen  &Abdoulah, Assistant to Chief Operating Officer, Vice President of Digital Television, TCI, November 1819, 1997  {OP- &("Abdoulah Interview, Nov. 1819"); Ellis, Leslie and Joe Estrella, TCI Rolls Out All TV In More Areas, Multichannel News, July 14, 1997, at 8.a Cablevision Systems,[  yO-ԍBoston, Massachusetts, and Los Angeles, California.[ Comcast, {O: - &ԍOrange County, California. Strategis Group, Digital and Advanced Analog SetTop Trials and Deployments, Cable Trends: 1997, May 1997. Cox,  yO - &ԍOrange County, California. Telephone interviews with Alex Netchvolodoff, Vice President for Public Policy, Cox Enterprises, (Oct. 23, and Dec. 2, 1997) ("Netchvolodoff Interviews, Oct. 23 and Dec. 2"). Time Warner,L  {O- &ԍSan Diego, California and San Antonio, Texas. Strategis Group, Digital and Advanced Analog Settop Trials  {O-and Deployments, Cable Trends: 1997, May 1997. and US West's MediaOne.BD {OH- &YԍRichard Bilotti, et al., Morgan Stanley & Co., Inc., Multichannel Metamorphosis II: Digital Derby Rounding  {O- &KTurn #1, Apr. 25, 1997, at 64, 69, 79, and 84. Some industry analysts predict that cable operators' digital video  &services will generate substantial revenue (1 million to 1.5 million digital video subscribers for each of the seven  &listed firms within two to three years); Strategis Group predicts $2.5 billion in digital cable revenues per year by  &2002 from 14 million digital cable subscribers out of 63.4 million homes passed by digital cable, or 14% of homes  &passed or 20.4% of cable subscribers: Strategis Group, Cable Trends 1997, at 11; Morgan Stanley predicts $3  &Kbillion in digital cable revenue by 2002 from 14 million digital video subscribers: Telephone interview with Marc Nabi, Research Assistant, Morgan Stanley & Co., Inc. (Oct. 22, 1997) ("Nabi Interview, Oct. 22") B  S- &Adelphia and Jones also plan to begin offering digital video service in selected markets. {O,- &ZԍJoel Brinkley, Cable TV in Digital Push to Get in More Channels, New York Times, Nov. 10, 1997, at D7. Jones offers digital video in Tucson, Arizona. Jammu Interviews, Oct. 27 and Dec. 3. TCI is using  &?a 12:1 digital to analog compression ratio to provide 36 digital channels in its current digital video  S-service.H yO6-ԍAbdoulah Interview, Nov. 1819 .H  S8-  : .47.` ` Internet and High Speed Data Services. Internet and other data can be transmitted faster  S- &over some cable systems, using cable modems,Z {OP!- &=ԍSee 1996 Report, 12 FCC Rcd at 441314 103. TCI reports its cable modems as capable of sustained  &Ydownstream transmission of 27 Mbps (27,000 Kbps) (for a shared network). Abdoulah Interview, Nov. 1819. The current generation of personal computer Internet cards appears to be limited to approximately 10 Mbps.  than over current twistedpair telephone systems, using  S- &telephone modemse {OJ%-ԍPrice Waterhouse, EMC Technology Forecast 1998, at 129.e or integrated services digital network ("ISDN"),R yO- &yԍISDN is a technology used by telephone companies to deliver much higher data rates over one common  &twistedpair than provided over a telephone line using conventional technology. Equipment is required at the  &consumer's home and in the telephone company's central office to effect the service, but the network remains the  &same as with plain old telephone service ("POTS"). The transmission is completely digital from end to end, as  {O- &opposed to POTS. The Yankee Group, Bringing Broadband Home: New Networks for New Services, Dec. 1995, at  &15. Basicrate ISDN provides two "B" channels of 64 Kbps each (combined 128 Kbps) and one administrative "D"  &Zchannel of 16 Kbps for exchanging call setup information. The Bchannels provide circuitswitched, endtoend  &digital channels for customer communications; they can be used to interface with the voice telephone network. A  &standard ISDN line can carry up to 128 Kbps or 64 Kbps plus a voice telephone call. Primary rate ISDN provides  &twentythree 64 Kbps "B" channels and one 64 Kbps "D" channel achieving the T1 speed of 1.544 Mbps. Price  {Ob -Waterhouse, EMC Technology Forecast 1998, at 126.  asymmetrical digital subscriber", ,`(`(88c"  S- &line ("ADSL"),,  yO - &ԍADSL is a technology that offers downstream data rates of up to 6 Mbps and upstream rates between 64 and  &Z600 Kbps over standard copper telephone wires. It does this through one of two competing ADSL technologies:  {O\ - &Carrierless Amplitude and Phase16 (CAP16) and Discrete MultiTone (DMT). The Yankee Group, Bringing  {O&- &xBroadband Home: New Networks for New Services, Dec. 1995, at 18. ADSL delivers data at a speed of 1.5 Mbps  {O-to 6 Mbps. Price Waterhouse, EMC Technology Forecast 1998, at 126. or highbit rate digital subscriber line ("HDSL") technology and equipment depending  S- &Lon the architecture..$ yOZ- &ZԍSimilar to ADSL, HDSL uses two copper twisted pairs to deliver the equivalent of a T1 line (1.544 Mbps),  &<with equal downstream and upstream bandwidth. This application is used by telephone companies to supply T1  {O- &-lines. The Yankee Group, Bringing Broadband Home: New Networks for New Services, Dec. 1995, at 18. HDSL  {O-delivers data at a speed of 1.5 Mbps to 6 Mbps. Price Waterhouse, EMC Technology Forecast 1998, at 126.. MSOs offering cable modem service in 1997 include U.S. West's MediaOne, TCI,  S- &Time Warner, Comcast, Cox, Jones Intercable, Cablevision Systems, and Adelphia. {O- &-ԍSee App. B, Tbl. B11. These firms use cable modems from General Instrument, LAN City, Motorola, and Zenith. 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 twoway plant in these  S8- &areas.8( yO- &ԍAbdoulah Interview, Nov. 1819. TCI provides @Home cable modem service for $35 per month (unlimited usage, modem equipment included). TCI plans to offer cable modem service in six to twelve additional markets during 1998.18 {OX-ԍId.1 US  &yWest's MediaOne offers data service marketed as "MediaOne Express," to approximately 10,00020,000  S- &customers in a widespread offering. yO - &hԍTelephone Interview with Jim White, Regulatory Counsel, US West's MediaOne, (Nov. 21, 1997) ("Jim White Interview, Nov. 21"). Other MSOs conducting cable modem market trials include  S- &LCentury, Charter, Fanch, Marcus, Media General, and Prime Cable.j yO#- &ԍ"Select Cable Modem Market Trials in North America: As of October 1, 1997" at  &Yhttp://CableDatacomNews.com/cmic8.htm. Several industry analysts project that cable modem service will generate  &substantial revenues for cable operators. Strategis Group, Cable Trends 1997, at 11 ($3 billion in annual revenues  &;from cable modem service from 6 million subscribers out of 24 million homes passed by highspeed dataready cable plant). There are currently about 50,000"  ,`(`(88S"  &/cable modem subscribers as of October 1997, which is projected to grow to 197,000 next year as the  S-service becomes more widely available. yO@- &%ԍJeff Pelline, "Cable Modem Users Growing," C/Net News.com, Oct. 16, 1997, at http://www.news.com/News/Item/0,4,15359,00.html.  S- : /48.` ` Several systems are upgrading to improve their ability to provide these services. Indeed,  &kcable 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  S- &in Comcast this June in exchange for a 11.5% interest in the companyN\  {O - &ԍDavid Bank, Microsoft, Time Warner and US West Discuss HighSpeed Internet Service, Wall Street Journal,  {O - &Nov. 6, 1997, at B8. and John Markoff, Microsoft Seems Near Deal to Invest in US West Cable TV, New York Times, Nov. 5, 1997, at D1.N may indicate the importance of  &Lcable operators to future competition in this area. Microsoft is reportedly considering investing in other  S-cable companies as well.2D yO- &iԍMicrosoft is expressing interest in investing as much as $1 billion in US West's MediaOne cable operations,  {Ol- &<and is reportedly in talks with TCI, Time Warner and Cox about future investments.  See Kim, James, Microsoft  {O6- &Charts Course into Cable, USA Today, Nov. 6, 1997 at 2B. It has been reported that Microsoft's talks with Time  &wWarner and US West's MediaOne specifically have involved the creation of a highspeed Internet access service that  {O- &would compete with @Home Corp.  See David Bank, Microsoft, Time Warner and US West Discuss HighSpeed  {O-Internet Service, Wall Street Journal, Nov. 6, 1997, at B8.2  Sp- : 049.` ` 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 dialup online services  S - &which operate at much slower speeds.  {O\- &ԍRichard Bilotti, et al., Morgan Stanley & Co., Inc., Deploying HighSpeed Cable Data Modems, June. 21, 1996, at 10. The @Home local network, for example, has its own routing  &kand caching (storage) servers which allow the most frequently accessed material from its own content  S - &centers and from the Internet to be transferred from the source to these storage areas.M   yOf- &ԍAt Home Corp. was founded by TCI and venture capital firm Kleiner Perkins Caufield & Byers in May 1995.  &ZIn June 1996, Comcast, Cox, and in 1997, Cablevision Systems all acquired equity investments in @Home. Two  &Canadian MSOs, Rogers and Shaw, along with Sun Microsystems purchased equity in @Home through a private  &stock placement in April 1997. The company went public in July 1997. InterMedia Partners, and Marcus Cable plan  &to distribute the service though they are not investors. A customer is not required to subscribe to cable television  &Yservice to receive @Home Internet service. "Cable Internet Service Providers and Systems Integrators: @Home," at  &mhttp://CableDatacomNews.com/cmic5.htm and "@Home Availability & Live Demonstrations," at  {O!- &http://www.home.net/home/availability.html. and John M. Higgins, Cablevision gets piece of @Home, Broadcasting & Cable, Oct. 6, 1997, at 20.M @Home provides  &service for Comcast, Cox, TCI, InterMedia Partners, Marcus, and Cablevision Systems customers, as well  SX- &as Canadian MSOs Rogers and Shaw.(\X {O%- &dԍCable Internet Service Providers and Systems Integrators: @Home, at  {O&- &http://CableDatacomNews.com/cmic5.htm. and @Home Availability & Live Demonstrations, at http://www.home.net/home/availability.html.( Service is currently available in numerous localities in Maryland,"X!,`(`(88<"  S- &\New Jersey, California, and Connecticut.1 {Oh-ԍId.1 The Road Runner service,Z yO- &ԍThe Road Runner Group was formed by Time Warner Cable and Time Inc., as a separate business unit to  &spearhead the development and deployment of highspeed cable data services. The Road Runner Group has leveraged  {O- &-a host of Time Warner content for it's broadband service, including Time, Money, People, and Sports Illustrated  &Magazines, CNN, and Warner Bros. studios. Cable Internet Service Providers and Systems Integrators, "The Road  {O-Runner Group," See http://CableDatacomNews.com/cmic5.htm. rather than building its own  &national network backbone and customer service infrastructure, has formed a partnership with MCI to  S- &provide these services. {O^ - &ԍCable Internet Service Providers and Systems Integrators, "The Road Runner Group," See http://CableDatacomNews.com/cmic5.htm. 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  S`- &networks, and is operating a specialized help desk to provide technical support to subscribers.1`h  {Oh-ԍId.1 Road  &Runner provides service for Time Warner Cable and several MSO affiliates including Cablevision Systems  S- &Corp., Century Communications, and Fanch Communications.1  {O-ԍId.1 A number of other providers, such as  &WebTV, WorldGate, ICTV, NetChannel and Wink TV, are introducing services that will provide Internet  S-content over television sets.p  {O-ԍ Who's Who in Silicon Valley, Cablevision, Dec. 8, 1997, at 2660.p  Sp- : 150.` ` In September 1997, Cable Television Laboratories launched its "OpenCable" initiative to  &yencourage development of interactive set top boxes. These boxes may include greater computing power,  S - &twoway capabilities, interactive programming guides, graphics acelerators and cable modems.  {O-ԍPrice Colman, Making Sense of SetTops, Broadcasting & Cable, Oct. 27, 1997, at 51. As cable  &operators convert to digital technology, the industry has made a major commitment to establishing an open  &zstandard for the next generation of cable boxes. CableLabs received 23 responses from computer and  S - &yconsumer electronics companies and other vendors to its OpenCable request for information.z  {O-ԍTelecommunications Reports,Video Competition Report, Dec. 15, 1997 at 78. z 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.  S- : 2251.` ` Cable Telephony. Cable telephony requires sizeable and expensive upgrades and presents  S- &a number of technical and regulatory obstacles.B {O$- &ԍStrategis Group, Cable Trends 1997, at 19, and Leslie Cauley, MileHigh Melee: US West Takes Over A Huge  {Of%-Cable Firm, Then Angers Its Brass, Wall Street Journal, Aug. 29, 1997, at A1. Because other services can provide greater immediate"",`(`(88"  S- &revenue streams, many cable operators have limited their telephony efforts.1 {Oh-ԍId.1 Some analysts predict that  &[cable telephony is not expected to be a significant revenue source in most markets for the industry in the  S- &near future.SZ yO-ԍStrategis Group, Cable Trends 1997, at 19.S 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  S`- &Systems, Jones Intercable, TCI, and Time Warner.E` yO-ԍNCTA Comments at Apps. A1A3.E Cox is currently offering voice telephone service  S8- &Mover its own network8z yOR - &ԍCox offers its residential customers telephone over its own HFC network (fiber to the node and coaxial cable to the residence). 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  S- &the end of 1997 including Omaha, Nebraska.U yOZ-ԍNetchvolodoff Interviews, Oct. 23 and Dec. 2.U 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  SH - &networks.1H b  {OJ-ԍId.1 Cablevision System's cable telephone trials are being marketed to 115,000 households on  S - &Long Island, New York, with 5,000 subscribers as of March 1997.  {O-ԍJessica Reif Cohen et al., Media & Entertainment, Merrill Lynch, Mar. 7, 1997, at 19. Additionally, US West's MediaOne  S - &launched cable telephony`X  yO- &ԍUS West's MediaOne offers cable telephony using fiber to the node technology where fiberoptic cable is used  &to carry telephone transmission to community nodes. From those nodes, MediaOne states it transports telephone service via their cable plant. Jim White Interview, Nov. 21.` to onethird of the households in its Atlanta cable franchise area during 1997.  S - &Although this rollout is being described as a "commercial launch," it appears to be more of a trial.  {O- &hԍDennis H. Leibowitz et al., Broadcasting & Cable, Cable Industry Outlook '97, Donaldson, Lufkin, & Jenrette, Apr. 17, 1997, at 11.  &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  SX- &over its own plant to an estimated 250,000 households by the end of 1997.X {O!-ԍJessica Reif Cohen et al., Media & Entertainment, Merrill Lynch & Co., Mar. 7, 1997, at 17. TCI currently has 1,000  S0- &telephone subscribers.10 {Ob$-ԍId.1 Jones Intercable offers telephone service to 20,000 customers in Alexandria,  &jVirginia, and in Maryland's Prince George's County. By the end of 1997, Jones Intercable plans to reach"#$,`(`(88X"  S- &30,000 customers.M yOh-ԍJammu Interviews, Oct. 27 and Dec. 3.M Currently, Jones provides telephone service over it own fiber network to MDUs and  S- &uses the existing copper twisted pair wiring inside the buildings to offer the service to customers.1X {O-ԍId.1 It  S-plans to begin offering service over the coaxial cable already installed for their cable customers soon.1 {O:-ԍId.1  S`- : 352.` ` MultiService 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  S- &>in Irvine, California, apartment communities.| {O - &ԍHuffstutter, P.J., Cox Bundling Phone, Internet Services for Irvine Renters, The Los Angeles Times, Sept. 26, 1997, at B5. Additionally, Cox currently offers cable data service  &bundled (over one cable wire only) with their cable service to approximately 714,000 households in  Sr- &various markets, and expects to increase that number to over one million by the end of 1997.Ur yO-ԍNetchvolodoff Interviews, Oct. 23 and Dec. 2.U As  &indicated in the previous paragraph, TCI is currently offering cable television and cable telephone to in  S" - &selected markets" f  {O(-ԍJessica Reif Cohen et al., Media & Entertainment, Merrill Lynch, & Co., Mar. 7, 1997, at 17. Jones Intercable currently offers Internet access to 41,000 of its cable television  &kcustomers in Alexandria, Virginia. As indicated above, Jones also offers telephone service to its cable  S -television customers in Alexandria and in Maryland's Prince George's County.M  yOj-ԍJammu Interviews, Oct. 27 and Dec. 3.M  S - : 453.` ` 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  S2- &connections).^2  {OZ- &ԍAndrew W. Davis, Switched Network vs. Hybrid Fiber Coaxial for TwoWay Video From Telcos or Cable,  {O$- &KAdvanced Imaging, Mar. 1, 1996, at 65. and Leslie Cauley, MileHigh Melee: US West Takes Over A Huge Cable  {O-Firm, Then Angers Its Brass, Wall Street Journal, Aug. 29, 1997, at A1. US West's MediaOne, for example, is reported to be having software problems adding  &telephone service to certain systems, although it states that the overall technical approach is still on  S- &Ktrack.1 {O0"-ԍId.1 Ameritech reportedly does not plan to use its cable systems to offer telephony, at least in the near  S- &term, because it is seen as prohibitively expensive and technically difficult.1@ {O$-ԍId.1 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$,`(`(88"Ԍ S- B.` ` Direct Broadcast Satellite Services  S- : _554.` ` 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  S:- &subscription fee to receive the service.\: {O-ԍ1996 Report, 12 FCC Rcd at 4376  36.\  Each DBS operator transmits its programming services to  &subscribers from specific orbital locations. Permissible orbital locations are established by international  S- &telecommunications regulations and Commission rules.~Z {O -ԍSee Table C1 for allocation of orbital locations assigned by the United States.~ DIRECTV, United States Satellite Broadcasting  S-("USSB"), and EchoStar currently offer DBS video programming. yON - &yԍAlphastar, a mediumpowered FSS provider owned by TeeComm Electronics, Inc., filed for Chapter 11  &bankruptcy protection in May 1997 and ceased transmitting to its 50,000 subscribers at 3:00 a.m. EDT on August  {O - &K8, 1997. AlphaStar Goes Dark, PrimeStar Prepares To Go West, SkyREPORT, Aug. 1997, at 4; James Careless,  {O- &iDBS Service AlphaStar Files for Chapter 11, Multichannel News, June 2, 1997, at 46. DIRECTV has announced  &that it will give a satellite dish and integrated reception device ("IRD") receiver free to each former Alphastar  {O:- &subscriber who purchases DIRECTV programming. Subscribers must also pay for installation.  See Paul Kagan  {O-Associates, Inc., DIRECTV to the AID of SKYLINK, Private Cable Investor, Aug. 31, 1997, at 12. Primestar is a medium powered  S- & fixed satellite service ("FSS") that shares many of the attributes of DBS operators.4  {On- &ZԍIn the 1997 Report, as in previous years, we include a discussion of Primestar Partners, L.P. ("Primestar"),  &Ma mediumpowered Kuband Fixed Satellite Service ("FSS"), together with our highpowered Kuband DBS  &providers, DIRECTV, USSB and Echostar, as DBS providers. Unless otherwise noted, our discussions of attributes  &of DBS providers includes Primestar. Tables C1, C2, C3, C4 and C5 provide certain transmission, channel,  &programming, subscriber and price information for these four firms. At this time, all directtohome ("DTH")  &isatellite services use two different frequency bands for transmission, Kuband and Cband. In the Kuband (12/14  &-GHz), service is provided in two different portions of the band. Primestar provides medium power service while  &=high powered DBS service is provided in another portion of the Kuband. Cband service (4/6 GHz), is often  &distinguished by its larger antennas with diameters typically around seven and onehalf feet (approximately 2.5 meters). 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.  S - : n655.  ` ` Subscribership. DBS systems serve more subscribers than any type of MVPD other than  S - &franchised cable system operators.@  {OB - &ԍNCTA Comments at 1. SBCA Comments at 3; Dennis H. Leibowitz et al., Satellite Industry Conference,  {O !-Donaldson, Lufkin & Jenrette, Aug. 1997, at 12;See Table E1. See also 1996 Report, 12 FCC Rcd at 4376 38. @ The four DBS providers furnished programming to nearly 5.1  S - &jmillion subscribers as of June 1997." * {Ov#- &ԍUSSB subscribers are not reported as a group by SkyREPORT, DTH Subscribers, Sept. 1997, at 4. DIRECTV  &iand USSB are complimentary services because subscribers use the same equipment to receive each service and the  &services offer different programming. According to SkyREPORT, only a small portion of USSB subscribers do not also receive DIRECTV. 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" %,`(`(88j"  S- &12 months, July 1995 to July 1996. {Oh- &ԍSee Tables C3, C4 and C5. SBCA Comments at Appendix A; DTH Subscribers, SkyREPORT, Aug. 1997, at 8. Predictions vary regarding the continued growth of DBS. Some  &industry analysts expect the DBS industry growth to continue, reaching 15 million subscribers by 2001  S- &(14.5% of the total television market)." {Or- &ԍRichard Bilotti et al., Telecommunications, Cable Television, Multichannel Metamorphosis II, Digital Derby  {O<-Rounding Turn #1, Morgan Stanley, Apr. 25, 1997, at 2.  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  S`- &jits projection to 14.6 million subscribers by 2002.`~ {O~ - &ԍVideo Week, Warren Publishing, Aug. 4, 1997; Dennis H. Leibowitz et al., Direct Broadcast Satellite(DBS)  {OH -Industry, Donaldson, Lufkin & Jenrette, Nov. 21, 1997 at 11, citing Paul Kagan Associates. In addition, DIRECTV, which had projected that it  S8-would have 10 million customers by 2000, no longer expects to meet this figure.18 {O -ԍId.1  S- : 756.` ` 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  S- &and other interactive programming and data services.l  {O- &xԍ  Stuart Levin, Programmer Spotlight, Digital Cable Television is Here: Just in Time to Meet the DBS Threat  {On- &to Cable, Independent Cable News, June 1997, at 12; Leslie Ellis et al., TCI Rolls Out All TV in More Areas,  {O8- &;Multichannel News, July 14, 1997, at 8; Consumer Communications, Cable TV's Changing Competitive Landscape,  {O- &The Yankee Group White Paper, Mar. 1997, at 2; Dennis H. Leibowitz et al., Broadcasting & Cable, Tele {O-Communications, Inc. (TCOMA), The New Game Plan, Donaldson, Lufkin & Jenrette, Dec. 23, 1997, at 5.  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  S - &yprogramming variety, especially sports' X $ & yO- &ԍAccording to a poll by Bruskin/Goldring Research, 47% of those surveyed and 52.4% of the male subscribers  &cited sports as the reason they subscribed to DBS. DIRECTV and Primestar offer as many as 29 channels of sports  &programming, including ESPN's "Full Court" collegiate basketball and "GamePlan" collegiate football channels, the  &24 FOX SPORTSCHANNELs and HTS regional sports channels, and the full, regular season professional league  &xsports networks. Other sports entertainment events have included this summer's USSB's TysonHolyfield boxing  {O- &match (see DIRECTV, Inc. Comments, Programming Lineup; Primestar website at  {Op- &; Dennis H. Leibowitz et al., Satellite Industry  {O: - &Conference, Donaldson, Lufkin & Jenrette, Aug. 1997, at 17, 18. The league channels include not only the NHL's  yO!- &xCenter Ice, the MLB's Extra Innings and the NBA's League Pass, but also new sports programming such as soccer  {O!- &that has been added this year (see MLS/ESPN SHOOTOUT,  yO"- &<>) . The NFL's Sunday Ticket is only carried by DIRECTV.  {O^#- &eDIRECTV, Inc. Comments, Programming Lineup; Primestar website at  & . Primestar is also marketing special "niche" sporting  {O$- &Zevents like rodeos and NASCAR auto races (see DTH Game Plan for Sports, Services Use Packages, Channels to  {O%- &Secure Attractive Subscriber Base, SkyREPORT, Aug. 1997 at 13). Furthermore, as a continuing part of its  {O&- &emphasis on sports programming, DIRECTV has created a magazine called ON Official Magazine of DIRECTV"L',`(`('"  {OX- &<Sports for subscribers who take its Total Choice Gold, Total Choice Platinum or other collegiate or professional  {O"- &sports programming packages (Ted Hearn, DIRECTV Seeking FCC Nod for Six New Satellites, Multichannel News, June 30, 1997 at 24; the magazine will feature sports articles and provide sports program listings). ' and movies,  yO|- &ԍMovies are another program offering which attracts subscribers to DBS. USSB advertises itself as the DBS  &service with the most movie channels, its way of distinguishing itself from its DBS competitors (USSB webpage  &>@www.USSB.com). USSB's movie channels include premium and multiplex movie channels HBO 15 and  {O- &Showtime 14 as well as The Movie Channel, Cinemax, and FLIX (see DIRECTV, Inc. Comments, Programming  {O- &JLineup; Primestar website at ; Dennis H. Leibowitz  {Oh - &et al., Satellite Industry Conference, USSB, Donaldson, Lufkin & Jenrette, Aug. 1997, at 17, 18. See, e.g., USSB  {O2 -Channels, <>).  are also cited as reasons for consumers choosing" & ,`(`(88 "  S- &kone of the DBS services.  {O - &ԍBeyond Video, DIRECTV & DISH Say They'll Have New Interactive Services by Christmas, SkyREPORT, Jul. 1997, at 3. However, DBS's advantages may be minimized once cable systems install  S-digital technology and can offer comparable programming features.lV  {O-ԍSee, e.g., Video Week, Warren Publishing, August 4, 1997 at 4.l  S- : 857.  ` ` 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  S8- &purchase additional equipment to receive programming on additional television sets.]8 yO-ԍVideo Week, Warren Publishing, August 4, 1997 at 4. ]  A May 1997 study  &by USSB of 11,320 consumers found that 600 of those surveyed had shopped "recently" for digital  S- &satellite system, and 70% of those did not buy the service,1x {O-ԍId.1 which may , in part, explain the lowered  S- &projections for new subscribers.G  {Oj-ԍSee para. 55 supra.G A recent study reports that only 68 of 647 cable subscribers surveyed  S-indicated that they were "very likely" to switch to DBS. {O- &ԍChilton Research Services Survey conducted August 1115, 1997, as reported in Cablevision, Sept. 22, 1997 at 71.  SH - : $958.` ` Impediments to carriage of local broadcast signals by DBS services reduce the satellite  S - &services' ability to compete effectively with cable television.~  {O!- &wԍSBCA Comments at 19; NRTC Comments at 1213; Primetime24 Comments at 2; Heather Fleming, Sky Goes  {O"- &to Capital Hill for Quick Copyright Fix, Broadcasting & Cable, Mar. 17, 1997 at 35; Rick Westerman et al., Direct  {OJ#- &,Broadcast Satellite, UBS Securities, Mar. 4, 1997, at 7; DBS subscribers can only obtain local broadcast signals using  yO$- &conventional overtheair antennas or through basic cable subscriptions. According to one consumer survey, more  &than 87% of those surveyed cited the inability to receive local stations as major reason for not buying a DBS system,  &Kand 60% cited the need for additional equipment in order to receive programming on other television sets in the household (Video Week, Warren Publishing, August 4, 1997, at 4). However, the DBS industry is working  &on at least a partial solution to this situation, and is developing antennas to improve overtheair broadcast" '<,`(`(88 "  &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  S- &.of Echostar's markets.0H {O- &ZԍSee Dennis H. Leibowitz et al., Satellite Industry Conference, Donaldson, Lufkin & Jenrette, Aug. 1997, at  &1213. For example, Emerson advertises its "Dishmate UHF/VHF Antenna" as designed specifically to function with  {O- &the DBS antenna (My TV Reception Is So Clear, You'd Think I had a 50foot Antenna on My Roof, Advertisement  &in the New York Times Magazine, Aug. 31, 1997, at 63). Echostar has recently introduced a more technically  &sophisticated dish receiver which can integrate offair broadcast signals with the satellite transmission, eliminating  {O- &the separate A/B switch mechanism (Kent Gibbons et al., Future is Near for PrimeStar Service, Multichannel News,  {O- &hJuly 28, 1997, at 7; Tammy J. Fluette, A Decade of Difference, SBCA Celebrates Ten Years of Service, Private Cable & Wireless Cable, Sept. 1997, at 40). 0 Capitol Broadcasting Company, Inc. ("Capitol") has announced its "Local TV  S- &on Satellite" plan for retransmitting local signals by satellite.qZ {O - &xԍSee Statement of Capitol Broadcasting Company, Inc., before the Subcommittee on Courts and Intellectual  &Property of the Committee on the Judiciary, U.S. House of Representatives, Hearing on the Copyright Licensing Regimes Covering Retransmission of Broadcast Signals License (Oct. 30, 1997).q Capitol states that it will operate a satellite  S`- &in the Kaband with 61 spotbeams that will cover the continental United States, Alaska and Hawaii.1`  {O-ԍId.1  &LCapitol intends to offer DBS providers a local station package of all overtheair, full power, commercial  S-television stations within a given station's designated market area.1  {O<-ԍId.1  S- : :59.` `  The "upfront costs" to subscribers that DBS operators may charge are an additional  S- &disincentive for some consumers considering DBS service. {OV-ԍBruskin & Goldring Research, DTH Barriers to Purchase Study, Wave III, SBCA, June 1997, at 33. The costs for the basic equipment,  &installation, and one month of programming range from $185 for Primestar service, where the consumer  SH - &rents equipment, up to $379 for DIRECTV's service.ZH  yO- &ԍPrimestar's cost includes $150 for professional installation and monthly charges of $34.99 for the programming  &package, $10 of which is the equipment rental. DIRECTV's cost includes $199 equipment, $150 professional  {O(-installation and monthly charges of $29.99 for the basic programming package. See Table C3.  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 $5 per month per  S - &television.   yOB - &ԍAn IRD antenna can provide multiple channels of satellite programming to 23 sets simultaneously. An additional IRD antenna is needed to provide multiple channels of satellite programming to 45 sets simultaneously.  Industry observers expect the cost of IRDs to decline. This decline, however, may be offset  S -by continued monthly charges for service to additional televisions in the household.s\ * {Or#- &ԍRichard Bilotti et al., Telecommunications, Cable Television, Multichannel Metamorphosis II, Digital Derby {O<$- &wRounding Turn #1, Morgan Stanley, Apr. 25, 1997, at 8, 12; Jimmy Schaeffler, The State of DBS: Circa July, 1997, Private Cable & Wireless Cable, July 1997, at 18.s  SX- : 4;60.` ` To overcome the "upfront costs," DBS providers also have developed a number of  S0- &=discount programs and equipment plans to increase demand for their programming services. In the 1996"0(N,`(`(88J"  S- &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  S- &antenna dropping to just $199 in some cases,R yO-ԍ1996 Report, 12 FCC Rcd at 4382  43. R as also noted in Table C3 of this report. This decline  &has continued. Discount retailers, such as WalMart, are selling equipment for $49 and some mail order  Sb- &firms are offering the equipment for as little as $25.bX {OZ- &ԍRetailers Cheer Exit of $200 DSS Rebate, But Establishments Wait for DIRECTV's Next Move, SkyREPORT, July 1997, at 1011. In June 1997, Echostar dropped its requirement  &that new subscribers pay the $300 annual programming fee in advance to purchase the $199 DBS receiver  S- &and other equipment. Some DBS customers can now buy programming on a monthtomonth basis. {Od -ԍInside the Industry, SkyREPORT, June 1997, at 11; Satellite and International, Comm. Daily, May 19, 1997.  &Echostar also plans to introduce a $129 "no frills" secondset receiver, and will provide customers with  S- &zselfinstallation kits or offer $100 off the professional installation charge.D {O-ԍKent Gibbons et al., Future is Near for PrimeStar Service, Multichannel News, July 28, 1997, at 76. In July 1997, DIRECTV  S- &eliminated its prepaid programming requirement, but dropped its $200 equipment rebate.\ {O- &ԍBeyond Video, DIRECTV & DISH Say They'll Have New Interactive Services by Christmas, SkyREPORT, July  &i1997, at 3. DIRECTV's DSS equipment manufacturers sponsored the $200 rebate to compete with ECHOSTAR's  {O-$199 equipment offer. Satellite and International, Comm. Daily, May 19, 1997.  To attract  &knew customers, DIRECTV offered a 50% discount off the $159 price for NFL Sunday Ticket to new  SJ - &ksubscribers.OJ  yO-ԍDIRECTV Homepage at <O Video Magazine subscribers could buy a sixmonth subscription to DIRECTV's Total  &Choice Platinum programming package by October 15, 1997, and be eligible for the free equipment  S - &offer.z  {O&-ԍDIRECTV Expands Free DSS Equipment, Multichannel News, Sept. 8, 1997, at 14.z Thomson Consumer Electronics, maker of the RCA DSS equipment, offered its own promotion,  S - &]giving anyone who buys an RCA largescreen television the DSS equipment for free.1  {O-ԍId.1 Primestar  S - &announced a discount on installation and one month of free programming this fall.  {O-ԍKent Gibbons et al., Future is Near for PrimeStar, Multichannel News, July 28, 1997, at 1, 76. In addition to  &offering discounted equipment and programming prices, DBS providers are heavily marketing their  S\- &services.\\@ yO63.` ` DBS providers have announced plans to launch various new video and data access  &products. DIRECTV plans to develop a satellitedelivered PCbased video programming and Internet  S- &Kservice ("DIRECPC"), with a telephone return path.?  yO-ԍDIRECTV Comments at 12.? Hughes Network Systems ("Hughes"), DIRECTV's  &affiliate, is retailing the DIRECPC's Internet service through consumer electronics stores to compete with  Sj- &the cable industry's deployment of high speed cable modems.ejT  {O^"-ԍDirecPC: Out of the Closet, SkyREPORT, July 1997, at 4.e  In addition, Hughes recently announced  &the launch of DIRECDUO, a dualfunctioning DBS antenna, which consumers can use to receive both  S- &DIRECTV video programming and DIRECPC Internet and interactive data access services. {O%-ԍDIRECTV, Inc. Comments at 12; DirecPC: Out of the Closet, SkyREPORT, July 1997, at 4. Echostar"*x,`(`(88b"  S- &plans to launch interactive services by the end of this year, {Oh- &ԍBeyond Video, DIRECTV & DISH Say They'll Have New Interactive Services by Christmas, SkyREPORT, July 1997, at 3. and is  &working with content providers CNN, MTV, ESPN, and Bloomberg Information TV to supply  S- &programming.1" {Or-ԍId.1 Echostar also plans to carry Data Broadcasting Corp.'s Signal realtime quote service,  &which provides data directly from the equity, futures and options exchanges to the user's personal  S`- &computer.z` {O -ԍEchoStar to Carry Signal, Private Cable & Wireless Cable, Sept. 1997, at 45.z In 1998, Echostar plans to add late night broadcasts of Internet content by satellite to  S8-interactive settop boxes for morning access.3Z8F {O - &ԍBeyond Video, DIRECTV & DISH Say They'll Have New Interactive Services by Christmas, SkyREPORT, July  &1997, at 3. The settop boxes will feature a filter mechanism which scans content for information based on customer zip codes. 3  S- :  ?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  S- &videos through their dish antenna, using a telephone "return path."h  {O- &ԍId.; Jimmy Schaeffler, The State of DBS: Circa July, 1997, Private Cable & Wireless Cable, July 1997, at 15. DBS providers even anticipate integrating their services with standard household utilities like lighting.  Microsoft will incorporate a  Sp-DIRECTV interactive link in its Windows 98 software.`p  {O-ԍA Very Good Month..., SkyREPORT, July 1997, at 13.`  S - : @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 mediumpowered  S - &Lchannels.$ T  {O- &iԍHeadendings, Primestar Makes "Big Switch," Broadcasting & Cable, Apr. 28, 1997 at 43; Alan Breznick et  {O- &ial., Primestar Packing More Program Punch, Cable World, Mar. 3, 1997, at 1, 44. The additional channels will  &feature ten regionalized weather channels from MSNBC Weather, eight regional sports channels, 20 payperview channels, two Showtime channels, American Movie Classics, Court TV and several other networks.  In June 1997, MCI agreed to assign the authorization for ASkyB's highpower DBS service  S - &|at 110$ west latitude and two satellites to Primestar.  @ yO- &ԍPrimestar is a joint venture of TCI Satellite Inc. ("TSAT"), Time Warner, Cox Enterprises, Comcast,  &MediaOne and GE American Corporation. Prior to reaching this agreement with Primestar, MCI had entered into  &an agreement with News Corporation to form a joint venture, known as American Sky Broadcasting ("ASkyB"), to provide service using this authorization. Primestar has announced plans to use  S - &the 110$ west latitude position to offer a 225 channel service in 1998.  ( {OJ$- &xԍHeadendings, Primestar Makes "Big Switch," Broadcasting & Cable, Apr. 28, 1997 at 43; Alan Breznick et  {O%-al., Primestar Packing More Program Punch, Cable World, Mar. 3, 1997, at 1, 44.  Consummation of the agreement  &is subject to Commission approval. The parties have filed applications with the Commission, and a number of parties have filed objections to the applications. "2+,`(`(88Y"Ԍ S-  : `ԙA66.` ` Echostar plans to expand its services by offering more channels with the launch of two  S- &\more satellites. EchoStar III was launched in October 1997 to provide service at 61.5$ west latitude.  S- &.EchoStar IV's launch is planned for September 1998. {O- &ԍRick Westerman and Edward T. Hatch, Direct Broadcast Satellite, Outlook, UBS Securities LLC, Mar. 4, 1997, at 1011. As noted in paragraph 58 above, this expansion may facilitate retransmission of local broadcast channels to some of Echostar's markets.  S8- : `B67.` ` Other DBS Entrants. Continental Satellite Corporation ("Continental"), and Dominion  &lVideo Satellite, Inc. ("Dominion") each hold licenses but have not launched any satellites. Tempo  S- &launched a satellite in March 1996 at 119$ west latitude and is authorized to provide 11 channels of  S- &Zservice from that position and a second orbital location at 166$ west latitude (a total of 22 transponders);N\" {O - &ԍTempo is a wholly owned subsidiary of TCI Satellite Entertainment. See Rick Westerman and Edward T.  {ON - &LHatch, "Table 3: DBS Industry Licensed Number of Transponders," Direct Broadcast Satellite, Outlook, UBS Securities, Mar. 4, 1997, at 9. N  S- &jContinental is authorized to provide 11 channels of service from 61.5$ and 166$ west latitude (a total of  Sr- &y22 transponders); and Dominion is authorized to provide eight channels of service from 61.5$ and has an  SJ - &application pending to provide eight channels of service at 166$ west latitude (a total of 16  S" - &transponders).<" F {O-ԍSee Table C1.< Of the three, only Tempo's 11 transponders at 119 west latitude are positioned at a full  S - &jcontinental United States view ("CONUS") slot.\  {Or- &<ԍRick Westerman and Edward T. Hatch, "Table 3: DBS Industry Licensed Number of Transponders," Direct  {O<- &Broadcast Satellite, Outlook, UBS Securities, Mar. 4, 1997, at 9. "CONUS" indicates that the signal transmissions from satellites in these orbital slots are capable of reaching all parts of the United States. In addition, the Commission has authorized Televisa  &International, LLC., to operate one million receiveonly earth stations in the United States to receive DTH S - &FSS television services from Mexico's Solidaridad II satellite operating at 113$ west latitude, signaling  S -the first stages of direct competition for the United States DTH market from foreign companies.\  {O- &ԍSee In the Matter of Televisa International, LLC., Application for Blanket License for ReceiveOnly Earth  {O- &Stations in the Fixed Satellite Service for DirecttoHome Subscription Television Service, File No. 330DSEL97, Call Sign E970096, Order and Authorization, DA 971758 (rel. Aug. 18, 1997).  S2- C.` ` Home Satellite Dishes  S- : C68.` ` 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  Sl- &programming transmitted from various Cband satellites.;l  yO,#-ԍSBCA Comments at 6.; 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",,`(`(884"  S- &150 are unscrambled. yOh-ԍTelephone interview with Harry W. Thibedeau, Manager of Industry Affairs, SBCA (Sept. 27, 1997). HSD owners can watch the unscrambled channels without paying a subscription  S- &kfee, subject to section 705(b) of the Communications Act.zX {O-ԍSee 47 U.S.C. 605(b) (satellite cable programming for private viewing).z To receive scrambled channels, an HSD  &^owner must purchase an IRD from an equipment dealer and pay a subscription fee to an HSD  S- &programming packager. Nationwide, approximately 20 to 25 HSD program packagers assemble  S`- &[programming from individual program services which they make available in packages ("onestop shop")  S8- &to subscribers.=8 yO -ԍSBCA Comments at 67.= Like DBS systems, however, HSD program packagers do not provide local broadcast signals.  S-  : D69.` ` 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 nonsubscription programming. Industry analysts estimate  S - &that there are approximately 3.8 to 4 million HSD users. z yO-ԍTelephone interview with Harry W. Thibedeau, Manager of Industry Affairs, SBCA (Sept. 27, 1997). 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  SZ- &.subscribers reported on June 30, 1997.=Z  {O-ԍSee Table E1. = According to one report, sales of HSDs fell to below 200,000  S2-last year from 642,000 in 1994.|2 {On-ԍJeff Bailey, Air Waves, Wall Street Journal, Oct. 15, 1997, at A1.|  S- : E70.` ` Much of the decline in HSD subscribership results from owners switching to DBS services  S- &in order to receive digital programming.;.  yO-ԍSBCA Comments at 6.; Not only have DBS equipment prices become less expensive  S- &than the typical HSD equipment,  {O- &ԍSee Table C3; Bruskin & Goldring Research, Home Satellite Dish Owner Survey for SCBA, Mar. 1997 at 15. but DBS firms like DIRECTV have launched aggressive advertising  Sj- &and promotional campaigns encouraging consumers to switch to DBS service./Zj {O"#- &ԍSatellite and International, Comm. Daily, Aug. 26, 1997. For example, DIRECTV's campaign, "DIRECTV  &,Delivers," offers free DSS equipment and programming packages to commercial HSD subscribers through November 30 of this year./ Responding to consumers  &preference for digital programming, HSD provider General Instrument has introduced a digital receiver,  &Lthe 4DTV, capable of receiving both digital and analog signals for HSD subscribers who want to upgrade"-:,`(`(88"  S- &their HSD systems to receive digital quality pictures. {Oh- &Mԍ4DTV's Slow Trip to Store Shelves, Some Dealers Have a Lot of It, Some Keep Waiting for Product, SkyREPORT, Jun. 1997 at 10; GI Comments at 2. 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  S- &underway." {OJ- &Mԍ4DTV's Slow Trip to Store Shelves, Some Dealers Have a Lot of It, Some Keep Waiting for Product, SkyREPORT, Jun. 1997 at 1011. These concerns may be diminishing as at least one program provider recently announced  S`-that it is adding several digital channels of programming for HSD subscribers with the 4DTV receiver.`| {O| - &ԍProgramming, HBO Delivers to CBand Market, Private Cable & Wireless Cable, Sep. 1997, at 44. HBO will add 16 digital channels of its MultiChannel HBO and Cinemax programming.  S- D.` ` Wireless Cable Systems  R-X` ` 1. Multichannel Multipoint Distribution Service (#  Sp- : F71.` ` 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  S - &<capacity on Instructional Television Fixed Service ("ITFS") channels.?&  {O- &;ԍAmendment of Parts 21 and 74 of the Commission's Rules with Regard to Filing Procedures in the Multipoint  &Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(j) of the  {O(- &Communications Act Competitive Bidding, MM Dkt. No. 94131 and PP Dkt. No. 93253, Report and Order ("MDS  {O-Auction Order"), 10 FCC Rcd at 9589, 9593  7 (1995); 1996 Report, 12 FCC Rcd at 4386  51 n.152. ? An MMDS system's transmission  &range is dependent upon the transmitter's power, the kind of receiving antenna, and the presence of a line S - &=ofsight ("LOS")\  yO4- &xԍ"Lineofsight" refers to the "straight eyesight line between two locations, often between a radio frequency  {O- &receiver (MMDS antenna) and radio frequency (MMDS) transmitter." Glenn R. Jones, Jones Cable Television and  {O-Information Infrastructure Dictionary, Englewood, CO: Jones International, Inc., 1994, at 115.  path between the transmitter or signal booster and the receiving antenna.[  {OX-ԍMDS Auction Order, 10 FCC Rcd at 9593  6.[ MMDS  &?operators have a maximum of 33 microwave channels available in each market, including 13 MDS  S -channels and 20 ITFS channels.E z {O-ԍId.  67.E  S0- : G72.