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Before the
               Federal Communications Commission
                     Washington, D.C. 20554



In the Matter of

Annual Assessment of the Status of      
Competition in Markets for the
     )
Delivery of Video Programming
)
)
)
)
)


CS Docket No. 99-230



                      SIXTH ANNUAL REPORT

   Adopted:  December 30, 1999          Released:  January 14, 2000

By the Commission:  Commissioner Furchtgott-Roth dissenting and issuing a statement; and
                  Commissioner Tristani issuing a statement.

                                   
                       Table of Contents
                                
                                                 Paragraph     
                                                               
I.   Introduction                                            .     1
     
     A.   Scope of this Report. . . . . . . . . . . . . . .     2

     B.   Summary of Findings . . . . . . . . . . . . . . .     5

II.  Competitors in Markets for the Delivery of Video Programming. . .      17

     A.   Cable Industry. . . . . . . . . . . . . . . . . .    17

     B.   Direct Broadcast Satellite Services . . . . . . .    69

     C.   Home Satellite Dishes . . . . . . . . . . . . . .    84

     D.   Multichannel Multipoint Distribution Systems. . .    85
     
     E.   Satellite Master Antenna Systems. . . . . . . . .    92

     F.   Broadcast Television Service. . . . . . . . . . .   101

     G.   Other Entrants. . . . . . . . . . . . . . . . . .   110

          1.   Internet Video . . . . . . . . . . . . . . .   110
          2.   Home Video Sales and Rentals . . . . . . . .   117
     H.   Local Exchange Carriers . . . . . . . . . . . . .   120

     I.   Electric and Gas Utilities. . . . . . . . . . . .   136

III. Market Structure and Conditions Affecting Competition.   138

     A.   Horizontal Issues in Markets for the Delivery of Video Programming . .     138

          1.   Competitive Issues in Markets for the Delivery of Video Programming. .     140
          2.   Competitive Issues in Markets for the Purchase of Video Programming. .     160
     
     
     B.   Vertical Integration and Other Programming Issues   178

          1.   Status of Vertical Integration . . . . . . .   178
          2.   Other Programming Issues . . . . . . . . . .   183

     C.   Technical Advances. . . . . . . . . . . . . . . .   206

          1.   Deployment of Digital Technology . . . . . .   207
          2.   Navigation Devices . . . . . . . . . . . . .   210
          3.   Cable Modems . . . . . . . . . . . . . . . .   212

IV.  Competitive Responses. . . . . . . . . . . . . . . . .   215
     
     A.   New Case Studies. . . . . . . . . . . . . . . . .   217

          1.   Royal Oak, Huntington Woods, and Clausen, Michigan. . .     217
          2.   West Point, Georgia. . . . . . . . . . . . .   222
          3.   Somerville, Massachusetts. . . . . . . . . .   227
          4.   Various Communities, Vermont . . . . . . . .   234
          5.   Lebanon, Ohio. . . . . . . . . . . . . . . .   240

     B.   Preliminary Findings. . . . . . . . . . . . . . .   244

V.   Administrative Matters . . . . . . . . . . . . . . . .   249

Appendices

     A.   List of Commenters
     B.   Cable Industry Tables
     C.   Horizontal Issues Tables
     D.   Vertical Integration Tables