` ` The Commission authorized digital MMDS use in July 1996.&0  {O"- &ԍRequest for Declaratory Ruling on the Use of Digital Modulation by Multipoint Distribution Service and  {O#- &Instructional Fixed Service Stations, DA 951854, Declaratory Ruling and Order ("Digital Declaratory Ruling"), 11  {Op$- &xFCC Rcd 18839 (1996), petitions for clarification and partial recon. pending; 1996 Report, 12 FCC Rcd at 4386  51.  Digital compression  &permits MMDS operators to provide six or more digital channels of programming, with an increased range".,`(`(88"  S- &of service, on what was previously a single analog channel.p {Oh- &ԍDigital Declaratory Ruling, 11 FCC Rcd at 18842  5 n.11. Digital compression allows the transmission of  &several digital programs in the bandwidth required to transmit a single analog program, although the number of  &digital channels which can be accommodated by the bandwidth of a single analog channel varies with the digital  &;bandwidth demands of the specific programming. At a six to one ratio, 198 digital channels could be delivered using the bandwidth allocated to the 33 MMDS analog channels. p In addition to increased channel capacity,9Zz {O- &KԍJoe Schlosser, Pac Bell's LowKey Digital, Broadcasting & Cable, Oct. 6, 1997, at 62. Digital compression  &will enable MMDS operators to offer additional programming features such as numerous payperview channels to their subscribers.9  S- &digital technology is expected to improve picture and audio quality, {O - &>ԍAndrew Kreig, Insider, Dawn of Digital, Private Cable & Wireless Cable, June 1997, at 94;  Digital  {O -Declaratory Ruling, 11 FCC Rcd at 18842  5. and to permit twoway data  S- &transmission services.(  {OH- &ԍAmendment of Parts 1, 21 and 74 to Enable Multipoint Distribution Service and Instructional Television Fixed  {O- &-Service Licensees to Engage in TwoWay Transmissions, MM Dkt. No. 92217, Notice of Proposed Rulemaking  {O- &Z("TwoWay NPRM"), FCC 97360 (rel. Oct. 10, 1997), summarized at 62 Fed. Reg. 60025 (Nov. 6, 1997); 1996  {O-Report, 12 FCC Rcd at 43924393  64. The Commission has also proposed to amend its rules to facilitate the ability of  &MMDS operators to provide twoway transmission of Internet and other digital highspeed data services  S`- &Nthat may further enhance the competitiveness of wireless cable with other MVPDs.I ` {O-ԍTwoWay NPRM  12.I However,  &Oimplementation of digital MMDS technology has been slow because of technical and financial  S-considerations. ^z {O*- &KԍWCAI Comments at 8; K. C. Neel, Where's Wireless Cable? Very Up in the Air, Cable World, June 2, 1997,  {O- &at 1, 46; BellSouth Comments at 8;  Strategic Direction, People's Choice TV Corp., SEC Filing, June 30, 1997  {O-(filed Aug. 13, 1997), at 1; 1996 Report, 12 FCC Rcd at 43914392  6263. Ĩ  S-  : _ H73.` ` MMDS Service Areas. There were an estimated 252 MMDS systems in operation in July  S- &1997  yO- &ԍWCAI Comments at 8. The ten largest MMDS operators (by subscribers) are Heartland Wireless  &Communications, Inc. (194,100), AmericanTelecasting, Inc. (141,600), Wireless One (114,200), People's Choice TV  &(75,200), Wireless Broadcasting Systems of America (69,000), CAI Wireless Systems, Inc. (65,700), CS Wireless  &Systems, Inc. (46,860), Pacific Bell Video Services Pacific Telesis Group (56,000), BellSouth Wireless Cable, Inc.  {O- &(33,500), and Videotron/Wireless Holdings (21,000). Top 10 Wireless Cable MSOs, WCAI Facsimile, Nov. 14, 1997.  compared to the estimated 200 MMDS systems serving 900,000 subscribers in July 1996.\  {OT"-ԍ1996 Report, 12 FCC Rcd at 4388  54 n.166.\ The  &yCommission 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"J / ,`(`(88 "  S- &BTAs.L \ {Oh- &ԍMDS Auction Order, 10 FCC Rcd at 9608  3435. BTAs vary in size and shape and typically include a  {O2- &population center (city or large town) and the surrounding rural area.  See also 1996 Report, 12 FCC Rcd at 4387  52. L The MMDS auctions were designed to distribute unused spectrum through competitive bidding  S-while protecting the service area of incumbent MMDS providers within the BTAs. {Od- &ԍMMDS Auction Order, 10 FCC Rcd at 9591  12, recon., Memorandum and Order on Reconsideration, 10  &FCC Rcd 13821 (1995). Under the postauction licensing plan, a BTA authorization is granted to the auction winner  &for the entire BTA, and separate conditional station licenses are awarded for each single channel or channel group  &at each site location within the BTA. The BTA authorization holder is able to construct facilities over any vacant  &MDS channels within its BTA, provided its engineering design meets the Commission's interference protection  &standards. To date, the Commission has processed over 700 applications for individual MMDS stations within the  &JBTAs. In 1996, the Gulf Coast MDS Service Company petitioned the Commission to recognize the Gulf of Mexico  {O - &as an additional MMDS service area and to hold an auction to license MDS service there. See Petition for  &Rulemaking, MM Dkt. No. 94131 and PP Dkt. No. 93253 filed by Gulf Coast MDS Service Company, May 21, 1996.  S- : I74.` ` MMDS Capacity to Serve Television Households. The potential commercialization of  Sb- &digital MMDS technology noted in the 1996 Report b  {O- &KԍDigital Declaratory Ruling, 11 FCC Rcd at 18840, 1884218843  12, 56; 1996 Report, 12 FCC Rcd at 4386, 43914392  51, 62. The Commission authorized digital MMDS use in July 1996.  has proceeded slowly. This has tended to limit  S<- &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  S- &of the first half of 1997.  {OF- &ZԍId.; Paul Kagan Associates, Inc., Wireless Cable Sub Count and Revenue Projections, 19962000, Wireless  &.Cable Investor, Dec. 31, 1996, at 1011; Telephone interview with Andrew Kreig, President, Wireless Cable  &;Association, Nov. 13, 1997. MMDS has developed primarily in large and mediumsized cities. MMDS systems also  &wserve many smaller communities in the western states. The transmission range depends upon the transmitter power,  &hthe type of receiving antenna, and the presence of a lineofsight path between the transmitter or signal booster and  {O0- &the receiving antenna.  MDS Auction Order, 10 FCC Rcd at 95939594  7, 9. MMDS operators' technical ability  &to increase the number of homes seen by MMDS signals within their licensed areas is limited in part by the time  &consumed in siting MMDS transmission facilities, although in many circumstances this may be accomplished with  {O- &Jrelative speed.  Digital Declaratory Ruling, 11 FCC Rcd 18853 at  23; Amendment of Parts 21, 43, 74, 78, and 94  &of the Commission's Rules Governing Use of the Frequencies in the 2.1 and 2.5 GHz Bands Affecting: Private  &OperationalFixed Microwave Service, Multipoint Distribution Service, Multichannel Multipoint Distribution Service,  {O- &Instructional TelevisionFixed Service, and Cable Television Relay Service, Report and Order ("Wireless Cable  {O - &Order"), 5 FCC Rcd at 6410, 6422  7576 (1990). Various obstructions, e.g., topography, foliage, tall buildings  &-and other manmade features, also have restricted the potential deployment of MMDS systems, although digital  {O@"- &technology tends to improve reception.  Wireless Cable Order, 5 FCC Rcd at 6418, 6422  50, 78;  Digital  {O #-Declaratory Ruling, 11 FCC Rcd at 18842  5. Ĵ 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"t08,`(`(88 "  S- &1997.m {Oh- &ԍPaul Kagan Associates, Inc., Wireless Cable Sub Count and Revenue Projections, 19962000, Wireless Cable  &Investor, Dec. 31, 1996, at 1011; Telephone interview with Andrew Kreig, President, Wireless Cable Association,  &-Nov. 13, 1997. The difference between the number of homes with a serviceable line of sight and the number of  &homes seen is due to the presence of buildings, terrain, and foliage that may tend to obstruct MMDS signals and prevent many homes from being able to receive the MMDS signals.m The proportion of television homes seen by MMDS increased from 30.4% at the end of 1995  S- &[to 32.5% at the end of 1996, and remained unchanged, at 32.5%, through the end of June 1997.=z {O-ԍSee Table E1. = These  &zmeasures show MMDS operators' capacity to serve television households lags behind cable and DBS  S-operators' capacity to serve those homes.  {O4 -ԍSee paras. 1415 and 5455 supra for capacity data for cable and DBS operators, respectively.  S8- : J75.` ` Subscribership and Capacity Usage. MMDS subscribership grew from 851,000 at the end  S- &of 1995 to 1,180,000 at the end of 1996, an increase of 38.6%, and declined to z X-#X\  P6G;P##Xj\  P6G;9XP# z1,100,000 at the end of  S- &June 1997, a decrease of 6.8%.H yO(-ԍ WCAI Comments at 8; Table E1. H 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  S - &which operators may then be required to replace upon commencing digital transmission).!& .  {O- &xԍSee, e.g., WCAI Comments at 8; K. C. Neel, Where's Wireless Cable? Very Up in the Air, Cable World, June  &Z2, 1997, at 1, 46. For example, People's Choice TV Corp. notes in its SEC Filing that this year "the Company's  {OZ- &strategy is to conserve capital pending the implementation of digital video compression technology." SEC Filing,10 {O$-Q, People's Choice TV Corp., June 30, 1997 (filed Aug. 13, 1997) at 1.! The MMDS  &industry expects this trend to reverse itself when a number of the larger MMDS operators begin to launch  S -digital wireless cable systems.J  yOf- &ԍWCAI Comments at 89. Analysts have revised their forecasts to project MMDS subscribership in the range  {O.- &of 1.4 million to 3.7 million subscribers by 2002. See, e.g., Veronis, Suhler & Associates, Inc., Subscribers to  {O- &Subscription Video Services, Communications Industry Forecast, 1997, at 156 (1.4 million); Financial Benchmarks  {O- &in the Cable TV Industry: 1997, The Strategis Group, Aug. 1997, at 8 (3.7 million); Dennis H. Leibowitz et al.,  {O- &ZU.S. Cable Television Industry, Multichannel Penetration Model, Cable Industry Outlook '97, Donaldson, Lufkin  &x& Jenrette, Apr. 17, 1997, at 6. These projections indicate slower MMDS subscriber growth than did the analyst  {O!- &,projections current at the time of our last report.  See 1996 Report, 12 FCC Rcd at 43874388  53. Uncertainties associated with the implementation of digital MMDS appear to limit the value of MMDS subscriber projections.   SZ- : K76.` ` Financial Performance. The wireless cable industry's total revenues for 1996 were $420  S4- &?million, a 38.8% increase from the $303 million that the MMDS industry earned in 1995..4. {O&- &ԍPaul Kagan Associates, Inc., Wireless Cable Sub. Count and Rev. Projections, 19962000, Wireless Cable  {O&-Investor, Dec. 31, 1996, at 11; Wireless Cable Industry Projections, Wireless Cable Investor, Jan. 31, 1996, at3. . The"41,`(`(88,"  &=industry's negative cash flow position worsened, however, from negative $3.9 million at the end of 1995  S- &to negative $40.5 million at the end of 1996.z {O@-ԍId. For a description of cash flow calculations, see para. 25 supra. MMDS operators have had difficulty raising capital, in  S-part because MMDS stock prices have generally declined in 1997.|Zz {O- &ԍJohn M. Higgins, Wireless Operators Scale Back, Broadcasting & Cable, Sept. 22, 1997, at 63; Paul Kagan  &Associates, Inc., Wireless Cable Investor, Sep. 30, 1997, at 1, 12. For example, the Sept. 30, 1997 closing stock  &prices for six of the nine companies in Paul Kagan Associates, Inc.'s "Wireless Cable Average" were below the  &stocks' closing prices for Dec. 31, 1996. These companies include Heartland Wireless, Wireless One, American Telecasting, People's Choice TV, TelCom Wireless Cable and TV Filme, Inc. |  S`- : L77.` ` 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  S- &yadditional programming features such as numerous payperview channels to their subscribers. z {On-ԍJoe Schlosser, Pac Bell's LowKey Digital, Broadcasting & Cable, Oct. 6, 1997, at 62. Digital  &technology also improves the audio and video components of programming transmission, giving the viewer  Sr-increased picture clarity and compact disc quality sound.rz {O- &ԍAndrew Kreig, Insider, Dawn of Digital, Private Cable & Wireless Cable, June 1997, at 94; Digital  {Oz-Declaratory Ruling, 11 FCC Rcd at 18842  5.  S" - : _M78.` ` Internet and HighSpeed Data Services.  In 1996, several MMDS companies began testing  &technology that would allow them to provide highspeed Internet access and other digital data services  S - &similar to highspeed data services offered by other MVPDs. z {On- &ԍ1996 Report, 12 FCC Rcd at 43924393  64; Glenn Gamber, Hundt, CAI, Educators Unveil School HSA  {O8-Wireless Internet, Spectrum, WCAI, May 1997, at 1, 3. The Commission has proposed to amend  &.its rules to allow MDS and ITFS licensees to provide twoway communications services in both service  &frequencies in response to a petition for rulemaking filed by a group of over 100 participants in the  S\- &ywireless cable industry. \V z {OR- &,ԍTwoWay NPRM at  11. "Petitioners propose that [the Commission]...create a regulatory system authorizing  &ithe use of response stations and response station hubs to enable the twoway operation of wireless cable systems.  &Response stations would be the means of transmission from a subscriber's premises and could be implemented as  &separate transmitters or as parts of a transverter (combined transmitter and receiver) and could use either separate  &;transmitting antennas for return paths or combined transmitting/receiving antennas. Response stations would serve  &as the collection points for signals from the response stations in a multipointtopoint configuration for upstream  {O"- &signal flow." See also Petition for Rulemaking to Amend Parts 21 and 74 of the Commission's Rules to Enhance  &-the Ability of Multipoint Distribution Service and Instructional Television Fixed Service Licensees to Engage in Fixed TwoWay Transmissions, RM 9060, filed Mar. 14, 1997. The proposed rulemaking is intended to facilitate the most efficient use of the  &yaffected spectrum, to enhance the competitiveness of the wireless cable industry, and to provide benefits  &to the educational community through the use of twoway services. Although the primary use of MDS" 2*,O(O(88 "  &and ITFS frequencies has historically been the provision of video services, through this rulemaking use  S-of these frequencies could be made available for other services.Ez {O@-ԍTwoWay NPRM at  2.E  R-` ` 2. Local Multipoint Distribution Service   S8-  : pN79.` ` LMDS is a technology that uses microwave channels in the 28 GHz band to deliver  S- &\multichannel video programming as well as twoway voice and data service.Zz {O - &ԍIn the Matter of Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission's Rules to Redesignate the  &;27.529.5 GHz Frequency Band, to Reallocate the 29.530.0 GHz Frequency Band, to Establish Rules and Policies  {O - &wfor Local Multipoint Distribution Service and for Fixed Satellite Services, CC Dkt. No. 92297, First Report & Order  {Of - &and Fourth Notice of Proposed Rulemaking ("First LMDS Order"), 11 FCC Rcd at 19005, 1901019011  1415  yO0 - &(1996).  "[The LMDS hub]...receivers operate in small cells, typically six miles in diameter, which transmit to and  &[receive transmissions from subscriber locations. Because the cells are small, and arranged in a typical cellular  &pattern, a very high level of frequency reuse is possible. This pattern, combined with the availability of broadband  &microwave spectrum, results in sufficient capacity in the proposed LMDS system designs [to] offer [sic] services that  &compete both with local exchange carriers in the provision of local exchange service, and with cable operators in  {O- &the provision of video programming even in urban areas." First LMDS Order, 11 FCC Rcd at 1901019011  1415. With the exception of  &CellularVision's LMDS system in Brooklyn and Queens, New York, LMDS frequencies are not currently  S- &used to distribute video programming in the United States.]  z {O"- &ZԍThis operation was authorized by the Commission in 1991 on a waiver basis. Hye Crest Management, Inc.  {O- &(For License Authorization in the PointtoPoint Microwave Radio Service in 27.5-29.5 GHz Band and Request for  {O- &Waiver of the Rules), File No. 10380CFP88, Memorandum Opinion & Order, 6 FCC Rcd 332 (1991). Other  {O- &applications for LMDS service were subsequently frozen by the Commission. 1996 Report, 12 FCC Rcd at 43934394  65. ] Industry observers note that the LMDS  &industry is moving towards the provision of numerous services, including video programming and twoway  Sp-services like Internet access, highspeed data transmission and telephony.!pzz {O- &ԍWCAI Comments at 2; Douglas Smith, Connecting the World Without Wires, Private Cable & Wireless Cable, June 1997, at 71.  S - : O80.` ` In July 1996, the Commission adopted a frequency band plan that allocated 1000 MHz  &of spectrum to LMDS and permitted LMDS systems, geostationary and nongeostationary Fixed Satellite  &Service ("FSS") systems, and feeder links for nongeostationary Mobile Satellite Service ("NGSO/MSS  S - &<or Big LEO") systems to operate in the 28 GHz band.h" z {O!-ԍFirst LMDS Order, 11 FCC Rcd at 1900719008 25. h This action was intended to promote competition  &by permitting these various services to develop and offer consumer services such as video program  &distribution, twoway interactive video, teleconferencing, telemedicine, telecommuting and highspeed data  S0-services within the U.S. and internationally.B#0fz {O6%-ԍId. at 19007  3.B "3#,O(O(88 "Ԍ S- : 4P81.` ` In the same order, the Commission proposed to allocate an additional 300 MHz of  S- &kspectrum to LMDS at 31.031.3 GHz to provide greater technological flexibility for the industry.C$z {O@-ԍId. at 19043  95.C  &However, the Commission's order prohibits cable companies and LECs from acquiring inregion LMDS  S- &licenses for three years. The order is currently under appeal.k%\Zz {O- &ԍUnited States Telephone Association v. FCC, Case No. 971368 (D.C. Cir. May 20, 1997). The USTA also  &noted its disagreement with the decision to prohibit LEC acquisition of inregion LMDS licenses in its comment in  {O-this proceeding. See USTA Comments at 56.k The Commission plans to auction this  S`-LMDS spectrum block in February 1998.c&`~z yO~ - &ԍFCC Public Notice, LMDS Auction Postponed Until February 18, 1998, FCC Postpones Auction No. 17, DA  {OF - &972352, Report No. AUC9717C (Auction No. 17) (rel. Nov. 10, 1997); FCC Auction Notice, Auction of Local  {O - &Multipoint Distribution Service, DA No. 972081, Auction Notice and Filing Requirements for 986 Basic Trading  &Area ("BTA") Licenses in the 28 GHz and 31 GHz bands, Scheduled for December 10, 1997, Report No. AUC9717A (Auction No. 17) (rel. Sept. 25, 1997). c  S- E.` ` Satellite Master Antenna Television Systems  S-  S- : Q82.` ` SMATV systems are MVPDs that primarily serve MDUs.Q'2 z yO-ԍICTA Facsimile, Nov. 12, 1997, at  1.Q SMATV systems do not use  &public rightsofway and, thus, fall outside of the Communications Act's definition of a cable system, and  Sp- &can operate without being subject to franchise requirements.(xp z yO- &<ԍ1996 Act sec. 301(a)(2), 47 U.S.C. 522(7). SMATV operators are subject to significantly less regulatory  &oversight than are traditional cable television operators and, as a consequence, have greater flexibility with respect  &Jto service area, service content and pricing. For example, private cable and SMATV operators: (a) are not required  &to obtain cable television franchises; (b) do not face regulatory constraints on the geographic areas in which they may  &offer video services; (c) do not pay franchise and Federal Communications Commission subscriber fees; (d) are not  &obligated to pass every resident in a given area; (e) are not subject to rate regulation; and (f) are not subject to must carry and local government access obligations.  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)  &jthrough exclusive service contracts with the MDU owner. Under the 1996 Act, SMATV operators may  S - &Luse wires to connect separatelyowned buildings so long as the wires do not use public rightsofway.) z {O"!- &ԍId. Prior to the 1996 Act, to qualify for this exception the buildings had to be under common ownership, control or management.  &This statutory change may permit significant SMATV system growth in areas where different owners'  &krespective 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 S-owned without using public rightsofway.[*\z {O&-ԍ1996 Report, 12 FCC Rcd at 44044405  82.[ "4*,O(O(88"Ԍ S- : ԙR83.` ` SMATV systems have been the primary competitor to franchised cable systems for the  &kMDU 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  S- &lto become more efficient at the delivery of video programming to MDUs.S+\z {O- &ԍAmendment of Part 94 of the Commission's Rules to Permit Private Video Distribution Systems of Video  {O- &Entertainment Access to the 18 GHz Band, PR Dkt. No. 965, Report and Order ("18 GHz Order"), 6 FCC Rcd at 1270, 1275 n.11 (1991).S Firms using 18 GHz  &technology are known as enhanced SMATV systems and do not require the large networks of coaxial or  &kfiber optic cable and amplifiers that are used by traditional hard-wire cable television operators or the  S- &installation of a headend facility at each MDU as is required for earlier SMATV systems.,Bz {O - &hԍ18 GHz Order, 6 FCC Rcd at 12711272, 1275 n.11. Typically, an enhanced SMATV or private cable system  &Zoperating in a standalone MDU requires an offair antenna for receiving broadcast signals and two to three HSD  &or DBS antennas to receive satellite programming (depending upon the number of channels in the system). In the  &-case of two adjoining MDUs, the SMATV system's antennas can serve both buildings by running a wire from the  &,main building's antennas to the second building, assuming the transmission wire does not cross a public rightofway.  &When the enhanced SMATV or private cable system antennas serve two or more MDUs that are not adjoining, the  &JSMATV system uses an 18 GHz microwave transmission system to relay the programming to receiving antennas on the other MDUs. Telephone interview with Deborah Costlow,, General Counsel, ICTA, Nov. 13, 1997.  Thus,  &SMATV operators using 18 GHz technology are able to provide services at attractive rates that make them  S-competitive with franchised cable systems.;- z yOV-ԍICTA Comments at 5.;  Sp-  : ~S84.` ` Growth. ICTA notes that the SMATV industry is composed of hundreds of small and  SJ - &ymedium size firms throughout the nation.7.J z {Op-ԍId. at 1.7 The SMATV industry appears to have considerable growth  &1potential 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 onefourth of the nation's  S - &total population.7/ z {O-ԍId. at 2.7 The number of SMATV residential subscribers as of June 30, 1997, was estimated  S - &to be 1,162,500.0$ z {O- &.ԍSee Table E1. Commission staff estimated the number of SMATV subscribers for June 1997 based on  {O- &information found in Paul Kagan Associates, Inc., Private Cable Growth (Chart), Private Cable Investor, July 31,  &;1997, at 3. However, the ICTA estimates the number of SMATV and private cable subscribers to be approximately 1.5 to 1.75 million subscribers. ICTA Facsimile, Nov. 12, 1997, at  3. 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 " 50,O(O(88j"  S- &represented a 17.1% increase over the 962,000 subcribers estimated in December 1995.=1z {Oh-ԍSee Table E1. = Approximately  S- &3,400 SMATV operators serve MDUs.n2XZz yO- &ԍThe number of SMATV operators is derived from information provided by ABC, Inc., Government Affairs,  &based on the number of ESPN Affiliates from the "apartment" (MDU) sector as of June 30, 1997. (The data cannot be compared with data from previous years due to different information sources.) n 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  S- &NMDUs, such as Atlanta, Chicago, New York, and San Francisco.-3zz {O - &-ԍPaul Kagan Associates, Inc., OpTel 1996 Growth Curve, Private Cable Investor, Dec. 31, 1996, at 3; MTS  {Ol -Expansion Plans, Private Cable Investors, Nov. 30, 1996, at 5; 1996 Report, 12 FCC Rcd at 44034404  81.- Since our last report, system  &Lacquisitions 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  S-147,500.4^z {O- &hԍTable D1. Paul Kagan Associates, Inc., Private Cable Investor, Dec. 31, 1996, at 12; News, CEA Announces  {OP- &Sale of Private Cable Systems, Private Cable & Wireless Cable, June 1997, at 89; Joe Estrella, Private Cable Giant  {O-Buys Houston MDUs, Multichannel News, Sept. 8, 1997, at 47.  S- : #T85.` ` Technology. Many SMATV operators are upgrading existing systems to 750 MHz HFC  S- &=broadband architecture.5 z {O6- &xԍDavid M. Conrad, This Is Living! MDU Completes Step Into the Age of Bundling, Private Cable & Wireless Cable, Aug. 1997, at 14; ICTA Facsimile, Nov. 12, 1997, at  2. This architecture is capable of transmitting hundreds of channels using digital  Sr- &compression.6$rV z {Oh- &ԍIn the 1996 Report, we noted that industry analysts attributed the growth in SMATV systems to technical  &improvements which now make it profitable for operators to install SMATV systems in smaller MDUs. The result  &<has been an increase in the overall number of systems, although many of these SMATV systems may serve only  {O-single MDUs. 1996 Report, 12 FCC Rcd at 44034404  81.  In addition, several firms have technologies that permit SMATV systems to deliver DBS,  SJ - &local offair television signals and security services.7|J Bz {O,- &ԍFoxcom Introduces MDU Satellite Distribution System, Private Cable & Wireless Cable, Sept. 1997, at 38; Paul  {O- &wKagan Associates, Inc., Bridging the DBS Market, Private Cable Investor, Nov. 30, 1996, at 6. For example, Global  &Communications and Heifner Communications have developed a transmission reception technology called a "Digi &SMATV." This technology integrates the DBS antenna and IRD receiver/decoder with a central frequency processor.  &Using this technology, subscribers can receive DBS and overtheair digital and analog broadcast transmissions  &through an MDU's existing wiring. The system's developers cite its costefficiencies and flexibility, especially for  yO -smaller MDUs. Ă SMATV operators have employed enhanced  S" -microwave frequencies to link headends between widely separated MDUs.8" z {OH#- &ZԍICTA Comments at 1, 5; Bob Berger, The Road Ahead, Private Cable & Wireless Cable, Mar. 1997, at 51;  {O$- &David M. Conrad, This Is Living! MDU Completes Step Into the Age of Bundling, Private Cable & Wireless Cable,  {O$- &Aug. 1997 at 14; Paul Kagan Associates, Inc., Private Telephony Census, Private Cable Investor, Dec. 31, 1996 at  &2. SMATV systems use 18 GHz microwave facilities to link headends to rooftop antennas and to link buildings,  {On&- &which increases efficiencies. 1996 Report, 12 FCC Rcd at 4404  82; 18 GHz Order, 6 FCC Rcd at 12711272, 1275 n.11. "" 68,O(O(88 "Ԍ S- : 2ԙU86.` ` Special Features. SMATV systems compete with the franchised cable operators to serve  S- &=MDUs and MDU tenants.=9z yOB-ԍICTA Comments at 12.= Increasingly, SMATV operators offer a comprehensive, "onestop" 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  &payperview channels, special sports and special events packages, and NVOD, which may be unavailable  S:- &from the local cable system;::Xz {O2- &iԍDavid M. Conrad, This Is Living! MDU Completes Step Into the Age of Bundling, Private Cable & Wireless  {O- &iCable, Aug. 1997 at 14; Paul Kagan Associates, Inc., Private Telephony Census, Private Cable Investor, Dec. 31,  {O - &-1996 at 2; RCN New York City Expansion, Private Cable Investor, June 30, 1997, at 3; OnePoint's FullService {O - &YMarket Entry, Private Cable Investor, May 31, 1997, at 4; ICTA Comments at 5. As we noted in the 1996 Report,  &some SMATV systems have added other advanced electronic features such as "pictureinpicture," "pickandpay"  &K(or payperview programming), interactive games and videoondemand ("VOD") programming as part of their  {O -"customdesigned" programming packages for subscribers. 1996 Report, 12 FCC Rcd at 4405  83.  telecommunications services may include hightech security monitoring  S- &jthrough closed circuit security cameras, interactive and Internet access, local and longdistance telephony  &along with voice mail, paging, calling cards, and other business services tailored to the particular needs  S-of the building's tenants.v;z {O- &iԍDavid M. Conrad, This Is Living! MDU Completes Step Into the Age of Bundling, Private Cable & Wireless  {O- &Cable, Aug. 1997, at 14; Paul Kagan Associates, Inc., Private Telephony Census, Private Cable Investor, Dec. 31,  {O- &J1996, at 2; OnePoint's FullServiceMarket Entry, Private Cable Investor, May, 31, 1997, at 4; Joe Estrella, Private  {Ob- &Cable Giant Buys Houston MDUs, Multichannel News, Sept. 8, 1997, at 47. 1996 Report, 12 FCC at Rcd 44054406  83. v  Sr- : V87.` ` 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  S - &-packages of satellite transmitted programming and resell them to the SMATV operators.<^ Z z {O- &ԍTanya J. Fluette, Programming Prenuptials, Private Cable & Wireless Cable, Aug. 1997, at 24; Paul Kagan  {O- &Associates, Inc., World Satellite Network, Heifner Communications Merge, Private Cable Investor, June 30, 1997,  {O-at 5; Programming, Showtime Restructures DTH Division, Private Cable & Wireless Cable, Aug. 1997, at 40. Other SMATV  &=operators are contracting directly with satellite providers such as DIRECTV, Primestar, and Echostar to  S -purchase video programming.!=& z yO- &ԍICTA Facsimile, Nov. 12, 1997, at  4; Paul Kagan Associates, Inc., Private Cable Investor, June 30, 1997,  {O- &at 1; DIRECTV Signs Nationwide MDU Distribution Agreement, Private Cable & Wireless Cable, Sept. 1997, at 45;  {O^ - &Digital Transport Pacts, Private Cable Investor, Dec. 31, 1996 at 5; Comm Daily Notebook, Comm. Daily, Sept. 16,  {O(!-1997; 1996 Report, 12 FCC Rcd at 44044405  82. !  S\- : RW88.` ` 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 lowcost, technicallyadvanced, digital programming  &service that significantly increases channel capacity and adds special programming that is otherwise"7n=,O(O(88"  S- &-unavailable from cable systems or MMDS operators.o>z {Oh- &xԍPaul Kagan Associates, Inc., Private Cable Investor, June 30, 1997, at 1; DIRECTV Signs Nationwide MDU  {O2- &Distribution Agreement, Private Cable & Wireless Cable, Sept. 1997, at 45; Digital Transport Pacts, Private Cable  {O- &Investor, Dec. 31, 1996 at 5; Paul Kagan Associates, Inc., TelQuest Revised Transport Plan, Private Cable Investor,  {O- &ZJune 30, 1997, at 2; Monica Hogan, TSAT Outlines PrimeStar's HighPower Plans, Multichannel News, Aug. 18, 1997 at 10, 61. o Because of these features, even program packagers  &such as WSNET are contracting with DBS providers and then reselling these services to their SMATV  S- &subscribers.K?\z {O- &<ԍTanya J. Fluette, A Decade of Difference, SBCA Celebrates Ten Years of Service, Private Cable & Wireless  {O - &Cable, Sept. 1997, at 40; DIRECTV Signs Nationwide MDU Distribution Agreement, Private Cable & Wireless Cable, Sept. 1997, at 45.K SMATV providers may realize significant savings by avoiding plant and equipment  S- &investment.@^z {O - &ԍLori Parker, Tapping the Potential, DBS Offers Solutions to Private Cable Operators, Private Cable & Wireless  {O - &Cable, July 1997, at 89; EchoStar Talking to MMDS Operators, Private Cable Investor, Nov. 30, 1996 at 7; SkyView  {O`-To Deliver DIRECTV Nationwide, Private Cable Investor, Dec. 31, 1996 at 8; July 31, 1997, at 1. In particular, this arrangement makes serving smaller MDUs with fewer than 100 units  S`- &Zprofitable.A^` z {O- &ԍLori Parker, Tapping the Potential, DBS Offers Solutions to Private Cable Operators, Private Cable &  {O- &Wireless Cable, July 1997, at 89; EchoStar Talking to MMDS Operators, Private Cable Investor, Nov. 30, 1996 at  {O^-7; SkyView To Deliver DIRECTV Nationwide, Private Cable Investor, Dec. 31, 1996 at 8; July 31, 1997, at 1. 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  S-other services for their tenants.Bz {O- &xԍDavid M. Conrad, This Is Living! MDU Completes Step Into the Age of Bundling, Private Cable & Wireless Cable, Aug. 1997, at 14.  S-  : X89.` ` Real Estate Owners and Property Managers. In the last two years, Real Estate Investment  S- &Trusts ("REITS")C\Jz yO- &JԍA real estate investment trust ("REIT") is essentially a corporation or business trust that combines the capital  {OL- &iof many investors to acquire or provide financing for all forms of real estate. Frequently Asked Questions, What  {O-Is a REIT? The National Association of Real Estate Investment Trusts, at http://www.narcit.com/faqs.html#quest1. 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 communityoriented 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  S -properties.BD nz yO!-ԍUS West Comments at 1314.B  S - F.` ` Broadcast Television Service  S2- : Y90.` ` 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" 8D,O(O(88"  S- &-distribution by MVPDs.lEz {Oh-ԍSee 1995 Report, 11 FCC Rcd at 211315  112115.l During 1997, the broadcast industry experienced important changes, especially in the area of technological developments.  S- : ~Z91.` ` 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  S:- &ytelevision stations increased to 1561 as of July 31, 1997, from 1550 as of August 31, 1996.aF\:Zz {O4- &<ԍCompare Federal Communications Commission, Broadcast Station Totals as of July 31, 1997, FCC Public  {O- &YNotice (Aug. 29, 1997) with Federal Communications Commission, Broadcast Station Totals as of August 31, 1996, FCC News Release (Sept. 10, 1996).a Broadcast  S- &ltotal advertising revenues reached $31.3 billion in 1996, a 12% increase over 1995.G~z yO0 - &ԍThe Television Bureau of Advertising ("TVB") supplied this data to the Commission on October 3, 1997, which is based on information gathered from the Competitive Media Reporting's MediaWatch Service. Advertising  S- &revenues for the six broadcast networks alone reached $14.7 billion in 1996.nHZz {O`- &ԍId.  This figure represents sales for ABC, CBS, Fox, NBC, UPN and WB. In 1995, TVB reported advertising  &revenues for the four major networks (ABC, CBS, Fox and NBC) of $12.4 billion and estimated that UPN received $250 million for advertising in 1995, and that WB received $65 million. n In comparison, cable  &programming networks received an estimated $4.9 billion in advertising revenue in 1996, an increase of  S-21% over 1995.rI z {O2-ԍPaul Kagan Assocs., Inc., Cable TV Advertising, Nov. 30, 1996, at 3.r  SJ - : [92.` ` Broadcast station share of total television viewing declined, however, as a result of cable  S" - &and other MVPD competition, but it still attracts a large majority of the television audience.J" z {OL-ԍPeople's Choice: Ratings According to Nielsen, Sept. 1521, Broadcasting & Cable, Sept. 29, 1996, at 60. During  &ythe 19961997 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for  &a combined 59% share of prime time viewing among all television households (compared to 62% in the  &previous year); UPN and WB, the two newest networks, achieved a combined 9% share of prime time  S - &viewing, the same as last year.1K z {O>-ԍId.1 The most recent data available for households subscribing to cable  &jservice indicates that, even in cable homes, programming originating on local broadcast television stations  &accounted for a combined 60% share of all day viewing in the 199596 television season, while non S -premium cable networks and pay cable services achieved a combined 51% share of all day viewing.QL\ z {OX!- &;ԍNational Cable Television Assoc., Viewing Shares: Broadcast Years 1985/19861995/1996, Cable Television  {O""- &iDevelopments, Spring 1997, at 5 (citing A.C. Nielsen Co. statistics). Reported audience shares exceed 100% due to multiple set viewing.Q  S- : \93.` ` The 1996 Act directed the Commission to eliminate the restrictions on the number of  &television stations a person or entity may own or operate nationwide, and to increase the national audience"9L,O(O(88"  S- &reach limitations to 35%.M$z {Oh- &ԍ1996 Act  202(c)(1), requiring the Commission to modify its rules set forth in  73.3555 (47 C.F.R. 73.3555).  {M2- &See also Review of the Commission's Regulations Governing Television Broadcasting: Television Satellite Stations  {O- &xReview of Policy and Rules, MM Dkt. Nos. 91221 & 877, Second Further Notice of Proposed Rule Making, 11 FCC Rcd at 2165657 2 (1996). The Commission did this in March 1996.Nz {OT- &ԍSee Implementation of Sections 202(c)(1) and 202(e) of the Telecommunications Act of 1996 (National  {O-Broadcast Television Ownership and Dual Network Operations), Order, 11 FCC Rcd at 12374 (1996). Acquisitions subsequent to these  S-rules resulted in consolidation of television station ownership.Oz {O - &,ԍTelevision's Revamped Leadership, Broadcasting & Cable, June 30, 1997, at 3041, and Steve McClellan, Bud  {OR -Paxson Sets His Sights To Be Lucky Number 7, Broadcasting & Cable, June 30, 1997, at 4245. An initial wave of consolidation mainly  S- &.involved stations in the top media markets.1Pl z {O -ԍId.1 More recently, consolidations have occurred in small and  S- &midsized markets.Q z yO&- &xԍFor example, the investment and broadcast firm Hicks, Muse, Tate & Furst is attempting to consolidate its  &station ownership in small and midsized cities. Hicks is in the process of making a $1.7 billion deal to buy Lin  &Television, formerly the 22nd largest station owner with holdings almost exclusively in midsized markets, and is  {O~- &Zbuying or making deals to buy seven additional stations in small and midsized markets. David Lieberman, Small  {OH- &iCities Are TV Targets, USA Today, Aug. 14, 1997, at 3B. The article posits that the moves by Hicks may be the  &start of a second wave of consolidation in station ownership in small and midsized cities where the station prices  {O- &are lower. Lin Television has subsequently received a larger buyout offer from Raycom (New Offer Confirmed for  {O- &<Lin Television, New York Times, Oct. 21, 1997, at D9), which was subsequently topped by Hicks with the aid of  {On- &YNBC (Allen R. Myerson, Hicks, Muse, Aided by NBC, Sweetens Lin Television Bid, New York Times, Oct. 23, 1997, at D8). Overall, the number of television station owners dropped 21% to 475 in 1996 from  S`-600 in 1995.=RZ`z {O- &xԍBIA Companies, TV Station Ownership Consolidates 21% As Telecom Act Takes Effect (press release), Aug.  &13, 1997, at 1. BIA is a consulting and research company which specializes in the television, radio, and telecommunications industries.=   S- : _]94.` ` Significant developments in the broadcast field concerning Digital Television ("DTV") also  S- &occurred during the past year. In December 1996, the Commission adopted a DTV standard,S^z {OJ- &hԍAdvanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No.  {O- &87268, Fourth Report and Order ("Fourth Report and Order"), 11 FCC Rcd at 17771 (1996). See also Technical  {O-Standards for Digital Television, MM Dkt. No. 87268, Public Notice, 11 FCC Rcd at 16736 (1996).  and, in  S- &1997, issued two decisions concerning implementation of DTV service: (a) the Fifth Report and Order  S- &kestablishing service rules for DTV and limits on broadcasters' conversion to DTV;Tz {O"#- &hԍAdvanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No.  {O#-87268, Fifth Report and Order ("Fifth Report and Order"), 12 FCC Rcd at 12810 (1997).  and (b) the Sixth  St- &Report and Order setting out a table of allotments for DTV channels and assignments of spectrum for"t:DT,O(O(883 "  S- &[DTV for each broadcast station.YU\z {Oh- &YԍAdvanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No.  {O2- &87268, Sixth Report and Order ("Sixth Report and Order"), FCC 97115 (rel. Apr. 21, 1997) summarized at 62 Fed. Reg.26684 (May 14, 1997).Y Under the DTV construction schedule set out in the Fifth Report and  S- &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  S- &ten markets are required to be on the air with digital signals by May 1, 1999.eVz {O-ԍFifth Report and Order, 12 FCC Rcd at 1284041  76.e 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  S- &November 1, 1999.1W~z {O -ԍId.1 All other commercial stations are required to construct their DTV facilities by May  S- &1, 2002, and all noncommercial stations must construct their DTV facilities by May 1, 2003.Xz {Ot- &ԍId. Twentyfour television stations have voluntarily agreed to an 18month schedule for the construction of their DTV facilities. 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  SL -analog spectrum is 2006.lYZL j z {OV- &ԍId. at 1285051  99, 100. See also Balanced Budget Act of 1997 ("BBA"), Pub. L. 105-33, 111 Stat. 251  &j(1997) (codified at 47 U.S.C.  309(j)(14)(A)(B)) (establishing statutory target date for return of the analog spectrum and setting out exceptions to that deadline).l  S - : ^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  S4- &jprovision of one free, overtheair broadcast signal of at least comparable resolution to today's service.EZ|4 z {O`- &YԍSee Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt.  &No. 87268, Further Notice of Proposed Rulemaking and Third Notice of Inquiry, 10 FCC Rcd 10540 (1995);  {O- &Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No. 87 &268, Fifth Further Notice of Proposed Rule Making, 11 FCC Rcd 6235 (1996). HDTV signals will be of much  &Khigher quality than current broadcasts, with digital picture and CDquality sound. SDTV broadcasts also have the  &ipotential to be of higher quality, depending on the number of channels broadcast, and the quality of compression technology.E  &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";Z,O(O(88"  S- &yto 50 channel service that could compete with MVPDs.[$z {Oh- &ԍFred Dawson, Digital TV Picture Remains a Muddle, Multichannel News, Aug. 18, 1997, at 1, 64 (referring,  {O2- &in part, to Sinclair Broadcasting's plan in Baltimore, Maryland); John Higgins, HDTV Falling Out of Favor,  &Broadcasting & Cable, Aug. 18, at 4 (noting that five broadcasters in Atlanta could create a 1524 channel wireless cable system). At this time, however, it is unclear how DTV  S- &[will develop as a broadcast service for consumers.\z yO,- &YԍThere are a number of factors that will affect the development of DTV, including logistical and resource issues  &;regarding the construction and modification of television towers, the cost of conversion of station facilities and the  {O- &manufacture and availability of television sets with DTV capability. See, e.g., Jennifer Clarson, DTV Timetable  {O - &Turns Screws on Tower BuildOut, Television Broadcast, July 1997, at 1; Hype Definition Waiting for HDTV? Don't  {OP - &YGo Dumping Your Old Set Just Yet, Promise of Digital Television Is Fading as Broadcasters Complain About Costs,  {O - &Wall Street Journal, Sept. 12, 1997, at A1; and Joel Brinkley, 3 Networks, Set Makers In Standoff Over HDTV, New York Times, Aug. 29, 1997, at C1. 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.  S8- : _96.` ` We reported on two experimental HDTV stations in the 1996 Report.U]8 z {O-ԍ1996 Report, 12 FCC Rcd at 4409 n. 298.U 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  &yhas not announced that it has begun these broadcasts. KITV and its satellite stations in Hawaii will offer  S- & an asyet undetermined mix of HDTV and multicast SDTV.^z z {O- &ԍSee Hawaiian Stations to Launch DTV Broadcasting Dec. 1, Comm. Daily, Aug. 19, 1997, at 3. KITV in  &Honolulu has two satellite stations, KMAU in Wailuku and KHVO in Hilo, which will begin DTV broadcasts  &simultaneously. KITV converted to DTV early because it was undertaking a major upgrade of its facilities anyway.  &The Station's General Manager also stated that he believed DTV would improve signal transmission, which has been  &poor in the past due in part to Hawaii's mountainous terrain. These stations received their construction permits as  &follows: KHVODT in Hilo, Channel 18, BPCDT970821KE (Sept. 3, 1997); KITVDT in Honolulu, Channel 40, BPCDT970808KE (Sept. 4, 1997); KMAUDT in Wailuku, Channel 29, BPCDT970808KF (Oct. 21, 1997). WBTV in Charlotte, North Carolina,  Sr- &received a construction permit on October 2, 1997._rz {O- &ԍWBTVDT in Charlotte, North Carolina, Channel 23, BPCDT970919KE (Oct. 2, 1997). See also Mass  {O-Media, Comm. Daily, Oct. 9, 1997. As of December 31, 1997, seven DTV construction  SJ - &permits have been granted, including the four listed above.2`XJ ,z yO - &ԍThe others are: KHOUDT in Houston, Texas, Channel 31, BPCDT971016KE (Oct. 27, and WSBDT in  &Atlanta, Georgia, Channel 39, BPCDT971020KE (Nov. 21, 1997), and WCBSDT, New York, New York, Channel 56, BPCDT971103KE (Dec. 17, 1997).2 No station, however, has begun commercial  S" - &jDTV broadcasts.a" Lz {O$- &ԍSee, e.g., Joel Brinkley, Under Pressure, 2 Broadcasters Decide They Will Now Run HDTV, New York Times,  &Sept. 18, 1997, at D1 (regarding reconsideration by ABC and Sinclair Broadcasting of their earlier announced plans  {O%- &Yto offer multiple channels of SDTV rather than HDTV); Steve McClellan and Glen Dickson, CBS and Affiliates Talk  {Oj&- &Digital, Broadcasting & Cable, Oct. 6, 1997, at 17 (noting a planned meeting between CBS and its affiliates to discuss how much HDTV the network plans to offer and to what extent it will broadcast multichannel signals). In previous reports, we also noted that low power television ("LPTV") stations can"" <a,O(O(88 "  &yoffer multichannel video programming services on a subscription basis and that such service exists in two  S- &lareas.Vbz {O@-ԍ1996 Report, 12 FCC Rcd at 4410  94.V We also noted that such service remains extremely limited and does not appear to have a  S- &significant impact on competition in the video market.1cZz {O-ԍId.1 No further applications for LPTV multichannel  &video programming services construction permits or requests to begin service have been filed in the last year.  S- G.` ` Other Entrants  R- ` ` 1. Internet Video  Sp-  : A`97.` ` In the past two reports, we noted that software is currently available that makes realtime  SH - &and downloadable audio and video from the Internet available to a personal computer.,dH z {O- &ԍ1995 Report, 11 FCC Rcd at 2121  127, and 1996 Report, 12 FCC Rcd at 441213 99. This year, several  yO- &;other companies offer notable software packages including SummerSoft's VFone for video conferencing, WebCam  {Of- &]for placing video content on the Internet, and VPlay for viewing video content on the Internet (See  yO0- &http://www.summersoft.com/); Internet Video Services, Inc.'s netStream) for streaming video and netvideo) for  &Jdownloadable video; and Cinecom Corporation's Cine Video/Direct and Cine Video Director for PCtoPC live video  {O-(See http://www.cinecom.com)., We also reported  S - &another mechanism for PCbased video delivery for Javaenabled browsers.XeZ j z yO*- &ԍJava) is a computer language/platform developed and licensed by Sun Microsystems, Inc. OnlineTV offers  {O- &regularly scheduled content on the Internet through its Web site to anyone with a Java enabled browser. See OnlineTV Corp., http://onlinetv.com/. X Over the past year,  S - &Ladditional technologies for Internet video have emerged. WebTVbf z yO$-ԍWebTV Networks is subsidiary of the Microsoft Corporation.b recently announced plans to provide  S - &television/Internet interactivity or "hyperlinking"gZ z yO- &wԍ"Hyperlinking" is the process by which a television viewer can instantly access an advertiser's or programmer's  &Krelated Web site or product order form through the single touch of a remote control button. Warren Publishing,  {O-Cable Systems Ready for Commercial Launch of Competitor to WebTV, Comm. Daily, Sept. 16, 1997, at 4.  and video viewing over the Internet through WebTV S - &specific technologies,h >z {O- &-ԍDavid Bank, Microsoft's WebTV Unit to Introduce Process That Uses Web to Enhance TV, The Wall Street Journal, Sept. 15, 1997 at B2. and WorldGate has announced similar plans based on different technologies.1i z {O!-ԍId.1  &.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. "=*i,O(O(88"Ԍ S- : a98.` ` Last year we reported that delivery of video programming over the Internet was inhibited  S- &by the limited bandwidth and transmission delays of the Internet.\jz {O@-ԍ1996 Report, 12 FCC Rcd at 441213 107. \ 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.  S- : b99.` ` Despite the relative weakness of PCbased video provision over the Internet, many  &companies are upgrading and marketing software that renders video delivery to a computer through an  S- &Internet connection.FkZz {O -ԍSee fn. 356 supra.F 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 PCbased delivery are: (a) downloading a video file for later playback; and (b) streaming.  S - : `c100.` ` 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  &Lof the video file, a typical consumer will expend considerably more time downloading the file than it will  S - &take to "play" it.l z yO - &yԍThe downloaded file resides on the hard disk of the user's computer. The video file must be downloaded entirely before it can be played using an appropriate player or helper application. 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.  S- : 3d101.` ` "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  &La 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  S-the Internet each week.mDz yO- &+ ԍPresentation by Phil Barrett, of Progressive Networks, at the CrossIndustry Working Team meeting, Princeton,  {O-New Jersey, Aug. 6, 1997. See also http://www.real.com/corporate/index.html.  S- : qe102.` ` 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">m,O(O(88="  S- &phone lines to send messages.nz {Oh- &ԍDavid Bank, Microsoft's WebTV Unit to Introduce Process That Uses Web to Enhance TV, Wall Street Journal, Sept. 15, 1997, at B2. The RCA division of Thomson, SA has launched a product similar to  S- & WebTV which merges television, the World Wide Web, and email features.xo\"z yO- &ԍRCA's product is based on a design from NetworkComputer, Inc., a unit of Oracle Corporation which uses  {Ob- &programming from NetChannel, Inc. David Bank, Microsoft's WebTV Unit to Introduce Process That Uses Web to  {O,-Enhance TV, Wall Street Journal, Sept. 15, 1997, at B2.x Also, WorldGate has  &announced plans for a similar product which, instead of an upstream telephone connection, will use  &>advanced analog or digital settop boxes to provide full, twoway Internet and Web access over cable  S`-television networks using the television as a display device.yp\`Fz yOF - &,ԍWorldGate also allows for hyperlinking which permits the television viewer to instantly access, remotely, the  {O - &Web site of an advertiser currently on the television. Cable Systems Ready for Commercial Launch of Competitor  {O -to WebTV, Comm. Daily, Sept. 16, 1997, at 4. y  R-` `  2. Home Video Sales and Rentals  S-   S- : f103.` ` Premium and payperview cable services are not regulated because they are competitive.qj z {O-ԍSee House Committee on Energy and Commerce, H.R. Rep. No. 623, 102d Cong., 2nd Sess. (1992) at 90.  &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  SH - &video services similar to the premium and payperview services offered by MVPDs.r^H z {O- &ԍCompetition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television  {O- &Service, MM Dkt. N., 89600, Report, 5 FCC Rcd 4962, 501920 109110 (1990); 1994 Report, 9 FCC Rcd at  {Ox-750910 134135;1995 Report, 11 FCC Rcd at 21189 121. It is estimated  S - &/that 88% of all U.S. television households own at least one VCR.s "z {O-ԍConsumer Electronics & the U.S. Economy, Consumer Electronics Manufacturers Association, 1996. 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,  &jrepresenting approximately $4.5 billion, or 45%, of the $9.9 billion of estimated domestic studio revenue  S - &in 1996.tX z yO- &ԍHollywood Entertainment Corp., Filing Pursuant to Rule 424(b)(3) (filed Sept. 25, 1997), SEC File No. 333 &35351 ("Hollywood Filing"). The data in this filing are from Hollywood Entertainment, Adams Media Research, Paul Kagan Associates, Motion Picture Association of America, and the Video Software Dealers Association. As a comparison, the combined total spending for similar products distributed by cable  SX-television, satellite, and other MVPD pay television services was $7.2 billion in 1996.uXz {O"- &ԍVeronis, Suhler & Associates, The Veronis, Suhler & Associates Communications Industry Forecast 184 (1997).  S- : g104.` ` The video retail industry is highly competitive with supermarkets, pharmacies, convenience  &jstores, bookstores, mass merchants, mail order operations and other retailers involved in video tape sales  &Lor rentals. In 1996, there were approximately 27,000 video specialty stores in the U.S. selling or renting"?.u,O(O(88"  S- &Lvideo tapes.9vz yOh-ԍHollywood Filing.9 A large video tape store may carry as many as 10,000 titles, including multiple copies of  S-the more popular titles.wXz {O-ԍId. Hollywood Entertainment cites statistics for its typical Hollywood Video store.  S- : h105.` ` 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  S8- &distribution channel.1x8z {O -ԍId.1 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  S- &Land syndicated television.1y|z {O -ԍId.1 The studios determine the sequential order in which they release movies to  &Meach distribution channel based upon the order they believe will maximize their total revenue from all  S- &distribution channels combined.1zz {OF-ԍId.1 For example, movie studios have generally licensed their films first  &jto the broadcast television networks and then to basic cable television networks since the cable networks  SH - &yusually pay less than the broadcast networks.{H z {O- &KԍGeraldine Fabrikant, Time Warner is Licensing 12 Films to Cable Outlets, New York Times, Jan. 16, 1997, at D10. 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  S - &rates comparable to those paid by the broadcast networks.|Z z {O- &ԍId. See also Eben Shapiro, Turner to Premiere FirstRun Movies on Cable Network, Wall Street Journal, Jan.  &16, 1997, at B11 (indicating that the Turner Broadcasting unit of Time Warner paid "network" rates for a 12picture deal after the broadcast networks had an opportunity to bid on the movies). 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  &Lcompanies, 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.  S- : i106.` ` In the last year, Digital Versatile Disc ("DVD") technology has become available for  Sh- &consumers.}hz {O$#- &ԍJoel Brinkley, It's a Made for Television Controversy, New York Times, Oct. 15, 1997, at D1. For additional  {O#-information, see also 1995 Report, 11 FCC Rcd at 2119 122. 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"),  &Moffer 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 onscreen menu allows DVD users to switch between"@x},O(O(883"  &ymultiple language tracks and subtitles, to watch the original theatrical trailer and to explore material about  S- &>the cast, director and making of the film.g~z yO@-ԍWarner Home Video Web site, http:\\207.155.85.62/store/faq.tam.g DVD players entered the marketplace in February 1997,  S- &=although DVD with recording capability is not expected until 1998.Xz {O-ԍVeronis, Suhler & Associates, Communications Industry Forecast, Filmed Entertainment, at 201. DVD players range in price from  S- &[$499gz yO-ԍWarner Home Video Web site, http:\\207.155.85.62/store/faq.tam.g to $5000.zz {O -ԍVeronis, Suhler & Associates, Communications Industry Forecast, Filmed Entertainment, at 201. More than 50 titles have been released in this format at an approximate cost of $25  S`- &Leach.1` z {O -ԍId.1 In September 1997, Circuit City announced plans to introduce Divx, a payperview alternative  &for digital discs using a Divxenabled DVD player that is connected to a phone line to forward playing  S- &and billing information to a central computer.(z {ON- &ԍJoel Brinkley, It's a Made for Television Controversy, New York Times, Oct. 15, 1997, at D1; Jerry Knight,  {O-Coming to a TV Near You: The Disposable Video Disc, Washington Post Business Section, Oct. 6, 1997, at 5.( Divx versions of movies are expected to cost $5. The  &=consumer will be able to view the movie for a 48hour period after it is first played. After that time, the  S-consumer will have to pay an additional fee for another 48hour viewing period.1 z {OZ-ԍId.1  Rp-` `  3. Interactive Video and Data Service  SH -  S - : j107.` ` The interactive video and data service ("IVDS") is a pointtomultipoint, multipointto S - &point, short distance communication service.6 z yO$- &LԍThe Commission established a frequency allocation at 218219 MHz for IVDS in 1992, allowing a 500  &ikilohertz frequency segment to two licensees in each of the 734 cellulardefined service areas (306 Metropolitan  {O- &Statistical Areas ("MSAs") and 428 Rural Service Areas ("RSAs")).  Amendment of Parts 0, 1, 2 and 95 of the  {O~- &ZCommission's Rules to Provide Interactive Video and Data Services, GEN Docket No. 912, Report and Order, 7  {OH- &FCC Rcd 1630, 163033 (1992), on recon., Memorandum Opinion and Order, 7 FCC Rcd 4923 (1992), further  {O- &recon., Second Memorandum Opinion and Order, 8 FCC Rcd 2787 (1993). The first 18 IVDS system licenses  &(covering nine of the top ten MSAs) were awarded by lottery held in September 1993. Public Notice, Mimeo No.  &42412 (rel. March 30, 1994). These licenses were granted in March 1994. The Commission auctioned the remaining  {Ol- &Y594 MSA IVDS licenses in July 1994. Public Notice, Mimeo No. 44160 (rel. Aug. 2, 1994), erratum, Public Notice,  {O6 - &Mimeo No. 44265 (rel. August 9, 1994). For Commission's competitive bidding authority, see 47 U.S.C.  309(j).  {O!- &Licenses have been granted to all of the IVDS auction bidders that satisfied the applicable payment deadlines. See  &Public Notice, DA 95152 (rel. Feb. 8, 1995); News Release, Mimeo No. 51403 (rel. Dec. 29, 1994). The regulations governing IVDS are codified at 47 C.F.R.  95.801.863. An IVDS licensee may transmit information, product, and  S - &service offerings to its subscribers and receive interactive responses.k z {O$-ԍMobile operation is permitted. See 47 C.F.R. 95.805(e).k Although the IVDS channel width is insufficient for the transmission of conventional full motion video, IVDS services were initially planned " A,O(O(88 "Ԍ S- &[as interactive textbased supplements for the use of television viewers.z yOh-#X\  P6G;P#эAt this time, it appears that there are very few IVDS services in operation. Recently, however, nonIVDS  S- &technologies have developed some of these same supplementary, interactive, textbased services,Xz yO- &Y#X\  P6G;P#эWebTV, Wink and WavePhore are examples of firms offering textbased interactive television services which encompass, or are similar to, those originally envisioned by potential IVDS providers. 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  S`-may develop other applications consistent with the Commission's rules without Commission approval.^x`z yO - &ԍThe Commission had scheduled a second IVDS auction for February 1997 to award licenses in the 428 RSAs  &and in the MSAs for which bidders in the first auction did not satisfy applicable payment deadlines. In January  &1997, however, the Commission postponed the auction in order to "consider a petition for rulemaking and numerous  &<informal requests of potential bidders and license holders seeking to obtain additional flexibility for the service."  &Public Notice, DA 97209, Report No. AUC9613E (rel. Jan. 29, 1997). The Commission is currently considering  &requests to extend the IVDS license term from five to ten years, and to allow the same entity to own or control both IVDS licenses in a single market.^  S- H. ` ` Local Exchange Carriers  S-  : Ck108.` ` In the 1995 and 1996 Reports, we noted that LECs did not yet represent a national  S- &=presence in the MVPD market, and that they were weighing their options for entry. z {O*-ԍ1995 Report, 11 FCC Rcd at 2110  103, 1996 Report, 12 FCC Rcd at 4394  67. This is still true.  &LTo date, LECs represent a competitive presence in a small (although growing) number of markets for the  &Ldelivery 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.  S -  : l109.` ` As we noted in the 1996 Report,V z {O-ԍ1996 Report, 12 FCC Rcd at 4395  68.V 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  S - &Act;A z yO-ԍ47 U.S.C. 571(a)(1).A (2) provide transmission of video programming on a common carrier basis under Title II of the  S- &Communications Act;Az yO("-ԍ47 U.S.C. 571(a)(2).A (3) provide video programming as a cable system under Title VI of the  S-Communications Act;A4z yO$-ԍ47 U.S.C. 571(a)(3).A or (4) provide video programming by means of an open video system.Ez yO &-ԍ47 U.S.C. 571(a)(3)(4).E "BT,O(O(88"Ԍ R-` `  1. Current and Planned LEC Video Delivery   S- : m110.` ` MMDS. SBC Communications, through its Pacific Bell Video Services subsidiary (herein  S- &referred to as "SBC"), and BellSouth are the largest LEC investors in MMDS licenses and systems.tz yO-ԍBellSouth Comments at 78 and Exhibit 1, "Letter to Sen. John McCain," at 2.t  &SBC announced its initial commercial rollout of digital MMDS, under the brand name "Pacific Bell Digital  S:- &TV," in Los Angeles and Orange County in May 1997.:Xz yO2- &ZԍRecent reports indicate that these MMDS systems might be sold or subject to a management buyout. Price  {O-Colman, SBC Selling LA Wireless Cable, Broadcasting & Cable, Dec. 8, 1997, at 90. The service offers more than 120 channels of  S- &=digital video, with packages priced from $31.95 to $53.95,z {Od - &ԍPacificTelesis, Pacific Bell, Nevada Bell, Pacific Bell Digital TV Begins Initial Rollout in Southern California (online news release), May 29, 1997. and currently serves 10,000 subscribers. z yO - &ԍLetter from Link Brown, Director Federal Regulatory, SBC Communications, to Meredith Jones, Chief, Cable Services Bureau, Sept. 1997.  &Press reports indicate that SBC eventually will be able to offer digital MMDS service to five million line S- &ofsight homes.d z {O- &ԍRob Doyle, A Wireless Weapon in the Cable Wars, BusinessWeek, Oct. 14, 1996, at 105; confirmed by telephone interview with Gina Harrison, Director Regulatory Affairs, PacTel (Feb. 26, 1997). SBC also operates the 42,000 subscriber MMDS system in Riverside, California. z {O -ԍPacific Telesis Group, Pacific Telesis Acquires Wireless Cable TV Company (news bulletin), Apr. 18, 1995.  &In February 1996, BellSouth acquired Wireless Cable of Atlanta, Inc. ("WCA") and its MMDS operations  Sr- &for $46.9 million. WCA has 9,000 subscribers in the Atlanta region."rP z {Ob- &iԍBellSouth Corp., BellSouth Acquires Wireless Cable of Atlanta (news release), Feb. 12, 1997, at 1; Web site  &xat http://www.bellsouthcorp.com/proactive/documents/ render/10098.html. After upgrading the system to digital  &technology, the company is expected to provide 100 channels of video programming with access to more than 900,000 line of sight households 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,  S - &>Kentucky. BellSouth launched its digital MMDS system in New Orleans on November 19, 1997. :z {O- &KԍBellSouth Corp., BellSouth Brings New Era of Home Entertainment Service to New Orleans (news release), Nov. 17, 1997, at 1. The system offers 160 channels and offers service to 400,000 homes.  &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  S -Louisville during the second half of 1998.SX z yO"- &jԍBellSouth Comments at 7. US West in its comments names in further detail BellSouth's Florida MMDS  &holdings: all of Dade County, which surrounds Miami, Broward County, Jacksonville, Orlando, Daytona Beach, Ft. Myers, Lakeland, and Bradenton. US West Comments at 89.S "ZC,O(O(88Z"Ԍ S-  : 3n111.` ` LEC investment in MMDS has experienced some retrenchment as well. At the end of  S- &j1996, Bell Atlantic and NYNEX suspended investment in their MMDS systems.z {O@- &ԍ1996 Report, 12 FCC Rcd at 4398  72; K.C. Neel, Where's Wireless Cable? Very Up in the Air, Cable World, June 2, 1997, at 1, 46. Early in 1997, SBC  S-terminated PacTel's wireless cable service in San Diego."z {Or-ԍJoe Schlosser, Pac Bell's LowKey Digital, Broadcasting & Cable, Oct. 6, 1997, at 62.  S`-  : o112.` ` InRegion 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  S- &\services to their customers.z {Of - &ԍ1995 Report, 11 FCC Rcd at 210607  97, 1996 Report, 12 FCC Rcd at 439899  7374. See paras. 180204 for a discussion of the competitive effects of these LECowned cable franchises. The most aggressive of the LECs in this area was, and continues to be,  S- &yAmeritech. 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.  S-Forty of these cable franchises were operational as of December 31, 1997.z {OH- &ZԍThe active franchises are located in: Illinois: Glendale Heights, Naperville, Glen Ellyn, Arlington Heights,  {O- &Elgin; Michigan: Canton Township, Plymouth, Plymouth Township, Northville, Fraser, Northville Township,  &xSouthgate, Garden City, Troy, Wayne, Lincoln Park, Sterling Heights, Clinton, Mount Clemens, St. Clair Shores,  {O- &Allen Park, Utica, Melvingdale, Royal Oak, Madison Heights; Ohio: Hilliard, Upper Arlington, North Olmsted,  &Columbus, Berea, Perry Township, Worthington, Clinton Township, Riverlea, Blendon Township, Sharon Township,  &YFairview Park, Franklin Township, Mifflin Township, Norwich Township. The franchises which have not yet begun  {O- &service are located in: Illinois: Vernon Hills, Prospect Heights, Des Plaines, Schaumburg; Michigan: Warren,  &Trenton, Pleasant Ridge, Ferndale, Huntington Woods, Clawson, Berkley, Roseville, Eastpointe, Westland, Riverview;  {O- &Ohio: Marble Cliff, Valleyview, Minerva Park, Madison Township, Westlake, Jackson Township, Dublin, Prairie  &Township. Ameritech Comments, Attachment 1 at 12. Updated by Geoff Potter, Ameritech New Media, on December 31, 1997.   SJ - : Qp113.` ` BellSouth has acquired cable franchises in 18 areas in Alabama, Florida, Georgia, South  S" - &0Carolina, and Tennessee, passing 1.2 million cable households." xz yO:- &ԍThe franchises are located in: City of Vestavia Hills, Alabama; Counties of Broward, Dade, Seminole, and  &St. Johns (World Golf Village) and Cities of Coconut Creek, Orlando, and Pembroke Pines, Florida; Counties of  &Cherokee, Dekalb, and Gwinnett and Cities of Chamblee, Duluth, Lawrenceville, Roswell, and Woodstock, Georgia;  &City of Charleston (Daniel Island), South Carolina; and City of Bartlett, Tennessee. BellSouth Comments at 7,and  &-telephone interview with Tom Rawls, Vice President and General Council, BellSouth Interactive Media Services, Inc. (Sept. 10, 1997). GTE has ten competitive cable  S - &franchises, and one noncompetitive franchise.| z yO"- &ԍThe noncompetitive franchise is in Cerritos, California. The competitive franchises are: Clearwater, St.  &Petersburg, Penellas County, Safety Harbor, and Dunedin, Florida; Camarillo, Thousand Oaks, Port Hueneme,  &JOxnard, and Ventura County, California. Telephone interview with Bill Shaw, Federal Docket Manager, GTE (Sept.  &9, 1997). GTE reports that it is already signing up subscribers for the Clearwater, Florida system and plans to pass  {O%- &95,000 homes in this area. GTE Launches Its First Cable Franchise in Florida, Multichannel News, July 1, 1996,  {Ot&- &at 2. See also Local and State Actions, Warren's Cable Regulation Monitor, Aug. 26, 1996; Notebook, Television"<',O(O(&"  {OX- &ZDigest, Sept. 2, 1996. GTE plans to pass 122,000 homes in Thousand Oaks, California. Ameritech Gets 2 More  {O"- &System Approvals, CableFAX, Feb. 8, 1996. In addition, GTE owns four currently operational SMATV systems in  &-the Dallas/Ft. Worth area. These systems serve 800 video subscribers, and offer integrated telephony and video  &services, although not on the same wire. Telephone interview with Sharon Harris, Director of Regulatory Affairs, GTE (Feb. 26, 1997). SNET has received a statewide cable franchise in" DD,O(O(88 "  &kConnecticut, potentially passing 1.3 million homes, where previously it had applied to provide video  S- &dialtone ("VDT") service.Dz {O-ԍSNET Gets Statewide Cable Franchise in Connecticut, Comm. Daily, Sept. 26, 1996, at 1. SNET has begun offering 80 channels of cable service to 2,000 customers  &in Uniondale, Connecticut, and says that it plans to reach onethird of the state's homes by the end of  S- &1998, and all homes in Connecticut by 2007.)z {O - &ԍDavid D. Kirkpatrick, SNET Is Offering CableTV Service in Connecticut, The Wall Street Journal, Mar. 12,  {O -1997, at B6, and SNET Launches Cable Service in Conn., Competes with TCI, Comm. Daily, Mar. 12, 1997, at 6.) US West has elected to pursue cable franchises for its  S`- &?former Omaha, Nebraska, VDT trial.`2 z yO2- &ԍLetter from Robert H. Jackson, US West's Executive Director Federal Regulatory, to Meredith J. Jones, Chief, Cable Services Bureau, Apr. 16, 1996. Bell Atlantic is also constructing and testing an advanced  &Switched Digital Video ("SDV") system in the midAtlantic region, but rollout and service plans are  S-unclear.| z {O:-ԍSee para. 177 infra for more details on Bell Atlantic's SDV plans.|  S-  : ~q114.` ` In contrast, Pacific Bell Video Services, which, before its merger with SBC in 1997, had  S- &.obtained cable franchises for San Jose,&z yOT- &;ԍPacific Bell Video Services launched its commercial video service initially to 7500 homes in the San Jose area.  {O- &YPacific Telesis Corp., Pacific Bell Video Service Launches Commercial Cable TV Service in San Jose (press release),  {O- &Aug. 30, 1996; Pacific Telesis Corp., San Jose First California City to Get Cable TV Franchise From Pacific Bell  {O-Video Services (press release), June 25, 1996. and the surrounding Santa Clara County in Californiax z {OB-ԍLocal and State Actions, Warren's Cable Regulation Monitor, Aug. 19, 1996.x is now  Sp- &in the process of terminating these franchises.pz yO- &ԍLetter from Steven M. Harris, Vice President, External Affairs, Pacific Bell Video Services, to William F. Caton, Secretary, Federal Communications Commission, July 31, 1997. SBC is reportedly looking for a buyer for the incomplete  SH - &[system that Pacific Bell Video Services was constructing to serve these franchises.H z {O -ԍP.J. Huffstutter, PacBell Seeking Buyers for Its Cable TV System Business, Los Angeles Times, Nov. 13, 1997. SBC performed an  S - &=18month cable trial in Richardson, Texas, a suburb of Dallas,] z {OF#-ԍComm Daily Notebook, Comm. Daily, Feb. 3, 1997.] which ended on July 7, 1997. z yO$- &xԍLetter from Mark K. Armstrong, Vice President, External Affairs, Southwestern Bell, to William F. Caton, Federal Communications Commission, July 11, 1997. Sprint  &applied for cable franchises in Wake Forest and Wake County, North Carolina last year, where it had been" Ep,O(O(88 "  S- &.operating VDT trialsz {Oh-ԍFederal Communications Commission, Cable Services Action (Sprint, Inc.), FCC Public Notice (Nov. 1, 1996). but later notified the Commission that it would not seek a cable franchise in this  S-area and that it was terminating video service in Wake County.Zz {O- &ԍSee In the Matter of Sprint Corporation Request for Extension of Time and Notification of Termination of  {O-Trial, Order, 12 FCC Rcd at 4198, DA 97695 (CSB Apr. 8, 1997).  S- : Qr115.` ` OutofRegion Cable Systems. We previously reported on outofregion cable systems  Sb- &=owned by LECs,bz {O - &yԍ1994 Report, 9 FCC Rcd at 7498  107 n.305. In particular, we discussed SBC in Montgomery County, Maryland, and Arlington, Virginia, and US West in the Atlanta, Georgia, area and on US West's purchase of Continental Cablevision.Vbz {O -ԍ1996 Report, 12 FCC Rcd at 4400  75.V 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  S- &Lhave separate boards. US West plans to complete this split by mid1998.$z yO,- &YԍUS West Chairman Richard McCormick told reporters that the company realized that the telephone and cable  {O- &businesses are not converging. US West to Split Cable and Phone Businesses into Publicly Traded Companies,  {O- &Comm. Daily, Oct. 28, 1997, at 1. See also Leslie Cauley, US West's Plan to Split Up Reflects Failure in Strategy, Wall Street Journal, Oct. 28, 1997, at B4. In addition, since the 1996  S- &.Report, SBC has sold its interest in cable systems in Montgomery County, Maryland, and in Arlington,  S-Virginia.\ z yO- &ԍPrime Cable had been operating these systems for SBC, and SBC sold the systems to an investment group led  {O- &by Prime Cable and backed by Carlyle Group. Leslie Cauley, SBC Communications to Sell Its Stake In Two  {O^-WashingtonArea Cable Systems, Wall Street Journal, Sept. 29, 1997, at B6.  SN -  : $s116.` ` 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.  S - : t117.` ` The Commission has certified seven OVS operators to offer OVS service in ten areas:  S - &KBell Atlantic for Dover, New Jersey (its former VDT system);g z {O-ԍBell Atlantic OVS Certification, 11 FCC Rcd 13249 (1996).g Digital Broadcasting Open Video Systems  S`- &for Southern California;-`Dz {OD!- &ԍSee Public Notice, DA 961703 (Oct. 10, 1996). Digital Broadcasting Open Video Systems ("DBOVS")  &proposes to use LEC facilities for the transmission of video services, although it is unclear whether DBOVS will  &implement this plan. DBOVS, on September 9, 1997, refiled for certification to reflect an ownership change, and  {O#-this application has been approved by the Cable Services Bureau. Public Notice, DA 972301 (Sept. 19,1997).- MFS for systems in Boston and New York City;`z {O%- &ԍSee Metropolitan Fiber Systems/New York, Inc. (Certification to Operate and Open Video System), Consolidated Order, 12 FCC Rcd 20896 (1997). Urban Communications"`FR,O(O(88K"  S- &Transport for systems in New York City and Westchester County, New York;"z {Oh- &ԍSee Urban Communications Transport Corporation (Certification to Operate an Open Video System),  &Consolidated Order, 12 FCC Rcd 1336 (1997). Urban Communications Transport has not filed a Notice of Intent  &to begin service and does not appear to have facilities for video transport, so it is unlikely that it will be able to offer service in the near future. RCN for systems in the  S- &.Boston area (with Boston Edison Technology Group),z {O*- &<ԍSee RCNBETG, LLC, (Certification to Operate an Open Video System), Memorandum Opinion and Order, 12 FCC Rcd 2480 (1997). and in New York City; z {O - &ԍSee Residential Communications Network of New York, Inc. (Certification to Operate an Open Video System), Memorandum Opinion and Order, 12 FCC Rcd 2477 (1997). Microwave Satellite  S- &[Technologies, Inc., in New York City,f z {O - &ԍSee Microwave Satellite Technologies (Certification to Operate an Open Video System), Memorandum Opinion and Order, 12 FCC Rcd 3008 (1997). and GST Telecom in Albuquerque, New Mexico. z {O- &ԍSee GST Telecom New Mexico, Inc. (Certification to Operate an Open Video System), Memorandum Opinion and Order, DA 972504 (CSB Nov. 20, 1997). Currently,  S-Bell Atlantic in Dover,z {OB- &ԍBell Atlantic, Bell Atlantic Now Offering Video Services in Dover Township New Jersey (news release), Nov. 1, 1996. and RCN in New York and Boston are the only operating open video systems.tz {O- &ԍSteve Rosenbush, CTec Surges Ahead in Phome, Cable Markets, USA Today, Sept. 15, 1997, at 3B. RCN &BETG, however, is simultaneously seeking cable franchises in Boston and some of the surrounding communities  &where it is already certified as an OVS operator. Press reports indicate that RCNBETG will attempt to reach  {O- &xfranchise agreements in the areas but will maintain OVS service if unsuccessful. Kent Gibbons, RCN's Boston Deal  {O-Reveals OVS Pitfalls, Multichannel News, June 9, 1997, at 1, 66.  S8-` ` 2. Video Programming and Packaging  S-  S-  : u118.` ` 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: TeleTV,  &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  SK - &trade press reports indicated that the viability of both ventures was precarious.K *z {O -ԍ1995 Report, 11 FCC Rcd at 2109  100, and 1996 Report, 12 FCC Rcd at 4402  78. Since the 1996 Report,  S% - &Americast has lost two of its members, SBC and Pacific Telesis,% z yO"- &,ԍReports indicate that SBC pulled out on July 28, 1997, but this fact was not announced until October 6, 1997.  {OI#-See SBC Pullout, Video Competition Report, Oct. 6, 1997. and its plans for service have been  &scaled back. The remaining companies in Americast have announced that they will separately handle their  S - &jown programming agreements and marketing.T z {O&-ԍNew Media, Comm. Daily, Aug. 11, 1997.T Program packages are being offered under the Americast" G,O(O(88 "  S- &brand name by BellSouth on its New Orleans digital MMDS system,z {Oh- &hԍSee BellSouth Corp., BellSouth Brings New Era of Home Entertainment Service to New Orleans (news release), Nov. 17, 1997. and by Ameritech on its active  S- &cable franchises."z {O-ԍSee Ameritech New Media, Ameritech New Media Cable Franchises, Oct. 7, 1997. Atpresent, except for operations relating to Pacific Telesis' (now part of SBC) MMDS  &operations, TeleTV is not providing video programming or packaging services, and announcements of  S-cuts in staff continue.z {O- &iԍBill Carter, Former CBS President Quits Troubled TeleTV Venture, New York Times, Apr. 7, 1997, at D8. The article states that TeleTV laid off half of its workforce.  S8-  : v119.` ` As noted in the 1996 Report and paragraph 108 above, LECs do not yet present a large,  &nationwide competitive presence in the MVPD market. Some LECs continue to test various technologies  &kand 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  &0through most of the possible means available to them: MMDS, inregion and outofregion 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  S -notable competitive presence.  S - I.` ` Electric and Gas Utilities  SZ- : w120.` ` Since the 1996 Report, several utilities have announced or commenced ventures involving  &multichannel video programming distribution. QST Communications, an unregulated affiliate of Central  S - &jIllinois Light Co., is building a network for highspeed voice, data and video services in Peoria, Illinois.e\ z {O- &KԍFred Dawson, Utilities Turn Up Juice On Telecom Compete Projects, Multichannel News Broadband Week,  {O- &KOct. 14, 1996, at 81, 83 ("Multichannel News (Utilities Turn Up Juice)") (reporting that QST has begun building a network using stateoftheart optical rings). e  &RCN and Potomac Electric and Power Company ("PEPCO") announced a venture to build a fiber network  &=for local telephone and dialup Internet access services and for eventual provision of cable television and  S- &Lhighspeed data access services in the Washington, D.C., area.i\2 z {Of- &ԍMartha M. Hamilton and Mike Mills, Pepco Plans Phone, Web, Cable Service, Washington Post, Aug. 6, 1997,  &at A1. PEPCO and RCN plan to enter local telephone services as a retail reseller of services purchased on a  {O-wholesale basis from Bell Atlantic. Id. i Access Communications First Coast, a  &zpartnership 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"DHV ,O(O(88c"  S- &monitoring services in Clay County, Florida.>Zz {Oh- &wԍ Comm Daily Notebook, Comm. Daily, May 28, 1997 (incumbent cable operators in Clay County include Time  &Warner, Continental and P.D.Q. Cable TV) (UtiliCom specializes in partnerships with utilities to build telecommunications networks).> Some municipallyowned utilities are providing or plan  S-to provide cable television service in their respective areas.QZz {Ob- &ԍSee New York Times, Oct. 4, 1997, B1 (reporting plans for municipal video and telecommunications networks  &in Alta, Spencer, and Muscatine, Iowa; Tacoma, Washington; and Newnan, Georgia, and active systems in Harlan and Hawarden, Iowa, and Glasgow, Kentucky). Q  S- : Rx121. ` ` Utilities' provision of nonenergy services may extend the value of utilities' existing  &network and nonnetwork assets. Utilities, for example, use communications networks for load  S8- &management, thereby saving energy and reducing capital investment.8 z {O - &ԍRoss Kerber, Utilities Reach Out to Add Phone, Cable Service, Wall Street Journal, Jan. 27, 1997, at B1 ("The  {O -Wall Street Journal (Utilities Add Phone, Cable Service)"). They may be able to use these  &networks to provide multichannel video and other services to derive additional revenue with  S- &iproportionately little additional investment.~h z {O- &iԍSee Multichannel News (Utilities Turn Up Juice) (electric utilities' infrastructure costs are about $7,000 per  &icustomer while cable networks' infrastructure costs are about $700 to $1,000 per customer; utilities savings from  &load management can cut capital costs by 50 percent; accordingly, load management energy savings alone can almost  &justify an electric utility's cost of a hybrid fibercoax communications network, which can also be used in providing  {O- &iother communications services and video programming). See also The Wall Street Journal (Utilities Add Phone,  {O- &Cable Service) (electric and gas companies own a total of about 600,000 miles of highcapacity, fiberoptic cable and have rights of way to lay more cable).  Industry observers, moreover, consider utilities' reputations,  &Mlongterm customer relationships and billing systems to equal those of telephone companies, thereby  S- &forming an appropriate foundation for the provision of nonenergy services.z {O- &ԍSee, e.g., id.; Comm Daily Notebook, Comm. Daily, Nov. 13, 1996 (a recent consumer study comparing power,  &.telecommunications and cable television providers found that "`electric companies ranked No.1 in customer  &recognition, loyalty, satisfaction,'" quoting Paul Demerly, President, Napa Valley Consulting Group). Whether for  &production, marketing or other reasons, many utilities are pursuing video programming distribution,  {O- &Jtelecommunications and/or other communicationsrelated services. See, e.g., The Wall Street Journal (Utilities Add  {O-Phone, Cable Service).  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  S - &markets.^ ,z {O - &ԍId. As an alternative to entering into multichannel video distribution, some utilities have begun to work with  {O!- &icable operators to determine the feasibility of using existing cable plant to support utility load management. See  {O"-Multichannel News (Utilities Turn Up Juice) (five such trials are under way in various parts of the country). 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  &!settop boxes in providing energy management services to customers who subscribe to the DISH" IR,O(O(88 "  S- &Network. z {Oh- & ԍTeCom Inc., TeCom Announces Agreement with EchoStar Communications Corp. (press release), June 20, 1997 (http://www.tampaelectric.com/tecom/INNwsEchoStar.html). TeCom is an affiliate of Tampa Electric Company.  In addition, pursuant to its agreement with EchoStar, TeCom will offer to energy industry  S-firms the right to market EchoStar's DISH Network DBS services to potential subscribers."z {O- &=ԍId.; UTC Report: Highlights of Recent Video and Cable Related Activities of Electric and Gas Utilities,  {Od-October 1996August 1997.  S- III.MARKET STRUCTURE AND CONDITIONS AFFECTING COMPETITION`(#(#  S8-A.` ` Horizontal Issues in Markets for Video Programming  S- :  y122.` ` 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  &jupstream (or "wholesale") market for acquisition of video programming. We first identify the market for  SH - &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.   R - ` ` 1. Market Definition (#`   S2-  : #z123.` ` Our approach to market definition is the same as in prior reports. As we explained in the  S - &k1996 Report,V ~z {O(-ԍ1996 Report, 12 FCC Rcd at 4418 115.V 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  S- &jrelevant geographic market. In the downstream market, we use multichannel video programming services as a starting point for the definition of the relevant product.  SD-  : #{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"  S- &of the various service providers.Hz {O-ԍId. at 4418 117.H 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  &zcustomers 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  &0relative 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,"J,O(O(88"  &>and security. Data limitations, however, limit our ability to define the markets more rigorously or to measure the market shares of noncable MVPDs in each individual local market across the country.  S- : |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  S - &Mbehavior among buyers will be successful. z yO` - &ԍConcentration alone is not sufficient to determine whether a market is noncompetitive. If it is easy for new participants to enter the market, for example, highly concentrated markets may behave competitively. The more concentrated the market, the more likely that buyers will possess some market power (or "monopsony" power).  R -` `  2. Concentration in Local Markets  S0- : }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  S- &barriers to entry by potential MVPDs. z {O- &ԍ1994 Report, 9 FCC Rcd at 7541 201; 1995 Report, 11 FCC Rcd at 212324 132; and 1996 Report 12 FCC Rcd 4419  118. 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 longterm exclusive contracts at a time when alternative service providers  Sh- &were not available.&hzz {O- &ԍSee, Telecommunications Services Inside Wiring, Customer Premises Equipment, In the Matter of  {OL- &wImplementation of the Cable Television Consumer Protection and Competition Act of 1992: Cable Home Wiring, CS  &Docket Nos. 95184 and 92260, Report and Order and Second Notice of Proposed Rulemaking, FCC 97376  {O-258261 (rel. Oct. 17, 1997) summarized at 62 Fed. Reg. 61065 (Nov. 14, 1997). As a result, there may be a tendency for prices to rise above competitive levels and  &yfor product quality, innovation, and service to fall below competitive levels in both household and MDU markets.  S-  : ~~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 noncable 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  &yidentical and reflects the market shares that each MVPD holds on a national basis. A second measure we"(Kh ,O(O(88l"  S- & use is the HerfindahlHirschman Index ("HHI").^xz yOh- &ZԍThe HHI is a measure of horizontal concentration that is calculated by summing the squared market shares  &of the sellers in a market. It is a measure of concentration that takes account of the entire firm size distribution.  &Its value falls with increasing numbers of firms but rises as the degree of inequality among firms increases. The  &United States Department of Justice ("DOJ") and Federal Trade Commission ("FTC") regularly use the HHI to  &evaluate the effects of proposed mergers on competition. DOJ and FTC consider markets with an HHI below 1000  &Jas "unconcentrated;" markets with an HHI between 1000 and 1800 as "moderately concentrated;" and markets with an HHI above 1800 as "highly concentrated." ^ 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 noncable MVPDs and to provide a point of reference for assessing competition among MVPDs over time.  S8- : o128.` ` 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  &Lsubscribers to cable and noncable MVPDs found in Table E1, a surrogate for measuring the availability  S- &and attractiveness of various options in the hypothetical local market.z yOh- &hԍIn this hypothetical local market, we assume that all MVPD services are in the product market and all MVPDs are in the geographic market. This may or may not be the case in specific local markets. In this hypothetical local market,  &Mas of June 1997, the shares of the market participants, grouped by competing technologies, would be  Sp- &roughly: cable, 87.1%; DBS/HSD, 9.8%; SMATV, 1.6%; and wireless cable, 1.5%.p` z {Op- &ԍSee Table E1. DBS and HDS are combined since they both represent directtohome ("DTH") satellite services. Although some  &noncable 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  &jof cable only decreased slightly from 87.7% in December 1996 to 87.1% in June 1997. Using the market  S - &shares for each technology, the estimate of the HHI is 7567, a decrease from the HHI of 7898 for 1996.C z yO*- &JԍThese figures were calculated using the "percentage of MVPD total" figures found in Table E1 of this report.  &[To begin tracking the impact of overbuilders, the total number of cable subscribers reported in Table E1 was  &reduced by the number of subscribers served by overbuilders and a separate competing group of overbuilders was  &added. The number of subscribers served by overbuilders increased from approximately 200,000 in 1996 to almost 520,000 by June 1997. C  S - &Nevertheless, an HHI of 7567 remains several times greater than the 1800 threshold at which a market may be considered "highly concentrated."  R0-` ` 3. Competitors Serving Multiple Dwelling Unit Buildings   S- : 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.,  Sh- &SMATV/DBS service), to provide video programming to consumers residing in MDUs.RXhjz yOr%- &ԍMDUs comprise a wide variety of high density residential complexes, including high- and low-rise rental  &buildings, condominiums, and cooperatives. Townhouse and mobile home communities, nursing homes, hospitals and hotels may share in some aspects of this market. R The MDU"hL,O(O(88s"  &0market is substantial. As of 1990, there were almost 31.5 million MDUs in the U.S., comprising  S- &approximately 28% of the total housing units nationwide. z yO@- &ԍLiberty Comments in CS Docket No. 95184 (inside wiring) at Tables 14 (citing 1990 data from the Bureau  &hof the Census). There are more than 13.2 million units in MDUs with more than ten units. OpTel, Inc., Form 10K  &w(filed Nov. 26, 1997, for year ending August 31, 1997), SEC file 33324881 ("OpTel 10K, Nov. 26, 1997") (citing 1990 Bureau of Census data). The emergence of a distinct MDU market  S- &is reflected in Section 301(b)(2) of the 1996 Act,z yO-ԍ47 U.S.C. 543(d) (allowing cable operators' nonuniform, nonpredatory pricing to infranchisearea MDUs). which excepts cable bulk discounts to MDUs from  &the uniform rate provision of Section623(d) of the Communications Act, thereby allowing cable operators  S`- &Kmore flexibility in competing with other MVPDs for MDU subscribers.P`@z {O@ -ԍSee, e.g., US West Comments at 14.P The Commission's recent Order  S:-concerning MDU inside wiring is designed to facilitate competition in this market.