     I.   INTRODUCTION
1.   Section 628(g) of the Communications Act of 1934, as amended ("Communications Act"),
requires the Commission to report annually to Congress on the status of competition in markets for the
delivery of video programming. Congress imposed this annual reporting requirement in the Cable Television
Consumer Protection and Competition Act of 1992 ("1992 Cable Act") as a means of obtaining information
on the competitive status of markets for the delivery of video programming.  This is the Commission's sixth
annual report ("1999 Report") submitted pursuant to Section 628(g) of the Communications Act.
     A.   Scope of this Report
1.   In this 1999 Report, we update the information in our previous reports and provide data and
information that summarizes the status of competition in markets for the delivery of video programming.  The
information and analysis provided in this report are based on publicly available data, filings in various
Commission rulemaking proceedings, and information submitted by commenters in response to a Notice of
Inquiry ("Notice") in this docket.  To the extent that information provided in previous annual reports is still
relevant, we do not repeat that information in this report other than in an abbreviated fashion, and provide
references to the discussions in prior reports.
2.   In Section II, we examine the cable television industry, existing multichannel video programming
distributors ("MVPDs") and other program distribution technologies and potential competitors to cable
television.  Among the MVPD systems or techniques discussed are direct broadcast satellite ("DBS") services
and home satellite dishes ("HSDs"), wireless cable systems using frequencies in the multichannel multipoint
distribution service ("MMDS") and the instructional television fixed service ("ITFS"), private cable or satellite
master antenna television ("SMATV") systems as well as broadcast television service.  We also consider other
existing and potential distribution technologies for video programming, including the Internet, home video
sales and rentals, local exchange telephone carriers ("LECs"), and electric and gas utilities.  We include these
services and providers because they offer, or may offer, video programming or video programming in
conjunction with nonvideo services.  
3.   In Section III of this report, we examine market structure and competition.  We evaluate
horizontal concentration in the multichannel video marketplace and vertical integration between cable
television systems and programming services.  We also discuss competitors serving multiple dwelling unit
("MDU") buildings.  We further address programming issues and technical advances.  In Section IV, we
examine a limited number of cases where consumers have a choice between an incumbent cable operator and
another MVPD in a specific market and report on the effects of this entry.
     A.   Summary of Findings
4.   In the 1999 Report, we examine the status of competition in markets for the delivery of video
programming, discuss changes that have occurred in the competitive environment over the last year, and
describe barriers to competition that continue to exist.  Overall, the Report finds that competitive alternatives
and consumer choices continue to develop.  Cable television still is the dominant technology for delivery of
video programming to consumers in the MVPD marketplace, although its market share continues to decline. 
As of June 1999, 82% of all MVPD subscribers received their video programming from a local franchised
cable operator, compared to 85% a year earlier.  
5.   The total number of subscribers to both cable and noncable MVPDs continues to increase. A total
of 80.9 million households subscribed to multichannel video programming services as of June 1999, up 5.5%
over the 76.6 million households subscribing to MVPDs in June 1998.  This subscriber growth accompanied
a 3.2 percentage point increase in multichannel video programming distributors' penetration of television
households to 81.4% as of June 1999.  
6.   Since the 1998 Report, the number of cable subscribers continued to grow, reaching 66.7 million
as of June 1999, up almost 2% over the 65.4 million cable subscribers in June 1998.  The total number of
noncable MVPD households grew from 11.2 million as of June 1998 to 14.2 million homes as of June 1999,
an increase of 26%.
7.   Much of the increase in the growth of noncable MVPD subscribers is attributable to the growth of
DBS.  DBS appears to attract former cable subscribers and consumers not previously subscribing to an MVPD. 
Between June 1998 and June 1999, the number of DBS subscribers grew from 7.2 million households to 10.1
million households.  DBS subscribers now represent 12.5% of all MVPD subscribers.  There also have been
a number of additional cable overbuilds in the last year.  While the Commission has certified new open video
systems, some OVS operators have converted portions of their systems to franchised cable operations. Over
the last year, the number of subscribers to and market shares of HSD and MMDS subscribers continued to
decline.  However, the number of SMATV subscribers has increased this year, reversing a decline exhibited
the previous year.
8.   During the period under review, cable rates rose faster than inflation, although the difference
between the cable price index and the Consumer Price Index ("CPI") is not as great as in the previous year. 
According to the Bureau of Labor Statistics, between June 1998 and June 1999, cable prices rose 3.8%
compared to a 2% increase in the CPI, which measures general price changes.  Concurrently with these rate
increases, capital expenditures for the upgrading of cable facilities increased (up 13.2% over 1998), the
number of video and nonvideo services offered increased, and programming costs increased (license fees
increased by 14.6% and programming expenses increased by 16.3%).  In addition, the increase in labor costs
in the communications industry is reported to exceed the increase in labor costs for all industries combined by
almost 2%.  We note that during this period, on March 31, 1999, rates for cable programming service tiers
("CPSTs") were deregulated by Congress.  We also note that cable operators' pricing decisions may be
affected where direct competition exists.  Available evidence indicates that when an incumbent cable operator
faces head-to-head competition, it responds in a variety of ways, including lowering prices or adding channels
without changing the monthly rate, as well as improving customer service and adding new services such as
interactive programming.
9.   The Telecommunications Act of 1996 ("1996 Act") removed barriers to LEC entry into the video
marketplace in order to facilitate competition between incumbent cable operators and telephone companies. 
For example, the 1996 Act repealed a statutory prohibition against an entity holding attributable interests in a
cable system and a LEC with overlapping service areas.  At the time of the 1996 Act's passage, it was expected
that local exchange telephone carriers would begin to compete in video delivery markets, and cable operators
would begin to provide local telephone exchange service.  Since the 1998 Report, there has been an increase
in the amount of video programming provided to consumers by telephone companies, although the expected
technological convergence that would permit use of telephone facilities for video service has not yet occurred. 
Ameritech now holds 111 cable franchises and reports that it serves approximately 250,000 subscribers. 
BellSouth has received cable franchises in 21 areas with the potential to pass 1.4 million homes in addition to
its right to provide MMDS service to approximately 3.5 million homes.  Other LECs, including GTE, SNET,
and U S West, also provide cable television service in a number of areas.  As reported last year, Bell Atlantic
and SBC have joint marketing agreements with DirecTV in order to offer video service to their telephone
customers in some areas. While the 1996 Act created the OVS framework as a means of entry into the video
marketplace by LECs, few telephone companies have sought certification.  Alternatively, only a limited
number of cable operators have begun to offer telephone service, and such service uses traditional telephone
switching equipment rather than cable facilities.  However, cable operators are beginning to develop and test
Internet Protocol ("IP") telephony.  The potential to provide telephone service prompted several large
transactions over the past year, most notably AT&T's purchase of Telecommunications, Inc. ("TCI").
10.  Since the 1998 Report, the most significant convergence of service offerings has been the pairing
of Internet service with other service offerings. There is evidence that a wide variety of companies throughout
the communications industries are attempting to become providers of multiple services, including data access. 
Cable operators continue to expand their broadband infrastructure that permits them to offer high-speed
Internet access.  Currently, the most popular way to access the Internet over cable is through the use of a cable
modem and personal computer.  A small portion of cable Internet access is delivered through a television
receiver rather than a personal computer.  Many cable operators also are planning to integrate telephony and
high-speed data access.  Like cable, the DBS industry is developing ways to bring advanced services to their
customers.  For example, Hughes Network Systems, Inc., parent of DirecTV, offers a satellite-delivered
Internet access service ("DirecPC") with a telephone return path.  EchoStar and OpenTV, Inc., a company that
produces interactive television technology, plan to offer e-mail, e-commerce, and on-line banking services in
the next year.  SMATV operators are also beginning to offer local and long distance telephone service and
Internet access along with video service.  In addition, a few MMDS operators are offering Internet service.
11.  The data provided in this Report suggest that companies comprising several different segments of
the communications industry are seeking to provide combinations of services to consumers, including video,
voice, and data.  In this context, we believe it is appropriate to compare the cable industry with other
communications industry segments that currently provide, or plan to provide, such combinations of services. 
Specifically, we find that the cable television industry holds a relatively small market share compared to other
communications industry segments that offer or intend to offer video, voice, and data services.  For example,
in 1998, the total revenue for these segments of the communications industry (i.e., cable television, MMDS,
DBS, television broadcasting, long distance telephone, and local telephone) was $334 billion.  Of this total,
cable operators represented 12.3% of the communications industry's revenues. 
12.  Noncable MVPDs continue to report that regulatory and other barriers to entry limit their ability
to compete with incumbent cable operators and to thereby provide consumers with additional choices. 
Noncable MVPDs also continue to experience some difficulties in obtaining programming from both vertically
integrated cable programmers and unaffiliated programmers who continue to make exclusive agreements with
cable operators.  In multiple dwelling units ("MDUs"), potential entry may be discouraged or limited because
an incumbent video programming distributor has a long-term and/or exclusive contract.  Other issues also
remain with respect to how, and under what circumstances, existing inside wiring in MDUs may be made
available to alternative video service providers.
13.  In addition, consumers have historically reported that their inability to receive local signals from
DBS operators may negatively affect their decision as to whether to subscribe to DBS.  The Commission
previously recommended that legislation be enacted to remove barriers to DBS carriage of local broadcast
signals.  On November 29, 1999, a revised Satellite Home Viewer Act ("SHVA") was signed into law,
permitting satellite providers to distribute local broadcast signals within their local television markets.  On that
date, DBS operators began offering local broadcast stations in some markets, and reported plans to provide
local broadcast stations to a significant portion of U. S. households within the next few months.  The
Commission hopes that the revised SHVA will have a significant and positive effect on MVPD competition.
We expect that DBS operators will now offer a programming package more comparable to and competitive
with the services offered by cable operators.  We further believe that increased competition is the best way to
keep cable rates reasonable and in check.  Moreover, the Commission plans to aggressively implement the new
SHVA in order to facilitate consumer choice in the MVPD marketplace.
14.  Our findings as to particular distribution mechanisms operating in markets for the delivery of
video programming include the following:
     n    Cable Systems:  Since the 1998 Report, the cable television industry has continued to grow
in terms of subscribership (up to 66.7 million subscribers as of June 1999, a 2% increase from June 1998),
channel capacity (some operators now offer over 170 video channels), number of national satellite-delivered
video programming services (up to 283 services by June 1999 from 245 in June 1998, a 16% increase),
revenues (an approximate 8% increase between June 1998 and June 1999), audience ratings (non-premium
cable viewership rose from a 39 share at the end of June 1998 to a 42 share at the end of June 1999), and
expenditures on programming (an approximate 15% increase in program license fees paid by cable system
operators).

     n    The cable industry remains healthy financially, which has enabled it to invest in improved
facilities, either through upgrades or rebuilding.  As a result, there have been increases in channel capacity,
the deployment of digital transmissions that provide better picture quality than can be offered through
analog service, and nonvideo services, such as Internet access.  Cable operators also offer telephony,
although the use of integrated facilities remains primarily experimental with limited exceptions.   

     n    Direct-to-Home ("DTH") Satellite Service (DBS and HSD): Video service is available
from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers'
premises, and from medium and low power satellites requiring larger satellite dish antennas.  In the last
year, DirecTV merged with United States Satellite Broadcasting Co., Inc. ("USSB") and acquired
PrimeStar.  There are over ten million DBS subscribers (EchoStar, DirecTV, and PrimeStar's subscribers
being transitioned to DirecTV's service), an increase of approximately 39% since the 1998 Report. Between
June 1998 and June 1999, the number of HSD subscribers, measured as the number of HSD users that
actually purchase programming packages, declined from 2 million to 1.8 million, a decrease of 12%, that is
likely due to subscribers switching to DBS.  DirecTV and EchoStar are among the ten largest providers of
multichannel video programming service.  DBS represented a 12.5% share of the national MVPD market in
June 1999 and HSD represented another 2.2% of that market.