\^:z {O - &ԍCable Home Wiring, CS Docket No. 95-184 and MM Docket No. 92-260, Report and Order and Second  {Ov- &Further Notice of Proposed Rulemaking ("Inside Wiring Order"), FCC 97376 (released Oct. 17, 1997). See paras.  {O@-219221 infra.\  S- : D130.` ` Traditionally, cable and SMATV operators provided MVPD services to MDU  S- &subscribers.Z z {OZ- &KԍSee, e.g., US West Comments at 13 (US West's cable subsidiary, MediaOne, serving areas in and outside US  &West's telephone service area, faces competition from more than a dozen SMATV providers in Florida, more than 30 in Georgia, a dozen in California, approximately six in Illinois, and more than five in New England). 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  &zunified 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  S - &programming to MDUs directly.> z yO<-ԍDIRECTV Comments at 9.> In addition, entities with large numbers of subscribers in multiple  &properties across different states, such as national property management firms, are beginning to negotiate  &Mfor multichannel programming services on a nationwide basis, bringing additional bargaining power to  S -their negotiations with MVPDs.A z {OT!-ԍId. at 1314.A  S- : 131.` ` Firms Serving Primarily MDUs. RCN, OpTel and Cable Plus each serves high density  S- &areas and MDUs, generally using distribution systems that are not subject to cable franchise regulations.nX<z yOp%- &yԍUnless indicated otherwise, RCN, OpTel and Cable Plus information in this MDU discussion is from the  &Zfollowing sources, respectively: RCN Corp., Filing 1012G, SEC File No. 00022825 (filed Sept. 5, 1997) ("RCN"',O(O(Q&"  &Filing 1012G, Sept. 5, 1997"); OpTel, Inc., Form 10K (year ending August 31, 1997), SEC File No. 33324881  &(filed Nov. 26, 1997) ("OpTel 10K, Nov. 26, 1997"); Telephone interview with Darla Norris, Vice President &Finance, Cable Plus (Oct. 24, 1997) ("Cable Plus Interview"). These firms generally distribute video programming  {O- &over SMATV systems, id.; OpTel 8K, Aug. 4, 1997; see paras. 8283 supra (discussing inapplicability of franchise  &requirements to SMATV; use of 18 GHz pointtopoint microwave transmission and wire connections of multiple  &-owners' adjacent properties to connect MDU systems without crossing public rights of way). RCN also operates  &ZOVS systems and cable systems, RCN SEC Filing 1012G, Sept. 5, 1997, and OpTel also operates a cable system,  {O- &OpTel Form 10K, Nov. 26, 1997. See paras. 116117 supra (discussing OVS operators, including RCN);   {O- &J653(c)(1)(C), 47 U.S.C. 573 (franchising requirements not applicable to OVS); see also 1996 Report, 12 FCC Rcd at 43645,43956, 44001 6, 689, 76 (discussing OVS).n "M. ,O(O(88"  &RCN is deploying fiber optic networks to deliver these services, and, as of June 1997, had connected 310  S- &.buildings in New York City and 52 buildings in Boston to its facilities.`z. z yO - &ZԍRCN SEC Filing 1012G, Sept. 5, 1997. RCN has announced that it will provide MVPD services in Boston  &through franchised cable systems. RCN's activities in Boston are in partnership with Boston Edison Company. RCN  &,intends to serve commercial accounts on or near its networks. RCN recently announced that it plans to develop an  {O- &advanced fiber network in the Washington, D.C., area through a joint venture with PEPCO. Id.  See also Testimony  &Kof Richard S. Hahn ,Vice President,Boston Edison Company, before the United States House of Representatives,  &Commerce Committee Subcommittee on Telecommunications, Trade, and Consumer Protection, July 29, 1997, 1997 WL 442601 (F.D.C.H.). ` RCN currently has two video  &Lheadends within its advanced fiber optic networks in New York City and Boston, and uses 750 MHz of  S- &jeach system's available bandwidth for a video distribution capability of up to 110 video channels."pz yO- &ԍRCN SEC Filing 1012G, Sept. 5, 1997. RCN has announced that, through an arrangement with DIRECTV,  &RCN customers in MDUs will have access to a combined 250 channels of programming service including exclusive  {O(- &ysports programming. See RCN/DIRECTV News Release, October 2, 1996; DIRECTV Reply Comments in IB Docket No. 9559.  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,  S-including DS-1 and digital data.Zz yO - &ԍRCN SEC Filing 1012G, Sept. 5, 1997. For voice services, where fiber extensions are not yet available,  &interim facility connections are provided by leasing special access facilities from MFS/WorldCom or the incumbent  &MLEC. Within a building (or small grouping of buildings), a voice service hub is established by installing an  &Integrated Digital Loop Carrier ("IDLC") device that acts as the point of interface between the backbone facility and  &the intra-building wiring. Internal wiring (twisted pair copper cable) connects the IDLC to the customer premises  {O-and the customer-owned telephone equipment. Id.  S- : 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  Sp- &Lassistance from the building management.1pz {O#-ԍId.1 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" Nf,O(O(88 "  &building or institution as an entry tactic, although future agreements are likely to provide for the purchase  S-of services on an individual basis.1z {O@-ԍId.1  S-  : o133.` ` OpTel supplies SMATV multichannel video programming and, increasingly, telephone  S`- &Kservices to residents of MDUs under buildingentry agreements with MDU owners.|Z`Zz yOZ- &.ԍOpTel 10K, Nov. 26, 1997, at 4. For regulatory purposes, OpTel "is considered to be a private cable  &television operator in most of the markets it serves. Private cable television operators deliver services to consumers  {O-without hardwire crossings of public rights of way." Id. | 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  S- &lines.1|z {O -ԍId.1 OpTel seeks to offer a complete package of MVPD and telecommunications services and intends  &to continue its investment in bidirectional fiber optic and microwave networks, believing this to be the  S-optimal means for delivering both MVPD and telecommunications services.:z {OF-ԍId. at 4, 9.:  SH - : 134.` ` OpTel provides video programming to MDUs through 18 GHz buildingtobuilding  &=microwave and fiber optic networks, and through non-networked SMATV systems, generally providing  S - &up to 72 channels of video programming.& z {O8- &ԍId at 4. As of August 1997, OpTel had 35 18 GHz networks and one fiber optic network in service in 11  {O-metropolitan areas. On average, 54% of the units passed by OpTel were served by OpTel networks. Id.& The company provides shared tenant services ("STS")  &Ntelephone services through private branch exchange ("PBX") switches. OpTel intends to convert  &Lsubstantially all of its SMATV systems to 18 GHz or fiber optic networks by the end of fiscal 1999, to  &yprovide 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  S0- &2002.0 z {O- &ԍId. at 5, 78, 11. Optel provides local and long distance services as a CLEC in Houston through a central  &office switch, its first, installed in October 1997. OpTel plans soon to expand its CLEC services to replace its  {O^- &remaining STS/PBX services in Houston, and to route the additional traffic through its central office switch. Id.  &OpTel currently operates in and plans to remain in Houston, DallasFt. Worth, Chicago, Phoenix, San DiegoLos  &Angeles, San Francisco, Denver, MiamiFt. Lauderdale. The company plans to divest its Tampa and Austin  {O-operations.  Id. at 79. The company intends to modify its existing networks, currently used to provide video  &jprogramming, 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  &jconfiguration if feasible and to supplement its microwave plant if necessary, including through the use of"Oz,O(O(88"  S- &other available radio spectrum for telecommunications services.z {Oh- &ԍId. at 11. OpTel has commenced frequency coordination for such radio spectrum in Dallas. OpTel plans to  &Zsupplement its own switching facilities, fiber optic network and microwave networks with switching and network  {O- &I capacity leased from other companies. Id. (noting also that the implementation of the company's telecommunications  &kplans "will depend in some measure on the speed and manner in which states implement (i) the liberalized  &hcompetition provisions of the Telecommunications Act, and (ii) the establishment of the interconnection and tariff requirements that the Telecommunications Act imposes on the incumbent LEC.")  The company also plans to offer  S-Internet access, intrusion alarm, utility monitoring, PCS, cellular and paging services.7Dz {O-ԍId. at 9.7  S- : P135.` ` OpTel provides services principally under long-term rightofentry 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  &jservice agreements, provide that OpTel will be the exclusive provider of local telephone service to MDU  &zresidents, 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  Sp-the LEC for telecommunications services.&pz {O- &ԍId at 4, 1416. The weighted average unexpired term of OpTel's cable television rights of entry was  {O- &;approximately eight years as of August 31, 1997, Id at 4. Agreements affecting viewers' ability to install receiving  &equipment may be subject in certain circumstances to the Commisson's rules limiting restrictions on overtheair  {OB-reception devices. See paras. 212218 infra.   S - : 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  S - &.services.= z yO4-ԍCable Plus Interview.= 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  S - &receive the local broadcast signals.1 T z {Ot-ԍId.1 Cable Plus generally signs exclusive, long-term (approximately 15  &year) agreements with apartment owners (many of whom have extensive real estate holdings), who then  S0- &zoffer Cable Plus' services to residents.10z {O-ԍId.1 Cable Plus plans to serve primarily concentrated clusters of  S-multifamily housing units in growing areas.xz {O "- &<ԍM. Sharon Baker, Cable Plus gets $55 M, plus allies, Puget Sound Business Journal, Sept. 5, 1997, Vol. 18, No. 17.  S- : 137.` ` Cable Operator Services to MDUs. Traditional franchised cable firms continue to compete  &Lfor 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 cablemodem Internet access services"BP,O(O(88"  S- &to the first of 25,000 MDU residents in Irvine, California, in the Fall, 1997.z {Oh- &wԍP.J. Huffstutter, Cox Bundling Phone, Internet Services for Irvine Renters, Los Angeles Times, Sept. 26, 1997, at B5. Some cable firms offer  &\price discounts for MDU service and enter into MDU service agreements providing various forms of exclusivity.  S`- : 138.` ` LEC Service to MDUs. Several LEC affiliates report that they are providing MVPD  &yservices 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  S- &operator.A"z yO -ԍAmeritech Comments at 29.A 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 onehalf, have  &cited their exclusive agreements with other cable operators as the reason for failing to contract with  Sr- &Ameritech.1rz {O-ԍId.1 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  S" -objects to the installation of redundant wiring.8" Dz {O-ԍId. at 31.8  S - : C139.` ` DBS Service to the MDU Market. DIRECTV, USSB, EchoStar and Primestar have  S - &Lrecently begun to focus on the MDU market.& z {O"- &ԍMonica Hogan, DIRECTV Signs Miss. MDU Deal with Wireless One, Multichannel News, Sep. 8, 1997, at  {O- &.66; Monica Hogan, TSAT Outlines PrimeStar's HighPower Plans, Multichannel News, Aug. 18, 1997 at 61;  {O- &DIRECTV Comments at 9; See para. 88 supra. MMDS and SMATV firms supplying DBS programming generally also provide local programming to their subscribers. For example, DIRECTV has entered into agreements to  &provide programming service directly to 150 private cable operators and has a nonexclusive agreement  &=with WSNet, a distributor of satellite programming packages, to make DIRECTV programming available  S4- &jnationwide to WSNet's customer base.T4 z yO-ԍPrivate Cable Investor, July 31, 1997, at 1.T 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  S- &fewer than 100 units.1T z {O-ԍId.1 Primestar also plans to provide programming to SMATV operators and other  S-interests, either as the sole program provider or as a supplementary program provider.z {OB"-ԍMonica Hogan, TSAT Outlines PrimeStar's HighPower Plans, Multichannel News, Aug. 18, 1997 at 61. "lQx,O(O(88"  R-` ` 4. Regional Concentration of Cable Systems  S- : 140.` ` Clustering, a process by which MSOs consolidate system ownership within separate  S- &zgeographical regions,z {O- &ZԍDavid Waterman and Andrew A. Weiss, Vertical Integration in Cable Television, The MIT Press (1997) at 42. can have both procompetitive and anticompetitive effects. In response to the  S`- &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  S- &Leliminate system redundancies and to attract more advertising."z {O -ԍUpbeat WCS Panel Draws 100 Independent Operators, Independent Cable News, Jan. 1997, at 1, 3. 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  S- &franchise areas. This assures advertisers that they will get extensive regional market coverage.z {O - &ԍJoseph B. Cahill, TCI Sets Its Sights on Chicago, Eyes MediaOne Deal, Electronic Media, Aug. 18, 1997, at 4, 36. Finally,  &Lregional clustering may also enhance MSOs' ability to compete successfully in the future with LECs and  SJ - &Mmajor electric utilities as providers of data transmission and local telephone services.J z {O-ԍNCTA Reply Comments at 2930; NCTA Comments at 3738; See 1996 Report 12 FCC Rcd at 4428  138. 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)  S -as "full service providers" in these markets.e\ z {O- &ԍNCTA Comments at 3738; Price Colman, Charter on the Rise, Broadcasting & Cable, Jun. 16, 1997, at 44;  {O- &Upbeat WCS Panel Draws 100 Independent Operators, Independent Cable News, Jan. 1997, at 1, 3; See 1996 Report, 12 FCC Rcd at 442728  13738. e  S - : 141. ` ` On the other hand, clustering raises certain anticompetitive concerns. Clustering eliminates  SZ- &operators of adjacent cable systems as potential overbuilders.VZ z {O-ԍ1994 Report, 9 FCC Rcd at 7519 154.V These operators would be relatively low &cost potential wireline overbuilders because they could likely use their existing headend and parts of  &Ltheir 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  S- &jcapital investment of a cable system.9V z {O -ԍId. n. 421.9 Overbuilding from adjoining franchise areas, however, has rarely  S- &>been a significant means of entry into MVPD markets.Yz {O#-ԍ1995 Report, 11 FCC Rcd at 2078 44.Y 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.  S- : 142. ` ` System Mergers and Acquisitions.  Since the last report, cable MSOs have undertaken or  &yannounced numerous system mergers, acquisitions and divestitures with the objective of creating regional"Rz,O(O(883"  S- &"clusters" of contiguous cable systems.sz {Oh-ԍId. at 2128 142; 1996 Report, 12 FCC Rcd at 4427  137.s In 1996, there were more than 100 cable transactions. Most  S- &of these transactions resulted in the expansion of existing clusters of cable systems.=Zz {O-ԍ See Table E2.= These transactions  S- &totalled approximately $16.3 billion, and covered 7.8 million subscribers.z {O<-ԍPaul Kagan Associates, Inc., Cable TV System Sales 1996, Cable TV Financial Databook, 1996, at 162. A similar pattern seems to  &be emerging in 1997. In the first nine months of 1997, cable transactions have been proposed which, if  S`- &[consummated, will total more than $13.2 billion and cover approximately 6.9 million subscribers..`~z {O~ - &KԍSee Table E7. Table E7 also shows that there have been an estimated 80 mergers, acquisitions and trades  {OH -that have been announced or consummated that would affect nearly 7.2 million subscribers since the 1996 Report.. TCI is involved in proposed transactions totalling $9.4 billion or 71.2% of the $13.2 billion total.  S-  : 143.` ` The number of clusters serving at least 100,000 subscribers increased from 137 at the end  S- &of 1995 to 139 at the end of 1996.<z {O:-ԍSee Table E2.< In 1995, these clusters accounted for about 31.2 million or 50.2%  &of the 62.1 million cable subscribers. In 1996, these clusters included 33.6 million subscribers, and  &represented 52.9% of the 63.5 million cable subscribers. Among the five largest MSOs, Time Warner had  &[31 clusters, TCI had 30 clusters, MediaOne had 14 clusters, Comcast had nine clusters and Cox had nine  S - &clusters.Q\ l z {O,- &ԍPaul Kagan Associates, Inc., Major Cable TV Systems Cluster, Cable TV Financial Databook, 1997, at 3941;  {O- &zTop Cable System Operators, Cable TV Financial Databook, 1997, at 1718; and Suburban Cable Web site http://www.suburban.com/website. Q Smaller MSOs continued to expand their clusters too. z {OP- &ԍ1995 Report, 11 FCC Rcd at 2129 143; Paul Kagan Associates, Inc, Rural/Small MSOs Charge Spurred by  {O-Private Equity Partners, Cable TV Investor, Dec. 18, 1995, at 7. Jones Intercable (with 1.5 million  &lsubscribers) had four clusters of 100,000 or more subscribers, and Suburban Cable (with 1 million  &\subscribers), Charter Communications (with 0.9 million subscribers), Marcus Cable (with 1.3 million  S -subscribers) and FrontierVision (with 0.4 million subscribers) each had two clusters.q z yO4-ԍPaul Kagan Associates, Inc., Cable TV Financial Databook, 1997, at 3941.q  SX- : 144.` ` Although the total number of clusters did not increase significantly since the last report,  &there appears to be a trend for clusters to be increasing in size. This tendency toward larger clusters may  S- &reflect greater economies of scale.n|z {O$"-ԍSee Table E2 for the total number of clusters and subscribers..n 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%. "S,O(O(88q"Ԍ S-  : Pԙ145.` ` The plans of TCI, Time Warner, and the other large MSOs to consolidate and cluster their  S- &systems, if realized, are likely to have a significant impact on the cable industry.z {O@- &ԍPrice Colman, Station & Cable Trading, Cable's $23 BillionPlus Year, Broadcasting & Cable, Feb. 3, 1997, at 20. TCI, in particular, has  &proposed a number of consolidations with several of the largest MSOs this year in furtherance of a  S- &clustering strategy."z yOJ-ԍTable E6 summarizes the major acquisitions and joint ventures that have been announced by TCI this year. For example, TCI plans to sell its systems in the New York City area with 820,000  &subscribers to Cablevision in exchange for a onethird equity interest in Cablevision. If consummated,  &the proposed transactions between TCI and Cablevision's New York area cluster will result in the nation's  S- &largest cluster, with 2.5 million subscribers.uz yOb -ԍWCAI Comments at 4; Bell Atlantic Comments at 45; BellSouth Comments at 45.u 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  Sp- &serving 466,000 subscribers in those three states.vpBz yOR-ԍWCAI Comments at 4; BellSouth Comments at 45; Bell Atlantic Comments at 45.v Mediacom, for example,g pz yO-ԍTable E7 reports consummated and announced cable transactions.g 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  S -of the top 20 cable MSOs.V  b z {O-ԍMass Media, Comm. Daily, Sept. 3, 1997. V  S - : 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  S0- &.communities outside of the major urban regions, including rural areas. &0 z {O- &ԍPaul Kagan Associates, Inc., GiantSized Deals Generate Wall Street Business, Cable TV Finance, June 30,  {O- &i1997 at 8; Price Colman, Station & Cable Trading, Cable's $23 BillionPlus Year, Broadcasting & Cable, Feb. 3,  {OX- &J1997, at 20; and Kent Gibbons, MSO's Clustering Efforts Extend Beyond Top 10, Multichannel News, Sept. 1, 1997, at 31. Like the larger MSOs, the mid S- &zsize MSOs are focusing on specific markets.1 z {O -ԍId.1 For example, CableVision Communications, formerly  S- &Rifkin & Associates, plans to acquire more systems with approximately 12,000 subscribers. tz {O"-ԍCharles Paikert, Riftin Rolls Out New Look, Plans and Services, Multichannel News, July 7, 1997, at 26. Insight  &Communications ("Insight") is also acquiring cable systems in communities outside the major metropolitan markets.  S@- : 147. ` ` System Trades. Systemforsystem "swaps" or trades between MSOs, both large and small,  &continue. Swaps enable MSOs to increase their regional clusters while minimizing the financial outlays"T ,O(O(88q"  S- &and avoiding capital gains taxes.z {Oh- &ԍPrice Colman, Station & Cable Trading, Cable's $23 BillionPlus Year, Broadcasting & Cable, Feb. 3, 1997,  {O2-at 20. See 1996 Report, 12 FCC Rcd at 442728 13738. Since the 1996 Report, the largest proposed systemforsystem swaps  &[are between TCI and Time Warner, Time Warner and Cox, Time Warner and Marcus Cable, and Cox and  S- &jInsight.$z {Ov- &JԍSee Table E7. See also Paul Kagan Associates, Inc., Cable TV Investor, Apr. 30, 1997, at 11; Aug. 22, 1997, at 8; Sept. 10, 1997, at 4; Cable TV Finance, July 31, 1997, at 8. 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  Sb- &systems in Illinois.b~z {O -ԍTCI and Time Warner To Set Partnerships, Swap Some Systems, Wall Street Journal, Sept. 3, 1997, at B8. 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  S-eight states.z {Or-ԍKent Gibbons, Cablevision Sells Ill. System to Unload Debt, Multichannel News, Aug. 18, 1997, at 12.  Sr- : 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  &0removing 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  S - &venture by adding 95,000 TCI subscribers. z {ON- &ԍTime Warner (press release), Sept. 3, 1997; and TCI and Time Warner To Set Partnerships, Swap Some  {O-Systems, Wall Street Journal, Sept. 3, 1997, at B8. TCI has also agreed to form a partnership with TCA Cable  &kTV. 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 $45 million in  Sl-debt.^l z {O - &ԍTeleCommunications Inc. Venture with TCA Cable Is Part of Restructuring Effort, Wall Street Journal, Aug.  {O - &18, 1997, at B7; At Press Time, TCI, TCA Link Up, Electronic Media, Aug. 18, 1997, at 40; Swaps and Partnerships:  {O!-TCI Communications, Inc. and TCA Cable, Cable World, Aug. 25, 1997, at 45.  SD-   R-XX` `  5. Concentration in the National Market (#`  S-  : 149.` ` The 1992 Cable Act directs the Commission to place limits on the concentration of  S- &<ownership of cable systems at the national level.$z yOh'-ԍ1992 Cable Act,  11 (c) amending, Communications Act, 613, 47 U.S.C. 533. This direction reflects concerns that such concentration"U,O(O(88"  &jcould 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  S- &\programming distribution capacity or subscribers on a national level,z yO- &ԍMany industry sources believe that 15 to 20 million subscribers are needed for longterm success. See paras.  {O-155 and 165 infra. 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.  S- : 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  S- &in national concentration figures, and not just cable MSOs and cable subscribers."z yOZ - &ԍSince the Commission's inception of efforts to track cable industry MSO concentration, we have recognized  yO" - &ythat the specific characteristics of this market render a conventional analysis inappropriate. We provide the  &information again this year (summarized in Tables E3 and E4) simply for purposes of comparison to similar  &concentration figures provided in years past. Using this approach, the percentage of cable subscribers served by the  &Yfour largest MSOs remained approximately the same at 62.3%, with TCI's subscriber share at 29.3%, Time Warner's  &subscriber share at 18.3%, MediaOne's subscriber share at 8.0%, and Comcast's subscriber share at 6.7%.  &Examination of changes in the national HHI for cable MSOs reveals a slight increase in concentration because the  &increase in market share by TCI and MediaOne was greater than the loss in market share by Time Warner and  &Comcast. The combined shares of all MSOs indicate a HHI of 1379 in 1997, a figure that increased from 1326 in 1996.  As noncable 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  S - &kmultichannel video programming, serving 87% of total MVPD subscribers.; z {Oz-ԍSee Table E1; Significantly, the rapid  &growth of DBS systems, such as DIRECTV/USSB and Primestar, has resulted in both being among the  S - &top ten MVPDs nationwide.= L z {O-ԍSee Table E5. = However, despite the inroads noncable MVPDs have made in subscriber penetration, the largest cable MSOs remain the largest MVPDs.  SX-  : 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  S-subscribers.az {O^!-ԍ1996 Report, 12 FCC Rcd at 4499, App. F, Table 3. a These four firms now serve 54.3% of all MVPD subscribers nationwide.<pz {O"-ԍSee Table E5.<  S- : B152.` ` 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  &ybecause MVPD programming networks are often purchased on a "persubscriber" basis. The nationwide"@V,O(O(88c"  S- &purchaser MVPD or HHI is 1166 "moderately concentrated" under the Merger Guidelines.pz {Oh-ԍTable E5. The Merger Guidelines are summarized at fn. 462 supra.p The HHI  S-is 153 points higher than the HHI of 1013 reported in last year's report._Zz {O-ԍ1996 Report, 12 FCC Rcd at 4499, App. F, Table 3._  S- : }153.` ` The above discussion and supporting tablesIz {O-ԍSeeTables E3, E4, and E5I 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  S- &discussed in the preceding sectionI~z {O. -ԍSee para. 140 supra. I involving systems owned or controlled by TCI that will be transferred  S- &to or managed by another system operator with a large cluster of other systems in the region.Ez {O-ԍSee Tables E6 and E7.E These  &transaction have been articulated by TCI as being essentially a divestiture of systems, reducing TCI's level  S- &of system ownership by onethird. Xz yO- &ԍ October 10, 1997 testimony of Leo Hindery, President of Telecommunications, Inc., before the Antitrust,  &Business Rights and Competition Subcommittee of the Senate Judiciary Committee ("When we have finished, TCI will have reduced its size by about 1/3 and it will no longer be the nation's largest cable operator."). 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  &yTCI is transferring systems with 820,000 subscribers to Cablevision and is receiving in return a onethird  S - &/equity interest in Cablevision.! z yO- &ԍAccording to the press release announcing this transaction, TCI would acquire shares representing 33% of  &Cablevision's total outstanding shares and would receive two seats on the Cablevision board of directors. The Dolan  &family interests, however, would continue in control of Cablevision. In the past, in several situations of significant  &<size involving TCI, the Commission has been able to conclude that major ownerships held by TCI did not create  {O- &jattributable interests, at least for some purposes, because they were passive or noncontrolling in nature. See  {Ol- &wApplications of Roy M. Speer and Silver Management Company, 11 FCC Rcd. 14147 (1996) (TCI nonvoting equity  & interest in broadcast station licensee not attributable for purposes of cabletelevision broadcast station crossownership  {O- &rule); Turner Broadcasting System and Time Warner, 11 FCC Rcd 19595 (1996) (Approximately 9% nonvoting interest of TCI in Time Warner not attributable for purposes of the horizontal ownership rule). 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.  S - : 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  &yresult 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""W!,O(O(88"  S- &[horizontal ownership rule adopted by the Commission pursuant to the 1992 Cable Act."Xz yOh- &ԍ47 C.F.R. 76.503. The rule, it should be emphasized, limits an operator to 30% of all homes passed  &nationwide through cable systems. The data discussed above are generally in terms of subscriber rather than homes passed. While some correlation exists between subscribers and homes, they are not exactly parallel. This rule has  S- &been voluntarily stayed by the CommissionL#\z {O`- &,ԍSee Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act  {O*- &of 1992, Horizontal and Vertical Ownership Limits, MM Dkt. No. 92264, Second Report and Order, 8 FCC rcd 8565, 8567 3 (1993).L 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  Sb-its rules.G$Hb z {O - &ԍDaniels Cablevision, Inc. v. United States, 835 F. Supp. 1, 10 (D.D.C. 1993), aff'd in part, Time Warner  {O - &Entertainment Co., L.P. v. FCC, 93 F.3d 957 (D.C. Cir. 1996). The Daniels case involved a direct challenge to the  {O - &istatute. Time Warner challenged the stayed rules in Time Warner Entertainment Co., L.P. v. FCC, No. 94-1035.  &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  {O- &Commission considered petitions for reconsideration of the rules. See Time Warner Entertainment Co., L.P. v. FCC,  &93 F. 3d 957, 979-80 (D.C. Cir. 1996). A petition is pending before the Commission, filed by The Center for Media Education and the Consumer Federal of America, requesting that the stay be lifted. G  S- : 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 longterm success requires that the new channel be available to at least  &=fifteen to twenty million households. Noncable MVPDs, i.e., DBS/HSD, SMATV, MMDS, and OVS,  Sr- &currently serve about 9.5 million subscribers nationwide,=%rz {O.-ԍSee Table E1. = 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 noncable 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  &Lconventional understanding of what is required to support a new national service, clearly many local and  &0regional services exist with a smaller subscriber base. Moreover, some programming, including in  &Lparticular sports programming, that is offered by DBS operators is unique to the DBS market. As these  &noncable distribution channels continue to grow, it is likely that they will mitigate to some extent the dependence of programming networks on cable MSOs.  S- : 156.` ` Our reexamination of the upstream national MVPD concentration reveals a moderate but  &[stable level of concentration for purchases of video programming channels. Continued noncable MVPD  &jgrowth, 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.  S- "X%,O(O(88"  S-B.` ` VERTICAL INTEGRATION AND OTHER PROGRAMMING ISSUES  R-` `  1. Status of Vertical Integration  S`- : 157.` ` This section addresses the extent to which video programming services are affiliated with  S8- &{cable operators. &8z yO- &ԍVertical integration occurs where a cable system (a video programming service distributor) has an ownership  {Oh-interest in a video programming service supplier or vice versa. 1996 Report,12 FCC Rcd at 4429 n.398.  As we have noted in previous reports, although vertical relationships can have  S- &beneficial effects,'Z"z yO - &xԍSuch procompetitive effects can include efficiencies in the production, distribution and marketing of video  &programming, and incentives to expand channel capacity and create new programming by spreading the risk inherent  {Ob -in program production ventures. See e.g., H.R. Rep. No. 862, 102nd Cong., 2d Sess. 56 at 4143 (1992). 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  S-to the public. (Dz {O|- &ԍ1995 Report, 11 FCC Rcd at 2135  158; Vertical Ownership Limits, MM Docket 92264, Memorandum Opinion and Order on Reconsideration of the Second Report and Order, 10 FCC Rcd 7364, 7365 4 (1995).   SH - : A158.` ` During 1997, the number of both vertically and nonvertically integrated national satellite &delivered cable programming services increased. Of the 172 national satellitedelivered cable  S - &programming services, 68 (40%) are vertically integrated with at least one MSO, and 104 (60%) are not.) z yO6- &ԍThe number of vertically and nonvertically integrated national satellitedelivered programming services reported accounts for the sale of Viacom cable systems to TCI on July 23, 1996.  &In 1996, of the 147 national satellitedelivered cable programming services reported, 67 (46%) were  S - &vertically integrated and 80 (54%) were not._*\ z {O>- &.ԍ1996 Report, 12 FCC Rcd at 450916 App. G, Tbls. 12. The number of vertically and nonvertically  {O- &integrated national satellitedelivered programming services reported in the 1996 Report reflected the sale of Viacom cable systems to TCI on July 23, 1996._ Thus, while the number of vertically integrated  &programming services has increased, the percentage of vertically integrated programming, relative to the  &/total number of national, satellitedelivered programming services, declined from 1996 to 1997. This  S0- & percentage has also declined in recent years; in the 1995 Report we reported that 51% (66 of 129) of  S - &.national satellitedelivered cable programming services were vertically integrated,W+ z {O-ԍ1995 Report, 11 FCC Rcd at 2132 150.W and the 1994 Report  &reported that 53% (56 of 106) of national satellitedelivered cable programming services were vertically  S-integrated.V,z {O#-ԍ1994 Report, 9 FCC Rcd at 7522 161.V "Y>,,O(O(88"Ԍ S- : }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  S-networks. In 1997, cable MSOs own 50% or more of 50 networks.-z {O-ԍCompare 1996 Report, 12 FCC Rcd at 450912 App. G, Tbl.1 with infra App. F, Tbl. F1.  S`- : 160.` ` In 1997, 26 of the 50 most subscribed to cable programming networks are vertically  &integrated. Two of the top 50 services (CSPAN and CSPAN 2), while not owned by cable operators,  S- &were developed with significant involvement by the cable industry..Zz yO - &ԍCSPAN and CSPAN 2 are nonprofit cable networks, receiving funding through system operators and other MVPDs that provide support on a persubscriber basis. In terms of prime time ratings, eight  S-of the top 15 cable programming networks are vertically integrated,9/z yO: -ԍApp. F, Tbl. F7.9 as was the case last year.`0Bz {O -ԍ1996 Report, 12 FCC Rcd at 4528, App. F, Tbl. F7.`  S- : 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 SH - &!integrated services.91H z yO-ԍApp. F, Tbl. F5.9 TCI, the largest MSO, holds ownership interests in 39 of the 172 national  S - &programming services, 23% of all national cable programming networks.?2 d z yO$-ԍApp. F, Tbls. F1, F5.? In 1996, TCI also held  &interests in 23% of all national programming services (34 of 147 national programming services). Time  &jWarner, the nation's second largest MSO, holds interests in 20 of the 172 national programming services,  S - &or 12% of all national programming services,13 z {O<-ԍId.1 a decrease from 1996 when Time Warner owned 22 of  S -147 (or 15%) of all national programming services.Z4 z {O-ԍ1995 Report, 11 FCC Rcd at 213233 152.Z  S0- : 162.` ` The data set forth above generally identifies vertical ownership relationship by reference  &yto the ownership attribution standards associated with the Commission's horizontal and vertical (channel  S- & occupancy) rules._5z {O -ԍSee 47 C.F.R.  76.503, 47 C.F.R.  76.504._ 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  Sh- &interest.O6hz {O$-ԍSee 47 C.F.R. Section 76.1000(b).O Using this more inclusive attribution standard, the recently announced transaction to bring the"hZ<6,O(O(88"  &Seagram (Universal Studios) cable networks under the control of HSN Inc. would apparently result in both  S-the USA Network and the SCIFI Network being considered vertically integrated.c7z yO@- &ԍLiberty Media, a wholly owned subsidiary of TCI, would own 15% of HSN Inc. and would have a right to  &increase this interest to 25%. Barry Diller, Chairman and Chief Executive Officer of HSN would be entitled to  &[exercise voting rights over all HSN securities owed by Liberty. If this is correct, then these services would be  {O- &covered by the program access rules that apply to vertically integrated cable satellite programming services. See HSN SEC Form 8K, filed October 20, 1997.c  S- : Q163.` ` In 1997, 77 services reportedly intended to begin offering new programming service,98zz yO -ԍApp. F, Tbl. F4.9  S`- &/most of which do not have MSO affiliations. Many of these services were also included in the 1996  S:- &Report as planning program launches. In the 1996 Report, we reported that 63 prospective services  S- &intended to begin offering programming service.h9 z {O -ԍ1996 Report, 12 FCC Rcd at 451720 App. F, Tbls. F3, F4.h Of these 63, the Commission is aware of 16  S- &programming service launches that have occurred since the release of the 1996 Report. Eight of the  S- &ylaunched programming services are vertically integrated with an MSO, and eight are not.:z yO- &JԍApp. F, Tbls. F1, F5. App. F, Tbl. F2 lists existing national programming services without a cable operator holding an attributable interest. Although not  &yvertically integrated with cable system operators, four of the eight nonvertically 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.  S - : 164.` ` There is a general trend by existing service providers, regardless of whether they are  &Mvertically integrated with MSOs, to create additional programming services. For example, five recent  &knetwork launches by The Discovery Channel, which is affiliated with TCI and Cox Communications,  &Minclude 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.  S-  : 165.` ` New networks must make significant investments in order to build a network that will be  &Mattractive to MVPDs and to subscribers. The comprehensive costs of launching a new national cable  SF- &network are estimated at approximately $100 to $125 million, or more.K;ZF z {O - &<ԍSee Joint Comments of Outdoor Life Network, Speedvision Network, The Golf Channel, BET on Jazz and  &America's Health Network in the Matter of Closed Captioning and Video Description of Video Programming, MM Docket No. 95176, at 10 (filed Feb. 28, 1997).K New programming networks  &jgenerally 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 S-even until they are available to at least 15 to 20 million subscribers.9<z {O&-ԍId. at 36. 9 "[<,O(O(88"Ԍ R- ` ` 2. Other Programming Issues   S- : 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  &Lthe 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  Sr- &-teams.;=rz yO -ԍWCAI Comments at 5.; Subsequently, the Fox Sports Net, a joint venture between TCI's Liberty Media Corp. and News  SJ - &Corp., purchased 40 percent of Cablevision's SportsChannel regional networks.>J Xz {OB -ԍThomas Umstead, Fox Builds Sports Empire, Multichannel News, June 23, 1997, at 1. The eight Fox/Liberty  &\regional sports networks and the seven SportsChannel regional services together will reach 55 million  S - &cable subscribers in 17 major markets.1? z {O-ԍId.1 In contrast to ESPN's national programming, Fox Sports Net  S - &intends to offer home games to viewers in local markets and supplement these with national material.@ |z {O-ԍMark Landler, Sports Networks Ready to Rumble, New York Times, Sept. 28, 1997, Week in Review at 3.  &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  SZ-will have access to programming produced by Fox Sports Net.AZz yO- &ZԍIn 1996, Comcast became owner of the Philadelphia 76ers basketball team and Philadelphia Flyers hockey  {O-franchises. The New Establishment, Vanity Fair, Oct. 1997, at 166.  S - : o167.` ` 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  Sj- &just to obtain it.ABjh z yOr-ԍAmeritech Comments at 38.A 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  S- &controlled by a few of the largest cable MSOs.DC z yO!-ԍBell Atlantic Comments at 3.D 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  &jprogram content (the MSG and SportsChannel networks) and the cable systems that will retransmit that  Sz- &program content in the New York market.;Dz z yO&-ԍWCAI Comments at 5.; Some commenters note that new entrants, such as  &DIRECTV, have benefitted from sports programming, such as DIRECTV's exclusive NFL football"R\D,O(O(88"  S- &package, that are not available to cable operators.EEz yOh-ԍNCTA Reply Comments at 2627.E NCTA believes that the high cost of sports  S-programming contributes to higher cable television programming rates.TF\Xz yO- &ԍTestimony of Decker Anstrom, President, at the December 18, 1997 Commission meeting; Kagan Media  {O- &wAppraisals, Inc., TV Programming Costs; An Analysis of the Market Forces Driving Entertainment and Sports Rights  {Ob-Fees, December 1997.T  S- : 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  S:- &12 of which are cable channels programmed by local TV stations that offer regional news.G:|z {OV - &ԍSee NCTA , Regional Video Services, Cable Television Developments, Spring 1997 at 96114; John Dempsy  {O -and Gary Levin, News Derby Upset by Dark Horse, Variety, September 2228, 1997, at 1. Twentyfour  S- &hour local news services are competing for ratings with CNN and broadcast stations in their markets.Hz {O-ԍVariety, News Derby Upset by Dark Horse, John Dempsy and Gary Levin, September 2228, 1997, at 71.  &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'  S- &operating costs.1Ij z {O-ԍId.1 New England News (a regional news channel), for example, receives 60% of its  Sr- &Mrevenues from subscriber fees from cable operators, charging nearly as much as CNN.1Jr z {O-ԍId.1 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  S -marketplace.1K z {O(-ԍId.1  S - : a169.` ` Regulatory Issues Related to Program Access, Carriage Rules.ML z {Oj-ԍSee paras. 229238 infra.M The Commission  &established rules pursuant to the 1992 Cable Act concerning programming arrangements between MVPDs  S\- &.and satellitedelivered programming vendors (the "program access" rules).6M\z yO- &ԍThe Commission's program access rules are set forth at 47C.F.R. 76.100076.1003, and the program  {Ov -carriage rules are set forth at 47 C.F.R.  76.130076.1302. See also 47 U.S.C. 536(a)(2); 47 U.S.C. 548. 6 These rules prohibit unfair  &competition and discriminatory practices by cable operators and certain verticallyintegrated programmers  S - &/that may deter competition from other MVPDs.N  z {O#-ԍ1995 Report, 11 FCC Rcd at 2155 157; 1994 Report, 9 FCC Rcd at 752022 157-60, 752830 17378. The program access rules also prohibit exclusive  &Mdistribution contracts for satellite cable or broadcast programming between vertically integrated cable"]N,O(O(88*"  &joperators and programmers, unless the parties can demonstrate to the Commission that the contract is in  S-the public interest.EOz yO@-ԍ47 C.F.R. 76.1002(c)(2).E  S- : 4170.` ` 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  &kthe 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  S- &communication that is unavailable on commercial local stations.?PXz yO -ԍAlliance Comments at 2.? 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 nonvertically integrated with MSOs. Alliance states that PEG programming channels  SJ - &are carried by 16% of the nation's cable systems7QJ z {O-ԍId. at 4.7 and that PEG access centers throughout the nation  S" -produce more than 20,000 hours of original programming per week for cable system distribution.7R" zz {O<-ԍId. at 2.7  S - C.` ` Technical Advances  S -  : } 171.` ` In the 1996 Report, we discussed the two general strategies MVPDs were using to increase  S\- &capacity: upgrading wired network architecture and deploying digital compression.aS\ z {O-ԍ1996 Report, 12 FCC Rcd at 44424 171179.a While cable  &Loperators 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  &LMSO in the cable industry has elected to use digital compression as its predominant means of expanding  S- &/channel capacity on most of its systems.hTz {O-ԍTCI to Go Mostly Digital, TV Technology, June 1997, at 18.h TCI intends to allocate some of its existing analog video  S- &channel bandwidth for digital video as well as for data and Internet services. In November 1997, Adelphia  Sl- &Communications launched digital cable to nearly 70% of its 1.8 million subscribers.Ul0 z {O<- &,ԍPrice Colman, Adelphia Plans Digital Blitz, Broadcasting & Cable, Nov. 10, 1997, at 59. Adelphia also plans  {O -to proceed with 750 MHz upgrades. Id. at 60. 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  S-and Time Warner and Marcus Cable are planning market tests.V z {O $- &,ԍId. at 59. See also Joel Brinkley, Cable TV in Digital Push To Get in More Channels, New York Times, Nov. 10, 1997, at D7.  S- : 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"|^V,O(O(88"  &[generally only require changing processing equipment at the cable system's headend and providing digital  &or hybrid analog/digital settops at the subscriber premises. Generally, those subscribers who want the  &new services will be provided with the new settops. 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  &Ldigital compression techniques, cable operators now believe that the increases in bandwidth provided by  S8- &rewiring and system upgrades may not be necessary to add a large number of channels.W8z {O- &ԍTCI Redefines Itself (Again), Charts New Upgrade Path, CED: Communications Engineering & Design, June 1997 at 74. On the other  &Mhand, without the benefit of rewiring and rebuilding of existing systems which, in general, modify the  &architecture of many existing cable plants, telephony and twoway services may be difficult to  S-implement.X"z {O - &ԍDream Machine: HFC System Offers Telephony/Data/Cable, Communications Technology, March 1997 at 40.  Sp-  : 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  S - &ratios had dramatically increased from the earlier 6:1 ratios that were prevalent.YY |z {O<-ԍ1996 Report, 12 FCC Rcd at 44434 176.Y One of the more  &significant advancements that enabled such a high channel compression ratio has been the development  S -and refinement of a compression and combining technique called statistical multiplexing.HZD z yO~- &ԍUnlike channel compression techniques that assign constant bit rates as high as 6 MBits/sec to all scenes within  &a video program, statistical multiplexing assigns bit rates as low as 1 MBit/sec to video programs. To compensate  &for complicated or rapidly changing scenes that require more than the 1 MBit/sec bit rate within a program, the  &scenes within a group of video programs are continuously analyzed at a high rate. Scenes that require higher bit rates  &than 1 MBit/sec are shifted to programs within the group that contain quiet scenes which are using lower bit/rates.  &In short, the bit/rate requirements for each scene in a program are actively managed and allocated throughout a group  {O.- &jof programs to maximize the bit/rate use of the particular scene at a given time. Also see IMEDIA brochure:  {O-IMEDIAStatMux, 24 Digital Channels in the Space of a Single Analog Channel.H  S - : %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  S- &to their subscribers.[z {O- &ԍSee HITS Unveils New Digital Programming Lineup, Cable World, Sept. 29, 1997, at 24. See also 1996  {O -Report, 12 FCC Rcd at 43834 46. 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 settop boxes are required to receive HITS  &programming. Other cable operators, including MediaOne, Comcast, Cox, Adelphia, Jones Intercable,  S@-Century Communications and Buford Television are using or plan to use HITS.\@vz {OV&-ԍPrice Colman, Adelphia Plans Digital Blitz, Broadcasting & Cable, Nov. 10, 1997, at 59. "_\,O(O(88S"Ԍ S- : 175.` ` The new digital programming and ancillary data services require new settop boxes.]z {Oh-ԍSee para. 48 (discussion of Microsoft's investments in cable) and para. 102 (discussion of WebTV) supra.  &In an attempt to reduce cost and promote uniformity in settop devices, Cable Television Laboratories,  &Inc. ("CableLabs") and its members have attempted to create standards for interoperable settop boxes  S- &and the provision of a platform for the offering of new interactive services to cable customers.^Zz {O- &<ԍSpecs News From CableLabs, Cable Industry Creates "OpenCable"; Goal Is Interoperable SetTop Boxes,  {OL-August/September 1997, at 1. See also para. 50 supra. Further,  &after evaluating nearly two dozen computer industry proposals for settop box technology, CableLabs  &voted not to specify any single operating standard and recommended that interactive services over cable  S- &Luse open Internet specifications that would allow the use of any operating system._z {Of - (#ԍDavid Bank, Microsoft, Time Warner and US West Discuss HighSpeed Internet Service, Wall Street Journal, Nov. 6, 1997, at B8. Further, pursuant  &Nto the 1996 Act, the Commission is in the midst of a rulemaking on the commercial availability of  S-navigational devices,`z {Op- & ԍImplementation of Section 304 of the Telecommunications Act of 1996 Commercial Availability of Navigational  {O:-Devices, CS Docket No. 9780, Notice of Proposed Rulemaking, 12 FCC Rcd 5639 (1997).  which may produce similar results.  Sp-  : 176.` ` In the 1995 and 1996 Reports, we reported on limited LEC activity in the area of  SJ - &<Asynchronous Digital Subscriber Line ("ADSL"), mainly for the purpose of Internet access.aJ l z {OV-ԍ1995 Report, 11 FCC Rcd at 214950  191193; 1996 Report, 12 FCC Rcd at 4446 184. This ADSL  &Lactivity consisted of technical trials. Current reports indicate that LECs have moved forward with these  &jtrials, 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 rollout plans, however, and it is unclear  S - &how long it will be before there is widespread commercial deployment.ab z {OH- &ԍSee, e.g., DSL: coming soon?, Feb. 3, 1997; Web site at  {O- &Jhttp://www.internettelephony.com/archive/2.03.97/CoverStory/ coverstory.html. USA Today is also reporting that  &GTE will soon offer the service to large residential and office buildings in Los Angeles, San Francisco, and Chicago,  {O- &but the company has not yet officially announced this. Local Carriers Roll Out Digital Modems, Nov. 17, 1997; Web site at http://www.usatoday.com/money/ mds2.htm.a SBC Communications launched  S -its digital subscriber line service in San Francisco and Austin, Texas in November 1997.^c z {O-ԍSee Telephony, Comm. Daily, Nov. 17, 1997.^  S2- : 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 midAtlantic region over the next three years. Bell  S- &Atlantic announced at this time that service would begin in 1997.ZdFz {Ox%-ԍSee 1996 Report, 12 FCC Rcd at 4401  77.Z Service has not yet begun, but"`d,O(O(88"  &Lconstruction has begun in southeastern Pennsylvania with voice and data services to be offered first, and  S-video to follow.ez yO@-ԍTelephone interview with Marie Breslin, Director, FCC Relations, Bell Atlantic, October 15, 1997.  S- IV.COMPETITIVE RESPONSES  S8- A.` ` New Case Studies  S- : 178.` ` During 1997, the Commission issued decisions finding that an additional 45 cable  S- &=communities with approximately 300,000 subscribers faced effective competition.fXz yO - &ԍIn these cases, the incumbent operators relied on a new test for effective competition provided by the 1996  &iAct whereby a cable system is considered to be subject to effective competition (and therefore exempt from rate regulation) where:  (#Xa local exchange carrier or its affiliate (or any multichannel video programming distributor using the  (#\facilities of such a carrier or its affiliate) offers video programming services directly to subscribers by any  (#means (other than directtohome satellite services) in the franchise area of an unaffiliated cable operator  (#]which is providing cable services in that franchise area, but only if the video programming services so  (#/offered in that area are comparable to the video programming services provided by the unaffiliated cable operator in that area. 47 U.S.C.  543(a)(2).(# 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.  S - : B179.` ` 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.  R0- ` ` 1. Columbus, Berea, and Columbus Grove, Ohio   S- : _180.` ` The 1996 Report described the entry by Ameritech into Time Warner's western Columbus  S- &market and Coaxial's eastern Columbus market in May 1996 and July 1996, respectively.ag z {OJ-ԍ1996 Report, 12 FCC Rcd at 445456 20912.a 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  SB- &Commission issued an order finding effective competition in the area served by Coaxial.hB z {Od"- &ԍCoaxial Communications of Central Ohio, Inc., Petition for Determination of Effective Competition, Memorandum Opinion and Order ("Columbus Order"), 12 FCC Rcd 1872,1877 13 (1997). The  &Commission found that Ameritech's cable system overlaps about fifty percent of Coaxial's system (which  S-passes approximately 93,000 homes) and that Coaxial had lost subscribers who switched to Ameritech.Biz {On&-ԍId. at 1876 11.B "ani,O(O(88"Ԍ S-  : 181.` ` In June 1996, Ameritech was also awarded a cable franchise in the city of Berea, Ohio.jz {Oh- &;ԍCablevision of the Midwest, Inc., d/b/a V Cable, Inc., Petition for Determination of Effective Competition, CSR 4944E, Memorandum and Opinion Order ("Berea Order"), DA 97648 (1997) at 2.  &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 settop box) at a rate of $27.95  &per month. This service included all 17 channels from Localcast plus 42 other channels including TNT,  S`- &SportChannels, MTV and the Disney Channel.k`"z {O"-ԍKen Wood, Ameritech, Cablevision Lock Horns, The News Sun, Sept. 26, 1996, at A1. These cable services and prices are very similar to those  S8-offered by Ameritech in the Columbus market.l8z {O - &ԍPetition of Coaxial Communications of Central Ohio, Inc., For Determination of Effective Competition, Petition for Special Relief, CSR 4789E, (July 15, 1996), Exhibit C.  S- : A182.` ` Cablevision, the incumbent cable operator in Berea with approximately 4,500 subscribers,  S- &offers a total of 74 channels on its basic and expanded basic service tiers.mz {On- &JԍV Cable, Inc., Berea, OH, Petition for Determination of Effective Competition, Petition for Special Relief, CSR 4944E (Feb. 14, 1997), Exhibit 14. Cablevision has responded  S- &to Ameritech by offering new expanded basic tier channels free for six months.nh z {O- &<ԍKen Wood, Berea Subscribers Reaping Benefits of Cable Television Competition, The News Sun, Nov. 14, 1996 at A10. 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  S - &channel._o z {O- &ԍImplementation of Sections of the Cable Act of 1992, Rate Regulation Horizontal and Vertical Ownership  {OL- &Limits Development of Competition and Diversity of Video Programming Distribution and Carriage, Comments of  &Ameritech New Media, Inc. on Petition to Update Cable Television Regulations and Freeze Existing Cable Television  &YRates Filed by Consumers Union and Consumer Federation of America ("Comments on Consumer Union Petition"), RM No. 9167 (October 30, 1997), Attachment 1._ In addition, Cablevision moved the Disney Channel from an a la carte service to the expanded  S -basic tier, saving customers who had subscribed to the Disney Channel over $11 per month.sp vz yO-ԍAmeritech News Release June 18, 1996 at 1; and Ameritech Comments at 1011.s X(#  S - : o183.` ` Cablevisions petition for determination of effective competition was granted in March  &l31, 1997. The Commission found that Ameritech is a LEC, provides comparable programming to  &Cablevision's services, and has completely overbuilt the city of Berea. In addition, the Commission found  &that Ameritech's actual offering of service combined with aggressive marketing efforts have resulted in  S-a decline in Cablevision's subscribership.;qz yO#-ԍBerea Order at 34.; "bq,O(O(88 "Ԍ S- : 184.` ` In September 1996, Quality One Technologies ("Q1"), a whollyowned subsidiary of  S- &Columbus Grove Telephone Company, was granted a cable franchise by the Village of Columbus Grove.rz {O@- &ԍTime Warner Entertainment Company, L.P., d/b/a Time Warner Cable, for Determination of Effective  {O -Competition, Petition for Special Relief, CSR 5059E (July 15, 1997), Exhibit C.  &In May 1997, Q1 began offering cable services in competition with Time Warner, the incumbent cable  S- &operator.7s$z {OL-ԍId. at 8.7 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  S8-(including one converter box).?t8z {O -ԍId. at Exhibit L.?  S-  : $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  S- &zfor $27.14; and a 47 channel Cable Plus service $30.09.FuHz {O-ԍId. at Exhibits N and O.F Q1 offered additional programming in each  &of its packages, except for the largest package which was priced the same as Time Warner's comparable  &zpackage. 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, SciFi, 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.  SX- : o186.` ` In response to Q1's competitive service, Time Warner changed its channel lineup on its  S0- & two largest services and instituted a customer loyalty program.8v0z {O-ԍId. at 11.8 Time Warner moved the History  &jChannel, 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  Sh- &Planet, Classic Sports and CNN SI) to its Cable Plus service at no additional cost.Iwhl z {Ot-ԍId. at Exhibits I, N and O.I In addition, Time  &Warner promises not to increase its rates for one year and to allow customers to earn a monthly credit that  S-can be used to pay their cable bill at the end of the year.Fx z {O!-ԍId. at 11 and Exhibit N.F  S- : 2187.` ` 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,"c x,O(O(88"  S- &serves customers in Columbus Grove, and is an actual competitor in the market.1yz {Oh-ԍId.1 On November 17,  S-1997, the Commission granted the petition.zZz {O- &ԍTime Warner Entertainment Company, L.P., d/b/a Time Warner Cable, for Determination of Effective  {O-Competition, CSR 5059E, Memorandum Opinion and Order, DA 972414 11 (rel. Nov. 20, 1997).  R-` ` 2. Fairfield, Bridgeport, Stratford, Orange, Woodbridge, (#  R`-XX` ` X and Milford, Connecticut (#  S8-  S- : $188.` ` In September 1996, Southern New England Telephone ("SNET") was awarded a cable  &yfranchise 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 30day 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  &Mvoucher to its cable subscribers redeemable on the purchase of any other SNET service, including the  S -phone services.8{\ z {ON- &ZԍStephen Higgins, 1Day Old Cable TV Rivalry Produces Instant Savings, New Haven Register, Friday, May  {O- &K23, 1997, at A1; and Edward J. Crowder, SNET TV Now in Tune with Fairfield, Connecticut Post, May 23, 1997, at C1.8  S - : Q189.` ` 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 ("FairfieldNew Haven").  &/Cablevision charged $32.95 per month for 82 channels for its basic plus expanded basic package (its  S- &."Optimum TV" service, excluding pay per view channels).1|z {OZ-ԍId.1 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  &Lto "Total Magazine," and free installation (up to three television sets) to new subscribers in the Fairfield  S@- &/area.}@l z yOL-ԍSNET Opposition Petition for Special Relief, July 10, 1997 ("SNET Opposition Petition") at 7. 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  S- &the survey."F~ z yOd#-ԍSNET Opposition Petition at 8.F Cablevision also started to build a statewide fiber network (similar to SNET's fiber network) which is expected to be completed by the end of this year. "xd ~,O(O(88"Ԍ S- : 3190.` ` In June 1997, Cablevision filed a petition for determination of effective competition in  S- &the six Connecticut cable communities that comprise its franchise.z {O@- &ԍCablevision Systems of Southern Connecticut, Fairfield, Bridgeport, Stratford, Orange, Woodbridge, Milford, Petition for Special Relief, CSR 5031E (June 13, 1997). In August of this year, SNET urged  &the Commission to deny Cablevision's petition, arguing that it was premature to deregulate an entire  &lfranchise area if only a portion of it is subject to headtohead competition. In its petition, SNET  &explained that Cablevision serves six communities, but only offers a price discount in Fairfield City where  S8- &SNET is currently providing competing cable services.CZ8"z {O- &ԍCablevision Systems of Southern Connecticut, Fairfield, Bridgeport, Stratford, Orange, Woodbridge, Milford,  &hPetition for Determination of Effective Competition, SNET Opposition to Petition for Special Relief, CSR5031E (July 10, 1997) at 1618.C Cablevision subscribers in the other five  &zcommunities are not being offered a discount. The Connecticut Department of Public Utility Control  S-supports SNET's position.\Dz {O - &ԍCablevision Systems of Southern Connecticut, Fairfield, Bridgeport, Stratford, Orange, Woodbridge, Milford,  {O- &Petition for Determination of Effective Competition, Opposition to Petition for Special Relief by the Connecticut Department of Public Utility Control, CSR5031E (July 22, 1997), at 2. The Commission is currently reviewing this petition.  R- ` ` 3. Sterling Heights Area, Michigan  Sp-  SH - : 3191.` ` 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  S - &(population 32,000). h z {O- &ԍComcast Cablevision of Sterling Heights, Inc., Comcast Cablevision of Taylor, Inc., Petition for Determination of Effective Competition ("Sterling Heights Petition"), March 25, 1997, at Exhibit E. 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  S - &=Channel to the expanded basic tier at no additional cost.V z yO -ԍAmeritech (news release) Sept. 18, 1996, at 1.V In addition, it offered, for a limited time, free  &Lbasic or expanded service for the first two months, free installation, and free premium channels including  SX- &Showtime, The Movie Channel, Flix and Sundance Channel for two months.NXR z yOJ-ԍSterling Heights Petition, at 5 n. 14.N According to Comcast,  &Ameritech has at least 1,500 subscribers in Garden City, 500 subscribers in Southgate, 150 subscribers  S-in Fraser, and 100 subscribers in Sterling Heights.7z {O -ԍId. at 4.7  S- : 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"et,O(O(88b"  S- &NInteractive Programming Guide capability.Gz yOh-ԍAmeritech Comments at 11.G 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  S8-$1.20.x8Xz yO0-ԍAmeritech Comments at 11; and Comments on Consumer Union Petition, Attachment 1.x  S- : }193.` ` Comcast's petition for determination of effective competition was granted in May 1997.O\z {Op - &kԍComcast Cablevision of Sterling Heights, Inc. and Comcast Cablevision of Taylor, Inc., Petition for  {O: - &Determination of Effective Competition, CSR 4988E, Memorandum Opinion and Order ("Sterling Heights Order"), 12 FCC Rcd 6815, 6818 4 (1997).O  &jThe Commission found that Ameritech has completely overbuilt Fraser, Southgate, and Garden City and  S- &\is providing service in these areas.1 z {OD-ԍId.1 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  S -has initiated an extensive promotion campaign.< z {O^-ԍId. at 9.<  R - ` ` 4. Thousand Oaks, California  S - : 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  S0- &-$10.95 for 28 channels.00 z {O- &ԍMiguel Bustillo, Thousand Oaks Orders Falcon to Reduce Basic Cable Rates, Los Angeles Times, Oct. 3, 1996, at B4. GTE is competing with two incumbent cable operators that serve different parts  S- &of the city, Falcon and TCI. z {O2-ԍFalcon Cablevision to Cut Rates for Several Premium Channels, Los Angeles Times, Nov. 22, 1996, at B1 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  S-Oaks. TCI charges $10.51 for 21 channel basic tier service.z {OL"- &ԍId.; Miguel Helft, Battle For Cable High Ground Begins Underground, Los Angeles Times, Aug. 20, 1996, at B1.  S@- : 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"fv,O(O(88q"  S- &yhas cut its prices in half for premium channels (from $9.95 to $5 each).1z {Oh-ԍId.1 TCI, on the other hand, seems  &=to be positioning itself to compete with GTE for new services such as "interactive television." The new  &\service would allow viewers to customize a program. For example, while watching Prime Sports, the  &[viewer can request game statistics, watch interviews with players, or follow a star player throughout the  S`-game.`Zz {OZ- &ԍMiguel Helft, Battle For Cable High Ground Begins Underground; Telecommunications Giants Argue Over  {O$-Cut Lines, Wage HighTech War for TV Viewers, Los Angeles Times, Aug. 20, 1996, at B1.  S- : 196.` ` Falcon Cablevision's petition for determination of effective competition was granted by  S- &.the Commission in April 1997.z {O> - &;ԍFalcon Cablevision, Petition for Determination of Effective Competition, CSR 4955E, Memorandum Opinion and Order, DA 97861 11 (Apr. 24, 1997), at 5. The Commission noted that the entire franchise area will be overbuilt  &zby GTE, which has a ten year franchise with Thousand Oaks, and that Falcon has lowered prices and  S- &added new channels.9z {OH-ԍId. at 45.9 According to GTE, it now has more than 1,000 subscribers and more are being  Sp-added every day.pz yO- &ԍFalcon Cablevision for Determination of Effective Competition, Petition for Special Relief, CSR 4955E (March 5, 1997), at 6 n. 22.  S - ` ` 5. St. Petersburg and Pinellas County, Florida   S - : _197.` ` The entry by GTE into Clearwater in June 1996 and the Commission's subsequent finding  S - &of effective competition in Clearwater was discussed in the 1996 Report.a z {OC-ԍ1996 Report, 12 FCC Rcd at 445758 21820.a While Clearwater is GTE's  &kfirst cable franchise in Pinellas County, Florida, it obtained a second franchise to serve the City of St.  S[- &Petersburg[ z {O- &ԍParagon Communications d/b/a Time Warner Communications, For Determination of Effective Competition, St. Petersburg Petition for Special Relief ("St. Petersburg Petition"), CSR 4930E (January 15, 1997), at 7.  in August 1996 and a third franchise to serve the unincorporated areas of Pinellas County  S3-in September 1996.?3z {O-ԍId. at Exhibit E.?  S-  : 3198.` ` In the City of St. Petersburg, GTE offers 78 channels of programming compared to 82  S- &kchannels offered by Time Warner, the incumbent cable operator.Lxz {O#-ԍId. at 9 and Exhibits E and F.L GTE's 23 channel basic service is  S- &priced at $10.95 and its 60 channel basic plus enhanced basic service is $25.95. z {O=&- &ԍId. at Exhibit E; and Waveney Ann Moore, Cable War Expands to St. Petersburg, St. Petersburg Times, Jan. 5, 1997, at 12. These two services and"gd,O(O(88"  &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),  S- &ya cable modem service at $28.95 to GTE cable subscribers,z {O- &-ԍMoore, Cable War Expands to St. Petersburg, at 12. The cable modem rents for an additional $14.95 per month. a 45 day risk free guarantee (whereby GTE  &zwill pay the costs of switching the customer back to its old cable operator if not satisfied with GTE's  &kservice), free installation (up to two television sets), and an interactive program guide and free remote  S- &kcontrol.K"z yO -ԍSt. Petersburg Petition, Exhibit E.K By January 1997, GTE was offering its services to about 800 homes and was undertaking  S-substantial construction in the northern sections of the city.z {O: -ԍWaveney Ann Moore, Cable War Expands to St. Petersburg, St. Petersburg Times, Jan. 5, 1997, at 1.  S- : 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  &Lexpanded 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  S -customers in St. Petersburg and Clearwater.K\ Dz {O- &ԍTime Warner EntertainmentAdvance/Newhouse Partnership and Paragon Communications both d/b/a Time  {O- &Warner Communications, For Determination of Effective Competition, Petition for Special Relief, CSR 4850E (October 9, 1996), Exhibits F and G.K  S - : 2200.` ` According to Time Warner, its response in the St. Petersburg market (with approximately  S - &z71,000 subscribers) is similar to its competitive response to GTE's entry in the Clearwater market.H h z yO-ԍSt. Petersburg Petition at 910.H  &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  &jmore channels than GTE. For example, Time Warner offers 64 channels on its basic plus expanded basic  S- &service compared to GTE's 60 channel service. z yOx- &[ԍId. at Exhibit F. Time Warner did not provide any information on its rates for basic or expanded basic services. Further, Time Warner believes that GTE's innovative  S- &services (such as GTE's interactive service) are not very successful.`P z {O -ԍMoore, Cable War Expands to St. Petersburg, at 12.` Throughout Pinellas County, Time  S-Warner is monitoring the success of its rivals.8z {O#-ԍId. at 12.8  S@- : 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"ht,O(O(88q"  S- &1997.mz {Oh- &yԍParagon Communications d/b/a Time Warner Communications, Petition for Determination of Effective  {O2- &Competition, CSR 4921E, Memorandum Opinion and Order ("St. Petersburg Order"), DA 97566 13 (rel. Mar.  {O- &J18, 1997); and Time Warner EntertainmentAdvance/Newhouse Partnership and Paragon Communication, Petition  {O- &for Determination of Effective Competition, CSR 4850E, Memorandum Opinion and Order ("Pinellas County Order"), 12 FCC Rcd 3143, 3149 12 (1997).m 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.  S- &/Petersburg.Fz yO-ԍSt. Petersburg Order 11. F The Commission also found that Time Warner's loss of subscribers to GTE is further  S- &evidence of competition in the city.-$z yO8 - &ԍSt. Petersburg Order at 6. Time Warner submitted an affidavit by Robert J. Barlow stating that several Time  {O - &{Warner subscribers stated that they switched to GTE's cable service. See Time Warner Entertainment {O - &JAdvance/Newhouse Partnership and Paragon Communication, Petition for Determination of Effective Competition, CSR 4850E, Petition for Special Relief, ("Pinellas County Petition"), CSR 4850E (October 9, 1996), Exhibit D.- 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  &jalso found that Time Warner's loss of subscribers to GTE was persuasive evidence that competition was  S-present in the County.X z yO-ԍPinellas County Order at 314748 1011.X  R- ` ` 6. Wayne, Michigan  Sp-  : #202.` ` The City of Wayne awarded a cable franchise to Ameritech in March 1996.]\p z {O- &ԍTime Warner EntertainmentAdvance/Newhouse Partnership and Paragon Communications both d/b/a Time  {Of- &Warner Cable, Petition for Determination of Effective Competition, CSR 4935E, Memorandum and Opinion Order ("Wayne Order"), 12 FCC Rcd 3175, 3176 3 (1997).] Ameritech  &offered 80 channels on its basic and expanded basic tiers and included channels such as the History  &yChannel, ESPN2, the Golf Channel and the Disney Channel at no additional cost. Its basic and expanded  S - &[basic rates were $9.95 and $23.95, respectively.X\ z {OH- &ԍTime Warner EntertainmentAdvance/Newhouse Partnership and Paragon Communications both d/b/a Time  {O- &Warner Cable, Petition for Determination of Effective Competition, Petition for Special Relief ("Wayne Petition"), CSR 4935E (January 30, 1997), Exhibit F.X However, Ameritech offered free basic and expanded  &basic services for the first two months, free installation, and free Showtime, The Movie Channel, Flix and  &LSundance Channel for two months. Time Warner, the incumbent provider, offered a total of 60 channels  S - &on its basic and expanded basic service tiers.W z {O!-ԍId., Exhibit I; Ameritech Comments at 12.W The rates were $11.26 and $20.90 for basic and expanded  SX-basic services, respectively.ZXfz yO^$-ԍTime Warner, FCC Form 1240, Part I, Jan. 31, 1995.Z "0i,O(O(88J"Ԍ S- : 203.` ` Following Ameritechs entry to the cable market, Time Warner (with about 5,000  S- &jsubscribers): (a) lowered the price of its expanded basic services;Az yO@-ԍAmeritech Comments at 12.A (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 oneyear 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  S-analog and 200 MHz reserved for digital.ZXz yO -ԍWayne Petition at 1213; Ameritech Comments at 12.Z  S- : o204.` ` 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  &Ovirtually complete in the City of Wayne and that Ameritech's services reduced Time Warner's  SH - &\subscribership.QH z yO-ԍWayne Order, 12 FCC Rcd at 3179 11. Q 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  S -stations, public schools, and public libraries.D xz {O-ԍId. at 317677 4.D  S - B. ` ` Preliminary Findings  SX- : 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  S-entrants appear to be focusing on similar strategies in their efforts to win customers.^ z {O:-ԍ1996 Report, 12 FCC Rcd at 4461 22931.^  S@- : `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, FairfieldNew 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  &kservice tiers at no additional cost. However, in Berea, FairfieldNew Haven, and Thousand Oaks, the  &kchannel lineup of the incumbent was equal or larger than that of the entrant. Thus, in contrast to the  SP- &preliminary finding in the 1996 Report, the tendency for entrants to enter the market with a larger channel lineup than the incumbent is not as apparent in 1997.  S- : P207.` ` 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"bj,O(O(88"  &reductions by discounting only for a limited period of time, to only those customers who can switch to  S-a competing service,Xz yO@- &ԍAmeritech claims that the reaction of incumbents to new entry (such as reducing prices and expanding services)  &his in marked contrast to the incumbent's behavior in adjacent communities not yet served by an entrant, where cable rates continue to rise and subscribers have poor choices. Comments on Consumer Union Petition at 3.  or only if additional services are taken.  S-  : 208.` ` Entrants also appear to be competing on the basis of price. Entrants in Connecticut and  &MThousand 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 nonvideo services. In Connecticut, for example, SNET offered a $30 voucher good toward the purchase of any other service offered by SNET.  S- : 3209.` ` The incumbent operators in all six cases have already petitioned for relief from current  &Mcable 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  &ystated in the last report, we expect incumbents and entrants to compete differently where these petitions  S - &yare granted by the Commission.1 z {O-ԍId.1 Since the current rate regulations under certain circumstances prohibit  S - &cable operators from providing selective rate discounting,H  zz yO-ԍAs stated in the Communications Act, sec.623(d), as amended:  (#X"A cable operator shall have a rate structure, for the provision of cable service, that is uniform throughout the geographic area in which cable service is provided over its cable system."(#H deregulated cable operators have a greater ability to provide selective rate discounts to maintain their subscriber base in the market.  SX- : ~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.  Sx- V.ISSUES RELATING TO FEDERAL LAWS AND REGULATIONS  S(-  : P 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  &yof the 1996 Act. In particular, we describe developments related to overtheair reception devices, inside  &wiring, pole attachments, television towers for DTV, program access issues, horizontal ownership issues,"kb ,O(O(88"  &]copyright act issues, MVPD carriage of broadcast signals, public service obligations for DBS, and navigation devices.  S-` ` A. OvertheAir Reception Devices  S8- : p212.` ` 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 overtheair reception of television broadcast signals, multichannel multipoint distribution  S- &service, or direct broadcast satellite services.";z yO( -ԍ1996 Act, 207.; 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  S - &.the viewer has a direct or indirect ownership interest.-& Xz {O- &hԍSee Preemption of Local Zoning Regulation of Satellite Earth Stations, Restrictions on OvertheAir Reception  {O- &Devices: Television Broadcast and Multichannel Multipoint Distribution Service, IB Docket No. 9559, CS Docket  &=No. 9683, Report and Order, Memorandum Opinion and Order and Further Notice of Proposed Rulemaking  {Ot-("OTARD Order"), 11 FCC Rcd 19276 (1996). Petitions for reconsideration are pending. - The Commission sought comment in a pending  S - &jFurther 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  S -alternative to allowing individual antennas.d Fz {Oh-ԍOTARD Order, 11 FCC Rcd at 19311315 5965. d  S2- : n213.` ` The overtheair reception devices ("OTARD") rules|2z yO- &ԍThe Commission currently has two rules, 47 C.F.R.  25.104 and 47 C.F.R.  1.4000, that govern the  &installation and use of reception devices and specify the circumstances under which federal preemption of local  &zoning ordinances would occur. Section 25.104, which partially implements Section 207 of the 1996 Act, applies  &to home satellite antennas greater than one meter in diameter and permits certain installation and use restrictions that  {O- &hfurther a "clearly defined health, safety, or aesthetic objective."  Section 1.4000, referenced in the text above as the  {O- &OTARD Rule, was adopted specifically to implement Section 207. See OTARD Order, 11 FCC Rcd at 19277289 25.s applies to satellite dishes (including  &DBS and other DTH satellite dishes) one meter or smaller in diameter, or dishes of any size located in  S- &Alaska;z yO -ԍCurrently, satellite reception in Alaska requires dishes greater than one meter in diameter. MDS, MMDS and LMDS (i.e., wireless cable) antennas one meter or smaller in diagonal  S- &mmeasurement, plus a mast if needed; and television antennas of any size.@z yO#-ԍ47 C.F.R. 1.4000. @ The rule prohibits  &governmental and private restrictions that impair the ability of antenna users to install, maintain, or use  &overtheair reception devices or to receive acceptable quality signals, except where such restrictions are"jl<,O(O(88"  &necessary "to accomplish a clearly defined safety objective" or "to preserve an historic district listed or  S-eligible for listing in the National Register of Historic Places . . ."Gz yO@-ԍ47 C.F.R. 1.4000(b).G  S- : 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.  S - : q215.` ` Of the six orders issued by the Bureau, five involved preemption of homeowner  S - &associations' regulations that unduly restricted consumers' ability to install reception devices. Xz {O- &=ԍIn the Matter of Michael J. MacDonald, CSR 4922O, DA 972189 (released Oct. 14, 1997); In re Jay  {O- &Lubliner and Deborah Galvin, Potomac, Maryland, CSR 4915O, DA 972188 (released Oct. 14, 1997); In re CS  {O- &Wireless Systems, Inc. d/b/a OmniVision of San Antonio, CSR 4947O, DA 972187 (released Oct. 14, 1997); In re  {ON- &zVictor Frankfurt, Vernon Hills, Illinois, CSR 5024O, DA 972305 (released Oct. 31, 1997); In re Wireless  {O-Broadcasting Systems of Sacramento, Inc., CSR 5001O, DA 972506 (released Nov. 28, 1997). One  &homeowner's association claimed its restrictions were necessary to preserve an historic district and thus  S - &permissible under the OTARD rule, but the Bureau found inadequate evidence to support the claim.j z {OZ-ԍSee In the Matter of Michael J. MacDonald, CSR 4922O.j  &Another homeowner's association failed to offer sufficient evidence to support its claim that petitioners  SX- &could receive acceptable quality signals by placing an antenna in their attic.wXz {O-ԍSee In re Jay Lubliner and Deborah Galvin, CSR 4915O. w Three other petitions  &Linvolved regulations that completely prohibited the installation of exterior antennas without justification  S- &on either safety or historic preservation grounds,6 z {O-ԍSee In re CS Wireless Systems, CSR 4947O; In re Victor Frankfurt, CSR 5024O. while another concerned regulations that prohibited  &antenna installation unless the homeowner complied with an unspecified prior approval process related to  S- &aesthetic factors.v z {O -ԍSee In re Wireless Broadcasting Systems of Sacramento, Inc., CSR 5001O.v The sixth order preempted a governmental restriction in Meade, Kansas, requiring  &permits and prior approval for antenna installation and compliance with unspecified setback requirements  Sh-under penalty of a $500 a day fine.hZ z {Ob"-ԍIn re Star Lambert, CSR 4913O, Memorandum Opinion and Order, 12 FCC Rcd 10455 (1997).  S- : _216.` ` Commenters argue that the rules as presently crafted give local government authorities and  S- &yhomeowners associations many opportunities to block competition.z {O|&- &ԍSee, e.g., BellSouth Comments at 1718; ICTA Comments at 1314; NAB Reply Comments at 3031; OpTel Comments at 4. For example, several commenters"mF,O(O(88C"  &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  S- &.installation.z yO- &ԍDIRECTV Comments at 10; NAB Reply Comments at 3334; NRTC Reply Comments at 1213; SBCA Comments at 12. 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  S`- &[that have no legitimate public safety objective.Z` z yO - &ԍBellSouth Comments at 18. BellSouth also claims that the Commission exceeded its legal authority under  &x207 by inferring for itself the authority to allow restrictions that impair video reception if such restrictions are  {O -designed to promote safety or historical preservation interests. Id. at 1718. These concerns will be considered by the Commission  S8- &in connection with the pending OTARD reconsideration petitions and the Further Notice of Proposed  S-Rulemaking.FBz {O -ԍSee fn. 689 supra.F  S- : 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  St- &providers,Qtz yO-ԍICTA Comments at 13; OpTel Comments at 4.Q while others have sought to create new fees or taxes for competing MVPDs due to concerns  SL - &that increased competition will result in a reduction in franchise fees.TL d z yOP-ԍICTA Comments at 1314; OpTel Comments at 4.T They recommend that the  &zCommission broaden its federal antenna preemption to include microwave and other antennas used to  S - &jdeliver video programming, and closely scrutinize local fees or taxes imposed on competitive MVPDs.2 z {O-ԍId. 2  &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.  S- : 218.` ` The preemption of antenna placement restrictions contained in Section 207 eliminates  &zsome 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  Sl- &gain access to an acceptable receiving location. This issue will be addressed in the Further Notice of  SF- &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.  S- B.` ` Inside Wiring (#`  S- : n219.` ` In previous Reports, the Commission noted that strategic behavior by incumbent firms can  SZ- &kcreate impediments to entry and competition by rival service providers.Z z {O'-ԍSee, e.g., 1995 Report, 11 FCC Rcd at 215456 2059; 1996 Report, 12 FCC Rcd at 445052 196200. Strategic behavior may be"Zn,O(O(88"  &designed to raise rivals' costs or decrease their access to customers, and can deter wouldbe competitors'  S- &entry by creating a credible threat that entry would be unprofitable.Fz yO@-ԍ12 FCC Rcd at 44501 196.F Various commenters assert that  &exclusive contracts for MDUs and lack of access to inside wiring impede competition for multichannel  S- &{video programming services to MDU residents.XZXz {O- &ԍSee, e.g., NCCTA Comments at 1; RCN Reply Comments at 9. Cable inside wiring includes the wiring within  &a subscriber's premises ("cable home wiring") and, in MDUs, other wiring dedicated exclusively to serving a specific subscriber unit ("home run wiring"). X These commenters advocate moving the MDU  &[demarcation point to the building entry or to the location at which the wire becomes dedicated to serving  S8- &a specific subscriber unit,|8zz yOR -ԍAmeritech Comments at 3132; RCN Reply Comments at 1011; GTE Reply Comments at 78.| prohibiting incumbent cable operator and/or landlord limitation of competitive  S-access,y z {O -ԍAmeritech Comments at 3132; RCN Comments at 911; See NCCTA Comments at 1.y and prohibiting or limiting exclusive MDU service agreements.)z {OL- &ԍSee Ameritech Comments at 2830; DIRECTV Comments at 911; GTE Reply Comments at 59; ICTA  &YComments at 8; OpTel Comments at 35. Some commenters assert that the use of perpetual exclusive contracts by  {O- &hfranchised cable operators in MDUs restrains and inhibits competition. See, e.g., GTE Reply Comments at 7; ICTA  & Comments at 6, 811; OpTel Comments at 35. GTE, ICTA and OpTel support the use of exclusive service contracts  &in MDUs, but argue that perpetual exclusive contracts impede competition. These commenters advocate a "fresh  &look" for perpetual contracts entered into by MVPDs and dominant telecommunications providers. The "fresh look"  &iwould allow customers (whether MDU owners or individual subscribers) to renegotiate or cancel such contracts as  &Zcompetition is introduced. GTE Comments at 7; ICTA Comments at 811; OpTel Comments at 5. In addition,  &ZICTA recommends that the Commission preclude MDU video service contracts from linking the duration of the contract to that of the cable operator's franchise and all renewals or extensions thereof. ICTA Comments at 6. )  S- : 220. ` ` On October 17, 1997 , the Commission released a Report and Order and Second Further  S- &Notice of Proposed Rulemaking concerning inside wiring, which is designed to facilitate competition  St- &among MVPDs serving MDUs.t8z {OL-ԍInside Wiring Order, fn. 470 supra. See also paras. 129139 supra. The Order establishes procedures for the orderly disposition of MDU  &kwiring (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  S - &premises to compete for the right to use inside wiring on a unit by unit basis.  z yOh- &ԍThe Commission will apply rules regarding disposition of cable home run wiring to all MVPDs. MDU owners may also purchase "loopthrough" wiring upon the owner's termination of the incumbent's services to the MDU.  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  S - &Lprogramming services to MDUs. The Order, however, seeks comment concerning the possibility of the  Sb-Commission's adoption of certain restrictions on such agreements.  S-  : 221. ` ` The rules adopted were limited in scope, applying to MDU home run wiring only where  &0the 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"o",O(O(88"  &{be adopted to further facilitate competition in MDUs, including ongoing building and unitbyunit competition.  S- C.` ` Pole Attachments  S8-  : B222.` ` In the 1996 Report, we noted that Congress had directed the Commission to issue new  S- &pole attachment formulas within two years of the effective date of the 1996 Act.z {Oz- &ԍ1996 Report, 12 FCC Rcd at 4450  195. Section 703 of the 1996 Act amended Section 224 of the Communications Act, Regulation of Pole Attachments, 47 U.S.C. 224. 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  Sr-use of rights of way.Dr"z {O4 - &ԍSee Amendment of Rules and Policies Governing Pole Attachments, CS Docket No. 9798, Notice of Proposed  &Rulemaking, 12 FCC Rcd 10527 (1997): seeks comment on the Commission's use of current presumptions, on  &;carrying charge and rate of return elements of the pole attachment formula, on the use of gross versus net data, and  {O- &Jon a new conduit methodology; and Amendment of Rules and Policies Governing Pole Attachments, CS Docket No.  &97151, FCC 97234, Notice of Proposed Rulemaking (released August 12, 1997): seeks comment on the  &Jimplementation of a methodology to ensure just, reasonable, and nondiscriminatory maximum pole attachment and  &conduit rates and on a method to ensure that rates charged for the use of rights of way are just, reasonable and nondiscriminatory.  S" - : o223.` ` In the Notice, we sought information that would demonstrate whether the rates charged  S - &for pole attachments by exempt cooperatives . z {O- &ԍThe statute exempts "any person who is cooperatively organized" from regulation of pole attachments. See 47 U.S.C. 224(a)(1). and governmental entities impede or promote competition,  S - &especially in rural areas. z {O- &,ԍNotice, 12 FCC Rcd. at 784344 20. The 1996 Act amended Section 224(a)(4) of the Communications Act  &to define "pole attachment" as "any attachment by a cable system or provider of telecommunications service to a  {O- &pole, duct, conduit, or rightofway owned or controlled by a utility." See 47 U.S.C. 224(a)(4). However, poles,  &Jducts, conduits and rightsofway owned or controlled by any railroad, cooperative, or federal or state entity are not  {O -considered utilities under this section. Notice, id.Ħ All pole attachment rates are subject to negotiation, but the pole rates charged  &.by nonexempt 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  S\-attachment rates are not currently subject to regulation in the event of a dispute.[\>z {O:!-ԍSee 47 U.S.C. 224(a)(1) and (e)(1). [  S - : 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 "p,O(O(88"Ԍ S- &exceeding the national average.z {Oh-ԍSee, e.g., NCTA Comments at 4041; SCBA Comments at 1821; SCBA Reply Comments at 3. NCTA claims that although cooperative utilities were found to charge  S- &the lowest pole rates when the exemption was adopted in 1978, they now often charge the highest rates.IZz {O-ԍSee NCTA Comments at 4142.I Commenters relate several examples of significant pole attachment rate  &increases where cooperative or municipal entities had announced plans to enter the telecommunications  S`- &service market.CX`z yO- &ԍNCTA Comments at 4244 (cites numerous increases ranging from 38% in Nashville to 565% in North  &wCarolina); US West Comments at 2123 (cites a proposed doubling of one municipality's pole rates to $10, with that rate increasing to $25 over five years).C 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  S-unreasonable pole attachment conditions and rates.^ z {O -ԍSee NCTA Comments at 4142; SCBA Comments at 21.^  S- : _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  Sp- &elimination of the exemption.Cpz yO-ԍAPPA Reply Comments at 23.C APPA also contends that it is of no consequence that some cooperatives'  &Lpole rates are above the national average since that average is derived from many values above and below  S - &it, and may reflect belowcost rates as well.7 . z {O-ԍId. at 4.7 APPA claims that eliminating the exemption that  &ygovernment 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  S - &Kwith the Commission's complex pole attachment requirements.U z yO-ԍAPPA Comments at 2; APPA Reply Comments at 2.U 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  &.$9.02 per pole; and (d) 75% of cooperatives do not recover the attaching entity's proportionate share of  S- &the full cost of the pole in their rates.s\P z {O- &ԍSee, e.g., NRECA Comments at 2; Minnesota Electric Comments at 2; Montana Electric Comments at 23;  &NRTC Comments at 24. APPA contends that recent cooperative pole rate increases may reflect efforts to begin  {Ob!