     n    Wireless Cable Systems:  Currently, the wireless cable industry ("MMDS") provides
competition to the cable industry in only limited areas.  MMDS subscribership fell from 1.0 million
subscribers to 821,000 subscribers between June 1998 and June 1999, a decrease of 17.9%.  Analysts state
that the advent of digital MMDS and the Commission's authorization of two-way MMDS service will make
high-speed Internet and telephony possible and have the potential to foster renewed MMDS growth. 
Wireless cable represented a 1% share of the national MVPD market in June 1999.

     n    SMATV Systems:  SMATV systems use some of the same technology as cable systems,
but do not use public rights-of-way, and focus principally on serving subscribers living in multiple dwelling
units ("MDUs").  SMATV subscribership has increased 54% since the last report, with the industry
representing an approximately 1.8% share of the national MVPD subscribership as of June 1999.  Upgraded
facilities, and expanded service offerings to include DBS programming, Internet access, telephone service,
and security services, have fostered SMATV growth.

     n    Broadcast TV:  Broadcast networks and stations are competitors to MVPDs in the
advertising and program acquisition markets and supply video programming directly to the approximately
20% of television households that are not MVPD subscribers.  Additionally, broadcast networks and
stations are suppliers of content for distribution by MVPDs.  Since the 1998 Report, the broadcast industry
has continued to grow in the number of operating stations (from 1583 in 1998 to 1599 in 1999) and in
advertising revenues ($34.6 billion in 1998, a 6.7% increase over 1997).  While audience levels have
declined in the last year, the four major television broadcast networks still account for a 52% share of prime
time television viewing for all television households.  Broadcast television stations continue to deploy
digital television ("DTV") service.  There are 111 television stations on the air broadcasting DTV signals
and digital simulcasts of some programming have begun.

     n    LEC Entry:  The 1996 Act expanded opportunities for LECs to enter markets for the delivery
of multichannel video programming.  As noted in previous reports, LECs do not yet represent a national
presence in the MVPD market.  The competitive presence of LECs in specific video markets, however, is
growing.  In certain areas, especially in the midwest, LECs are already or are becoming significant regional
competitors.  Particularly notable are the efforts of Ameritech as a cable overbuilder and BellSouth as an
overbuilder and MMDS operator.  Ameritech has acquired 111 cable franchises, potentially passing more than
1.7 million homes.  Ninety of these cable franchises are operational, in whole or in part, and they serve at least
250,000 subscribers.  BellSouth has acquired cable franchises in 18 areas, with the potential to pass 1.2 million
homes, and is launching digital MMDS service in a number of areas.  In previous reports, we noted that, while
LECs were not yet a national competitor, their competitive presence was growing.  It now appears that their
rate of entry into the MVPD marketplace may be slowing. 
     n    Open Video Systems:  In the 1996 Act, Congress established a new framework for the
delivery of video programming -- the open video system ("OVS").  Under these rules, a LEC or other
entrant may provide video programming to subscribers, although the OVS operator must provide non-
discriminatory access to unaffiliated programmers on a portion of its channel capacity.  The Commission
has certified 13 OVS operators to serve 28 areas.  RCN owns the only operating open video systems and
currently serves areas surrounding Boston, New York City, and Washington, D.C.  In several areas for
which it holds OVS certifications, or portions of these areas, RCN has converted its systems to franchised
cable systems.  Between June 1998 and June 1999, the number of OVS subscribers went from
approximately 66,000 to 60,000, a decline attributed to the conversion of some OVS operations to cable
service.  OVS subscribers now represent slightly less than 1% of all MVPD subscribers.  As a result of
litigation that was resolved in January 1999, one of the major advantages for an entity choosing the OVS
mode of regulation   the absence of any need for a traditional cable television franchise   may no longer
exist.

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

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

     n    Electric Utilities:  Utilities are not yet major competitors in the telecommunications or cable
markets, but they possess characteristics that could potentially help them become competitively significant in
the cable market.  Some may already possess fiber-optic networks throughout the public rights-of-way in the
areas they serve.  In the last year, several utilities have announced, commenced, or moved forward with
ventures involving multichannel video programming distribution.  Starpower, a joint venture between RCN
and PEPCO, has begun to offer video, telephone, and Internet services in the Washington, D.C. area.  Seren,
a wholly-owned subsidiary of Minneapolis-based Northern States Power, is currently offering cable and high-
speed data access as an overbuilder in several Minnesota communities and plans to expand its service.  Others,
including several municipal utilities in Iowa, the municipal utility in Lebanon, Ohio, and Millennium Telecom,
which is partially owned by Tri-County Electric Cooperative in Texas, have begun or plan to begin video and
other services to their customers.  
15.  We also find:
     n Consolidations within the cable industry continue as cable operators acquire and trade systems. 
The seven largest operators now serve almost 90% of all U.S. cable subscribers.  However, in terms of one
traditional economic measure, national concentration among the top MVPDs has declined since last year. 
DBS operators DirecTV and EchoStar rank among the ten largest MVPDs in terms of nationwide
subscribership along with eight cable multiple system operators ("MSOs").  As a result of acquisitions and
trades, cable MSOs have continued to increase the extent to which their systems form regional clusters. 
Currently, 40.4 million of the nation's cable subscribers are served by systems that are included in regional
clusters.  By clustering their systems, cable operators may be able to achieve efficiencies that facilitate the
provision of cable and other services, such as telephony.
     n The number of satellite-delivered programming networks has increased from 245 in 1998 to 278
in 1999.  Vertical integration of national programming services between cable operators and programmers,
measured in terms of the total number of services in operation, declined from last year's total of 39% to 36%
this year, continuing a five year trend.  However, in 1999, one or more of the top six cable MSOs held an
ownership interest in each of 101 vertically integrated national programming services.  Sports programming
warrants special attention because of its widespread appeal and strategic significance for MVPDs.  The Report
identifies 75 regional networks, 26 of which are sports channels, many owned at least in part by MSOs.  There
are also 30 regional and local news networks that compete with local broadcast stations and national cable
networks (e.g., CNN).  
     n The program access rules adopted pursuant to the 1992 Cable Act were designed to ensure that
alternative MVPDs can acquire, on non-discriminatory terms, vertically-integrated satellite delivered
programming.  We recognize that the terrestrial distribution of programming, including in particular regional
sports programming, could eventually have a substantial impact on the ability of alternative MVPDs to
compete in the video marketplace.  We will continue to monitor this issue and its impact on the competitive
marketplace.
     n Technological advances that will permit MVPDs to increase both quantity of service (i.e., an
increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings
(e.g., interactive services) continue.  In particular, cable operators and other MVPDs continue to develop and
deploy advanced technologies, especially digital compression, in order to deliver additional video options and
other services (e.g., data access, telephony) to their customers.  To access these wide ranging services,
consumers use "navigation devices."  In the last year, on reconsideration, the Commission made some
modifications to the rules and policies adopted to implement Section 629 of the Communications Act, which
is intended to ensure commercial availability of these navigation devices.  The cable industry reports that it is
making steady progress towards the development of specifications to separate out security and non-security
functions for the interoperability of digital set-top boxes by July 1, 2000, as required by the rules.  Interface
requirements and a certification process for the high-speed cable modems needed to access data services have
also been developed.  When these processes are complete, additional competition in the market for equipment
used by subscribers should be possible.
     XVI. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING
     A.   Cable Industry