-recovering full pole costs. See APPA Reply Comments at 3.s NRECA also disputes claims that many cooperatives offer DBS  &?service, noting that there are some 1,000 rural electric cooperatives in the U.S., but less than 10%  S-participate in DBS.tz {O$- &ZԍSee NRECA Comments at 2 and NRECA Reply Comments at 3; see also Minnesota Electric Comments at 3; Montana Electric Comments at 2. "hq,O(O(88"Ԍ S- : }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  S-charged to competitors may no longer be cost based and that competition may accordingly be distorted.z {OP-ԍSee, e.g., NCTA Comments at 4146; SCBA Comments at 21; US West Comments at 2123  S- D.` ` Television Towers for DTV  SH - : 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  S - &spectrum. Zz {O- &ԍFifth Report and Order, 12 FCC Rcd at 128401 76. In the Fifth Report and Order, we found that an  &Jaccelerated rollout of digital television was essential for four reasons. We found that absent a speedy rollout, other  &digital television services might achieve levels of penetration that could preclude the success of overtheair digital  &television, leaving viewers without a free, universally available digital programming service. Second, we determined  &that a rapid construction period would promote DTV's competitive strength internationally, spurring the American  &economy in terms of manufacturing, trade, technological development, international investment, and job growth.  &Third, we stated that "an aggressive construction schedule helps to offset possible disincentives that any individual  &ibroadcaster may have to begin digital transmissions quickly." Finally, we found that a rapid buildout would work  &to ensure that the recovery of broadcast spectrum occurs as quickly as possible. This will enable the federal  &government to reallocate some of the recovered spectrum for public safety purposes, and to eventually auction the  {O-rest. Fifth Report and Order, 12 FCC Rcd at 128423 8083. Digital television may provide a means for broadcast television to become more competitive  &jin 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  S - &joften new transmitters, new digital production facilities and, in some cases, new towers. z {O- &ԍKyle Pope and Mark Robichaux, Hype Definition: Waiting for HDTV? Don't Go Dumping Your Old Set Just  {O-Yet, Wall Street Journal, Sept. 12, 1997, at A1. Of particular  &concern to broadcasters is the effect of local and state regulations on their ability to upgrade existing  S0- &towers or to construct new towers in a timely manner.0z yO- &jԍNAB Reply Comments at 3537. There are also other logistical and resource concerns that may affect  &Kbroadcasters' ability to meet the deadline for conversion to DTV, including the number of towers that need to be  {Oz - &modified or constructed, the scarcity of construction crews, weather delays and supply shortages. Preemption of State  &and Local Zoning and Land Use Restrictions on the Siting, Placement and Construction of Broadcast Station  {O "- &JTransmission Facilities, MM Dkt. No. 97182, Notice of Proposed Rulemaking ("DTV Tower Notice"), 12 FCC Rcd 12505, 12505 4 (1997). 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  S- &ability to meet construction schedule requirements.cz {O&-ԍFifth Report and Order, 12 FCC Rcd at 12810  77. c We are, however, also sensitive to the important"r(,O(O(88"  &state and local roles in zoning and land use matters and their longstanding interest in the protection and welfare of their citizenry.  S-  : 228.` ` The Commission has adopted a DTV Tower Notice to seek comment on whether any action  Sb- &is necessary in order to achieve a rapid rollout of DTV.\bz {O-ԍDTV Tower Notice, 12 FCC Rcd at 12508 11.\ 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  S- &Maximum Service Television ("Petitioners")." Zz {O - &ԍThis petition was filed in the Commission's digital television proceeding, MM Dkt. No. 87268. In the DTV  {O - &Tower Notice, the Commission stated that this petition would be treated as one filed pursuant to 47 C.F.R.  1.401  {O - &Zseeking the institution of a new rule making proceeding. DTV Tower Notice, 12 FCC Rcd at 12504 n.1. See also  &NAB Reply Comments at 3637. The Petitioners propose a rule that would: (a) provide specific time limits for state  &Jand local government action in response to requests for approval of the placement, construction or modification of  &broadcast transmission facilities; (b) remove from local consideration certain types of restrictions on the siting and  &construction of transmission facilities, including regulations based on the environmental or health effects of radio  &frequency ("RF") emissions, interference with other telecommunications signals and consumer electronics devices,  &and tower marking and lighting requirements provided that the facility has been determined by the Commission to  &be in compliance with applicable federal rules; (c) preempt all state and local land use, building, and similar laws,  &rules or regulations that impair the ability of licensed broadcasters to place, construct or modify their transmission  &,facilities unless the promulgating authority can demonstrate that the regulation is reasonable in relation to a clearly  &defined and expressly stated health or safety objective other than the categorical preemptions described above; and  &(d) provide for expeditious review by the Commission of any denial of a request by a state or local government.  {O-DTV Tower Notice, 12 FCC Rcd at 125067 and 1252022 59 and Appendix B." 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.  St- E.` ` Program Access Issues  S$ - : 229.` ` The Commission established rules pursuant to the 1992 Cable Act concerning  &programming arrangements between MVPDs and satellitedelivered program vendors (the "program  S - &access" rules)., z yOV- &ԍThe Commission's program access are set forth at 47C.F.R. 76.100076.1003, and the program carriage  {O-rules are set forth at 47 C.F.R.  76.130076.1302. See also 47 U.S.C. 536(a)(2); 47 U.S.C. 548. , These rules prohibit unfair competition and discriminatory practices by cable operators  S - &and certain verticallyintegrated programmers <z yO- &,ԍA verticallyintegrated programmer is one that shares ownership interests in common with one or more cable  {OP -system operators (See 1996 Report, 12 FCC Rcd at 4429 n. 398). that may inhibit competition. z {O!-ԍ1995 Report, 11 FCC Rcd at 2155 157; 1994 Report, 9 FCC Rcd at 752022 157-60, 752830 17378. 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  S4-Commission that the contract is in the public interest.E4(z yO%-ԍ47 C.F.R. 76.1002(c)(2).E " s,O(O(88"Ԍ S- : 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  S- &programming.z {O-ԍE.g., 1990 Report, 5 FCC Rcd at 502132 11230; 1995 Report, 11 FCC Rcd at2135 158. 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  S`- &[increased choice for consumers in programming and distribution markets.$`Zz {OZ- &YԍSee, e.g., 1990 Cable Report, 5 FCC Rcd at 500811 8291, 503132 12930; 1995 Report, 11 FCC Rcd  {O$- &at 2135 158. See Memorandum Opinion and Order and Notice of Proposed Rulemaking, FCC 97415 (rel. Dec.  &18, 1997) at 4, citing Report of the House Committee on Energy and Commerce, H.R. Rep. No. 102628, 102d Cong., 2d Sess. 41 (1992). 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  S- &longterm performance of both distribution markets and programming markets.eFz {O -ԍE.g., 1995 Report, 11 FCC Rcd at 2135  158. e Indeed, the program  &access rules have been credited as having been a necessary factor in the development of both the DBS and  S-MMDS industries.z {O- &ԍE.g., Eric Schine, Digital TV: Advantage, Hughes, Bus. Week, Mar.13, 1995, at 14; The Wireless Cable  {O-Industry, Dillon Read Equity Research, Aug.22, 1994, at3.  SH - : _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 fiberoptic  &facilities. We noted that, as a result, it appears that it may become possible for a verticallyintegrated  &Nprogrammer to switch from satellite delivery to terrestrial delivery for the purpose of evading the  S - &lCommission's rules concerning access to programming.^ 4 z {O~-ԍ1996 Report, 12 FCC Rcd at 4435 154. ^ 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 fiberbased 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  S-capability of delivering their services through fiber rather than through satellite transmission.A z yO -ԍBellSouth Comments at 15.A  Sj- : o232.` ` BellSouth urges the Commission to commence a rulemaking proceeding to either amend  &Mits 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 satellitedelivered, and (2) prohibit cable programming vendors  &and local broadcast television stations from requiring video distributors to carry any other programming  S-channel as a condition of granting retransmission consent.8V z {O&-ԍId. at 16.8 "zt,O(O(88"Ԍ S- : P233.` ` 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.  &0According to BellSouth, this means that nonvertically integrated programming services will have  S- &unprecedented incentives to maintain exclusive distribution arrangements with large MSOs.8z {O-ԍId. at 12.8 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 nonvertically  &integrated programmers (e.g., Fox and Microsoft) and vertically integrated cable operators such as TCI,  S-Time Warner, Cablevision and Comcast.8Zz {O -ԍId. at 13.8  S-  : _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. (RM9097), 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  S - &Lcharges to create an economic disincentive discouraging Section 628 violations.B z yO\-ԍAmeritech Petition at 12.B WCAI and DIRECTV  &[have asked the Commission to expand the scope of the Ameritech proceeding to include consideration of  S - &the issues raised above by BellSouth. |z {O- &ԍSee WCAI Reply Comments, RM9097 at 34 (filed July 17, 1997); DIRECTV Comments, RM9097 at 34 (filed July 2, 1997). DIRECTV alleges that MVPDs continue to experience difficulties  &zin 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  S- &market power.>z yOV-ԍDIRECTV Comments at 5.> 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  S- &requested above be incorporated into the statute as necessary.7f z {O-ԍId. at 7.7 In addition, on September 23, 1997,  &NDIRECTV 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,  S-available to DIRECTV for its subscribers in the Philadelphia area.] z {O!-ԍSee complaint of DIRECTV, filed Sept. 23, 1997.]  S- : 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  &kavailability of programming to cable's competitors. In this regard, a number of the more notable cable"(u ,O(O(88"  &programming services introduced over the past year are owned by entities that would not be viewed as  S- &vertically integrated under a traditional analysis of that term, e.g., MSNBC (Microsoft and NBC).<z yO@-ԍWCAI Comments at 10.< This  &is argued to be a particular concern when services, such as NBC or Nickelodeon, promote and advertise  &kservices, such as MSNBC or TV Land, that are sold on an exclusive basis and are unavailable to some  S`-competitors.`Xz yOX- &wԍStatement of Matthew Oristano, Chairman, People's Choice TV, on behalf of the WCAI, at the Dec. 18, 1997 Commission meeting.  S- : $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  &lbe 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  &kof the risk which cable operators take when they carry new programming produced by nonvertically  &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  &Mways. 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.  S- &In the long run, the agreements provide a future market for new, costly and/or innovative programming.Ez yOX-ԍViacom Reply Comments at 45.E  &yFurthermore, Viacom points out that those who argue for access to particular programming also want the  S-right to refuse to carry packages of programming.7@z {O-ԍId. at 9.7  Sh- : 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  S- & a Memorandum Opinion and Order and Notice of Proposed Rulemaking ("Program Access Notice")  S- &concerning the program access rules.r\z {Of- &ԍPetition for Rulemaking of Ameritech New Media, Inc. Regarding Development of Competition and Diversity  {O0 - &in Video Programming Distribution and Carriage, CS Dkt. No. 97248, RM No. 9097,Memorandum Opinion and Order and Notice of Proposed Rulemaking, FCC 97415 (rel. Dec. 18, 1997).r 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)  &Nwhether the Commission should impose damages in order to discourage violations of section 628;  &(d)whether the program access rules apply to previously satellitedelivered 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"v ,O(O(88L"  &prevent any multichannel video programming distributor from providing satellite cable programming or  S- &satellite broadcast programming to subscribers or consumers.";]z yO@-ԍCommunications Act  628(b), 47 U.S.C. 548(b).] 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.  S8- : 238.` ` On its face, Section 628 does not preclude a programmer from altering its distribution  S- &method from satellitedistribution to terrestrialdistribution.OXz {O -ԍProgram Access Notice at 51.O 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 verticallyintegrated programmer moves from satellitedelivered programming to  S- &terrestrialdelivered programming for the purpose of evading the program access requirements.1z {O$ -ԍId.1 Such  &an action could arguably constitute an "unfair method[ ] of competition or unfair or deceptive act[ ] or  &Lpractice[ ], 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  S - &to subscribers or consumers."i |z {O-ԍId. Communications Act  628(b), 47 U.S.C.  548(b).i The Program Access Notice seeks comment on appropriate ways to  &yaddress 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.  S - F .` ` Horizontal Ownership Limits  S-  : 239.` ` Section11(c) of the 1992 Cable Act directed the Commission to set limits on the number  S- &Lof cable subscribers that can be reached by an MSO.z yOB-ԍSection 11(c) of the 1992 Cable Act added Section 613(f) to the Communications Act, 47 U.S.C. 533(f). In October 1993, the Commission adopted rules  Sl- &providing that no MSO could pass more than 30% of the households passed by cable nationwide.f\lz {O- &ԍ47 C.F.R. 503. See also In the Matter of Implementation of Sections 11 and 13 of the Cable Television  {Ot- &YConsumer Protection and Competition Act of 1992, Horizontal and Vertical Ownership Limits, MM Docket No. 92264, Second Report and Order, 8 FCC Rcd 8565 (1993).f The  &cable systems attributable to an MSO are calculated by reference to the attribution rules that the  S- &Commission historically has imposed on broadcasters.M z yO~"-ԍ47 C.F.R. 76.501, 76.503(f).M The Commission's rules permit an MSO to pass  &/an additional 5% of cable subscribers, where the cable systems passing the additional subscribers are  S- &minority controlled.AR z yO%-ԍ47 C.F.R.  76.503(b).A In September 1993, the D.C. District Court held in Daniels Cablevision, Inc. v."w,O(O(88$"  S- &United Statesz {Oh- &ԍDaniels Cablevision, Inc. v. United States, 835 F. Supp. 1, 10 (D.D.C. 1993), aff'd in part, Time Warner  {O2-Entertainment Co., L.P. v. FCC, 93 F.3d 957 (D.C. Cir. 1996). that Section 11(c) violated the First Amendment. The court stayed further District  &Court proceedings pending an interlocutory appeal of its judgment but did not enjoin the Commission from  S-adopting and enforcing rules limiting horizontal concentration.8$z {Ov-ԍId. at 12.8  Sb- : R240.` ` The Commission voluntarily stayed the effective date of its rules until final judicial  S:- & resolution of the Daniels decision.L\:z {O - &ԍIn the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and  {OZ - &Competition Act of 1992, Horizontal and Vertical Ownership Limits, MM Docket No. 92264, Second Report and Order, 8 FCC Rcd at 8567  3. L 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  S- &\stayed rules in the D.C. Circuit Court in Time Warner Entertainment Co., L. P. v. FCC, No. 941035  S- &(D.C. Cir. 1994). In August 1996, the D.C. Circuit Court consolidated the Daniels appeal regarding the  Sx- &facial validity of the statute and the Time Warner challenge to the Commission's rules, and determined  SR - &to hold court proceedings in abeyance while the Commission reconsidered its horizontal rules.R z {O-ԍTime Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957, 97980 (D.C. Cir. 1996). Most  &Lrecently, 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  S -horizontal ownership rules and reevaluate its current horizontal ownership limits._ l z {O-ԍSee Consumers Union Petition, fn. 11 supra._  S -X G.X` ` Copyright Act(#`  Sb-  S:- : 241.` ` The major copyright issues affecting competition in multichannel video programming  &distribution involve the compulsory licenses for, respectively, satellite and cable retransmission of  S- &broadcast signals." z {O- &.ԍThe Copyright Act, 17 U.S.C 101 et seq., establishes the rights of owners of programming and other  yOR- &hcopyrighted works of authors and, in the case of compulsory licensing, allows nonowners to use programs and other  &works subject to certain payment and other conditions. Administratively, these copyright provisions fall under the jurisdiction of the Library of Congress, 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"x,O(O(884"  S- &broadcast retransmission issuesz yOh- &xԍA Review of the Copyright Licensing Regimes Covering Retransmission of Broadcast Signals, United States Copyright Office, August 1, 1997 ("Retransmission Report"). and the Librarian of Congress issued an Order, also described below, concerning royalty rates for satellite retransmission of broadcast signals.  S- : ~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  S:- &effectively against other MVPDs._\: z {O- &ԍSee NRTC Comments at 1217; PrimeTime 24 Comments at 27; SBCA Comments at 1823. These  {O - &commenters acknowledge that copyright law does not fall within the Commission's jurisdiction. See, e.g., PrimeTime 24 Comments at 2; SBCA Comments at 18._ SBCA, NRTC, and PrimeTime24 contend that the satellite  &compulsory license to retransmit broadcast network signals is anticompetitive because the license is limited  S- &to retransmission to "unserved households."~XDz yO - &<ԍ"Unserved households" are defined as homes that cannot receive a signal of Grade B intensity from a local  &network station through the use of a conventional rooftop antenna, and have not received the local network affiliate through a cable subscription within the previous 90 days. 17 U.S.C. 119(d)(10). ~ These commenters claim, among other things, that the  &\current definition of an "unserved household" does not adequately capture all households that cannot  S- &=receive clear television pictures from overtheair broadcasts.x d z {O-ԍSee NRTC Comments at 17; PrimeTime24 Comments at 48; SBCA Comments at 21.x In addition, NRTC and SBCA advocate  &La compulsory network broadcast retransmission license which would allow satellite retransmission to all  SJ - &subscribers, with satellite retransmitters compensating local stations.I XJ z yO- &ZԍNRTC Comments at 16; SBCA Comments at 23. NRTC also proposes that networks compensate satellite  &carriers for adding value to the network signal by increasing the audience reach of the networks beyond the area of affiliate exclusivity. NRTC Comments at 17.I NRTC contends that the inability  &of satellite carriers to retransmit network signals to "served" households is contrary to the purposes of the  S - &.1996 Act and the nation's pro-competitive telecommunication policies.8  z {O-ԍId. at 17.8 SBCA notes that the satellite  &kcompulsory license, embodied in Section 119 of the Copyright Act, is not permanent, while the cable  S - &compulsory license to retransmit network broadcast signals is permanent.?  z yO-ԍSBCA Comments at 1819.? In addition, Bell Atlantic  &Lseeks confirmation that open video systems meet the copyright statute's definition of a cable system, so  SZ-that OVS operators and programmers may use the cable compulsory copyright license.  Z8z yO2!- &ԍBell Atlantic Comments at 78. Bell Atlantic claims that OVS providers would have to negotiate individually  &with each copyright holder of each program on each broadcast or must carry station included in the programmer's  &lineup if OVS providers were not able to use the compulsory copyright license, and that this would make the OVS option impracticable.  S - : 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"y  ,O(O(88"  &.retransmission of broadcast signals. The Copyright Office recommends equal treatment of multichannel  &Lvideo programming delivery systems (except to the extent that technological differences or differences in  S- &regulatory burdens justify different copyright treatment), z yO- &ԍRetransmission Report at 3435 (endorsing "the goal of removing differences between the licenses where  &possible, so that the compulsory licenses should have the least possible impact on the competitive balance between  &satellite carriers and cable systems, while, at the same time, retaining differences that are justified by the regulatory and technological contexts of the two industries.")  including equalization of cable and satellite  &compulsory license fees (except for such fee differences as are justified by regulatory, technological or  S`- &economic factors),8`z {O -ԍId. at 60.8 continuation of the satellite compulsory retransmission license for as long as cable  S8- &.operators have a compulsory retransmission license,;8Bz {O -ԍId. at 3335.; and inclusion of OVS systems as entities eligible  S- &for use of the cable compulsory license;z {O- &ԍId. at 7577 (suggesting amendment of section 111 to facilitate the eligibility of open video systems for the  {ON-cable compulsory license); see id. at 6174. eventual termination of compulsory licensing for retransmission  S- &of broadcast signals;'D0 z yO- &-ԍThe Copyright Office believes that broadcast retransmission licensing would best be accomplished through  &Lnegotiations between collectives representing program copyright owners and program users, or other market  &mechanisms. Retransmission Report at iv, 33. Accordingly, the Office would prefer to see the eventual termination  {O- &of both the cable and satellite compulsory licenses. Id. at iv, 12, 33. The Copyright Office currently recommends  &the continuation these compulsory licenses, however, because the licenses have become "an integral part of the means  &Jof bringing video services to the public, . . . business arrangements and investments have been made in reliance upon  &them, and . . . at this time, the parties advocating such elimination have not presented a clear path toward terminating  {O2-the licenses." Id. at 33; see id. at iv. ' adjustment of license fees to reflect fair market value;%D<z yO- &ԍThe Copyright Office recommends that every five years a Copyright Arbitration Royalty Panel should set cable  &and satellite per subscriber, per signal retransmission license rates at their respective full fair market values.  {OT- &Retransmission Report at 5960. See Retransmission Report at 5960 (recommending fair market value standard for  &,cable retransmission fees); Satellite Home Viewer Act of 1994, 17 U.S.C. 119(c)(3)(D)(1994) (setting forth a fair  &market value standard for satellite retransmission fees). The Librarian of Congress recently issued an order  {O- &establishing satellite license rates determined by a CARP pursuant to these criteria. See Report of the Panel, Rate  &Adjustment for the Satellite Carrier Compulsory License, Copyright Office, Library of Congress, Docket No. 963 CARPSRA; 62 Fed. Reg 55746 (1997), and discussion below.% equalization of  &independent station and network signal retransmission fees and provision of cable retransmission royalty  S- &rights to owners of network programming (as exists for satellite retransmission royalties),""Hz yO!- &ԍRetransmission Report at 13134. Owners of copyrights in network programming (as opposed to owners of  &local programming contained in network affiliate broadcasts) are not eligible to participate in the distribution of cable  &compulsory license fees, 17 U.S.C. 111(d)(3), but are eligible to participate in the distribution of satellite  {O#-compulsory license fees, 17 U.S.C. 119. See Retransmission Report at 7, 13233. " simplification  Sp- &/of the cable compulsory license rate structure;gp2z {OB&-ԍRetransmission Report at 4142, 4959; see id. at 3641.g reduction of the small cable system subsidy;>pz {O-ԍId. at 4245. > and"pzZ,O(O(88$ "  S- &retention of the minimum retransmission fee applicable to all cable systems.Zz {O- &ԍId. at 13334. The minimum copyright royalty applies to all systems, including those retransmitting only local signals. 17 U.S.C. 111(d)(1)(B), (C) and (D). The Copyright Office also  &recommended postponing, as premature, any action concerning compulsory licensing of Internet  S-retransmission of broadcast signals.Gz yO-ԍRetransmission Report at 9298.G  S`- : 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  S- &accordance with the Commission's rulesDz yO - &ԍ17 U.S.C. 111(f) (Definition of "local service area of a primary transmitter.") A commercial television  &hstation's local market for copyright purposes coincides with its local market defined by the Commission's must carry  &Krules, 47 C.F.R.  76.55(e) and 76.59. Currently, the Commission uses Arbitron's Area of Dominant Influence  &("ADI"). Effective January 1, 2000, Nielsen's Designated Market Area ("DMA") definition will apply. Under  &YSection 76.59, these markets may be modified to include or exclude communites as a result of Commission decisions on individual requests.  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  SH -network signals.IH z yO-ԍRetransmission Report at 117130.I  S - : `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  S - &=administratively unworkable."1 L z {O-ԍId.1 The Copyright Office also finds the Grade B standard to be "less than  S - &<precise and cost inefficient when applied to individual household determinations."1 z {O-ԍId.1 The Copyright Office  &notes that future widespread use of overtheair digital television may allow a clear standard for  S0-determining when a household receives a good quality television picture from an overtheair signal.10pz {O@!-ԍId.1  S- : ` 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"{,O(O(88"  S- &ysatellite carriers, and the continued availability of retransmissions to the public.z yOh- &ԍSatellite Home Viewer Act of 1994, Pub. L. No. 103369, 103 Stat. 3477 (1994) (codified, in relevant part, as 17 U.S.C. 119(c)(3)(D) (1994)). On October 27, 1997,  &the Librarian of Congress issued a final order setting a monthly rate of 27 cents per subscriber for satellite  S- &retansmission of distant signals." z yOp- &JԍOrder of the Librarian, October 23, 1997, 62 Fed. Reg. 55742, 55759 (1997) (rates to be codified at 37 C.F.R  &y258.3). The Librarian's Order accepts the rate recommendations of a Copyright Arbitration Royalty Panel  &("CARP") convened to propose new rates for retransmissions under section 119 of the Satellite Home Viewer Act,  {O-17 U.S.C. 119. See 62 Fed. Reg. 55744 et seq. 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  S`- &signals.e Z` z {O - &ԍSee id. at 5574344; 37 CFR 258.3 (stating rates commencing May 1, 1992, to include, in addition to the  &6 cent and 17.5 cent rates noted in the text, a rate of "14 cents per subscriber per month for superstations whose signals are syndexproof, as defined in 258.2"). e The Librarian's order also set a rate of zero for retransmission of local superstation signals and  S8- &for local network signals retransmitted to unserved households.!z8, z yO- &;ԍOrder of the Librarian, October 23, 1997, 62 Fed. Reg. 55742, 55759 (1997) (rates to be codified at 37 C.F.R  &Y258.3). The royalty rates for cable compulsory license retransmission of distant signals are set in accordance with  &Za complicated and technical formula (except rates paid by smaller cable systems, which are set at a flat rate or at  &a percentage of gross receipts from broadcast signals, but which apply to a small minority of cable compulsory  &=license payments). SBCA presented testimony to the CARP indicating that cable operators pay section 111  &retransmission royalties of 9.8 cents per subscriber per month for superstation signals and 2.45 cents per subscriber  {O-per month for broadcast network signals. Id. at 55746.  These rates are to become effective  S-January 1, 1998.;"nz {O-ԍId. at 55759.;  S- :  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,  &jthe 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.  SX- H .` ` MVPD Carriage of Broadcast Signals  S- : 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  S- &.are obligated to carry certain qualified local broadcast stations.`#Xz yOX%- &;ԍSections 614 and 615 concerning the must carry rights of commercial and noncommercial television stations,  &respectively, and Section 325, which provides for retransmission consent, were added by the 1992 Cable Act. The"&",O(O(9&"  &i1996 Act extended these provisions to encompass OVS as well as cable. On March 31, 1997, the Supreme Court  {O - &upheld the must carry provisions of the 1992 Cable Act. Turner Broadcasting v. FCC, 117 S.Ct. 1174 (1997). In  & its decision, the Court emphasized that preserving the benefits of free, overtheair broadcast television and promoting the widespread dissemination of information from a multiplicity of sources were important governmental interests.` Pursuant to the Communications Act,"|z#,O(O(88"  &cable and OVS operators have an obligation to set aside a specified number of channels, based on their  S- &jtotal channel capacity for the carriage of local broadcast signals.$zz yO- &<ԍ47 U.S.C. 534(a), (b)(1), 47 C.F.R 76.56(b) (obligations to carry local commercial stations); 47 U.S.C. 535(a), (b); 47 C.F.R. 76.56(a) (obligations to carry qualified noncommercial stations). 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  S`- &Lrules.]%`z yO -ԍ47 U.S.C. 325(b)(3)(B); 47 C.F.R. 76.64(f).] A station electing mustcarry rights is entitled to insist on cable carriage in its local market area,  S8- &zwhich the Commission currently defines in terms of Arbitron's areas of dominant influence.H&8b z yO:- &ԍ47 U.S.C. 534(h)(1)(C); 47 C.F.R. 76.55(e). Beginning in 2000, television markets will be based on A.C.  {O- &Nielsen's Designated Market Areas ("DMAs"). See Definition of Markets for Purposes of the Cable Television  & Mandatory Television Broadcast Signal Carriage Rules, Implementation of Section 301(d) of the Telecommunications  {O- &LAct of 1996, Market Determinations, CS Dkt. No. 95178, Report and Order and Further Notice of Proposed  &Rulemaking, 11 FCC Rcd 6201, 62204 3948 (1996). The 1992 Cable Act also provides that the Commission may modify television markets for must carry purposes upon request. 47 U.S.C. 534(h)(1)(C); 47 C.F.R. 76.59. H 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  S- &stations are required to make this election every three years.'z yO>- &;ԍ47 U.S.C. 325(b)(3)(B); 47 C.F.R. 76.64(f). The next election must be made by October 1, 1999, and will become effective on January 1, 2000. Noncommercial educational broadcast  &jtelevision stations are entitled to request must carry status if they are licensed to a community within 50  Sp- &miles of the cable system headend or they place a Grade B contour over the system's principal headend.W(p6z yOF-ԍ47 U.S.C. 535(l); 47 C.F.R. 76.55(b).W They do not have the right to elect retransmission consent.  S -  : 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  &zdenied. The Bureau also has acted on 206 market modification requests since the passage of the 1992  S -Cable Act.p)X z yO!- &ԍUnder the mustcarry provisions of the Communications Act, upon written request, the Commission may  &modify television markets to include or exclude communities from the television market of a particular television station. 47 U.S.C. 534(h)(1)(C); 47 C.F.R. 76.59. p Of these cases, 145 requests were granted and 61 requests were either dismissed or denied.  S0-  : %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"}),O(O(88"  &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  S- &to conform with such modified standards."*z yO-ԍThis provision is codified as Section 614(b)(4)(B) of the Communications Act, 47 U.S.C. 543(b)(4)(B). In the 1996 Act, Congress stated that no ancillary or  S- &supplementary broadcast service shall have must carry rights.+Xz yO-ԍ47 U.S.C. 336(b)(3) which was added to the Communications Act by Section 201 of the 1996 Act. In the legislative history clarifying this  &language, Congress also stated that it did not intend "to confer must carry status on advanced television  S8- &jor other video services offered on designated frequencies"A,8z yO -ԍConference Report at 161.A and added that the "issue is to be the subject  S-of a Commission proceeding under section 614(b)(4)(B) of the Communications Act."1-xz {O( -ԍId.1  S- : 251.` ` In the context of adopting digital television standards, the Commission sought comment  &Lon relevant must carry rules or policies that might be needed both during the transition to DTV and once  Sp- &.DTV has replaced the current analog system.'.Zp z {O- &YԍAdvanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. No.  &<87268, Fourth Notice of Proposed Rulemaking and Third Notice of Inquiry, 10 FCC Rcd 10540, 1055210554 (1995). ' While the Commission has received comments on DTV  SH - &signal carriage issues,t/ZH , z yO- &-ԍWe note that this request for comment was made while judicial review of the constitutionality of the must  &carry rules was pending. On March 31, 1997, the Supreme Court upheld the constitutionality of the must carry rules.  {O-Turner Broadcasting v. FCC, 117 S.Ct. 1174 (1997).t we intend to seek further comment.00&H N z {O6- &ԍIn the Fifth Report and Order, the Commission stated that "[i]n order to obtain a full and updated record on  &,the applicability of the must carry and retransmission consent provisions in the digital context, particularly in light  {O- &of the Turner II [the March 31, 1997, mustcarry decision], we intend to issue a Notice to seek addition comment  {O-on these issues." See Fifth Report and Order, 12 FCC Rcd at 12853 106.0 Depending on the rules that the  &Commission may ultimately adopt, if any, cable and OVS operators subject to the must carry rules would  &Mbe required to allocate a portion of their channel capacity to the carriage of DTV signals. Must carry  &Lobligations would, therefore, affect the types and variety of services that cable and OVS operators could offer their subscribers in competition with other MVPDs.  SX- : ~252.` ` The carriage of local broadcast signals by any other MVPD is subject to retransmission  S0-consent from the broadcast station licensee.Z10<z yO "-ԍ47 U.S.C. 325(b)(1); 47 C.F.R. 76.54(a).Z In addition, under the Copyright Act, satellite providers "0~1,O(O(88,"Ԍ S- &are prohibited from delivering any broadcast television network signals,A2z yOh-ԍ17 U.S.C. 119(a)(2).A except in areas that are unserved  S- &by overtheair signals.o3XXz yO- &;ԍAn "unserved household" is one that cannot receive a signal of Grade B intensity from a local network station  &through the use of a conventional rooftop antenna, and has not received the local network affiliate through a cable subscription within the previous 90 days. 17 U.S.C. 119(d)(10).o 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  S`- &ksatellite carrier compulsory license,;4`xz yOx -ԍ17 U.S.C. 119.; retransmit the signals of network affiliated television broadcast  &stations within their local markets, the Copyright Office stated that "inclusion of locally retransmitted  S- &-network stations is not subject to challenge by the Copyright Office.5z {O - &-ԍ1996 Report, 12 FCC Rcd at 43845 48, citing Letter from Marilyn Kretsinger, Acting General Counsel,  &JUnited States Copyright Office, to William S. Reyner, Jr., Esq., Hogan and Hartson (Aug. 15, 1996). The following  yOJ- &[congressional hearings have been held on the carriage of local broadcast signals by satellite providers: Senate  yO- &hCommerce Committee on April 10, 1997; House Commerce, Telecommunications, Trade and Consumer Protection  &Committee on October 30, 1997; House Judiciary, Courts and Intellectual Property Committee on October 30, 1997; and the Senate Judiciary Committee on November 12, 1997. Recent advertising by DBS entities  &>emphasize that when combined with an indoor or outdoor antenna, a DBS dish can provide the same  S- &complement of local broadcast signals as cable television service.[6 z {O-ԍSee NASA Reply Comment at Exhibits A and B. [ Earlier this year, EchoStar announced  &|plans to distribute local broadcast signals in 22 local markets serving 43% of all U.S. television  Sp- &households.S7pz {O$- &ԍErgonomics Its Local or Bust, Broadcasting & Cable, Oct. 13, 1997, at 2228. In addition, as part of a  &proposed merger between Echostar and ASkyB that was not consummated, plans were announced for a DBS service  {O- &that would provide some local broadcast service using spot beam technology. See, e.g., Telecommunications Cable  {O- &;Television, Multichannel Metamorphosis II Digital Derby Rounding Turn #1, Morgan Stanley, April 25, 1997, at 46.S To add local broadcast signals to its service, EchoStar launched a satellite in October 1997  SH - &and plans to launch another satellite in the Spring of 1998.18H z {O-ԍId.1 Another satellite service, Capitol, has  &announced that it intends to offer DBS providers a package that includes all commercial television stations  S - &/within a given station's designated market area.H9 \z {O -ԍSee para. 58 supra. H However, if DBS or other satellite providers were  &zpermitted to retransmit local broadcast television signals, carriage requirements could become an issue relevant for the assessment of competition among MVPDs.  SX- I.` ` Public Service Obligations for DBS  S- : 253.` ` Section 335 of the Communications Act directed the Commission to initiate a rulemaking  &0to impose public interest or other requirements for providing video programming on DBS service"9,O(O(88 "  S- &providers.:z yOh- %&jԍSection 335 was added to the Communications Act by Section 25 of the 1992 Cable Act. 47 U.S.C. 335. Section 335(a) states, among other things, that any regulations shall, at a minimum, apply  &Mthe 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  &Leducational 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  S-and conditions.F; z yOX - &ԍNational educational programming suppliers are defined to include any qualified noncommercial educational  &television station, other public telecommunications entities, and public or private educational institutions. The  &Communications Act allows DBS providers to use unused channel capacity required to be reserved under the statute  &;for any purpose pending the actual use of such channel capacity for noncommercial programming of an educational or informational nature. F  SH - : ~254.` ` In March 1993, the Commission initiated a proceeding to implement Section 335.|<^H z {O- &-ԍImplementation of Section 25 of the Cable Television Consumer Protection and Competition Act of 1992,  {O- &Direct Broadcast Satellite Service Obligations, MM Dkt. No. 9325, Notice of Proposed Rulemaking ("Public Service  {OL-Obligations NPRM"), 8 FCC Rcd 1589 (1993).| In  &September 1993, after the Commission had received comments in this proceeding, the U.S. District Court  S - &for the District of Columbia held that Section 335 was unconstitutional.w= z {O-ԍDaniels Cablevision, Inc. v. United States, 835 F. Supp. 1 (D.D.C. 1993).w This ruling effectively froze  &Mthe proceeding. On August 30, 1996, the U.S. Court of Appeals for the District of Columbia Circuit  S - &0reversed the District Court and held that Section 335 was constitutional.w> z {O-ԍTime Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957 (D.C. Cir. 1996).w In January 1997, the  &Commission issued a Public Notice seeking to update and refresh the record in its proceeding  SX-implementing Section 335.g?\Xz {O- &ԍImplementation of Section 25 of the Cable Television Consumer Protection and Competition Act of 1992,  {O- &JDirect Broadcast Satellite Service Obligations Comments Sought in DBS Public Interest Rulemaking, MM Dkt. No. 9325, Public Notice, 12 FCC Rcd 2251 (1997).g  S- : 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  S- &capacity by DBS program providers as well as cable and OVS operators.?@>z yO$-ԍAlliance Comments at 1.? 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,  &jAlliance believes that the setasides allow the DBS providers to fulfill their public interest obligations by"B@,O(O(88"  &=offering a platform for the public to express its diversity of opinions, to provide a forum for educational  S- &>and noncommercial information, and to serve the DBS industry's concern for competitive fairness.:Az {O@-ԍId. at 3, 4.:  &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  S8- &\flexibility in designing their public service program packages.BB8Zz yO2-ԍSBCA Comments at 1314. B The Commission is developing a full  S-record in response to the Public Service Obligations NPRM.Cz {O - &YԍSBCA and Alliance have filed comments in response to the Public Service Obligations NPRM. See also SBCA and Alliance Comments in MM Docket No. 9325.  S- J.` ` Navigation Devices  Sr- : `256.` ` Section 629 of the Communications Act requires the Commission, in consultation with  &appropriate industry standardsetting organizations, to adopt rules to assure the commercial availability of  S" - &znavigation devices from manufacturers, retailers and other vendors not affiliated with any MVPDs.D" Dz yO-ԍ47 U.S.C. 549. Section 629 was added to the Communications Act by Section 304 of the 1996 Act.  &=Navigation devices are television settop 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  S2- &rights to prevent theft of service.>E2z yO-ԍ47 U.S.C. 549(b).> Multichannel video programming providers may continue to offer  S - &equipment as long as they do not subsidize the equipment prices with the charges for their services.>F d z yO-ԍ47 U.S.C. 549(a).>  &The rules will lapse when the Commission determines that the markets are competitive and that  S-elimination of such rules would serve the public interest.>G z yON-ԍ47 U.S.C. 549(e).>  Sj- : 2257.` ` In February 1997, the Commission issued a Notice of Proposed Rulemaking to implement  SD- &Section 629.*HD z {Oh"- & ԍImplementation of Section 304 of the Telecommunications Act of 1996 Commercial Availability of Navigational  {O2#-Devices, CS Docket No. 9780, Notice of Proposed Rulemaking ("Navigation Notice"), 12 FCC Rcd 5639 (1997).* 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"~H,O(O(88"  &=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.  S`- VI.VIDEO DESCRIPTION  S- : }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  S- &[to the widespread deployment of video description.Iz yO( - &,ԍ47 U.S.C. 613(f). Specifically, Section 713(f) of the Communications Act states that the Commission must  &y"commence an inquiry to examine the use of video descriptions on video programming in order to ensure the  &,accessibility of video programming to persons with visual impairments, and report to Congress on its findings. The  &Commission's report shall assess appropriate methods and schedules for phasing video descriptions into the  &Zmarketplace, technical and quality standards for video descriptions, a definition of programming for which video descriptions would apply, and other technical and legal issues that the Commission deems appropriate."  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  Sr- &before us was insufficient to assess appropriate methods and schedules for phasing in video description.J^r@z {OR- &ԍClosed Captioning and Video Description of Video Programming, Implementation of Section 305 of the  {O- &Telecommunications Act of 1996, Video Programming Accessibility,  MM Docket No. 95176, Report ("Video  {O-Accessibility Report"), 11 FCC Rcd 19214, 1927019271 138142 (1996).  SJ - &=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  &kaudio programming ("SAP") signal and the costs of adding this capability; the cost of providing video  &zdescription 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;  &zany current efforts to coordinate new technology standardsetting and funding mechanisms; and other  S -relevant legal and policy issues.^K f z {O-ԍNotice, 12 FCC Rcd at 78447845, 2123.^  S- :  259.