17.  This section addresses the performance of franchised cable system operators during the past year
in five major areas.  First, we report on general performance in terms of available basic services, subscriber
levels, and viewership.  Second, we discuss the cable industry's financial performance including its revenue,
cash flow status, and stock valuations.  Third, in the area of capital acquisition and disposition, we examine the
amount of funds raised and describe how these funds are being used to upgrade physical plant and to acquire
new systems.  Fourth, we consider other performance indicators such as system transactions, cable
overbuilds, and rates charged by cable operators.  Lastly, in the area of provision of advanced broadband
services, we review the growth of cable data access, digital broadband services, and broadband telephony.
               1.   General Performance
18.  Since our last report, the cable industry has continued to grow in basic cable subscribership,
homes passed, basic cable penetration, premium service subscriptions, basic cable viewership, and channel
capacity.  In addition, during 1998 and the first half of 1999, the industry continued to implement expanded
broadband service offerings including digital video, Internet access through cable, interactive cable, and
facilities-based broadband telephony. 
19.  Cable's Capacity to Serve Television Households.  The number of U.S. homes with at least one
television ("TV households") was reported as 98 million at the end of 1997 and June 1998.  At the end of
1998 and June 1999, the number of U.S. TV Households was reported as 99.4 million.  The number of homes
passed by cable was 94.6 million at the end of 1997 and 95.6 million at the end of 1998, an increase of 1.1%. 
By the end of June 1999, the number of homes passed by cable was 96.1 million.  The number of homes
passed as a proportion of the number of TV households increased 0.1% from 96.5% in December 1997 to
96.6% in December 1998, remaining at 96.6% of TV households in the first half of 1999. 
20.  Subscribership.  Basic cable television subscribership grew from 64.9 million subscribers at the
end of 1997 to 66.1 million subscribers at the end of 1998, an increase of 1.8%.  It continued to grow to an
estimated 66.7 million subscribers by June 30, 1999, a six month increase of approximately 0.9%.  Basic
cable penetration also grew, increasing from 68.6% at the end of 1997 to 69.1% at the end of 1998.  By the end
of the first half of 1999, it grew to 69.4%.  The percentage of TV households subscribing to cable continued
to increase, rising to 66.8% of all TV households by the end of 1998, and to 67% by the end of June 1999. 
The number of homes subscribing to premium cable services increased in 1998 from 31.5 million homes at the
end of 1997 to 35.3 million homes, an increase of 21.1%.  For the first half of 1999, premium cable
subscribers increased again, reaching 35.9 estimated subscribers, a six month increase of 1.7%.  The number
of premium services to which homes are subscribing (known as "premium units") increased from 57.9 million
premium units subscribed to by the end of 1998, to an estimated 59.2 million units subscribed to by the end of
the first half of 1999, a 2.2% increase over six months.
21.  Channel Capacity.  Cable operators continue to make significant capital expenditures to upgrade
and rebuild cable infrastructure to increase channel capacity.  Cable operators are increasing their channel
capacity by increasing their bandwidths and deploying digital technologies.  The increased bandwidth enables
them to offer additional channels of audio and video services, as well as other services (e.g., Internet access
and telephony).  Cable operators indicate that they need to provide additional and advanced services to
compete with DBS.  For example, Comcast notes that DBS operator Echostar recently announced that it will
launch a satellite that will increase its channel capacity by 150 channels, enabling Echostar to offer consumers
a 500-channel service.  Some cable operators currently provide customers with more than 170 programming
channels.  Comcast digital cable now offers over 170 channels to 60% of its subscribers.  Comcast's digital
offerings include 35 premium channels, 38 pay per view channels, 40 audio music channels, and an on-screen
programming guide.  Cox has also increased its channel capacity, offering more than 200 video and audio
channels in some of its service areas.  Through digital compression techniques, operators can also offer their
customers improved reception and resolution quality.
22.  According to one source, cable systems with a capacity of 30 or more channels accounted for
84.6% of cable systems in October 1998.  This represents 8,328 systems nationwide.  Systems with channel
capacities of 54 channels or more accounted for 20.7% of cable systems in October 1998, or 2,040 systems. 
In October 1999, cable systems with a capacity of 30 or more channels accounted for 85.4% of cable systems,
or 8,236 systems.  Cable systems with channel capacities of 54 channels or more accounted for 22.4% of
cable systems in October 1999, or 2,164 systems.  In addition, the same source now reports that 89 systems,
or almost 1% of all cable systems now have a capacity of 91 or more channels with 8 systems having over 125
channels.
23.  In October 1998, 98.8% of all cable customers subscribed to systems with capacities of 30
channels or more.  Moreover, 61.5% of all subscribers were served by systems with capacities of 54 or more
channels in October 1998.  In October 1999, 98.6% of all cable customers subscribed to systems with
capacities of 30 channels or more, and 64.2% of all subscribers were served by systems with capacities of 54
or more channels in October 1999.  In addition, 4.8% of all subscribers are reportedly served by systems with
capacities of 91 or more channels.
24.  Viewership.  As reported last year, viewership shares of non-premium cable networks has grown
significantly over the past decade, while viewership shares of broadcast television stations has steadily
declined.  This trend has continued over the past year.  Audience share statistics for Monday through Sunday,
24 hours a day, show that non-premium cable audience shares rose 8.8% from an average 38.8 share from
July 1997 through June 1998, to an average 42.2 share between July 1998 and June 1999.  Monday through
Sunday, 24 hours a day, broadcast television audience shares decreased 5% from an average 64.1 share from
July 1997 through June 1998, to an average 60.9 share between July 1998 and June 1999.
25.  Cable Networks.  In 1998, the number of basic cable networks increased from 131 to 139, a 6.1%
increase.  During the first half of 1999, the number of basic cable networks increased to 141, a 1.4% half-year
increase.  The number of premium networks increased from 14 to 18, a 28.6% increase from the end of 1997
to the end of 1998, and increased by four channels during the first half of 1999, reaching 22, a 22.2% half-year
increase.  The number of pay-per-view ("PPV") networks increased in 1998 from six to ten networks, but in
the first half of 1999 PPV networks decreased to eight, a half year decrease of 20%.  In the first half of 1999,
the number of networks classified as combined increased from seven to ten, or 42.9%.
26.  Programming Costs.  Programming networks incurred expenses of  $4.9 billion for producing and
acquiring programming in 1998, a 13.9% increase over 1997.  Reported estimates indicate that these
programming network expenses will total $5.7 billion in 1999, a 16.3% increase over 1998.  License fees
paid by cable system operators to basic cable network programmers increased 14.6%, from approximately $4.8
billion in 1998 to $5.5 billion in 1999. Analysts estimate that in 2000 fees will increase by an additional
10.9% to reach $6.1 billion.  Most cable operators pass increased programming costs along to subscribers as
allowed under the Commission's rules. 
27.  Other programming expenses incurred by cable operators include copyright fees for broadcast
signal carriage pursuant to Section 111 of the Copyright Act.  As of November 2, 1999, copyright fees paid
by cable system operators for broadcast signal carriage for the period July 1, 1997, to December 31, 1997,
were $77.8 million, and for the period January 1, 1998, to June 30, 1998, fees collected were $53.6 million. 
For the period July 1, 1998, through December 31, 1998, fees collected were $54 million, and for the period
January 1, 1999, to June 31, 1999, fees collected were $53.4 million.  The decline in fees collected for the
first period of 1998 is due largely to the changed status of WTBS from a superstation to a cable network.  As
such, copyright fees can no longer be collected for network TBS.
               1.   Financial Performance
28.  Data concerning cable industry revenue, cash flow, and stock prices indicate that the cable
industry remained strong in 1998 and in the first half of 1999. 
29.  Cable Industry Revenue.  Annual cable industry revenue grew 7.5% in 1998 over 1997, reaching
$32.7 billion.  By the end of 1998, revenue per subscriber grew 5.5% to $499.40 per subscriber per year, or
$41.62 per subscriber per month.  Analysts estimate that 1999 year-end total revenue will reach $35.3 billion,
an estimated 8% increase, and that revenue per subscriber per year will reach approximately $529, or $44 per
subscriber per month.
30.  From June 1997 through June 1998, nationwide cable rates rose more than four times the rate of
inflation.  Between June 1998 and June 1999, cable prices still increased by 3.8% compared to a 2% increase
in the Consumer Price Index ("CPI"), which is used to measure general price changes.  A portion of these rate
increases is attributable to capital expenditures for the upgrading of cable facilities, an increased number of
video and nonvideo services offered, and increased programming costs.  In addition, the increase in labor costs
in the communications industry exceeds the increase in labor costs for all industries combined by 1.9%.
31.  When cable system revenue is classified by source, advanced video service revenues (analog and
digital) show the greatest amount of growth in 1999, as was also the case in 1998.  Revenues for advanced
video services increased 117.3% in 1998, reaching $452 million, as operators continued to roll out new
services.  Analysts estimate that revenues from advanced services will more than double by the end of 1999,
reaching an estimated $1 billion.  In the more traditional revenue-generating sectors of cable, the home
shopping sector showed the greatest increase, generating $187 million in annual revenue in 1998, a 23%
increase over the previous year.  Industry analysts predict that home shopping revenue will increase 15% in
1999 to an estimated $215 million.  Equipment and installation revenue earned by MSOs increased 13.4% in
1998, from $2.3 billion in annual revenue in 1997 to an estimated $2.6 billion in 1998.  Industry analysts
predict this revenue sector will increase to an estimated $2.8 billion by year-end 1999.  In 1998, pay-per-view
revenue declined by 23.8% and local advertising revenue declined by 3.9%.  Annual revenue from premium
channels increased from $5 billion in 1997 to $5.1 billion in 1998, a 2.7% increase, and is expected to increase
only 2% to $5.2 billion by year-end 1999.  Revenue from the basic service tier ("BST") and from the cable
programming service tier ("CPST") combined grew from $20 billion in 1997 to $21.8 billion in 1998, a 9.1%
increase, and is expected to increase to $23.2 billion by year-end 1999.  On March 31, 1999, rate regulation
for CPST ceased under the 1996 Act.  
32.  Cable Industry Cash Flow.  Cash flow is used to assess the financial position of cable firms. 
Cash flow is generally expressed as "EBITDA" (earnings before interest, taxes, depreciation, and
amortization).  Financial analysts reported that industry-wide cash flow increased 10.5% between the end of
1997 and the end of 1998, from $13.4 billion to $14.8 billion.  Cash flow will increase an estimated 9.1%,
reaching  $16.1 billion by year-end 1999.  In 1998, the cable industry generated $225.9 in annual cash flow
per subscriber, $17.63 higher than the $208.24 per subscriber generated in 1997. Analysts estimate that in
1999, cash flow per subscriber per year will increase by $15.81, reaching $241.68.  The ratio of cash flow to
revenue ("cash flow margin") increased from 44% in 1997 to 45.2% in 1998, and is expected to increase to
45.7% in 1999.
33.  Stock Prices.  Between June 1998 and June 1999, stock market values of cable MSOs, as
represented by the Kagan MSO Index, grew steadily.  By comparison, during the same period, the Standard
and Poor's Index of 500 widely held stocks ("S&P 500") and the Dow Jones Industrial Average ("Dow
Jones") grew more modestly.  All three indices grew steadily during each of the four quarters beginning
July 1, 1998.  However, the Kagan MSO Index grew more rapidly from the end of the second quarter 1998
through the end of the second quarter 1999.  In May 1999, cable stock valuations reached historically high
levels. 
34.  Analysts cite several cable-specific factors that contributed to the overall growth of cable stock
valuations over the year-ended June 1999.  Among the most significant were the end of CPST rate regulation
on March 31, 1999, the transactions involving Paul Allen's Charter Communications, and other proposed
mergers and acquisitions including AT&T-MediaOne, Cox-TCA, and Adelphia-Century.  Analysts note that
such consolidations can offer certain market efficiencies, such as standardization, and centralized brand and
customer service management.
35.  Several market analysts believe cable stocks are not yet fully valued.  Some assert that the stock
market is ignoring the positive impact of new services such as video on demand, high-speed data, telephony,
and multiple product packaging.  Other analysts, however, indicate that deployment of these new services
could be the largest single fundamental risk to cable stock valuations.  Some analysts assert that the benefits
of successful deployment of new services will likely drive cable stocks in 2000, improving equity values by as
much as 20% to 30%.
               1.   Capital Acquisition and Disposition
36.  Industry Financing.  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.  These year to
year fluctuations in financing sources appear to be based on the availability of acceptable financing rates
through private investors or capital lending institutions.
37.  Between July 1, 1998, and December 31, 1998, the cable industry acquired $3 billion in private
debt financing (i.e., financing received from banks, insurance companies, and other institutional investors). 
In the second half of 1998, the industry acquired $998 million in net new public debt issue.  The industry
obtained its remaining financing from individuals, private corporations, venture capital firms, investment
banks, and public equity offerings (i.e., stock markets).  There was no significant financing activity in the
private markets in the second half of 1998, but public markets produced $250.3 million.
38.  Between January 1999 and June 1999, the industry acquired $13.6 billion in private debt,
compared with $1.5 billion for the same period in 1998.  Public debt also increased between January 1999
and June 1999, when compared to the same period in 1998.  Net new public debt issued for the first half of
1999 reached approximately $8.8 billion, while debt issued for the same period in 1998 reached approximately
$4.4 billion. Private equity generated from January 1999 through June 1999 was $27.5 million, whereas
private debt generated during the first six months of 1998 reached $135.5 million. 
39.  Capital Expenditures/Capital Investment.  In 1998, the cable industry spent a total of $7.7 billion
on the construction of new plant, upgrades, rebuilds, new equipment, and maintenance of new and existing
equipment.  This represents a 13.2% increase over the $6.8 billion spent in 1997 for investments in plant and
equipment, and for the expense of maintaining these investments.  Analysts expect that in 1999, operators
will spend an estimated $10.8 billion by year's end, an increase of 40.9% over 1998.  Of the $7.7 billion
spent in 1998, approximately $981 million was for maintenance expense, $600 million for new builds, $1.8
billion for rebuilds, $2.5 billion for upgrades, and $1.8 billion for equipment.  Upgrades and rebuilds
(i.e., the improvement of existing plant) continue to account for most of the capital expenditures made in the
past few years, including projections for year-end 1999.  Between 1995 and 1998, investment in the
improvement of existing plant has increased by an average of 20% each year.  Operators invested $3.7
billion in 1997, and $4.3 billion in 1998.  By year-end 1999, analysts expect expenditures for rebuilds and
upgrades to increase approximately 67%, to $7.2 billion.
40.  In 1998, many of the large MSOs spent more than half billion dollars each on upgrades and
rebuilds.  In the case of three of the MSOs, some or all of the expenditures in 1998 fulfilled commitments
made by those MSOs pursuant to social contracts with the Commission.  In addition, over the past four years
Comcast has invested more than $2 billion in system upgrades, an average of one half billion dollars per
year.  In 1999, Cox will invest approximately $650 million in upgrades.  Over the past four years,
MediaOne has invested about $4.1 billion in upgrading its plant, an average of $1 billion each year. 
MediaOne estimates that it will have invested in excess of $7 billion by year-end 2000.  AT&T states that
it has invested billions for network upgrades since acquiring TCI for $48 billion.  Cablevision has recently
upgraded and rebuilt its systems, investing hundreds of millions of dollars.
41.  Expenditures for upgrades have resulted in increased system capacity.  For example, Cox
estimates that by year-end 1999, 65% of its plant will be upgraded to 750 MHz with two-way capacity, and an
additional 11% of its systems upgraded to 550 MHz.  Comcast estimates that by year-end 1999, more than
85% of its customers will be receiving service at greater than 550 MHz and more than 63% will be receiving
service at 750 MHz.  In the first half of 1999, RCN added an average of 7.1 route miles of fiber optic
network daily, in addition to other network upgrades.
               1.   Other Performance Indicators
42.  Cable System Transactions.  The number of mergers, acquisitions, and exchanges between MSOs
has fluctuated over the past few years.  The number of systems sold increased between 1997 and 1998 from
110 to 114 systems.  One data source recorded 60 transactions from January 1999 through June 1999. 
Many of these transactions are the result of MSOs' ongoing efforts to regionalize, or "cluster," their operations
for the economic advantages to be gained by such aggregation.  The total number of subscribers affected by
system transactions and the average size (measured by the number of subscribers per system) of systems sold
continues to vary greatly from year to year.
43.  The average system size increased 74.9% from 112,616 subscribers per system sold in 1997 to
197,001 subscribers per system sold in 1998.  Between January and June 1999, the average number of
subscribers per system transaction was 258,535, a half-year increase of over 31.2%.  The total number of
subscribers affected by system transactions in 1998 increased 81.3%, from nearly 12 million subscribers in
1997 to approximately 22 million subscribers in 1998.  Between January 1999 and June 1999, about 15
million subscribers were affected by system transactions.  The total dollar value of transactions increased
191.1% from $22.2 billion at year-end 1997 to 64.6 billion at year-end 1998.  The average dollar value per
subscriber of transactions was approximately $3,900 between January 1999 and June 1999.  
44.  Overbuilding.  From 1995, when overbuild activity began to increase, to 1999, competing
franchises have been awarded covering 210 communities in 28 states, with the potential to pass 8.3 million