` ` Video description is an aural description of a program's key visual elements that is  S- &inserted during natural pauses in program dialogue.L z yO,- &[ԍ47 U.S.C. 613(g) (video description means the insertion of audio narrated descriptions of a television program's key visual elements into natural pauses between the program's dialogue). It generally describes actions that are not otherwise  &Mreflected 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  S- &a second soundtrack.MZ$P z yO%- &;ԍProviding video description through the SAP channel is also referred to as "closed description." Jaclyn Packer  {O&- &and Corinne Kirchner, Who's Watching: A Profile of the Blind and Visually Impaired Audience for Television and"L'L,O(O(&"  {OX- &Video ("Who's Watching"), American Foundation for the Blind, 1997, at vii. This study analyzes the needs and  &[television viewing habits of persons with visual disabilities as well as their perceptions of television and video  {O-description. Who's Watching at vvii. Use of a SAP channel allows the viewer to choose between the primary"M,O(O(88"  S- &>soundtrack and an alternative soundtrack.lNz {OT-ԍVideo Accessibility Report, 11 FCC Rcd at 1925319254 94.l Each SAPequipped broadcast signal has only one SAP channel.  S-  :  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  S8- &simultaneous transmission of the descriptive audio over a radio reading serviceBO8Fz yO -ԍACB Comments Cover Letter.B and "open" video  S-description, in which the descriptions are included in the primary soundtrack used by all viewers.`Pz {O- &ԍKaleidoscope Comments at 6; see also National Coalition Comments at 15. Kaleidoscope estimates that its  &Mcurrent programming, interstitials and commercials are 88% fully accessible and 12% partially accessible.  &Kaleidoscope Comments at 5. RP urges that future hardware be designed with persons with visual disabilities in  &mind, suggesting that all menus should "talk" and all access buttons for other audio channels be "brailled" or otherwise touch identifiable. RP Reply Comments at 3. `  S- :  261.` ` WGBH reports that 144 PBS member stations have SAP capability, reaching more than  S- &=78% of American households,UQ z yO-ԍWGBH Comments at 2; WGBH Reply Comments at 1.U and that SAPbased audio services are available to 44% of all television  Sp- &households through SAPequipped affiliates of at least one of the major commercial networks.ARpz yO(-ԍWGBH Reply Comments at 1.A WGBH  &reports that the cost of installing SAP capability for PBS stations which have added SAP capability ranges  S - &from $5000 to $25,000 depending on the size of the station.;S z yOh-ԍWGBH Comments at 2.; RP reports that installation of SAP  S - &equipment would cost approximately $50,000 per broadcast station.;T 8z yO-ԍRP Comments at 78.; RP also notes that cable operators  S - &would need to install equipment for each channel requiring SAP capability.U z {O8 -ԍId. at 8; see also NCTA Comments at 48 (cable operators must incur costs to add SAP capability). NCTA notes that while  &many cable operators already carry SAP signals, SAP is being used to provide other services, including  S - &Spanish language audio.>V Zz yOz#-ԍNCTA Comments at 48. > Cable operators that did not already have it would need to install SAP capable  SX- &equipment at their headends in order to transmit the SAP channel to subscribers.1WXz {O%-ԍId.1 WGBH estimates that"X|W,O(O(88x"  S- &the cost for MVPDs to add SAP capability ranges from $500 to $5,000.;Xz yOh-ԍWGBH Comments at 2.; Any programmer  &!providing video description would also have to have SAP capable equipment to deliver the video  S-description to cable headends and other MVPDs.<YXz yO-ԍNCTA Comments at 48.<  S`-  : }262.` ` According to the National Center for Health Statistics, 8.6 million persons in the U.S. have  S8- &visual disabilities.xZ\8z {O - &xԍVideo Accessibility Report, 11 FCC Rcd at 19254 96, citing National Center for Health Statistics, Current  &Estimates from the National Health Interview Survey, 1994, Series 10, No. 193, at 93, Table 62. Other estimates  {OR -range between eight and 12 million persons. Id.x 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  S- &video programming.E[ z {O-ԍWho's Watching at 23. E ACB estimates that as many as 500,000 children with visual disabilities under the  S- &kage of 18 may benefit from improved access to video service.<\z yO-ԍACB Comments at 34.< 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  SH - &this figure may increase as the population ages.`]H . z yO- &ԍACB Comments at 4 (persons with learning or cognitive disabilities may benefit from video description); RP  &Reply Comments at 2 (total number of potential beneficiaries approaches 30 million); Metropolitan Washington Ear  &iReply Comments at 4 (number of people with visual disabilities is closer to 12 million; millions more will benefit  &from video description, including relatives of the visually disabled, people learning English as a second language, and people with learning disabilities).` However, MPAA suggests that video description is of  &\limited utility regardless of the number of persons with visual disabilities, and that some people with  S - &jcongenital blindness find video description to be a nuisance.;^ z yOv-ԍMPAA Comments at 7.; Other commenters dispute this assertion,  &arguing that there is no evidence to support it and, even if true, video description can simply be turned  S - &off._\ nz {O- &ԍMetropolitan Washington Ear Reply Comments at 6; see also WGBH Reply Comments at 5. AFB also  &disputes the claim that video description is of limited utility, citing its own study of attitudes towards video  {OH -description. See AFB Reply Comments at 23, citing Who's Watching at 23.  RP argues that video description should not be subject to a costbenefit analysis, asserting that such  S -services are a civil right.9` z yO"-ԍRP Comments at 2.9  S0- : 263.` ` We previously reported that video description costs range from $1000 per program hour  S- &to $10,000 for a full length feature film.ua"z {O&-ԍVideo Accessibility Report, 11 FCC Rcd at 1925819259 106109.u NCTA states that the cost of video describing a full length"a,O(O(88:"  S- &feature film can range as high as $10,000.<bz yOh-ԍNCTA Comments at 47.< 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  S- &edit room operator costs.;cXz yO-ԍMPAA Comments at 3.; WGBH states that the cost of video description has dropped from $4,000 per  S- &hour to $3,400 per hour,dz {O- &ԍWGBH Comments at 2. See also RP Comments at 22 (cost of video description ranges from $3,000 to $5,000 per hour). and that this cost amounts to as little as .26% of the budget of a single episode  S`- &Mof a prime time program.e`Bz yOB - &ԍWGBH Comments at 3. WGBH maintains that this small increase should be borne by broadcasters in return  {O -for their use of the public airways. Id. Other commenters report that they have been able to produce accessible  &programming using inhouse resources and alternative technologies. For example, Kaleidoscope asserts  &that the rates previously cited by the Commission are overstated due to reliance on outside contractors,  S- &Lnoting that it is able to hold the cost of description down by inhouse production.fz yO$- &ԍKaleidoscope Comments at 6. NTN also maintains that estimates of the cost of video description have been dramatically overestimated. NTN Reply Comments at 12. 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  Sp- &yto much more than a program without video description."Egp z yO-ԍKaleidoscope Comments at 56.E NTN states that it routinely provides video  &description for between $1,000 and $1,200 an hour, a cost that NTN claims is likely to be reduced through  S - &[the use of digital technology.h z yOD- &ԍNTN Reply Comments at 12. NTN notes that it has achieved this rate as a profitable, commercial taxpaying entity. The services provided by Kaleidoscope and NTN, however, use "open"  S -video description.i z yOt- &ԍKaleidoscope Comments at 6; NTN Comments Attachment. Kaleidoscope also notes that "open" video description is significantly less complex and allows for additional savings in distribution.  S - : P264.` ` According to National Coalition, the market will not provide adequate incentives for video  S - &Mdescription, and increased availability of the service is dependent upon action by the Commission.Xj 4z yOT -ԍMetropolitan Washington Ear Reply Comments at 4.X  &ySimilarly, WGBH notes that while SAPcapable television receivers are increasingly available, the market  &has failed to respond with increased availability of video description as promised by the programming  S- &industry.Akz yOl$-ԍWGBH Reply Comments at 3.A According to WGBH, no commercial television programming has offered video description  S- &without public funding.1lTz {O&-ԍId.1 WGBH also asserts that there are currently sufficient video description"l,O(O(88*"  S- &/resources in existence to begin a phasein schedule.7mz {Oh-ԍId. at 4.7 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  S-alone.@nZz yO-ԍRP Reply Comments at 2. @  S8- : 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  S- &description.goz {OL -ԍVideo Accessibility Report, 11 FCC Rcd at 19270 139.g Commenters recognize that, in the current analog environment, SAP channel capacity is  S- &a limited resource and video description must compete with other possible uses of the SAP channel.p|z {O- &<ԍSee, e.g., AFB Reply Comments at 3; Metropolitan Washington Ear Reply Comments at 45; HBO Reply Comments at 2.  &The video programming industry notes that it has developed a profitable niche market by providing second  SJ - &language audio to serve the Spanishspeaking community.eqJ z {O-ԍSee, e.g., MPAA Comments at 3; HBO Reply Comments at 2.e We previously concluded that funding will  &also affect any schedule for the widespread use of video description, as it appears that advertising support  S - &alone is unlikely to be sufficient to fund this service given the costs involved.Ir& h z {O- &-ԍVideo Accessibility Report at 19270 140. We also reported that the primary source of funding for video  &description has been grants administered by PBS, National Endowment for the Arts, National Science Foundation  {O- &;and especially the Department of Education ("DOE") At the time of the Video Accessibility Report, DOE allocated  {O^-$1.5 million for video description, or about $0.19 per American with visual disability. Id. at 19259  110.I Funding remains a major  &concern. For example, MPAA notes that currently available sources of public funding for video  S - &description are becoming increasingly scarce.ds V z {O-ԍMPAA Comments at 6. See also HBO Reply Comments at 7.d Other commenters suggest that public funding should not  &be the criteria for additional Commission action, because such funding was only intended to "prime the  SZ-pump" by demonstrating the viability of the service and allowing a market to develop.LtZz {O-ԍSee, e.g., WGBH Comments at 3.L  S - :  266.` ` With respect to specific methods and schedules for video description, National Coalition  &{proposes a sevenyear implementation schedule for video description of prime time and children's  &programming, comparing this phase in period to the eight years schedule for closed captioning of prime  S- &ktime television.Muzz yO$-ԍNational Coalition Comments at 1011.M 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"j u,O(O(88"  S- &[time video description per week beginning in the fall of 1998,8vz {Oh-ԍId. at 11.8 and another three hours per week would  S- &be added each year until all 22 hours of prime time were described.1wZz {O-ԍId.1 National Coalition further proposes  &ythat 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  S`- &programming requirements.x`z {O- &-ԍId. at 1011. The children's educational programming requirements only apply to broadcast licensees. 47 C.F.R. 73.661. 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  S- &effective substitute for a video described audio track.9yFz {O~-ԍId. at 11. 9 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  S - &financing does not lend itself to video description.:z z {O-ԍId. at 12. : National Coalition also suggests that the Commission  &mdevelop 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  S -the blind to turn on a radio or use the SAP channel for an aural message.2{ j z {O-ԍId. 2  SX- :  267.` ` In the Video Accessibility Report, the Commission noted that copyright liability poses a  S2- &{significant hurdle to a widely applicable video description requirement.j|2 z {O-ԍVideo Accessibility Report, 11 FCC Rcd at 1927071 141.j NCTA and other video  &>programming industry commenters continue to cite potential copyright issues as an obstacle to more  S- &ywidespread deployment of video description.^}Z z {O- &ԍNCTA Comments at 48; Lifetime Reply Comments at 7; MPAA Comments at 67. See also HBO Reply  &Comments at 6 (copyright liability posed by video description creates an additional expense that is difficult to predict and is largely ignored by advocates 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  &jexample, 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"B},O(O(88"  S- &value to the original work.1~Zz {Oh- &ԍWGBH Comments at 3; WGBH Reply Comments at 45. See also National Coalition Comments at 13; AFB  &-Comments at 5 (the desire to obtain carriage will resolve copyright disputes if the Commission were to mandate video description).1 Kaleidoscope provides video description for originally produced material  S- &|or material already in the public domain in order to avoid any potential copyright problems.Cz yOb-ԍKaleidoscope Comments at 9.C  &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  S`-that it had made good faith efforts to obtain the rights to video describe a particular product.1`zz {Oz -ԍId.1  S- : # 268.` ` Based on the information received in response to this and earlier requests for information,  &yit is certain that "closed" video description is feasible. The necessary technology exists, and, as noted by  S- &[commenters, some video description is already being provided, both on cable and broadcast television.u z {Ol-ԍSee, e.g., MPAA Comments at 2; NCTA Comments at 47; WGBH Comments at 1.u  &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  &zregulations regarding digital television. As we previously stated, the DTV standard can accommodate  S - &Lvideo description, even though there is no data capacity reserved exclusively for video description.i z {O^-ԍFourth Report and Order, 11 FCC Rcd at 17795 58.i 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  S - &would consider appropriate changes to our rules.m\ 0 z {OP- &ԍId. The audio system of the DTV standard allows data to be specifically identified as an associated audio  &service for persons with visual disabilities. In addition, the DTV standard allows a separate complete audio service  {O-that includes video description.  Id.m In the digital environment, video description will not have to compete with foreign language audio for use of one SAP channel.  S-  : 4 269.` ` On the other hand, the costs of providing video description are substantial. Video  S- &description can cost $3,400 per program hour.;T z yO-ԍWGBH Comments at 2.; In addition, each programming network must have SAP  &ycapable 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  Sh- &to $5,000.1hz {O#-ԍId.1 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. "v,O(O(883"Ԍ S- :  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.  S- &LThe 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.  S" - : _271.` ` In response to Congress' request that we report on appropriate methods and schedules for  S - &phasing video descriptions into the marketplace,> z yOb -ԍ47 U.S.C. 613(f).> 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  &kavailability. For example, a minimal amount of video description could be required to be provided by  &ythe 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  S- &ywould apply,1Xz {O-ԍId.1 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  Sj- &Lprogramming.6Xjz yO- &ԍWe note that some programming services, most notably smaller cable programming networks, have very  &;limited viewership, even during prime time. We also note that the children's programming requirements only apply to broadcast licensees. 6 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  S- &that respondents would like to have described.C z {O-ԍWho's Watching at 26.C Whether funded through public sources or through a  &more direct regulatory requirement, a period of trial and experimentation would be beneficial so that more  &kspecific 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.  ST- VII.ADMINISTRATIVE MATTERS  S-  : #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). ",O(O(88"Ԍ S- : `273.` ` It is ORDERED that the Office of Legislative and Intergovernmental Affairs shall send  S- &copies of this 1997 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate.  Sb- : 274.` ` It is FURTHER ORDERED that the proceeding in CS Docket No. 97141 IS TERMINATED.  S-X` hp x f!(#%'0*,.8135@8:97.1% ~66.2%  68.2%-     -  yO:-d8` hp x (#%X# X\  P6G;P#(*)}Revised penetration figure based on 1990 Census.  yO-(e)}Estimated by Paul Kagan Associates.  S-#&a\  P6G;&P# Sources:  Sj- (#/,},U.S. Television Households: 1990 to 1994 A.C. Nielsen Co. as of January of the following year.  SB- (#}Taken from Veronis, Suhler & Associates, Subscribers to Subscription Video Services, The  S- (#Veronis, Suhler & Associates Communications Industry Forecast, August 1996, at 128. 1995  S- (#@Paul Kagan Assoc., Inc., Paul Kagan's 10Year Cable TV Industry Projections, The Cable TV  S- (#Financial Databook, 1996, at 11. 1995 Revised Paul Kagan Assoc., Inc., Paul Kagan's 10Year  S- (#Cable TV Industry Projections, Cable TV Investor, May, 1997, at 9. 1996 ĩ Nielsen Media  S- (#Research as cited by Broadcasting & Cable, Jan. 13, 1997 at 118. 1997 Nielsen Media Research  SZ-as cited in The TV Column, Washington Post, Aug. 26, 1997 at E4.(#  S - (#]}XHomes Passed and Basic Cable Subscribers: 1990 to 1994 Paul Kagan Assoc., Inc., History of  S- (#Cable and PayTV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; 1995 to  S- (#?1997 ĩ Paul Kagan Assoc., Inc., Paul Kagan's 10Year Cable TV Industry Projections, Cable TV  S-Investor, May, 1997, at 9. (# "J ,O(O(88G"I"  S-#&a\  P6G;&P# TABLE B2 6Premium Cable Services: 1990 1997  S- (in millions)#&a\  P6G;&P# Đd !HXX   @@@@@@@@@@@@@@A 8@@@@@@@ *      * &&  aEH" 8` hp x (#%X#6\  P6Q P#/>XXI!XXPremium Cable Service aoSubscribersXXr?XXPremium UnitsXX*      8* && 7 XXYearX end9/>XX9=XXYearend F<Total9zChange From yPrevious Year9@XX9XXYearend pTotal9Change From Previous Year*   2* &&  XX/>XXPXX@XXXX0D 2   w  && 2 XX1990_/>XX_GSXX23.9_|1.3%_@XX_XX41.5_'1.0%*   *2 XX1991) />XX) GSXX24.0) |0.4%) @XX) XX43.1) &3.9%**2 XX1992 />XX GSXX24.7 |2.9% @XX XX44.4 &3.0%*] *2 XX1993 />XX GSXX26.4 |6.9% @XX XX46.0 &3.6%*7 *2 XX1994 />XX HSXX28.1 |6.4% @XX XX51.1 '11.1%* *2 XX1995 />XX GSXX29.8 |6.0% @XX  aE XX 51.6 # ,5\  P6G;i,P#(*)#G\  P6G; P# '1.0%* *2 1996k />k  aE HS31.5# ,5\  P6G;i,P##G\  P6G; P#k |5.7%k @k 54.5k &5.6%*   *2 1997U/>UGWN/AUԩU@U aE  57.2 # ,5\  P6G;i,P##eJ\  PC P## eJ\  PC P#(e)# G\  P6G; P#U&5.0% _    8` hp x (#%X  yO-# X\  P6G;P#(*)}Revised Data updated by the source.  yO-(e)}Yearend estimated as of May 20, 1997, by Paul Kagan Associates.  Sw-#&a\  P6G;&P# Sources:  SO- (#}XPremium Cable Service Subscribers: 1990 to 1994 Paul Kagan Assoc., Inc., History of Cable  S)- (#]and PayTV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. 1995 to 1996  S- (#Paul Kagan Assoc., History of Cable and PayTV Subscribers and Revenues, Cable TV Investor, Feb. 24, 1997, at 10.(#  S- (#}XPremium 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  S=- (#subscribing to one or more premium services. 1990 to 1995 Paul Kagan Assoc., Inc., Pay TV  S- (#|Subscriber History, The Cable TV Financial Databook, July 1996, at 8. 1996 to 1997 Paul  S- (#@Kagan Assoc., Inc., Paul Kagan's 10Year Cable TV Industry Projections, Cable TV Investor, May, 1997, at 9.(# ",O(O(88j"  S-#&a\  P6G;&P# TABLE B3  S- Channel Capacity of Cable Systems: October 1995 October 1997      A 8@@@@@@@a8XX F     h       F Bh e hB   aEH#G\  P6G; P#h  h"@ l 1995(*) h"6 h"|n1996(*) h" h" 9596 h"` h"N@1997(*) h" h"9697Fh      \      8F BhY e hB  Channel CapacityY Y Number of  SystemsY  Percent of  SystemsY Y IGNumber of NSystemsY Percent of RSystemsY Y Percent Change Y  Y"Number of  jSystems Y UPercent of Y*Systems Y  Y Percent ChangeF\      F BY e hB  54 and + " I 1,558" 15.6% "U1,724"16.4%""10.7%   "'1,886 "_Z19.0% " " 9.4%FF B e hB  30 to 53H H"I 6,376H" 63.8%H H"U6,410H"60.8%H"H"00.5% H  H"&6,374 H"_Z64.1% H" H"ԩ0.6%FF B e hB  20 to 29 "I 1,104" 11.0% "U1,607"15.3%""45.6%   "*971 "`|9.8% " "ԩ39.6%FHF B e hB  13 to 19  "| 353 " 3.5%  "W 337 "3.2% " "ԩ4.5%    ")309  "a|3.1%  "  "ԩ8.3%FF B e hB  6 to 12: : "| 588: " 5.9%: : "W 456: "4.3%: ": "ԩ22.4% :  : ")399 : "`|4.0% : " : "ԩ12.5%F F B e hB  5 or less  " 14 " 0.1%  "[-12 "0.1% " "ԩ14.3%    "-10  "a|0.1%  "  "ԩ16.7%F: F B e hB  Not Avail.  "I 1,133 "  ԩ  "W 937 "ԩ " "ԩ17.3%    ")889  "hԩ  "  "ԩ5.1%F      F B e hB  Total< < "' 11,126< "  ԩ< < "S11,483< "ԩ< "< "03.2% <  < "$10,838 < "hԩ < " < "ԩ5.6%.       . B e hB    "  "          "0@  "l  "  " .l     < . Bh e hB  Sys. w/30+ channelsNh  Nh"I 7,934 Nh" 79.4% Nh"6 Nh"U8,134 Nh"77.1% Nh" Nh"02.5% Nh"` Nh"&8,260 Nh"^Z83.9% Nh" Nh" 1.5%Fl         F Bh e hB  Sys. w/less than 30 channelsI P  P"I 2,059 P" 20.6% P"6 P"U2,412 P"22.9% P" P"17.1% P"` P"'1,689 P"_Z17.0% P" P"ԩ30.0%-    N-  yO-# X\  P6G;P#d#X\  P6G;P#(*) Figures are as of October 1st, 1995/1996/1997. "Percentage of Systems" calculation excludes "not available" data.  Sh-#&a\  P6G;&P# Sources:  S@- X 1995 Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television &  S-Cable Factbook: Services Volume No. 64, 1996 Edition, at I81. (#  S- X 1996 ĩ Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 65, 1997 Edition, at I81.(#  S-}X 1997 ĩ Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television &  S~-Cable Factbook: Services Volume No. 66, 1998 Edition. (to be released).(# ",O(O(88j"  S- TABLE B4  Channel Capacity for Subscribers: October 1995 October 1997  S- (in millions)#G\  P6G; P#    a8XX XX F    h      NF Bh e hB   aE# G\  P6G; P#h  h"C o 1995(*) h"6 h"|n1996(*) h" h")9596 h" j h"OA1997(*) h" h" 9697Fh      \      F BhY e hB  Channel CapacityY Y Number of SubscribersY  Percent of l SubscribersY Y IMNumber of H?SubscribersY  Percent of SubscribersY Y Percent Change Y  Y +Number of Subscribers Y WPercent of USubscribers Y  Y"Percent ChangeF\      <F BY e hB  54 and +> >"L 27.69>" 47.9%>"6>"T33.58>"55.3%>">"21.3% >" j >"&35.73 >"`f58.4% >" >" 6.4%FF B e hB  30 to 53 "L 28.56" 49.4%"6"T26.06"42.9%"""ԩ8.8% " j "&24.35 "`f39.8% " " ԩ6.6%F>F B e hB  20 to 29 "m 1.20" 2.1%"6"W0.81"1.3%""ԩ32.5% " j "(0.85 "c1.4% " " 4.9%FF B e hB  13 to 190 0 "m 0.130 " 0.2%0 "60 "W0.100 "0.2%0 "0 "ԩ23.1% 0 " j 0 "(0.09 0 "c0.1% 0 " 0 "ԩ10.0%FF B e hB  6 to 12  "m 0.22 " 0.4% "6 "W0.19 "0.3% " "ԩ13.6%  " j  ")0.19  "b0.3%  "  " 0.0%F0 F B e hB  5 or less| | "m 0.00| " 0.0%| "6| "V0.00| "0.0%| "| "90.0% | " j | "(0.00 | "b0.0% | " | " 0.0%F F B e hB  Not Avail." " "m 1.50" "  ԩ" "6" "V0.09" " ԩ" "" "ԩ36.0% " " j " ")1.22 " "jԩ " " " "27.1%F      | F B e hB  Total  "L 59.30 "  ԩ "6 "W61.7 " ԩ " "94.0%  " j  "&62.43  "jԩ  "  " 1.2%.      " . B e hB  ~ ~ " ~ " ~ "6~ "^n~ ">~ "~ " ~ " j ~ "1L ~ "m ~ " ~ " .l      . Bh e hB  Sys. w/30+ channels h   h"m 56.3  h" 97.3%  h"6  h"V59.6  h"98.2%  h"  h"96.0%  h" j  h")60.1  h"`f98.2%  h"  h" 0.7%Fl     \    ~ F BhY e hB  Sys. w/less than 30FY  FY" 1.6 FY" 2.7% FY"6 FY"["1.1 FY"1.8% FY" FY"ԩ29.0% FY" j FY"*1.13 FY"c1.8% FY" FY" 2.7%-\    Y-8` hp x (#%8` hp x (#%d  yO-# X\  P6G;P#(*) Figures are as of October 1st, 1995/1996/1997."Percentage of Systems" calculation excludes "not available" data.  SD-#&a\  P6G;&P# Sources:  S- (#0}X 1995 Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 64, 1996 Edition, at I81.(#  S- (#0}X 1996 Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 65, 1997 Edition, at I81.(#  S- (#?}X 1997 ĩ Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 66, 1998 Edition. (to be released).(# " ,O(O(88n "  S-  #&a\  P6G;&P# TABLE B5  S-4 Growth By Network Type: 1994 1996   XX  <X@@@@@@@@@@@ :\          : 6 6  aE 8` hp x (#%X#6\  P6Q P#>8 XX># XX1994>_yXX> aEdXX1995# ,5\  P6G;i,P##G\  P6G; P#>XX>79495 k Change >M>91996 >} >XX9596'       '  <X@@@@@@@@@@@<bXXXXXXX@@@@@@@@@@@@@@ F            F B e hB uXXNetwork Type XX XXNumber M of  Networksd+ Percent 8of ) Networksd[IXXdiXXNumber vof gNetworksd0Percent of  NetworksdXXdChange dM dNumber %of Networks dJvPercent Vof G;Networks d} dXXChange.     2b. B e hB XX  XX  } XX < [IXX zXX  XX   M  (  Z>  |  oXX.2      d. B e hB  aEX(XB# G\  P6G; P#asic/NoChrgL8 X(XLB XX94L073.4%L[IXXL aEo'104# ,5\  P6G;i,P#(*)#G\  P6G; P#L`74.8%LXXL aE610.6(*) LU L"126 LN77.8% L} L21.2%D      DX(XPremium8 X(XB XX20115.6%[IXXv21`15.1%XXO5.0% U %18 Q11.1% } ԩ14.3%BpBX(XPay Per View8 X(Xd XX82A6.3%[IXXw85.8%XXO0.0% U &7 P4.3% } ԩ12.5%D    JDX(XCombination8 X(Xd XX62A4.7%[IXXw64.3%XXO0.0% U &11 P6.8% }  aE$# G\  P6G; P#83.3%.    2$. B e hB  XX 8 XX  } XX < [IXX zXX  XX   M  (  Z>  |  oXX.2     . B e hB X(XTotal 8 X(X  XX128 < [IXX sZ139  H=0 i# ,5\  P6G;i,P# XX  aE@ #G\  P6G; P#8.6%# ,5\  P6G;i,P#(*)  U   aE@ !#G\  P6G; P#162# ,5\  P6G;i,P#  Z>  |   aE@ XX#G\  P6G; P#16.5%# ,5\  P6G;i,P#-     0 -X( 0 8@H!#X   yO -#X\  P6G;P#d(*) Revised Data updated by the source.  S - #&a\  P6G;&P#Source:  S| - (#{X( 0 8@H!#8` hp x (#%}X 1994 1996 : National Cable Television Association, National Cable Video Networks By Type of  SV-Service: 1976 1996, Cable Television Developments, Spring 1997, at 6.(# "0,O(O(88hP "  S- TABLE B6  S-` Cable Industry Revenue and Cash Flow(*): 1993 1997 d <bXXXXXXX@@@@@@@@@@@@@@?TXXX|@@@@@@@@@@@@@@ F           0 F B e hB  p p aE$ #G\  P6G; P#1993# &a\  P6G;&P#pJp aEx#G\  P6G; P#1994# &a\  P6G;&P#pp aE0#eJ\  PC P#1995# eJ\  PC P#(**) p& pU1996 p p( 1997F      N      F BH e hB  yOp- # G\  P6G; P## X\  P6G;P#H H aEp-8` hp x (#%X#6\  P6Q P# "{  TotalYJXXYiXX ^E TotalY% AChange {From "Previous YearHXXHXX uTotalH% [Change From <Previous Year H& HEA : Total Ho-% cChange hFrom a{Previous iYear H HEstimated YearEnd ! Total.N      2p. BH e hB  yO-' XX# C\  P6QP# AXXPXX|XXXXXX. & E9 sm   .2l    . Bh e hB  aEXXX#6\  P6Q P#Average Number of Basic Subscribers (mil.)\h \h$ XXX56.2\hJXX\h`rXX58.5\h4.1%\hXX\h60.9\h4.1% \h& \h<62.8 \hj3.1% \h \h8 64.1.l    2. Bh e hB     - J h    .  &  E9  sm     22  \ B e hB  XXRevenue Segments (mil.)D  D -XXD JXXD hXXD D XXD D . D & D E9 D sm D  D  02        0 B e hB Regulated Tiersv  v D XX$15,169 v JXXv ZXX$15,164f v 0.0%v XXv ($16,860v x11.2% v & v 5g$18,395 v j9.1% v  v $20,008F      FXXPay Tiers@  @ O XX$4,625 @ JXX@ ZXX$4,522 @ iԩ2.2%@ XX@ I$4,775@ 5.6% @ & @ 7$4,966 @ i4.0% @  @ $5,153F FXXAdvertising   ! XX$984  JXX [XX$1,077  9.5% XX I$1,433 x33.1%  &  8$1,662  h16.0%    $1,912Ft FXXPayPerView   ! XX$452  JXX ]LXX$484  7.1% XX |$535 x10.5%  &  :$647  g20.9%    ( $815FN FXXHome Shopping   # XX$113  JXX ^LXX$127  ^12.4% XX |$144 x13.4%  &  ;$145  i0.7%    ( $152F( F B e hB XXMiscellaneous+Installations    O XX$1,123  JXX \XX$1,412  ^25.7% XX I$1,151 bԩ18.5%  &  8$1,305  h13.4%    $1,774F       F B e hB XXXTotal Revenue (mil.)^ ^D XXX$22,466 ^JXX^XXX$22,786f ^1.4%^XX^($24,898^9.3% ^& ^5g$27,120 ^i8.9% ^ ^$29,814F            FXXXRevenue Per Avg. Sub8 8D XXX$399.75 8JXX8XXX$389.50f 8iԩ2.6%8XX8($408.8385.0% 8& 85g$431.85 8i5.6% 8 8$465.12.      2. B e hB ' XX AXXPXX|XX(XXB , Y)  X !.2      \. B e hB  aEXXX# 6\  P6Q P#Cash Flow (mil.)D DD XXX$10,100 DPXXDZXX$9,936 Diԩ1.6%DXXD($11,161Dx12.3% D& D6g$12,177 Dj9.1% D D< N/AF            FXXXCash Flow per Sub D XXX$179.72 JXXYXX$169.85f iԩ5.5%XX($183.277.9% & 5g$193.90 i5.8%   ԩ.      2h. B e hB XXX AXXXPXX|XX(XXB , Y)  X !.2    B. B e hB XXXCash Flow/Total Revenue: :!p XXX45.0%:JXX:]:XX43.6%:iԩ3.1%:XX:T44.8%:2.8% :& :944.9% :i0.2% : :< N/A-    t-X` hp x (#%XX  yO-# ]\  PCP#Note: All figures are calculated using average number of subscribers (first row).  aE#eJ\  PC P#  yOb- &# ]\  PCP#(*) Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"), commonly referred to as "cash  &flow,from operations" is often used to value the operations of a communications firm without regard to the firm's  &icapital structure. Cash flow from operations is the net result of cash inflows from operations (revenue) and cash  &joutflows from operations (expenses), thus ignoring noncash charges to net income such as depreciation and  &amortization. Cash flow from operations indicates a firm's operation's ability to meet the firm's net finance and investment obligations.   yO-#X\  P6G;P#(**) Revised Data updated by the source#Xj\  P6G;9XP#  S- #&a\  P6G;&P#Sources :  Sc- (#X` hp x (#%` hp x (#%'X}X 1993 and 1994 ĩ Paul Kagan Assoc., Inc., History of Cable and PayTV Subscribers and  S=- (#?Revenues, Cable TV Investor, June 30, 1995, at 5 and Paul Kagan Assoc., Inc., Estimated Capital  S-Flows In Cable TV, The Cable TV Financial Databook, July 1995, at 92.(#  S- (#!}X 1995 to 1997 Paul Kagan Assoc., Inc., Paul Kagan's 10Year Cable TV Industry Projections,  S- (#Cable TV Investor, May 20, 1997, at 9; Paul Kagan Assoc., Inc., "Cable TV's Growth Chart," Cable TV Investor, March 27, 1997 at 4.(# "S",O(O(88%F"  S-s TABLES 7A & 7B mAnnual Cable Industry Revenue, Cash Flow, and Subscriber Information  S-JYearend 1995 Yearend 1996 d  S$}The following tables detail the data and the calculations used in the Commissions estimates of the cable industrys annual revenue and cash flow.  S$"}To calculate the industrywide estimates of revenue, we first calculate an average revenue per  &jsubscriber figure for each year by dividing the total revenue of the companies in the group by the average  &subscribers of these companies for that year. Second, we multiply this average revenue per subscriber  &figure by an estimate of the industrys average subscribership for the year. The same methodology was followed to calculate the industrywide estimates of cash flow.  S - S${}The estimates in this 1997 Report differ from those in the 1996 Report because secondary sources  &Lwere used in many cases to obtain data, and only the firms with subscribership of 500,000 or more were analyzed.  SZ- Sources:  S - (#]` hp x (#%'Fp x(066X1995: 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  (#Opersonnel. 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.(#  S-66X1996: Data collected from numerous sources. See footnotes.(#  S- (#?66XThe yearend industry subscriber estimates for 1995 and 1996 were taken from Table B1 of this Appendix.(#  SR- General Notes:  S- (#66XUnless otherwise noted, all YearEnd 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.(#  Sb- (#66XUnless 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.)(#  S!- (#n66XEach companys Average Subscribers figure is from one of the three following sources: a  (#0company reported figure, an average of quarterly subscribership information, or the midpoint of two yearend subscriber numbers.(# "J$,O(O(88%F"  S- (#66XIn 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 FiveA, Enstar Income Growth Program FiveB, Enstar Income  (#Growth Program SixA, Enstar Income Growth Program SixB, Enstar Income Program 19841, Enstar Income Program II1, Enstar Income Program II2, Enstar IV1, Enstar IV2, (# 66Enstar IV3.(#  S- (#66XIn each of the tables, the company referred to as Jones Partnerships represents the combined  (#Nresults of 21 separate partnerships associated with Jones Intercable. The partnerships are: Cable  (#TV Fund 11A Ltd, Cable TV Fund 11B Ltd, Cable TV Fund 11C Ltd, Cable TV Fund 11D  (#mLtd, Cable TV Fund 12A Ltd, Cable TV Fund 12B Ltd, Cable TV Fund 12C Ltd, Cable TV  (#Fund 12D Ltd, Cable TV Fund 14A Ltd, Cable TV Fund 14B Ltd, Cable TV Fund 15A Ltd,  (#!IDS/Jones Growth Partners 87A Ltd, IDS/Jones Growth Partners89B Ltd, IDS/Jones Growth  (#Partners II LP, Jones Cable Income Fund 1A Ltd, Jones Cable Income Fund 1B Ltd, Jones  (#"Cable Income Fund 1C Ltd, Jones Growth Partners LP, Jones Growth Partners II LP, Jones Intercable Investors LP, Jones Spacelink Income Growth Fund 1A.(#  SX- (#A66XIn 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  (#nCable Properties Five LTD Partnership, Northland Cable Properties Six LTD Partnership,  (#Northland Cable Properties Seven LTD Partnership, and Northland Cable Properties Eight LTD Partnership.(# "@,O(O(88F"  S-Fp x(0` hp x (# * TABLE 7A ă  S-  1995 Cable Industry Revenue and Cash Flow Calculations   ?TXXX|@@@@@@@@@@@@@@@@99@@@@@@@@ .    t. **  aEQ#6\  P6Q P# CompanyN ` hp x (#YearEnd   SubscribersTAverage KSubscribersAnnual ,Cable Revenue 8(mil.)@Monthly ?Cable wRevenue Per Subscriber@&Annual  Cable Cash Flow (mil.)@Z9Annual OCable Cash WFlow Per QSubscriber@,Average Cash Flow  aEBMargin    ** TCI Communications, Inc. 12,494,000T12,183,000$4,936.000 $33.76 $2,081.800 [$170.88 k42.2%@Time Warner 9,769,000T9,545,500$3,743.440 $32.68 $1,549.000 [$162.28 k41.4%Continental CablevisionN 4,066,795NT4,002,805N$1,695.263 N$35.29 N$705.272 N\$176.19 Nk41.6%Comcast 3,407,000T3,357,000$1,454.932 $36.12 $718.455 [$214.02 k49.4%\Cox Communications 3,248,759U3,215,878$1,287.016 $33.35 $510.998 [$158.90 k39.7%Cablevision Systemsj  2,061,200j U1,904,425j $905.155 j $39.61 j $392.416 j Z$206.05 j k43.4%Viacom  1,179,500 V1,165,000 $444.400  $31.79  $182.900  [$157.00  k41.2%x Marcus Cable  1,154,718 W1,110,352 $325.414  $24.42  $173.597  [$156.34  k53.3%, Century Communications  1,100,000 U1,046,000 $349.641  $27.86  $177.210  [$169.42  k50.7% Cablevision Industries:  1,041,768: U1,028,942: $423.212 : $34.28 : $203.133 : [$197.42 : k48.0% Adelphia Communications  1,002,760 X 993,284 $390.413  $32.75  $204.145  Z$205.53  k52.3%H Jones Partnerships  902,345 X 904,834 $391.772  $36.08  $122.852  [$135.77  k31.4% EW ScrippsV 766,400VX 756,850V$279.482 V$30.77 V$118.074 V\$156.01 Vk42.2% Lenfest Communications  596,366 X 586,872 $232.155  $32.97  $115.361  [$196.57  k49.7%dTCA Cable TV, Inc. 574,473Y 529,512$200.867 $31.61  $99.982 [$188.82 k49.8%Intermedia Partners IVr 554,000rY 539,100r$211.800 r$32.74 r $87.000 r\$161.38 rk41.1%Media One (US West)& 527,000&Y 513,500&$215.000 &$34.89 &$100.000 &[$194.74 &k46.5%Washington Post Co. 518,000X 508,000$194.142 $31.85  $81.988 \$161.39 k42.2%4Multimedia Inc (Gannett) 458,000X 452,250$174.941 $32.24  $89.703 [$198.35 k51.3%Jones Intercable, Inc.B 439,400BX 374,350B$135.350 B$30.13 B $49.428 B[$132.04 Bk36.5%Falcon Holding Group 419,288X 379,985$142.608 $31.27  $95.442 \$251.17 k66.9%PC TEC Corp 333,920Y 286,061$127.079 $37.02  $57.858 Z$202.26 k45.5%Charter Comm. SE, LP^ 249,106^Y 245,615^$88.624 ^$30.07 ^ $42.842 ^[$174.43 ^k48.3%Bresnan Communications 209,459X 206,048$70.389 $28.47  $28.555 [$138.58 k40.6%lGarden State Cablevision 200,086Y 198,026$92.815 $39.06  $51.176 Z$258.43 k55.1% Insight Communicationsz 163,923zY 159,293z$57.108 z$29.88 z $28.115 z[$176.50 zk49.2%Galaxy Telecom. 162,400.Z 161,663.$57.459 .$29.62 . $22.800 .\$141.03 .k39.7%Falcon Cable Systems 135,475Y 134,362$52.935 $32.83  $23.915 [$177.99 k45.2%<Rifkin Acquisition Partners 132,271Z 128,165$50.208 $32.65  $23.429 [$182.80 k46.7%Northland PartnershipsJ 102,766J[,99,061J$35.181 J$29.60 J $14.579 J\$147.17 Jk41.4%Helicon Group> 87,632[,86,615$35.225 $33.89  $17.141 [$197.90 k48.7%XEnstar Partnerships> 85,342Z,84,780$31.405 $30.87  $13.022 [$153.60 k41.5% Falcon Classic Cablef> 47,957fZ,47,435f$18.363 f$32.26 f+$8.263 f[$174.20 fk45.0%Cencom Inc. Cab. Prtnrs II> 44,500Z,43,750$17.046 $32.47 +$7.245 [$165.59 k42.5% tMercom, Inc.> 38,853Z,38,089$13.939 $30.50 +$5.191 [$136.29 k37.2% ( **  g ) h)l !   ** Total For GroupF 48,274,462FS47,016,397F$18,880.779z F$33.46 F$8,202.886 F[$174.47 Fk43.4%  g ) h)l  DTotal For Industry  62,100,000 R60,900,000 $24,456.137z  $33.46  $10,625.139d  [$174.47  k43.4%&\ & *Y* Percent Change From Previous Year"Y)  I 4.02%"Yh ]74.19%"Y %5.97%"Y 81.71%"Y) L5.75%"Yl  a_1.50%"Y  Uԩ0.21%\ ( Y` hp x (#   "#,O(O(88E$ "  S-d # &a\  P6G;&P#1995 Notes:  S-ԩ TCI  (#mXOn January 26, 1995, TCI acquired Telecable. TCIs results have been adjusted as though the  (#transaction took place on January 1, 1995. This increased TCIs revenue by $25 million and its  (#0cash flow by $10.8 million (calculated by applying Telecables 1994 cash flow margin to the $25  (#million.) TCIs average subscribership was calculated assuming that this acquisition occurred at the beginning of the year. (#  (#XTCIs 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. TCIs cash flow was  (#increased by $38 million to account for special strategic initiatives and a customer retention program.(#  S - é Time Warner  (#1XDuring 1995, Time Warner (TW) completed four acquisitions. TWs 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 TWs 1995 revenue  (#and $46 million to its 1995 cash flow. On May 2, 1995, TW acquired Summit Communications  (#lwhich had 165,000 subscribers at the end of 1994. This added $22 million to TWs 1995 revenue  (#and $11 million to its cash flow. On July 6, 1995, TW acquired KBLCOM, a subsidiary of  (#1Houston Industries Inc., which had 690,000 subscribers at the end of 1994. This added $139  (#million to TWs 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 TWs 1995 revenue and $45 million to its cash flow.(#  S- é Continental  (#  (#lXOn 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  (#1Chicago, Columbia Cable of Michigan, Consolidated Cablevision of California, and NCOM).  (#!Continentals data have been adjusted as though these transactions took place at the beginning of  (#2the year. This increased Continentals 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  (#m($79.107 million for Providence and $25.314 million for the other acquisitions.) Continentals  (#Aaverage subscribership was calculated assuming that these acquisitions had occurred at the  (#beginning of the year. This increased Continentals 1994 yearend subscriber number by 1,000,265 (771,000 for Providence and 229,265 for the other acquisitions.) (#  (#XWhen Continental reports its basic subscribership, it includes, on an equity basis, subscribers from  (#{its partially owned affiliates. Those subscribers were removed from the 1995 yearend subscriber number (123,364). Therefore, the 1994 average subscribers number has been adjusted as well.(#  (#XContinentals 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.(# "&,O(O(88n( "Ԍ S- é Cox  (#XOn February 1, 1995, Cox acquired Times Mirrors cable holdings. Coxs results have been  (#adjusted as though this transaction took place at the beginning of the year. Coxs revenue and cash  (#flow assume the acquisition had occurred at the beginning of the year. Coxs average subscriber  (#]number was calculated assuming that it had controlled the Times Mirror subscribers for the entire year. (#  (#}XCoxs 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.(#  Sp- é Marcus  (#XOn January 1, 1995, Marcus acquired cable systems from Crown Media, Inc., which added  (#193,300 subscribers to its 1994 yearend subscriber figure. On November 1, 1995, Marcus  (#lacquired cable systems from Sammons Communications, Inc. Marcus results have been adjusted  (#las 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 oneninth 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 oneninth of that number for October.) Marcus yearend 1994  (#subscriber figure was increased by 650,000 subscribers (the subscribership of the acquired systems on March 30, 1995).(#  S- é Century  (#XRevenue and cash flow data are for the 12 months ending November 30, 1995. Its yearend subscriber number is as of May 31, 1995.(#  S- é Adelphia  (#XAdelphias average subscribers, revenue, and cash flow are for the 12 months ending December31, 1995. Its yearend subscriber number is as of that date.(#  Sx- é TCA  (#XTCAs average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1996. Its yearend subscriber number is as of that date.(# ",O(O(88 "  S-/ TABLE 7B  S-  1996 Cable Industry Revenue and Cash Flow Calculations #Xj\  P6G;9XP# d @@99@@@@@@@@!)@<9@@@@@@@@ &\   & **  aE:#6\  P6Q P# Company_ ` hp x (#YearEnd   SubscribersRAverage I}SubscribersAnnual *Cable Revenue 6(mil.)QMonthly TCable Revenue Per SubscriberQ<Annual Cable Cash Flow (mil.)Q[OAnnual PCable Cash XFlow Per RSubscriberQBAverage Cash Flow  aEXMargin    **  aEQTCI Communications (1) 13,900,000R13,197,000$5,860.00B$37.00$2,230.00]I$168.9838.1%Q **  aETime Warner (2) 12,300,000R11,034,500$4,760.00B$35.94$2,012.00]I$182.3342.3% **  aEUS West (Media One) (2) Comcast_ 4,354,287_T4,210,541_$1,051.19_B$20.81_$1,473.00_\I$349.84_40.1% **  aEmComcast (1) 4,280,000R3,843,500$1,914.00B$41.496$919.00]I$239.1048.0%m **  aE!Cox Communications (1) 3,259,384R3,254,072$1,460.00B$37.386$556.90_I$171.1438.1%! aECablevision Systems (1) {  2,445,000{ S2,253,100{ $1,096.63{ B$40.56{ 6$448.00{ ]I$198.84{ 40.9% aE Adelphia Commctns (1) ׮ /  1,824,000/ T1,413,380/ $473.00/ B$27.87/ 6$242.00/ ^I$171.22/ 51.2%  **  aE= Marcus Cable (1) ,    1,275,000 T1,214,859 $435.00 B$29.84 6$204.00 ]I$167.92 46.9%=  **  aE Century Communications (1)  1,250,000 T1,175,000 $457.00 B$32.41 6$253.00 \'$215.319 55.4%  **  aE Lenfest Group (2)K  1,110,703K V853,535K $354.56K B$34.61K 6$182.91K ]I$214.28K 51.6%  **  aEY Falcon Cable TV(2) (2)  1,017,000 T1,079,041 $217.32 B$16.78 6$120.14 _I$111.34 55.3%Y  aE TCA Cable TV, Inc. (1)  627,000 V600,736 $253.31 B$35.14 6$120.00 ]I$199.75 47.4%  aE InterMedia Partners (2)g 573,655gV563,828g$106.42gB$15.73gW$48.49g_j$86.00g45.6%  aEuPostNewsweek Cable (1) 588,000V553,000$230.00B$34.66W$98.00]I$177.2242.6% u **  aE)Jones Intercable (2) 585,000W512,200$248.63B$40.456$100.50^I$196.2140.4% ) ** P ( f,m#7   ** Total For GroupG 49,089,029GP45,608,293G$18,917.060GB$32.05G$9,007.938G]I$189.97G47.6%  ** P ( f,m#/ ETotal For Industry 63,500,000P62,800,000$26,044.416B$34.56$12,403.628^I$197.5147.6%&\ & *Y* Percent Change From Previous Year Y(  2 4.02% Yf Z 3.03% Y #6.51% Y M3.18% Y,  b9.33% Ym# `T11.67% Y/  8.82%\ Y` hp x (#  {O-# X\  P6G;P#(1) Paul Kagan Assoc., Cable TV Investor, December, 1996 May, 1997. (2) Information derived from company 10K or direct correspondence with the company. " ,O(O(88a"  S-#&a\  P6G;&P#d 1996 Notes:  S- é Adelphia XFiscal yearend March 31, 1997.(#  S8- é Century XFiscal yearend May 31, 1997.(#  S-  S-ԩ Comcast  (#}XComcast acquired Scripps on November 1, 1996. Comcast numbers are pro forma Scripps acquisition.(#  SH -  S -ԩ Continental  (#  (#XWhen Continental reports its basic subscribership, it includes, on an equity basis, subscribers from  (#{its partially owned affiliates. Those subscribers were removed from the 1995 yearend subscriber number (123,364). Therefore, the 1996 average subscribers number has been adjusted as well.(#  (#XContinentals revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue.(# X(#  S- é Falcon Cable TV  (#lXThe 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.(#  (#2XOn 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.(#  S - é TCA Cable  (#XTCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1997. Its yearend subscriber number is as of that date.(#  Sp#- é US West (MediaOne)  (#XUS West acquired Continental Cablevision on November 15, 1996, and became "MediaOne." The US West numbers represented here are pro forma Continental Cablevision acquisition.(# "%,O(O(88'"  S- TABLE B8 , Acquisition of Capital: 1989 June 1997  S-($ in million) Đd  aE`#G\  P6G; P# 0 !)@<9@@@@@@@@Art@@@@@@@@@@@@@@@ B\         B F e hF ` ` Year ` hp x (#X( XX  Private DebtXX[OeXX p#Public DebtXXXX cPrivate EquityXX V IlXX .Public EquityXX |+ XX Total Capital Raised From  Financing 6Sources* + XXJ           J F e hF &  XX  XXSum F Raisedd4b% of 3[TotaldW#XXdkXXSum fRaisedd% of TotaldXXdXXSum MRaised di% of bTotal d*XX d- XXSum (Raised dU% of TTotal dxXXd+ 2     @2 F e hF 6 . XX. XX.>.W#XX.tuXX.s.XX.XX . .*XX .5|XX ._z .xXX.+ XX2@      2 F e hF X(X1989~ X(X~+ XX$6,494 ~4m80%~W#XX~hXX$840 ~10%~XX~eXX$726  ~9% ~*XX ~+XX$108  ~Y1% ~xXX~\XX$8,168 J      J F e hF X(X1990H  X(XH + XX$4,637 H 5m81%H W#XXH hXX$490 H 9%H XXH eXX$597  H t10% H *XX H /+XX$0  H X0% H xXXH FXX $5,724 JJX(X1991"  X(X" ^ XX$689 " 5m16%" W#XX" iXX$912 " 22%" XX" 2XX$1,290  " t30% " *XX " (XX$1,350  " U32% " xXX" FXX $4,241 J| JX(X1992  X(X  XX $(1,762) 3W ѩ69% W#XX eXX$2,400  93% XX 2XX$1,710   t67%  *XX  *XX$220   X9%  xXX FXX $2,568 JV JX(X1993  X(X  XX $(3,583) 15 ѩ186% W#XX eXX$5,280  274% XX XX$62   3%  *XX  +XX$165   X9%  xXX FXX $1,924 J0 JX(X1994  X(X + XX$4,772  5m71% W#XX fXX$1,089  16% XX eXX$409   6%  *XX  +XX$461   X7%  xXX FXX $6,731 J J1995   G $(808) 5xԩ9% W# f$4,500 51%  H$1,109  t13%  *  ($3,976  U45%  x r$8,777J J1996d dA $2,616d3\38.%dW#dg$1,354d20%dd$49 d1% d* d($3,450 dV41% dxdr$7,469J      J F e hF X(XJan Jun 1997N X(XN t $735N79%NW#Nf$6,972N84%NN$12 N0% N* N' $1,200 NX7% NxNr$8,919J      @J F e hF X(X X(X XX>W#XXtuXXsXXXX  *XX 5|XX _z xXX+ XX0@      r0 F e hF X(XTotal: 1989June 1997hX(Xh XX$13,790 ) XX$1,622hW#XXhvuXX$23,837 zXX$2,804hXXhXX$ 5,964 cXX$702 h*XX h:XX$17,215 ;XX$2,025 hxXXh;XX$60,806 J            J FehF X(XAverage Raised Per Year X(X( W#XXeXX *XX Il xXXrXX$7,153/      h/X( 0 8@H!#X  yO-d# C\  P6QP#* Total Capital Raised From Financing Sources = Private Debt + Public Debt + Private Equity + Public Equity.  ST-#&a\  P6G;&P# Sources:  S,- (# X 1989 Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, June 1993, at 86.