homes.  However, not all of the franchises awarded are currently operational.  After a franchise is awarded,
it can take a significant amount of time for the franchisee to build, or gain access to, a network over which to
provide video service.  For example, as of June 1999, Ameritech held 108 franchises but offered service in
only 90 communities.  Ameritech has the potential to pass 1.7 million homes in these 108 franchise areas.  As
of August 1999, Ameritech had increased its subscribership to 250,000, from 150,000 subscribers in August
1998.
45.  In addition, BellSouth offers service in all or parts of 12 of its 21 franchise areas. GTE offers
service in three of its nine franchise areas.  U S West offers service in four of its five franchise areas, and
SNET offers service in 12 areas covered by its statewide franchise in Connecticut.  These LEC overbuilders
are competing with MSOs such as TCI, Time Warner, Jones Intercable, Comcast, Cox, MediaOne, and Rifkin.
46.  Among the smaller firms awarded competing franchises is KnoLogy Holdings, Inc., which holds
21 franchises in four southeastern states.  KnoLogy is competing with incumbent cable operators, such as
Charter Communications, TCI, Jones Intercable, Comcast, Time Warner, and Marcus Cable.  It offers its
customers "one stop shopping" for cable service, high-speed Internet access, and local and long distance
telephone connections.  Buckeye CableSystem (Buckeye) offers service in 17 of its 19 Ohio franchise areas,
and is constructing systems in the remaining two franchise areas of  Waterville and Northwood, Ohio. 
Buckeye is also negotiating for a twentieth franchise in nearby Bedford, Michigan.  With the Waterville,
Northwood, and Bedford systems, Buckeye would compete head-to-head with incumbent FrontierVision. 
Buckeye intends to offer cable television service, cable-modem service, and local telephone service through
cable.   
47.  Since our 1998 Report, other planned overbuilds include Intertech Private Cable, which will
compete head-to-head with Adelphia in Kenmore, New York.  It will offer ten more channels than Adelphia
at a rate that is $5 less than Adelphia's current rate.  21st Century has invested $250 million in fiber network in
a portion of Chicago, where it offers cable television, Internet access, and telephone service.  21st Century
plans to propose overbuilds in other portions of Chicago to compete head-to-head with AT&T.  As of June 30,
1999, RCN passed 425,000 homes and served 270,000 OVS and cable subscribers.  RCN provides service to
areas surrounding the City of Boston, the New York City metropolitan areas, and the surrounding areas of
Washington, D.C.  RCN plans to extend its operations to San Francisco in late 1999 and to Philadelphia
sometime in 2000.  RCN offers Internet access, and local and long distance telephone, as well as video
services.
48.  New municipal overbuild activity continues to grow.  In Wadsworth, Ohio, the city's system had
2,228 customers as of March 1, 1999.  The city of Lebanon, Ohio, began serving cable subscribers on March
8, 1999.  Both of these Ohio systems are competing with the incumbent cable operator, Time Warner. 
Among municipalities planning overbuilds are Little Rock, Arkansas, and the surrounding communities of
North Little Rock, Jacksonville, Maumelle, and Sherwood.  A municipal consultant has recommended that the
communities build a state-of-the-art, two-way system that would provide 88 analog channels, 28 digital
channels, and high-speed Internet service.  Local government officials report that these communities are likely
to build such a system to compete with incumbent cable operator, Comcast.  In addition, they have indicated
that they plan to compete by providing better service at a lower price.  Other communities, such as Palo Alto,
California, Hastings, Nebraska, and Spencer, Iowa, are also considering overbuilding.
49.  An indication that an overbuilt system may be in operation occurs when an incumbent provider
asks the Commission to determine that effective competition exists within its service area.  Such a
determination exempts the cable operator from regulation of its rates. Since 1995, the Commission has granted
63 petitions for determination of effective competition status on the basis of overbuild competition.  As we
have done in recent reports, we again provide a study of selected areas where incumbent cable operators face
head-to-head effective competition.  Our case-by-case analysis shows that such competition often results in
lower prices, additional channels at the same monthly rate, improved services, or additional nonvideo
services.
50.  Several commenters seeking to overbuild incumbent cable systems cite barriers to entry into the
video distribution marketplace.  In particular, CCC, a coalition of wireline and wireless overbuilders, raises
a number of issues regarding laws and regulations that it claims inhibit its members' ability to introduce
competitive cable systems.  CCC contends that potential overbuilders have inadequate access to
programming because of exclusive contracts between cable operators and unaffiliated programmers and the
failure of the program access law to cover programming distributed over terrestrial facilities.  It argues that
its members face discriminatory programming prices because programmers offer discounts only to the largest
MSOs.  In addition, CCC claims that cable operators use a number of tactics to hinder competition in MDUs,
including:  (a) forcing competitors to postwire MDUs with a duplicate set of wiring; (b) refusing to remove or
relocate lock boxes that prevent access to existing home wiring; and (c) securing perpetual, exclusive contracts
to serve MDUs.
               1.   Provision of Advanced Broadband Services
51.  Since our last report, cable operators have been upgrading their networks and offering new
services at a rapid pace.  Some analysts estimate that most cable plant upgrades will be completed over the
next two years.  With these improvements to cable infrastructure, the marketing of new services such as
digital video, telephony, and data access, is projected to grow significantly over the next several years.
52.  Digital Video Services.  Digital signal transmission, as compared to the analog signal transmission
historically used in cable systems, can provide superior video picture quality and increased channel capacity
through compression techniques.  Accordingly, digital consumers can receive clearer video pictures, as well
as more programming options and advanced service offerings such as electronic programming guides and
video-on-demand.  Some analysts anticipate market trials of video-on-demand through digital set-top boxes
in late 1999, but predict that video-on-demand will not be offered in commercial rollouts by operators until
at least 20% of all cable subscribers have digital set-top boxes.
53.  Subscriber reception of digital video signals requires a set-top device to decompress and decode
incoming signals and to translate the digital signals into the analog signals used by current television sets. 
Presently, cable operators provide set top devices to the consumer for a monthly fee, though these devices will
soon become available to consumers through retail outlets.
54.  As of December 1998, there were more than 1.2 million digital cable subscribers.  Some
analysts estimate that by year-end 1999, there will be as many as 4.1 million digital cable subscribers.  Cox
is marketing its digital product in seven states and has 144,116 subscribers.  Cox offers three digital
packages:  movie, sports and information, and variety.  Customers may purchase one package for $5.95 or
all three for $10.95.  As of August 1999, Comcast served approximately 285,000 subscribers and expects to
serve between 400,000 to 450,000 by the end of 1999.  Comcast offers digital video service in seven
states. Adelphia offers digital video in 25 of its systems.  AT&T offers digital video in 22 states. 
MediaOne offers digital service in ten states, passing more than three million homes. 
55.  Internet and High-Speed Data Services.  Currently, most Americans access the Internet using
telephone lines at speeds of less than 56 kilobits-per-second ("Kbps.")  In January 1999, 65% of Internet
users were using analog telephone dial-up modems with an average speed of access of 33 Kbps.  It is
projected that telephone dial-up will remain the principal means of accessing the Internet for at least the next
several years.  However, as we have reported in the past, broadband technologies allow users to access the
Internet at much greater speeds.
56.  The most popular way to access the Internet over cable broadband infrastructure is through the use
of a cable modem and personal computer, with information transmitted over the cable system's wires.  Cable
broadband infrastructure accessed through cable modems allows users to access the Internet at speeds that
range from fifty to several hundred times faster than telephone dial-up.  Cable systems and cable modems
are reportedly able to offer speeds of up to 27 megabits-per-second ("Mbps").  However, because cable
broadband network capacity is shared among users, and because of the hardware limitations, most connections
are closer to one to ten Mbps.
57.  As reported last year, Cable Television Laboratories ("CableLabs") was founded in 1988 by a
consortium of cable operators in North and South America.  Established to provide a clearinghouse for
technological information, CableLabs created the cable modem standard, DOCSIS (Data Over Cable Service
Interface Specification), in an effort to ensure practicality and accessibility of cable modem technologies. 
Equipment conforming to the DOCSIS standard is eligible to be CableLabs Certified.  On April 22, 1999,
CableLabs issued the DOCSIS 1.1 specification, defining new standards for cable modem functionality that
allow cable operators to provide guaranteed bandwidth.  This development follows the passage of DOCSIS
1.0 on March 18, 1998, which encompassed data privacy and service protection and also allowed high-speed
modems to be certified for retail sale.  There are now thirteen modem suppliers whose products have been
certified for retail sale. 
58.  Internet access via a cable modem enables access to a wide array of services including Web
browsing, e-mail, streaming audio and video, local content, and CD-ROM servers.  Last year, we reported
that as of August 31, 1998, more than 15 million homes were passed by Internet access service through cable
modem technology, with approximately 300,000 subscribers.  As of July 1999, cable modem service was
available to 32 million homes in the United States and Canada with more than 1 million subscribers by July
1999. More than 90 percent of these subscribers receive "two-way" service, meaning that data transmission
is carried over cable broadband infrastructure in both directions.  The remaining 10 percent are served by
systems that provide data transmission over cable in the downstream direction (i.e., to the consumer) and
telephone line transmission in the upstream direction (i.e., back to the cable operator).  
59.  Virtually all the major MSOs offer Internet access via cable modems in portions of their
nationwide service areas.  Unlike high-speed access offered through a telephone company, the cable Internet
service provider ("ISP") is selected on a national basis by the individual MSO and offered to customers on a
regional basis.  Road Runner and Excite@Home are still the leading cable ISPs.  As of September 30,
1999, @Home reported 840,000 cable modem subscribers, a 300 percent increase since September 30, 1998.  As of September 30, 1999, Road Runner had 420,000 subscribers.  Other cable ISPs
include High Speed Access Corporation, The ISP Channel, and Online System Services Inc. 
60.  As of June 1999, Cox offered @Home service to 3.2 million homes, and was serving 112,000
subscribers.  Comcast offers @Home service to 2.4 million households, or 43.6 % of Comcast subscribers. 
As of August 1999, Comcast had 100,000 customers with three to five additional markets and 30,000
additional customers expected by year-end 1999.  Adelphia offers Internet access in nine states, passing
more than 425,000 homes.  Bresnan offers Internet access in three states, passing over 120,000 homes with
two-way service.  AT&T passes more than 1.6 million homes with @Home service in six states. 
MediaOne passes more than 5.8 million homes in fifteen states.  Cablevision Systems offers @Home service
to over 650,000 homes in Connecticut and Long Island, New York.  Charter offers Internet access through
numerous ISPs, including High Speed Access Corporation, @Home, and Earthlink.  Charter passes over
300,000 homes with Internet Access.  RCN offers Internet access service in Massachusetts, Pennsylvania,
New York City, New Jersey, Maryland, and Washington, DC.  Time Warner offers Road Runner Internet
access service in nine states passing over 3.8 million homes.
61.  Although wireless and satellite broadband technologies exist, telephone company xDSL
technologies currently are the most significant competitors to Internet over cable broadband.  Reported to
offer consumers data speeds between 1.5 Mbps and 52 Mbps, most users experience between only 1.5 and 8
Mbps for ADSL, the most widely used form of xDSL.  As we reported last year, xDSL technology has
several advantages over cable broadband technology.  Among the advantages is the ability to offer
customers simultaneous, high-speed Internet and voice or facsimile capabilities over a single telephone line. 
Dedicated lines that run from the telephone subscriber's home to the central office can guarantee the user a
constant, high-speed rate of data transmission and security.  This means that there is no decrease in data
transfer speeds as more users get online, unlike cable's shared network.
62.  Last year, we reported that in addition to the greater availability of Internet access over cable, the
generally lower price for cable Internet access was an important difference between cable and high-speed
telephone company products.  Currently, the number of xDSL subscribers is significantly less than the
number of cable broadband subscribers.  By June 1999, there were 159,150 xDSL subscribers compared
to more than one million cable Internet access subscribers.  The rollout of DSL and other broadband
technologies, however, is accelerating.  Analysts predict that over 30 million telephone lines will be able to
support xDSL services by the end of 1999, compared to the nearly 32 million homes passed by Internet
access over cable.  Several telephone companies recently announced plans to aggressively expand their
xDSL service areas.  For example, SBC will increase xDSL availability to over 10 million homes by the end
of 1999 and has committed to make broadband services available to 80% of its customers over the next three
years.
63.  In the last year, the price difference between cable Internet access and xDSL service has narrowed. 
DSL providers now offer service for as low as $19.95 a month.  For example, U S West offers a service
guaranteeing downstream data transfer rates of 256 Kbps for $19.95.  Bell Atlantic offers a service
guaranteeing data transfer rates of 640 Kbps downstream and 90 Kbps upstream for $49.95 per month.  It
also offers a service delivering a guaranteed 1.6 Mbps downstream and 90 Kbps upstream for $99.95 per
month.  By comparison, @Home cable Internet access is priced at $39.95 per month and offers transfer
speeds of up to 1.5 Mbps downstream and 128 Kbps upstream.  However, because bandwidth on cable
networks is shared among users, most @Home users experience data transfer rates of approximately 128 Kbps
downstream.
64.  In addition, as we have reported in the past, a small portion of cable Internet access is delivered
through a television receiver rather than a personal computer.  Such services are provided using a dedicated
browsing device that communicates with the cable set-top box to offer basic applications such as e-mail, Web
browsing and "hyperlinking" technology.  These services are typically priced at approximately $10 per month.  Providers of such service are WebTV and Worldgate.  Wink
Communications offers a similar product marketed primarily as an interactive tool for the enhancement of
multichannel video programming.     
65.  Telephone Services Offered by MSOs.  Opportunities for telephony over cable have contributed
to the consummation of several large transactions over the past year, including AT&T's purchase of Tele-
Communications, Inc., and its proposed purchase of MediaOne.  While operators have the technological
ability to upgrade cable networks to offer reliable, circuit-switched cable telephony, the AT&T-TCI merger
promised deployment of IP telephony.  An IP telephony voice call and a cable telephony voice call both
begin with special equipment that connects a household's twisted pair infrastructure with its cable
infrastructure.  Cable circuit-switched telephony, however, eventually turns the call over to traditional
"circuit switched" processing, while IP telephony eventually turns the call over to the network of the Internet
for IP processing.  IP telephony processes voice telephone calls much like data are processed on the Internet;
that is, digitized pieces of data are divided into discrete packets and are transported over the Internet following
the path of least resistance. 
66.  Rather than offering circuit-switched cable telephony services and creating separate telephony and
high-speed data architectures, many cable operators over the past year have responded to growing market
demand for high-speed Internet access, with plans to combine both telephony and high-speed data access into
one integrated multi-service communications platform.  However, before IP telephony can be deployed, a
number of technical hurdles remain.  Currently, CableLabs is managing a project called PacketCable, aimed
at identifying, qualifying, and supporting products that support Internet over cable-based multimedia services
such as IP telephony.  On March 12, 1999, the first of a series of PacketCable specifications was released. 
In September 1999, CableLabs participants conducted a series of PacketCable interoperability tests, drawing
closer to PacketCable standards implementation.  Operators like AT&T are beginning to develop and test the
necessary equipment to provide IP telephony, though no plans for deployment have been announced.
67.  While many cable operators are waiting for the development of IP telephony, others offer circuit-
switched cable telephony.  As of June 1999, Cox's residential telephone service, "Cox Digital Telephone," was
available in six markets, passing 870,213 homes and serving 59,793 subscribers.  Comcast recently
announced an agreement with AT&T to collaborate on local exchange telephone service through AT&T-
branded telephony in Comcast markets.  Through its controlling interest in Jones Communications, Comcast
serves 12,000 telephone subscribers in Prince George's County, Maryland, and Alexandria, Virginia. 
Comcast also offers facilities-based telephony service on its systems in Ft. Lauderdale, Florida, and Baltimore,
Maryland.  Comcast anticipates that IP telephony will replace current circuit-switched offerings. 
MediaOne offers telephony in five states passing more than 3.6 million homes.  Through its wholly-owned
subsidiary, Lightpath, Cablevision provides facilities-based telephone services to Long Island and Connecticut
and plans to offer this service in all of its markets.  AT&T provides facilities-based telephony to
approximately 15,000 subscribers in Fremont, California, Arlington Heights, Illinois, Dallas, Texas, and
Hartford, Connecticut. 
68.  Multi-Service Offerings.  Analysts believe that bundling of multiple services, offered either
entirely over an operator's own network, or over a combination of its own network and a leased network,
reduces churn, and increases equity values.  The financial impact of bundling video, voice, and data, can
lower an operator's marginal risk, and provide customers with the convenience of "one-stop" shopping. 
However, it is believed that ubiquity for bundling will not occur for at least several years.
     B.   Direct Broadcast Satellite Services