(#  S- (# X 1990 Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, June 1994, at 92.(#  S- (# X 1991 Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, July 1995, at 92.(#  SB- (# X 1992 to 1995 ĩPaul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, July 1996, at 115.(#  S- (# X 1996 Paul Kagan Assoc., Inc., Cable Financing Snapshot, Cable TV Finance, Jan. 31, 1997 at 10.(#  S- (# X 1997 Paul Kagan Assoc., Inc., Cable Financing Snapshot, Cable TV Finance, July 31, 1997 at 8.(#  "!,O(O(88# "  S- TABLE B9  S-0 System Transactions: 1994 June 1997#G\  P6G; P#  0 Art@@@@@@@@@@@@@@@ auV@@@@@@@@@@@@@ B     l hB >h >  aEf X( 0 8@H!#` X# 6\  P6Q P#% ` XX<XX1994jXXEXX1995r9495 CChangehh1996 hD1XX hWXX9596 SChange h&XX hXXJan Jun u1997,l 2 V, >h >  ` XXh% ` XXhE:XXhjXXhXXhhhh] hD1XX hcXX h&XX hXX,2  , > > X( XNumber of Systems Sold% X( X@XX64jXXg128r100%103 D1XX Vԩ19.5% &XX 44, 2 , > >  ` XX`% ` XX`E:XX`jXX`````] `D1XX `c `&XX `,2        , > > X( XTotal Number of Subscribers% X( X2-XX7,504,177jXX|10,937,652`45.8% P7,800,000 D1XX Uԩ28.7% &XX 2,385,232B              BX( XAverage System Size|% X( X|7`XX117,253|jXX|85,450||Jԩ27.1%||75,728 |D1XX |Wԩ11.4% |&XX |B54,210,       2 , > >  ` XXF% ` XXFE:XXFjXXFFFFF] FD1XX Fc F&XX F,2        , > > X( XNumber of Homes Passed% X( X0 XX12,492,997jXX}17,216,963`37.8% .12,610,000 D1XX Uԩ26.8% &XX 3,713,965B              BX( XAvg. # of Homes Passedb% X( Xb6`XX195,203bjXXb134,507bbJԩ31.1%bb122,427 bD1XX bX ԩ9.0% b&XX bB84,408,       2 , > >  ` XX, % ` XX, E:XX, jXX, , , , , ] , D1XX , c , &XX , ,2        , > > X( XTotal Dollar Value (mil.)n % X( Xn 4JXX$14,025 n jXXn $20,083n n `43.2%n n  $16,254 n D1XX n Wԩ19.1% n &XX n B$3,998B              BX( XAverage Dollar Value (mil.)H % X( XH ;XX$219H jXXH E$156H H Jԩ28.4%H H $157 H D1XX H Y 0.6% H &XX H u$904,       2 , > >  ` XX % ` XX E:XX jXX     ]  D1XX  c  &XX  ,2        l , > > Dollar X( XValue Per Home 0 Passed T % X( XT 9XX$1,123T jXXT $1,166T T 3.8%T T $1,246 T D1XX T Y 6.9% T &XX T B$1,077B        B > > X( XDollar Value Per Subscriber % X( X 8XX$1,869 jXX $1,836  kԩ1.8%  $2,065  D1XX  X12.5%  &XX  B$1,677B       T B > > X( XCash Flow Multiple % X( X ;XX10.3x jXX U9.7x  kԩ5.8%  11.0x  D1XX  X13.4%  &XX  7.7x+        +X( 0 8@H!#Xd  SV -# &a\  P6G;&P# Sources:  S.- (# X 1994 and 1995 Paul Kagan Assoc., Inc., YearToDate Cable System Sale Summary, Cable TV Investor, Feb. 24, 1997, at 12.(#  S- (# X Jan 1997 to June 1997 Paul Kagan Assoc., Inc., YearToDate Cable System Sale Summary, Cable TV Investor, July 9, 1997, at 10.(#  "B,O(O(88j"  S- TABLE B10dq Price Comparison Cable vs. DBS and MMDS  S-  D LAverage Monthly Rate, As of July 1997 6 6D  auV@@@@@@@@@@@@@ Dddx8 \         Cable DBS MMDS  8    Programming Service (Basic Service Tier and Cable Programming Services Tier)   $26.33   S@-$27.49# 8\  PCi,P#(*)#f\  PC&P#  $21.29 `   h  Equipment h $ 2.53 h  S( -$ 3.33# 8\  PCi,P#(**)#f\  PC&P# h  S( -n/a# 8\  PCi,P# (***)#f\  PC&P#` 8   hI  Total (Programming and Equipment)8 I $28.838 I $30.828 I $21.298 `   Ih  Average Number of Channels h 49.5h 47h 22.7` ` 8  hh  Average Monthly Rate per Channelh $0.63h $0.66h $0.94`    h  Installation (One time Charge) $39.56   S-$#f\  PC&P#175.00# 8\  PCi,P#(****)#f\  PC&P# $35.00   D   S- &L#f\  PC&P#(*)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 "doityourself" installation kit is also available at an average cost of $50.  S-#f\  PC&P#  S- Sources:  S-  XCable: 1997 Cable Industry Price Survey(#  S- XDBS: SCBA. Average of DIRECTV and Primestar, the two largest DBS providers. (#  Sx- (# XMMDS: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.(# " ,O(O(88!w"  S-6 Table B11  S- Cable Modem Deployment as of May 15, 1997    #Xj\  P6G;9XP##&a\  P6G;&P# c Dddx8 \ ddx(  c           `F0 #O PE37P#MSO J  `F0 City(ies) J  `F0 Modem Supplier J  `F0 Monthly Rate J  `F0 Install  `FCharges  ^  T  AdelphiaP Palm Beach County, FL Ocean County, NJ Coudersport, Lansdale & Mt. Lebanon, PA Amherst, Tonawanda, & Grand Island, NY Plymouth, Adams & N. Adams, MA  T General Instrument and LAN City (Bay Networks)  T $34.95 $44.95 $39.95 T $99.95^ z | Tv " Cablevision Systems , N. Oyster Bay, NY , LANCity (Bay Networks) T v $45.00T v $150z     v  Comcast, Towson & Baltimore, MD Sarasota, FL Union, NJ t Motorolat $39.95 $59.95 t $175   T    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  t   Coxh, Orange County, Mission Viejo, Poway & San Diego, CA Phoenix, AZ Meridian, CT  Motorola $44.95 $54.95 $175 z : v  Jones Intercable., Alexandria, VA., LANCity (Bay Networks) zv $39.95 zv $99.95z l  ve  TCI, Arlington Heights, IL E. Lansing, MI Fremont & Sunnyvale, CA Hartford, CT Seattle, WA e Zenith, LANCity (Bay Networks), and Motorolae $34.95 $44.95e $69 $150l   z e  Time Warner   Akron & Canton, OH Corning, Elmira, Binghamton, Albany, Troy & Saratoga, NY San Diego, CA Portland, ME # Motorola, Hewlett Packard, and Toshiba# $24.95# $200      S($-  #&a\  P6G;&P# "($,O(O(88 $"  S-Sources:  S- (#X( 0 8@H!#8` hp x (#%}XFred Dawson, Cable Modems Pass 2M Mark; MSOs Turn to Next Phase, Multichannel News, March 17, 1997 at 119 and 135.(#  S- (#8` hp x (#%8` hp x (#%}XMichael Harris, Cable Modem Commercial Launches and Trials in North America, Kinetic  Sd-Strategies, May 15, 1997. See http://CableDatacomNews.com/cmic7.htm.(#"d,O(O(88"  S-  @B-C-@  Appendix C   S-_Table C1   S`-V Satellite Orbital Positions  aE8 e #G\  P6G; P#  ddx(   JddxJk[XXXX 2    @ @@ @@P2 2 2                  Licensees7  7  7  7  7  7  7  7    Total , Channels ? sWestern Positions ?o= CIEastern Positionso=o=2@ @@ @@P@@@ @@P2 2 *aX2 Q  1E c  P   U ("Full CONUS" (a)   *@@@ @@P@@ @ P* 2 *aX2 Q  1E  R Gc175  8 y166   157    148  # 1119  Y( N110   101    Y 61.5   61.5 $@@ @ P  @ ~ $ 2 *aX2 DIRECTV |, 54|,R|,8" 8"M27" "#"Y("=27 " &  @   @ N & 2 *aX2 USSBP, 16P,RP,8  8z P8#V3_5  &  @   @ "& 2 *aX2 Echostar $, 35$,RL(b)Rc~(b)P i24 (c) #i11#6Y(@   !&  @ .  @ & 2; *aX2 Directsat, 22,O11,8,z ,  ,i10;V1; ;  !&.  @   @ & 2; *aX2 DBSC&, 22&,O11&,8&,&, &,#&,Y(&, &, 11  &  @ .  @ & 2; *aX2 MCI , 28,R,8,P, ,#,J}28 (d); ; &.  @   @ & 2; *aX2 Tempo/ Primestar(g) 22R11   i11Y(@  &  @ z  @ & 2v *aX2 Continental (Rainbow/ Loral DBS)Hv 22HvRQ RcHv11HvHv Hv#HvY(Hvj @ Hv 11&z  @   @ & 2v *aX2 Dominion v,  8 (f)v,RQ v,~(e)v,v, v,#v,Y(v,j @  8&  @ .  @ H& 2, *aX2 UnassignedJ, 27J,N10J,10J,o5J, J,#J,Y(J, J, 2&.  @   B & 2, *aX2 Total N  256N M32N 32N M32N 32  aEx  N i32  aEx# N S32N ' 32@ N  32  B  J  aEN ]e # G\  P6G; P#Notes:  aE (a)v"Full CONUS" indicates that the signal transmissions from satellites in these orbital slots are capable of reaching all parts of the vcontinental United States.  aE@" (b) vEchostar 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,  aE$(f) Dominion has a second petition pending before the Commission for 11 channels at an unspecified orbital position.--  aE~%(g) Tempo is a whollyowned subsidiary of TCI Satellite Entertainment.  bE$& Source: Number of DBS Channels by Ownership and Orbital Locations Table, FCC, 1997; USB Securities, Jun. 1996, at 26."$&,O(O(88&"  S-9 # &a\  P6G;&P#Table C2 ă  S- * DBS Industry Licensed Number of Transponders and Their Ranges ă ]e  JddxJk[XXXXddx`1`gG? """""  X@ @ PJ "g*aX"  Company"T Full  S- d CONUS#G\  P6G; P#(1)# &a\  P6G;&P#g"rMOther jPositionsg"6Totalg"KFull  S-6y CONUS#G\  P6G; P#(1)# &a\  P6G;&P#g" Total rPositionsX@ @ P` ` "gh*aX"  DIRECTVh"# 27h"27h"54h"M~28%h") 21%` `  "hh*aX"  USSBxh" S-& #&a\  P6G;&P#8xh"(8xh"16xh"P8%xh"W 6%` `  "hh*aX"  Echostar h") # 11 h"24 h"35 h"M~11% h") 14%` ` x Directsat8 h"# 118 h"118 h"228 h"M~11%8 h"W 9%` `   DBSC h"& 0 h"22 h"22 h"P0% h"W 9%` ` 8  "hh*aX"  MCI h"# 28 h"(0 h"28 h"M~29% h") 11%` 8   "hI*aX"  Tempo/  SX-#G\  P6G; P# # &a\  P6G;&P#Primestar #G\  P6G; P#(2) # &a\  P6G;&P#0I"# 110I"110I"220I"M~11%0I"W 9%8    "I**aX"  Continental (Rainbow/ Loral DBS)@*"& 0@*"22@*"22@*"P0%@*"W 9% ` 0 "*h*aX"  Dominionh"& 0h"(8h" 8h"P0%h"W 3%` ` @ "hh*aX"  Unassignedh"& 0h"27h"27h"P0%h") 11%` 8  "hI*aX"  Total`h"" 96`h"|160`h"}256`h"GB100%`h"100%  8 0@ @ P "IH*aX"   S- DBS Providers  S-Orbital Positions hH"T Full  S- d CONUS#G\  P6G; P#(1)# &a\  P6G;&P#hH"rMOther jPositionshH"6TotalhH"KFull  S-6y CONUS#G\  P6G; P#(1)# &a\  P6G;&P#hH" Total rPositions0@ @ P` 8 "Hh*aX"  DIRECTV/USSBh"# 35h"35h"70h"M~36%h") 27%` ` h "hh*aX"  Echostar(h"# 11(h"24(h"35(h"M~11%(h") 14%` h   "hv*aX"  Tempo/  S-Primestar #&a\  P6G;&P##G\  P6G; P#(2)# &a\  P6G;&P# v"# 11 v"11 v"22 v"M~11% v"W 9%h  (v aE 8` hp x (#% e m u%}- "5%')=,.0E357M:<>UAe#&a\  P6G;&P# #&a\  P6G;&P##G\  P6G; P#  aE6!NOTES: # X\  P6G;P#  yO!- +i e m u%}- "5%')=,.0E357M:<>UA e m u%}- "5%')=,.0E357M:<>UAee(1) "Full CONUS" indicates that the signal transmissions from satellites in these orbital slots are capable of """" reaching all parts of the continental United States.  yOl#- e m u%}- "5%')=,.0E357M:<>UA eF m u%}- "5%')=,.0E357M:<>UAee (2) Tempo is a whollyowned subsidiary of TCI Satellite Entertainment.}}  aE$ #G\  P6G; P#SOURCES: # X\  P6G;P#  {O%- s&Number of DBS Channels by Ownership and Orbital Locations Table, FCC, 1997; Rick Westerman, Direct Broadcast  {Ol&-Satellite, Outlook, UBS Securities, Mar. 4, 1997, at 9. #X\  P6G;P#"l&,O(O(88'"  S- #&a\  P6G;&P#9Table C3   S-xwDBS Providers  S- e d#&a\  P6G;&P# mddx`1`gG? """""ddx`0vm h 0@ @ P( H*aX  S-#&a\  P6G;&P#DBS ySTATISTICS pDH S- DIRECTV#G\  P6G; P#(1)# &a\  P6G;&P#HUSSBHPrimestarH3Echostar0@ @ P ` H+*aX  yO#X\  P6G;P#Launch DateJ N June 1994YRJune 1994 + January 1994+March 1996g 8  +s*aX Subscribers Sept. 1997 Sept. 1996 Change Growth V#   Z 2,892,000  Z 1,920,000  E  972,000  C  50.6% #  s (included with  yO -DIRECTV#G\  P6G; P#(2)# X\  P6G;P#)  s 61,809,000 61,475,000 ! 334,000  22.6% s 820,000 190,000 630,000 Y 331.6%8   s+*aX  yOhChannels#G\  P6G; P#(3)# X\  P6G;P#   175 HP # +29 HP + s165 MP +140 HP     +*aX Basic Programming Package #  "Total Choice"# 6  44 basic channels"The Basics" z+ 9 basic channels  n+z "Prime Value" .50 basic channels"DISH Pix" w! 10 basic channelsg   +*aX Monthly CostJ $29.99Y$7.95 Y yO(-:$24.99#G\  P6G; P# (4)# X\  P6G;P# +$15.00 v    +E*aX Most Complete Programming Package#  "Total Choice  < Platinum" #  75 basic channels,   29 sports channels,  14 premium movie  channels # E"Entertainment Plus" |N8 basic channels, 18 premium movie channelsn+E"Light Up the Sky" 66 basic channels, 14 premium vmovie channels E"America's {Top 50" w'50 basic channels, zZ1 regional sports uchannel  X   Eg*aX Monthly Cost8w $47.998 yO@-#X\  P6G;P#$34.95 8 $65.99 8 yO@-I$26.99#G\  P6G; P# (5)# &a\  P6G;&P# ",O(O(88-"X  H@ @ P gH*aX DBS ySTATISTICS pD0H DIRECTV0HUSSB0HPrimestar0H3EchostarH@ @ P8  H*aX  S-System Costs#G\  P6G; P#(6)# X\  P6G;P# Single Receiver Dual Receiver 8#   $199  $3508 $199 $350    yO- $199#G\  P6G; P#(7)# X\  P6G;P#  m$398   $199 $3008 8 H V*aX Professional Installation SelfInstallation Q  V#   ? $150$200 + $50 V C$150$200 /$50 V  yO- s $149#G\  P6G; P#(8)# X\  P6G;P#ѐN/A V $179 $708 0   Vr*aX Equipment Sources  #  Electronics/TV retailers, AT&T, DSS equipment manufacturers (e.g. RCA, Hitachi, Sony)# rElectronics/TV retailers and AT&TrMSO partners, Radio Shack, Key America and Associated Volume Buyer'srElectronics/TV retailers0   r yO  #X\  P6G;P#  yONotes:  yOx- S$ eF m u%}- "5%')=,.0E357M:<>UAXF` hp x (#%'0*,.8135@8:&,O(O(88'? "  S-#&a\  P6G;&P# Table C4A  ;DirectToHome Satellite Services   S`-r-Total Subscribers Đd hddx`0v!ddx@Lo h 0  X@ @ P  g*aX  PROVIDERS X July 1, 1994B  hg jJuly 1, 1995l2Uhg July 1, 1996hg kJuly 1, 1997X@ @ Pp  gw*aX  DBSw !$ 70,000w 1,150,000w d2,950,000w 5,047,000 p p h HSD8 w < 1,922,8108 w 2,321,3508 w d2,336,9308 w 2,184,470p    w*aX  Total   < 1,992,810  {3,471,350  d5,286,930  |7,231,470  H  S -   S - Table C4B   SH-VAnnual Subscriber Growth   c!ddx@Lo Addx 5 c  X@ @ PH  g*aX  ~PROVIDERSx"# . 19941995x"19951996x""19961997 Y1X@ @ P`  gh*aX  DBSh +h 1,080,000h#H1,800,000h#)M2,097,000` ` P hh*aX  HSDh#4 398,540h#015,580h#.ԩ152,460`    h*aX  Total#"h 1,478,540#H1,815,580#Y1 M1,944,540   S-d  S`- Table C4C  \Subscribers Growth Rate  S-h(Percentage Change) Đd ^Addx 5 addx ^   X@ @ P g*aX # |PROVIDERS#cj19941995#19951996#v19961997 "X@ @ P`  gh*aX  DBSP!h#r1,542.9%P!h#156.5%P!h# 71.1%` `  hh*aX  HSD"h#20.7%"h#)0.7%"h# ԩ6.5%`   P! h*aX  Total@$#{74.2%@$#+52.3%@$# 36.8%  " yO@$ #X\  P6G;P#  {O%-Source: SBCA Comments at Appendix A; DTH Subscribers, SkyREPORT, Nov. 1997, at 10. "%,O(O(88&#"  S-@ #&a\  P6G;&P#Table C5  rDTH Subscribers  S- d raddx ddx`h r $   B@ @ P"$ **aX*  yOV#X\  P6G;P#Dateh[ HSDh"g DIRECTV/+USSB*+ Prime }Star+/Echo IStar+DAlpha  Star+ZLMonthly dTotal+$ MonthtoMonth " Change@ @ PP ` *Y*aX* Oct-96Y 2,314,950Y32,028,000Y1,550,000Y235,000Y#b12,000Ye]6,139,950Y P P ` *YY*aX* Nov-96 Y 2,302,770 Y32,135,000 Y1,580,000 Y285,000 Y#b20,000 Ye]6,322,770 Yw 182,820P P  *YY*aX* Dec-96P Y 2,277,760P Y32,300,000P Y1,600,000P Y350,000P Y#b35,000P Ye]6,562,760P Yw 239,990P P   *YY*aX* Jan-97 Y 2,255,860 Y32,370,000 Y1,610,000 Y396,000 Y#b37,000 Ye]6,668,860 Yw 106,100P P P  *YY*aX* Feb-97 Y 2,234,600 Y32,420,000 Y1,630,000 Y437,000 Y#b40,000 Ye]6,761,600 Y  92,740P P   *YY*aX* Mar-97@Y 2,224,810@Y32,470,000@Y1,662,000@Y480,000@Y#b45,000@Ye]6,881,810@Yw 120,210P P   *YY*aX*  Apr-97Y 2,215,210Y32,520,000Y1,700,000Y513,000Y#b51,000Ye]6,999,210Yw 117,400P P @ *YY*aX* May-97Y 2,194,380Y32,575,000Y1,738,000Y545,000Y#b51,000Ye]7,103,380Yw 104,170P P  *YY*aX* Jun-970Y 2,184,4700Y32,639,0000Y1,767,0000Y590,0000Y#b51,0000Ye]7,231,4700Yw 128,090P X   *YX*aX*  yOpZ Cumulative  yO>Total xXxXxXxXxXxXt~xX1,091,520X   0X yO-  SP-#X\  P6G;P# #&a\  P6G;&P#Notes:  &*SkyREPORT's count of the number of DIRECTV/USSB subscribers is based on households that receive either of these services to avoid "doublecounting" subscribers that subscribe to both services.   S- Source:  S-DTH Subscribers, SkyREPORT, Nov. 1997, at 10. ":,O(O(88"  S- XX   @C-D-@  Appendix D  _Table D1  & Top Ten SMATV Operators Serving MDUs  S8-8(Ranked by Number of Units Passed)  S-#&a\  P6G;&P#  |ddx`h ddxp h| X @ @ P0 "*aX" 1997 ~Rank  yO@}#X\  P6G;P#(1996  yO {Rank)#&a\  P6G;&P#  /< Company /< /<  Properties MUnits Passed hRetail jSubs.  Bulk  Subs.@ @ P`  "h*aX"  S0 -1#X\  P6G;P# (2)#&a\  P6G;&P# h S0 -OpTel#X\  P6G;P# #G\  P6G; P#(i)# &a\  P6G;&P# h943 h#284,260 hs101,460 h 46,000` `   S -2 #X\  P6G;P# (1)#&a\  P6G;&P#h hICS (Interactive Cable Systems) h h450h h#132,000h hyD65,000h h 5,000` `   S -3 #X\  P6G;P# (3)#&a\  P6G;&P#hCable Plush324h#115,000hyD55,000h 18,000` ` h  SP-4 #X\  P6G;P# (4)#&a\  P6G;&P#(hMid-Atlantic Cable (h155(h)x75,000(hyD38,500(h 3,500` `  S-5 #X\  P6G;P# (6)#&a\  P6G;&P#hLiberty/RCN h235h)x68,000hyD32,000h 16,000` ` ( S-6#X\  P6G;P# (7)#&a\  P6G;&P#hMTS (MultiTechnology Services) h117h)x60,000hyD36,000h8"0` `  Sp-7 #X\  P6G;P# (5)#&a\  P6G;&P#Hh Sp-CAI Wireless #G\  P6G; P#(ii)# G\  P6G; P# Hh Sp-# &a\  P6G;&P#211Hh)x57,410HhyD23,510Hh 10,020` `  S-8 #X\  P6G;P# (8)#&a\  P6G;&P#hEdward Rose & Sons h863h)x34,580hyD23,540h8"0` ` H "hh*aX"  S0-~ 9#X\  P6G;P# (10)#&a\  P6G;&P#h S0-Wireless Cable of Atlanta#G\  P6G; P# (ii)# G\  P6G; P# (iii)# &a\  P6G;&P#h835h)x14,500h8,600h!400` `  "hh*aX"  S-yK 10 #G\  P6G; P#(iv) # &a\  P6G;&P# hhUltronicshh104hh/7,700hh3,650hh 1,450` \   "hv*aX"  X S-  TOTALS Đ/<˽  v S-P#&a\  P6G;&P#2,637#X\  P6G;P# v S-#&a\  P6G;&P#848,450#X\  P6G;P# v S-l #&a\  P6G;&P#387,260 #X\  P6G;P# v S-< #&a\  P6G;&P#100,370#X\  P6G;P#\   hv S-#&a\  P6G;&P#  S-d Notes:  St- &XF` hp x (#%'0*,.8135@8:1,004,000  yO-_  {M-Oz1.67%#|850,000 ]ԩ15.34%  {M-1.33%#)962,000 13.18%  {M- G1.40%#bX1,126,000 d_17.05%  {M-i1.56%Đb<P#"1,162,500   3.24%  {M- 1.58% "   "aX"   yO (6) HSD Subs. Pct. Change  {OD-  Pct. of MVPD Total  T #>1,612,000 n*  {MD-Oz2.67%#2,178,000 35.11%  {MD-3.41%#)\2,365,400  yO|- G8.60%  {MD- G3.45%#bX2,277,760  yO|-fyԩ3.71%  {MD-i3.15%#"""2,184,470  ԩ4.10%  {MD- 2.97% "  , "aX"   yO8- (7) DBS Subs. Pct. Change  {O-  Pct. of MVPD Total #n*D< 70,000  {M-n*  {M-Oz0.12%#|602,000 C760.00% {O- 0.94%#)\2,200,000  yO-265.45%  {M- G3.21%#bX4,285,000  yO-a' 94.77%  {M-i5.92% b<X #"5,047,000  17.78%  {M- 6.85%    "aX"   yO - (8) OVS Subs. (iv) Pct. Change  {OL"-  Pct. of MVPD Total  ##n*####)##bm2,190  {M!-b  {ML"-o0.0%Đb<##"!3,000  36.99%  {ML"- 0.00%  4  "aX"   yO0$-(9) VDT Subs. (Trials) (v) Pct. Change  {O%-  Pct. of MVPD Total '#n*'#"6,620  {M$-  {M%-0.01%'#)9,350 41.24%  {M%- G0.01%'#b0 Zԩ100.00%  {M%-i0.00%Đbb'#"A"0 <  0.00%  {M%- 0.00% # yO<'-d#X\  P6G;P#"<',O(O(88+'"Ԍ yO  Й #X\  P6G;P#  yONOTES:  yO - (i)XSome numbers have been rounded. (#  yO- (ii)The yearend 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.  yO- (#(iii)XThe total number of MVPD households is likely to be somewhat less than the given figure due to  {O- (#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  {Ob -estimate of the number of MVPD households. See (2) under Sources. (#  yO - (#(iv) XThis system was formerly Bell Atlantic's VDT system in Dover Township, New Jersey, which has been converted to an OVS system. See note (v). (#  {OL - (#(v)XThe 1996 Act repealed the VDT framework. For details, see  109, 113 and 117 supra. These trials were  {O-converted to an OVS format and cable franchises. See note (iv). (#  yOp SOURCES:  yO- (#(1)XTelevision households: 199294 from A. C. Nielsen Co. as of January of the following year cited by  {O- (#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  {O"- (#Broadcasting & Cable, Jan. 13, 1997 at 118; and 1997 from Nielsen Media Research as cited in The TV  {O-Column, Washington Post, Aug. 26, 1997, at E4. (#  yO~- (#(2)XTotal MVPD households: The sum of the total number of subscribers listed under each of the categories  {OF- (#of the various technologies. See note (ii) above. Because there were no permanent VDT subscribers, trial VDT subscriber figures were used in 199495.(#  {O- (#(3)XCable subscribers: 199294 from Paul Kagan Associates, Inc., History of Cable and PayTV Subscribers and  {Oj- (#=Revenues, Cable TV Investor, June 30, 1995, at 5; 199597 from Paul Kagan Associates, Inc., Paul Kagan's  {O4-10Year Cable TV Industry Projections, The Cable TV Investor,@E- E- @ May 20, 1997, at 9.(#  {O- (#(4)XMMDS subscribers: 19921994 from Paul Kagan Associates, Inc., Wireless Cable Industry Projections,1992 {O- (#2002, The 1995 Wireless Cable Databook, Jan.1995, at 23; 19951996 from Paul Kagan Associates, Inc.,  {OZ- (#.Wireless Cable Futures, Wireless Cable Investor, Dec. 31, 1996, at 1011; and 1997 from WCAI Comments at 8. (#  yO!- (#(5)XSMATV subscribers: 19921994 based on discussion with John Mansell, Senior Analyst, Paul Kagan  {O|"- (#Associates, Inc. and reference to Cable & Pay TV Census December, Marketing New Media, Dec. 19,  {OF#- (#=1994; 19951996 from Private Cable Growth, Private Cable Investor, Jul. 1997, at 3. The 1997 subscribers  {O$- (#have been estimated by the FCC based on data from Paul Kagan Associates, Inc., Private Cable Growth, Private Cable Investor, Jul. 1997, at 3. (# "j&,O(O(88''"  {O- (#(6)XHSD subscribers: 1992 from CBand Subscriptions in the Sky, SkyREPORT, 1st Q 1994 at 12, and  (#information provided by the SkyTRENDS research staff based on the number of General Instrument  {O- (#authorizations for receipt of scrambled programming; 1993 from Subscription Data from General Instrument  {O\- (#VC II+ Authorizations, SkyREPORT, Oct. 1994, at 21; 1994 from 1994 Net Authorizations, SkyREPORT,  yO&- (#Feb. 1995, at 9. (The 199294 HSD subscriber figures were reduced by 1% to account for the estimated  {O- (#number of Canadian subscribers.) 1995 from DTH Subscribers, SkyREPORT, Jan. 1997, at 8 and SBCA  {O-Comments at Appendix A; and 19961997 from DTH Subscribers, SkyREPORT, Nov. 1997, at 10.(#  {OJ- (#(7)XDBS subscribers: 1993 from Let the Games Begin, SkyREPORT, May 1994, at 2; 1994 from Kent Gibbons,  {O- (#DBS: We're Walking the Walk, Multichannel News, Jan.16, 1995, at 3, 52; 1995 from DTH Subscribers,  {O-SkyREPORT, Jan. 1997, at 8; and 19961997 from DTH Subscribers, SkyREPORT, Nov. 1997, at 10.(#  yOp - (#(8)XOVS subscribers: 1996 from Bell Atlantic Comments at 5. The 1997 subscribers have been estimated by the FCC.(#  {O - (#k(9)XVDT trial subscribers: 199495 from Section 214 Applications, ex parte letters and associated filings with the FCC. (#" ,O(O(88 '"  S- #&a\  P6G;&P#TABLE E2   S-H  Number and Subscriber Size of Major Cable System Clusters  S-f(Cumulative Figures)   wddxo^kb #####ddx8hhf w & @ @@ @@ @P#& &aX&  Range of 8Clustered Subscribers (thousands) pD"+ 1994"*1995"E1996$@ @@ @@ @Pp@ @ P8$ &pa:X&  ("5 Clusters("PSubs. B(millions)("iClusters("Subs. S(millions)("MClusters(" Subs. n(millions)p@ @ P`  &hpa:X& "100199 h" 58 h"Y 8.0 h"R76 h"10.4  h"b76 h"A 10.3` ` ( &hhpa:X& "200299 h" 26 h"Y 6.0 h"R35 h"T8.4 h"b34 h"o 8.3` `   &hhpa:X& "300399H h"L 6H h"Y 2.0H h"8H h"T2.8H h"b11H h"o 3.7` `   &hhpa:X& "400499 h"L 3 h"Y 1.3 h"R10 h"T4.5 h"e8 h"o 3.6` ` H  &hhpa:X& "` > 500 h"L 4h"Y 2.8h"8h"T5.1h"b10h"o 7.7` h    &hvpa:X& " S- Total ĐpDpv" 97pv"T20.1pv"$137pv"&31.2 pv"]X139pv"A 33.6h  v Sp-   S -d Sources:  S- &Paul Kagan Associates, Inc., Major Cable TV Systems/Clusters, The Cable TV Financial Databook, 1995, at 3839; 1996, at 3840; 1997, at 3941.  ",O(O(88"  S-#&a\  P6G;&P# TABLE E3   S-) 1997 Cable MSO Horizontal Concentration NationwideE$  yO- &ЍCalculated by applying the Commission's attribution rules to account for market shares as of June 30, 1997,  {O- &based on subscriber totals as of June 30, 1997, and reported in Paul Kagan Associates, Inc., Top 100 Cable System  {O- &Operators as of June 30, 1997, Cable TV Investor, Sep. 10, 1997 at 10. If a cable operator might be attributable to more than one MSO, it was assigned to the largest MSO. Thus, there is no double counting of cable operators. E Đd  hddx8hhf ddx` X h h X@ @ P gpa:X "YRankX jCompanyX  S-HPer Cent of Subscribers% yO\ -ЍThe total number of industry subscribers used to calculate the HHIs is 64,150,000, as reported in Table E1. "X@ @ P` ` ghpa:X " 1h TCIh# 29.32` `  hhpa:X " 2xh Time Warnerxh# 18.33` `  hhpa:X " 3 h MediaOne h#P!7.98` ` x hhpa:X " 48 h Comcast8 h#P!6.71` \   hhpa:X " R -0 Top 4  h  h#")62.34\ ` 8  hhpa:X " 5 h Cox h#P!5.10` `   hhpa:X " 6Th CablevisionTh#P!4.50` `   hhpa:X " 7h Jones h#P!2.30` ` T hhpa:X " 8h Centuryh#P!1.86` `  hhpa:X " 9th Marcusth#P!1.85` `  hhpa:X "10h Adelphiah#P!1.83` \ t hhpa:X " R\-! Top 10 4h# S\-  4h# R\-")79.77\ \  hhpa:X " R-! Top 25 h# S-h# R-")91.81\ \ 0 hhpa:X " R-! Top 50 h# S-  h# R-")96.93\ \   hpa:X "0 x  Sp- HHI &va_ a_ &x# Sp-  1379 rXpD yOT!- &<ЍThe HHI is calculated on the basis of market shares for the top 50 companies. Because all of the remaining  &MSOs have very small shares of the market, an HHI calculation that included all cable system operators could only be slightly higher (no more than 2-3 points) than the given HHI. r\   SD-  #&a\  P6G;&P#"Dd ,O(O(88?"  S- TABLE E4  S- Changes In Concentration Of The Cable Industry 19901997 Y #a%'*i,.1q35!8y:<)?AC1FHJ9MOQATVXI[]_X  !$'0*,.8135@8:Apr86` `  hhpa:X  Canal SurXh"I/Aug91` `  hhpa:X  Channel America Television Networkh"JNJun88` ` X hhpa:X  Children's Cable Networkh"G&May95` `  hhpa:X  Cine Latinoxh"3Dec94 (in U.S.)` `  hhpa:X  Classic Sports Networkh"G&May95` ` x hhpa:X  Classic Arts Showcase8 h"G&May94` `  hhpa:X  CMT: Country Music Television!h"H5Mar83` ` 8  hhpa:X  CNBC "h"I>Apr89` ` ! hhpa:X  Consumer Resource NetworkX$h"I:Dec94` ` " hhpa:X  Crime Channel%h"LcJul93"$,O(O(88%5%"` @ PX$ hpa:X   S- Programming Service ă" S-2& Launch Date @ P`  hpa:X  Deep Dish TV@h"KTJan86` `  hhpa:X  Disney Channelh"I>Apr83` ` @ hhpa:X  The Ecology Channelh"H/Nov94` `  hhpa:X  Employment Channel `h"JCFeb92` `  hhpa:X  ESPN h"JCSep79` ` ` hhpa:X  ESPN2 h"JIOct93` `  hhpa:X  ESPNEWS h"H/Nov96` p   hwpa:X  EthnicAmerican Broadcasting Co. w"O1992p P  wYpa:X  EWTN: Global Catholic Network @Y"I/Aug81P`   Yhpa:X  Eye on Peopleh"H5Mar97` ` @ hhpa:X  The Family Channelh"I>Apr77` `  hhpa:X  Fashion Network`h"LcJul96` `  hhpa:X  The Filipino Channelh"I>Apr91` ` ` hhpa:X  FiT TV h"I:Dec93` `  hhpa:X  Flixh"I/Aug92` `   hhpa:X  Foxneth"LcJul91` `  hhpa:X  Fox News Channel (FNC)@h"JIOct96` `  hhpa:X  Galavisionh"JIOct79` ` @ Game Show Networkh"I:Dec94` `  hhpa:X  Gay Entertainment Television`h"I0Nov 95` `  hhpa:X  The History Channelh"KTJan95` ` ` Home & Garden Television h"I:Dec94` `  hhpa:X  Home Shopping Network**!h"LcJul85` `   hhpa:X  Home Shopping (Spree!)**"h"H*Sept86` ` ! hhpa:X  HTV@$h"I/Aug95` ` " hhpa:X  The Inspirational Network (INSP)%h"I>Apr78"$,O(O(88%%"` @ P@$ hpa:X   S- Programming Service ă" S-2& Launch Date @ P`  hpa:X  Jackpot Channel@h"JIOct96` `  hhpa:X  Jewish Television Networkh"O1981` ` @ hhpa:X  Kaleidoscopeh"H%Sep90 ` `  hhpa:X  Ladbroke Racing Channel`h"H/Nov84` `  hhpa:X  Las Vegas Television Networkh"H/Nov91` ` ` hhpa:X  Lifetime Television  h"JCFeb84` `  hhpa:X  The Movie Channel (TMC) h"I:Dec79` `   hhpa:X  Mor Music TV h"I/Aug92` `   hhpa:X  MSNBC@h"LcJul96` `   hhpa:X  MTV: Music Televisionh"I/Aug81` ` @ hhpa:X  MTV Networks Latin America (formerly MTV Latino)h"JIOct93` `  hhpa:X  M2: Music Television`h"I/Aug96` `  hhpa:X  The Music Zoneh"I>Apr95` ` ` hhpa:X  My Pet TV h"JCSep96` `  hhpa:X  NASA Television h"LcJul91` `   hhpa:X  National & International Singles Television Networkh"I>Apr95` `  hhpa:X  NBC News Channel (formerly Canal de Noticias NBC)@h"H5Mar93` `  hhpa:X  NET Political NewsTalk Networkh"I:Dec93` ` @ hhpa:X  Network Oneh"I:Dec93` `  Newsworld International`h"JCSep94` `  hhpa:X  Nickelodeon/Nick at Niteh"I>Apr79` ` ` hhpa:X  Nick at Nite's TV Land h"I>Apr96` `  hhpa:X  Nostalgia Channel!h"JCFeb85` `   hhpa:X  Outdoor Channel "h"I>Apr93` ` ! hhpa:X  Planet Central Television@$h"G&May95` ` " hhpa:X  Playboy TV %h"H/Nov82"$,O(O(88%%"` @ P@$ hpa:X   S- Programming Service ă" S-2& Launch Date @ P`  hpa:X  Praise Television@h"I:Dec96` `  hhpa:X  The Recovery Networkh"JCFeb97` ` @ hhpa:X  SciFi Channel**h"H*Sept92` `  hhpa:X  SCOLA `h"I/Aug87` `  hhpa:X  Shop at Homeh"JNJun86` ` ` hhpa:X  Showtime h"LcJul76` `  hhpa:X  SingleVision h"JNJun94` `   hhpa:X  Spice h"G&May89` `   hhpa:X  Student Film Network@h"H/Nov94` p   hwpa:X  Sundance Channelw"JCFeb96p `@ whpa:X  Telemundoh"KTJan87`P hYpa:X  TNN: The Nashville Network`Y"H5Mar83P`  Yhpa:X  Total Communications Networkh"H/Nov95` ` ` hhpa:X  Trinity Broadcasting Network h"I>Apr78` `  hhpa:X  TRIOh"JCSep94` `   hhpa:X  Tropical Television Networkh"I/Aug96` `  hhpa:X  TV Asia@h"I>Apr93` `  hhpa:X  TV Japanh"LcJul91` ` @ hhpa:X  U Networkh"JIOct89` `  hhpa:X  Univision`h"JCSep76` `  hhpa:X  USA Network**h"I>Apr80` ` ` hhpa:X  ValueVision h"JIOct91` `  hhpa:X  VH1!h"KTJan85` p   hwpa:X  Via TV Network"w"I/Aug93p `! whpa:X  Video Catalog ChannelP$h"JIOct91`P" hYpa:X  The Weather Channel%Y"G&May82P` P$ Yhpa:X  WorldJazz'h"LcJul95"(&,O(O(88&p&"` @ P% hpa:X   S- Programming Service ă" S-2& Launch Date @ P`  hpa:X  The Worship Network@h"JCSep92`   hpa:X  Z Music"H5Mar93 l@ S-#&a\  P6G;&P#  S- &#&a\  P6G;&P#* Currently, there are no MSO ownership interests in CSPAN and CSPAN 2. However, several MSOs  SX-provide funding to CSPAN and are represented on the board of directors as voting members.  &** TCI (Liberty Media) will reportedly have a 15% nonvoting interest if the announced merger with  S - &Home Shopping Network is completed. (See Chris Parkes, HSN in $5bn Universal Studios Deal, Financial Times, Oct. 21, 1997, at 19.) X (#%'0*,.8135@8:@BMEGIULNQ]SU X Expected Launch  SX-iDate X@ @ P8  gIpa:X  American Sports ClassicshI Cablevision SystemshI"kTBA8 ` 0 Ihpa:X  BBC America h TCI, Cox h"] Early 1998` 8 h hIpa:X  International Channel Networks I Encore Media Group, International Media Group I"ZEnd of 19978 `   Ihpa:X  The Parents Channel ` h Malofilm Communications` h"kTBA`     hpa:X  World African Network Time Warner"l1998  `  * "Ownership Interest" refers to a 5% or greater interest in the programming service. TBA To Be Announced.  S(- &Sources: National Cable Television Assoc., Planned Services, Cable Television Developments, Spring  S- &1997, at 124137. 1997 Programming Guide, Private Cable & Wireless Cable, May 1997, at A1. Kim  S- &McAvoy and Carolyn West, Cable's Contenders, Broadcasting & Cable, May 12, 1997, at 63. Database, Cablevision, Oct. 6, 1996, at 46.",O(O(88b "  S- #&a\  P6G;&P#TABLE F4 ă  S- + Planned National Programming Services  S-Q;Unaffiliated With a Cable Operator ă  yO`-#X\  P6G;P# Oddx1n 6 "Mddx( "O  @ P`  pa:X   yO-9 Programming Service ă" yO Expected Launch Date @ PP ( Ypa:X  The ABZ ChannelXY"*Early 1998P P  YYpa:X  Air & Space NetworkY"8TBAP P X American Legal Network Y"8TBAP P  American Political ChannelH Y"8TBAP P   American West Network Y"8TBAP P H  Anthropology Programming and Entertainment Y"*Early 1998P P   AntiAging Network8Y"8TBAP P   Applause NetworksY"81998P P 8 Arena The Classic Music ChannelY"8TBAP P  Arts & Antiques Network(Y"8TBAP P  The Auto ChannelxY"December 1997P P ( Automotive Television NetworkY"8TBAP P x The BMovie NetworkY"81998P P  The Benefit NetworkhY"81998P P  The Biography ChannelY"8TBAP P h Black Women's TVY"8TBAP P  Boating ChannelXY"8TBAP P  BooknetY"8TBAP P X Career & Education Opportunity NetworkY"'March 1998P P  Catalogue TVH Y"8TBAP P  Celtic Vision!Y"81998P P H  CEO Channel"Y"8TBAP P ! Channel 5008$Y"8TBAP P " Chop TV%Y"8TBA"$,O(O(88%5%"P @ P8$ Ypa:X   yO-9 Programming Service ăp" yO Expected Launch Date @ PP  Ypa:X  Collectors Channel0Y"-Mid 1998P P  YYpa:X  Computer Shopping ChannelY"8TBAP P 0 YYpa:X  Conservative Television NetworkY"8TBAP P  The Creative Channel Y"8TBAP P  YYpa:X  The Enrichment ChannelpY"8TBAP P   FAD TV (Fashion & Design Television) Y"81997P P p Fashion Network Y"8TBAP P   YYpa:X  Fitness Interactive` Y"%z4th Qtr 1997P P   The Football Channel Y"81998P P `  GETv NetworkY"8TBAP P   Global Village NetworkPY"8TBAP P  Golden American NetworkY"%z4th Qtr 1997P P P The Gospel NetworkY"81997P P  Hobby Craft Network@Y"8TBAP P  Home Improvement TV NetworkY"8TBAP P @ Jock Talk TVY"81997P P  Little Leaguers Sports/News Network0Y"8TBAP P  The Love NetworkY"December 1997P P 0 M1 The Museum ChannelY"8TBAP P  The MBC Movie Channel Y"8TBAP P  Martial Arts NetworkpY"81998P P   The Military ChannelY"&1st Qtr 1998P P p NationTalk Y"8TBAP P  Native American Nations Program Network`!Y"8TBAP P   New Science Network"Y"81997P P `! Oasis TV$Y"8TBAP P " Orb TVP%Y"81998P P $ The Outlet Mall Network&Y"81997"%,O(O(88&C&"P @ PP% Ypa:X   yO-9 Programming Service ăp" yO Expected Launch Date @ PP  Ypa:X  Parent Television0Y"%z4th Qtr 1998P P  YYpa:X  Parenting Satellite Television NetworkY"&1st Qtr 1998P P 0 YYpa:X  Performance ShowcaseY"%z4th Qtr 1997P P  The Pet Television Network Y"8TBAP P  Premiere Horse NetworkpY"&1st Qtr 1998P P   YYpa:X  Prime Life Network Y"81998P P p Real Estate Network Y"8TBAP P   Seminar TV Network` Y""CFebruary 1998P P   YYpa:X  Sewing and Needle Arts Network Y"8TBAP P `  Soap ChannelY"8TBAP P   YYpa:X  Space Television NetworkPY"8TBAP P  The Success ChannelY"8TBAP P P YYpa:X  Talk TV NetworkY"81998P P  YYpa:X  The Technology Channel@Y"8TBAP P  The Theater ChannelY"%z4th Qtr 1997P P @ Therapy Channel NetworkY"8TBAP P  Toon Disney0Y"*April 1998P P  YYpa:X  TRAX Television NetworkY"8TBAP P 0 YYpa:X  TV Games NetworkY"%z4th Qtr 1998P   Ypa:X  ZDTV: Your Computer ChannelP"&1st Qtr 1998 J  S-#&a\  P6G;&P#TBA To Be Announced.  S- &Sources: National Cable Television Assoc., Planned Services, Cable Television Developments, Spring  Sj - &1997, at 124137. 1997 Programming Guide, Private Cable & Wireless Cable, May 1997, at A1. Kim  SD!- &McAvoy and Carolyn West, Cable's Contenders, Broadcasting & Cable, May 12, 1997, at 63. Database, Cablevision, Oct. 6, 1996, at 46."",O(O(88 #{"  S- TABLE F5 _ Top Eight MSO Ownership in National Programming,  S-9:MSO Rank in Order by Subscribers ă  X  rMddx( " !ddx8hX0 $########r $   @ @ P$ 2 pa:X2 "   aEH #X\  P6G;P#Services "L   aE  Subs.  aE, (Mil.) "     aE,S  TCI "Hh <Time 5Warner"2 u}Media zOne"    (Comcast"  Cox"1cCable 3yvision /:Systems"2 2 l.Adelphia " aEV!#X\  P6G;P#  Jones  Cable@ @ P 8 2+ pa:X2  Action PayPerView +" 8.0 +#z 22% +#[L +@ +#( +# +#[L +#@  +#" P  2+Y pa:X2 AMCV Y 67.0V Y #  V YX V Y V Y#(V Y#V Y#F75%V Y#@ V Y#"P    2Y+ pa:X2  Animal Planetn +" 27.6n +#z 49%n +#[Ln +@n +#(n +#l24.5%n +#[Ln +#@ n +#" P V  2+Y pa:X2 BET Y 51.6 Y#z 22% Y#[L Y#@ Y#( Y# Y#[L Y#@  Y#"P P n  2YY pa:X2 BET on JazzY 2.5Y#z 22%Y#[LY#@Y#(Y#Y#[LY#@ Y#"P P   2YY pa:X2 BET Movies^Y .3^Y#z 22%^Y#[L^Y#@^Y#(^Y#^Y#[L^Y#@ ^Y#"P   2Y+ pa:X2 The Box  yO-Worldwidev+ 24.5v+#z 80%v+#[Lv+#@v+#(v+#v+#[Lv+#@ v+#" P ^ 2+Y pa:X2 BravoY 30.0Y t  YX Y Y#(Y#Y#[LF50%Y#@ Y#"P  v 2Y+ pa:X2  yON-Cartoon Network 1/+ yON  45.8 +## +#@100%+2+#(+#+#[L+#@ +#" P  2+Y pa:X2 Catalog 1.Y# *.Y## .Y#F50%.Y#@.Y#(.Y#.Y#[L.Y#@ .Y#"P P  2YY pa:X2 Cinemax~Y yO  8.9 ~Y## ~Y#@100%~Y#@~Y#(~Y#~Y#[L~Y#@ ~Y#"P P .CNN 1/Y yO  72.4 Y## Y#@100%Y@Y#(Y#Y#[LY#@ Y#"P  ~ 2Y pa:X2 CNNfn The Financial Network 1/v yOV  8.4 v# v#@100%v@v#(v#v#[Lv#@ v#" P  2Y pa:X2 CNNI 1/Y yO  6.5 Y# Y#@100%Y@Y#(Y#Y#[LY#@ Y#"P P v 2YY pa:X2 CNN/SI Y .6 Y#  Y#@100% Y@ Y#( Y# Y#[L Y#@  Y#"P   2Y+ pa:X2 Comedy Central."+ yO   45.3 ."+ t  ."+#F50%."+ ."+#(."+#."+#[L."+#@ ."+#" P   2+Y pa:X2 Court TV~#Y yO"  32.4 ~#Y# 33.3%~#Y#=33.3%~#Y@~#Y#(~#Y#~#Y#[L~#Y#@ ~#Y#"P  ." 2Y+ pa:X2 Discovery Channel %+ yO$  72.7 %+#z 49%%+#[L%+#@%+#(%+#l24.5%%+#[L%+#@ %+#""$,O(O(88&%$" @ @ P~# 2+ pa:X2 "   aE #X\  P6G;P#Services "L   aEN  Subs.  aE (Mil.) "     aES  TCI "Hh <Time 5Warner"2 u}Media zOne"    (Comcast"  Cox"1cCable 3yvision /:Systems"2 2 l.Adelphia " aEV!#X\  P6G;P#  Jones  Cable@ @ P  2+ pa:X2 Discovery Civilization+# *+#z 49%+#[L+#@+#(+#l24.5%+#[L+#@ +#"   2++ pa:X2 Discovery Kids+# *+#z 49%+#[L+#@+#(+#l24.5%+#[L+#@ +#"   2++ pa:X2 Discovery Science+# *+#z 49%+#[L+#@+#(+#l24.5%+#[L+#@ +#"   2+ pa:X2 Discovery Travel and Living # * #z 49% #[L #@ #( #l24.5% #[L #@  #" P  2Y pa:X2 E! Y 46.0 Y# 10.4% Y#[L Y#}10.4% Y#x34.5% Y#l10.4% Y#[L Y#@  Y#"P P   2YY pa:X2 EncorebY 10.0bY#z 80%bY#[LbY#@bY#(bY#bY#[LbY#@ bY#"P    2Y+ pa:X2 Encore Love Storiesz+ 12.0z+#z 80%z+#[Lz+#@z+#(z+#z+#[Lz+#@ z+#"  b 2++ pa:X2 Encore Westerns+ **+#z 80%+#[L+#@+#(+#+#[L+#@ +#"  z 2++ pa:X2 Encore Mysteries+ **+#z 80%+#[L+#@+#(+#+#[L+#@ +#"   2++ pa:X2 Encore Action+ **+#z 80%+#[L+#@+#(+#+#[L+#@ +#"   2++ pa:X2 Encore True Stories+ **+#z 80%+#[L+#@+#(+#+#[L+#@ +#"   2++ pa:X2 }u%"}$&-)+-5024=7;E>@BMEGIULNQ]SU X \ dlt "$%|'),,.04357<:<>LEncore WAM!+ yOb  ** +#z 80%+#[L+#@+#(+#+#[L+#@ +#"   2++ pa:X2 Fox Sports Americas + yOz  3.7  + #z 25% +#[L +#@ +#( +# +#[L +#@  +#" P  2+Y pa:X2 fXZY yO  32.7 ZY #z 50%ZY#[LZY#@ZY#(ZY#ZY#[LZY#@ ZY#"P    2Y pa:X2 fXM: Movies from Fox:! yO  5.3 :! #z 50%:!#[L:!#@:!#(:!#:!#[L:!#@ :!#"  Z 2 pa:X2 GEMS International Television $ yO!  6.0 $ ## $#[L$#@$#($#50%$#[L$#@ $#""!,O(O(88"t"" @ @ P:! 2 pa:X2 "   aE #X\  P6G;P#Services "L   aEN  Subs.  aE (Mil.) "     aES  TCI "Hh <Time 5Warner"2 u}Media zOne"    (Comcast"  Cox"1cCable 3yvision /:Systems"2 2 l.Adelphia " aEV!#X\  P6G;P#  Jones  Cable@ @ P  2+ pa:X2 The Golf Channel+ yO"  11.0 +## +#[L+#@}20.2%+#( +#+#[LB +#@ +#"   2+ pa:X2 Great American Country  yO:  1.2 ## #[L#@#(##[L#@ #b!89% P  2Y pa:X2 HBOY yO  20.8 Y## Y#@100%Y#@Y#(Y#Y#[LY#@ Y#"P P  2YY pa:X2 HBO 22 Y# *2 Y## 2 Y#@100%2 Y#@2 Y#(2 Y#2 Y#[L2 Y#@ 2 Y#"P P HBO 3 Y# * Y##  Y#@100% Y#@ Y#( Y# Y#[L Y#@  Y#"P  2  2Y+ pa:X2 Headline News 1/ + yO   66.9  +##  +#@100% +#@2 +#(  +# +#[L +#@  +#"    2+ pa:X2 Independent Film Channelz yO"  8.0 z## z#[Lz#@z#(z#z#F75%z#@ z#"    2+ pa:X2 International Channel + yO  7.4 +#z 45%+#[L+#@2+#( +#+#[L+#@ +#"  z 2++ pa:X2 Knowledge TV+ yO  26.0 +## +#[L+#@+#(+#+#[L+#@ +#b!89%   2++ pa:X2 Learning Channel+ yO2  61.2 +#z 49%+#[L+#@+#(+#l24.5%+#[L+#@ +#" P  2+Y pa:X2 MuchMusicY yOJ  9.2 Y## Y#[LY#@Y#(Y#Y#F50%Y#@ Y#"P P  2YY pa:X2 OdysseybY yO  30.9 bY#z 49%bY#[LbY#@bY#(bY#bY#[LbY#@ bY#"P   2Y+ pa:X2 Outdoor Lifez+ yO  8.0 z+## z+#[Lz+#@}22.5%z+#(x22.5%z+#45%z+#[Lz+#@ z+#" P b 2+Y pa:X2 OvationY yO  3.0 Y## Y#F50%Y#@Y#(Y#Y#[LY#@ Y#"P  z 2Y+ pa:X2 Prevue Channel+ yOR  49.8 +# 40.5%+#[L+#@+#(+#+#[L+#@ +#"   2++ pa:X2 Prime Network + yOj  50.8  +#z 33% +#[L +#@ +#( +# +#F25% +#@  +#"   2+ pa:X2 Product Information Network#" yO!  8.0 ### ##[L##@##(##50%##[L##@ ##""!,O(O(88")"" @ @ P  2 pa:X2 "   aE #X\  P6G;P#Services "L   aEN  Subs.  aE (Mil.) "     aES  TCI "Hh <Time 5Warner"2 u}Media zOne"    (Comcast"  Cox"1cCable 3yvision /:Systems"2 2 l.Adelphia " aEV!#X\  P6G;P#  Jones  Cable@ @ PP  2Y pa:X2 QVC Y" yO"  63.0 Y## z 43%Y#[LY#@Y#(57%Y#Y#[LY#@ Y#"P P  2YY pa:X2 Q2:Y" yOr  10.9 :Y#z 43%:Y#[L:Y#@:Y#57%:Y#:Y#[L:Y#@ :Y#"P   2Y pa:X2 Request Television: Request 1" yO  35.0  z 40%#[L#@#(##[L#@ #"  : 2 pa:X2 Request Television: Request 2 "# * ## z 40% #[L #@ #( # #[L #@  #"   2 pa:X2 Request Television 35 "# * #z 40% #[L #@ #( # #[L #@  #"    2+ pa:X2 Romance Classics+" yOb  8.0 +## +#[L+#@+#(+#+#F75%+#@ +#" P   2+Y pa:X2 SpeedvisionBY" yOz  11.0 BY## BY#[LBY#}22.5%BY#x22.5%BY#45%BY#[LBY#@ BY#"P P  2YY pa:X2 Starz!Y" yO  4.8 Y#' 100%Y#[LY#@Y#(Y#Y#[LY#@ Y#"P P B 2YY pa:X2 Starz!2Y"# *Y#' 100%Y#[LY#@Y#(Y#Y#[LY#@ Y#"P P  2YY pa:X2 TBS 1/2Y" yOj  71.6 2Y## 2Y#[L@100%2Y#@2Y#(2Y#2Y#[L2Y#@ 2Y#"P P  2YY pa:X2 TNT 1/Y" yO  72.3 Y## Y#@100%Y#@2Y#(Y#Y#[LY#@ Y#"P  2 2Y+ pa:X2 The Travel Channel+" yO   20.5 +# z 34%#  +#[L+#@+#(+#17%+#[L+#@ +#"   2+ pa:X2 Turner Classic Movies 1/z" yO"  18.3 z z#@100%z#@z#(z#z#[Lz#@ z#"   2+ pa:X2 TV Food Network 2/+" yO  27.7 + # +#[L[L+#10%+#(+#1.9%+#[L+#@ +#"",O(O(88z" @ @ Pz 2+ pa:X2 "   aE #X\  P6G;P#Services "L   aEN  Subs.  aE (Mil.) "     aES  TCI "Hh <Time 5Warner"2 u}Media zOne"    (Comcast"  Cox"1cCable 3yvision /:Systems"2 2 l.Adelphia " aEV!#X\  P6G;P#  Jones  Cable@ @ P  2+ pa:X2 Viewers Choice+" yO"  38.0 +## z 10%+#F17%+#@12%+#(11%+#20%+#[L+#@ +#"   2+ pa:X2 Viewers Choice: Hot Choice" ***## z 10%#F17%#@12%#(11%#20%#[L#@ #" \ dlt "$%|'),,.04357<:<>L[ "c%'*k,.1s35#8{:<+?AC3FHJ;MOQCTVXK[]     2 pa:X2 Viewers Choice: Continuous Hits 1, 2, 3j " ***j ## z 10%j #F17%j #@12%j #(11%j #20%j #[Lj #@ j #"  H   S2 - X #Xj\  P6G;9XP# [ "c%'*k,.1s35#8{:<+?AC3FHJ;MOQCTVXK[]X` hp x (#%'0*,.8135@8: z Y  @ @ P  pa:X  Rank Programming Service MSO with Ownership Interest@ @ P` 8 hpa:X "1h TNTh Time Warner (100%)` ` T hhpa:X "2 h Nickelodeon/Nick at Nite h None` `  hhpa:X "3t h TBSt h Time Warner (100%)` `   hhpa:X "4 h USA Network h None` ` t  hhpa:X "54 h Lifetime Television4 h None` `   hhpa:X "6h Arts & Entertainment (A&E)h None` ` 4  hhpa:X "7h ESPNh None` `  hhpa:X "8Th The Discovery ChannelTh TCI (49%), Cox (24.5%)` `  hhpa:X "9h The Cartoon Networkh Time Warner (100%)` ` T hhpa:X "10h The Family Channelh None` `  hhpa:X "11th TNN (The Nashville Network)th None` `  hhpa:X "12h CNNh Time Warner (100%)` ` t hhpa:X "134h SciFi Channel4h None` `  hhpa:X "14h The Learning Channelh TCI (49%), Cox (24.5%)`   4 hpa:X "15$ fX$ TCI (50%)    S-#&a\  P6G;&P#* Superstations included in the source data are not included in this ranking.  S- &Source: Paul Kagan Assocs., Inc., Second Quarter 1997 PrimeTime Ratings, Cable TV Programming, Aug. 31, 1997, at 6. X` hp x (#%'0*,.8135@8:("BAC") alleged that Prime Ticket Network, et al., denied BAC access to Prime Ticket programming  &Lservices 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.  &yBAC 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  S-stipulation for dismissal.M ST- &ԍBritish American Communications, Inc. v. Prime Ticket Network, et al., Order, 12 FCC Rcd 10284 (CSB 1997).  S- : 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  &factfinding or procedural steps. The Bureau granted the complaint with respect to claims of price" ,O(O(88M1"  &[discrimination and discrimination in marketing requirements and dismissed the complaint with respect to  S-claims of discrimination in other terms and conditions.M S@- &MԍCorporate Media Partners d/b/a/ Americast and Ameritech New Media, Inc. v. Rainbow Property  S-Holdings, Inc., Order, DA 972040 (rel. Sept. 23, 1997).  S- : 8.` ` In a program access complaint dismissed in 1997, Wizard Programming, Inc. ("Wizard")  &yalleged 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  S- &jSection 628(b) of the Communications Act. DM S - &ԍWizard Programming, Inc. v. Superstar/Netlink Group, L.L.C. and TeleCommunications, Inc., Order, DA 972693 (rel. Dec. 24, 1997). Wizard claimed that SNG has discriminated against Wizard  &Lin the prices, terms, and conditions of sale or delivery of programming in violation of Section 76.1002(b)  S- &]of the Commission's rules. M S-ԍ47 C.F.R.  76.1002(b); see Communications Act  628(c)(2)(B), 47 U.S.C.  548(c)(2)(B). Wizard named TCI as a codefendant 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. " ` ,O(O(88 1"  S-   SEPARATE STATEMENT OF CHAIRMAN WILLIAM E. KENNARD Đ Q-d0S In the Matter of Annual Assessment of the Status ofĐ Q`-d Competition in Markets for the Delivery of Video Programming   dWhen Congress passed the Telecommunications Act of 1996, it mandated the sunset of cable  Sp-rate regulation on March 31, 1999 for all but the basic service tier.pH yO -#X\  P6G;P#э1996 Act,  301(b)(2), codified at 47 U.S.C.  543(d). 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 broadbased, widespread competition to the cable industry has not developed and is not imminent. Eightyseven 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 highend 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   @G-@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 12month 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"p#X,O(O(88%1"   indicates that the presence of true, headtohead 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" %,O(O(88&1" 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.  S -We will also pursue the cable industry's own suggestion,X H yO- &#X\  P6G;P#э See remarks of Decker Anstrom, President and Chief Executive Officer, National Cable Television Association,  yO- &at en banc presentation on the Status of Competition in the Multichannel Video Industry, Federal Communications Commission, December 18, 1997.  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  SP-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  S -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"p#,O(O(88%1" 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  S-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  S -arrives, is consistent with the historical underpinnings of federal regulation of cable television H yOx"-#X\  P6G;P##X\  P6G;P#э 47 U.S.C.  521(6), 47 U.S.C.  543(a)(2). and  S!-reaffirmed by the Telecommunications Act of 1996.!XH yO%-#X\  P6G;P#э Joint Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong. 2d Sess. 1 (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. "p#,O(O(88&%1" 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. "`,O(O(881"  S-\ Statement of U Commissioner Susan Ness  S-  Q`-d Re: Video Competition Report  S-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  S-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 wirebased 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.  S- 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  S-Keiretsu" by Ken Auletta,M {O-#X\  P6G;P#э Auletta,  The Next Corporate Order: American Keiretsu, The New Yorker, October 20 and 27, 1997, at 225. 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  S"- vigilant, however, to ensure that market power does not impair consumer access to these valued services."p#Z,O(O(88$1"  S-` `  ,hh^pp&  Xxx (#(#  S- SEPARATE STATEMENT OF COMMISSIONER HAROLD W. FURCHTGOTTROTH  S- In re: Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming  S-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. " ,O(O(881"  S-       S- SEPARATE STATEMENT OF COMMISSIONER GLORIA TRISTANI ă  S`-o In the Matter of Annual Assessment of the Status of Competition  Q:-.P  in Markets for the Delivery of Video ProgrammingĐd  S-Much in this year's Report on the status of multichannel video competition has a familiar ring: there are pockets of headtohead 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 headtohead 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 broadbased 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 fullscale 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  S-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  S-comparison of cable and DBS prices in paragraphs 3942 of the Report. While the comparisons do  S-include a DBS equipment cost of $200, the Report spreads that cost over a fiveyear period without  S-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 interestfree. 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. "&,O(O(88n(1"  S-  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  Sb-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.  S -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  S-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  S-consumers. Third, the Report describes several situations in which cable operators face actual headtohead 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  S-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"&,O(O(88n(1" different needs and different resources. Some would choose the basic "Chevy" service; others would choose the fullyloaded "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.