69.  Direct broadcast satellite ("DBS") operators use satellites to transmit video programming to
subscribers, who must buy or rent a small parabolic "dish" antenna and pay a subscription fee to receive the
programming service.  There are four companies licensed by the Commission to provide DBS service:
DirecTV, EchoStar (marketed as the DISH Network), Dominion Video Satellite, Inc. and R/L DBS
Company.  Of these, DirecTV, EchoStar and Dominion currently provide service.  DirecTV and EchoStar
offer up to 350 channels of video programming and serve more than ten million subscribers.  Dominion offers
religious oriented programming on a smaller number of channels than DirecTV or EchoStar.  As discussed
below, PrimeStar, which is now defunct, offered a medium powered satellite service that shared many of the
attributes of DBS service, though PrimeStar service required a larger antenna and had lower channel
capacity.  DirecTV acquired PrimeStar in May 1999, and its subscribers are being transitioned to DirecTV's
high-powered DBS service.
70.  Subscribership.  DBS remains cable's largest competitor, and DBS subscribership shows
continued growth.  As of June 1999, DBS providers had over ten million subscribers, an increase of
approximately 39% since 1998.  Between June 1998 and June 1999, DirecTV added 1,524,000 subscribers
and EchoStar added 1,234,000 subscribers.  DirecTV is the nation's leading satellite television service with
more than 7.6 million customers as of June 1999, and a 72% share of the domestic DBS market.  EchoStar
had almost 2.6 million subscribers and 28% DBS market share as of June 1999.  Analysts estimate that DBS
will have nearly 21 million subscribers by 2007. There is some overlap, however, between cable and DBS
subscribership.  Of the 60% of DBS subscribers with access to cable, 24% subscribe to cable in addition to
DBS, primarily to receive local broadcast signals.
71.  DBS versus Cable.  Differences between cable and DBS continue to diminish, and some observers
assert that consumers perceive DBS and cable to be substitutable services.  Both DBS and cable operators
offer video programming packages to subscribers for a monthly fee, and offer premium and pay-per-view
services.  However, DBS subscribers continue to report higher levels of customer satisfaction over cable. For
example, SBCA cites a DBS study that found "consumers who select DTH service find it superior to any other
video service   and for DBS subscribers, 90 percent rated the overall quality of their satellite system as
excellent or good." J.D. Power and Associates rated EchoStar's DISH Network number one in customer
satisfaction in the pay television industry in their 1999 Cable/Satellite TV Customer Satisfaction Study. 
72.  According to surveys of DBS subscribers, the primary advantages of DBS are superior channel
capacity (including the capacity for "Near Video On Demand" movies on pay-per-view), digital quality
picture, CD-quality sound, and specialized programming such as exclusive sports packages.  Some of these
advantages, however, may diminish as cable operators offer digital services that allow them to match DBS
operators in number of channels and signal quality.  
73.  Differences between cable and DBS prices have declined as the cost of DBS service and
equipment has decreased.  According to a study (the "Yankee Group 1999 DBS Study") that compared cable
and DBS programming prices, DBS's average programming price was $29.50 per month while its sample of
large MSO programming prices averaged $30.56 per month.  These figures are consistent with the
Commission's last Report on Cable Industry Prices, which found that the average monthly rate charged by
cable operators facing effective competition was $28.71 as of July 1, 1998.  For those cable operators not
facing effective competition, the average monthly rate was $30.53.  DBS subscribers, however, generally
pay additional "up-front costs" for equipment and installation. When examining "price and value differences"
between DBS and cable services, the study also found that during the first year of subscribership, cable has
"less than a $400 overall payment required of a consumer, compared to a near $600 investment by a satellite
consumer.  These figures include an average hardware cost of $166 for satellite customers, an average
installation cost of $66 for satellite equipment, and an average installation cost of $26.53 for cable service. 
However, discounts offered by DBS operators on equipment and installation can minimize the difference
between cable and DBS prices.
74.  Availability of Local Broadcast Stations.  Consumers continue to report that the primary
disadvantage of DBS is the lack of network television signals.  On November 29, 1999, a revision of the
Satellite Home Viewer Act ("SHVA") was enacted.  Under the Satellite Home Viewer Improvement Act of
1999 ("SHVIA"), satellite providers are allowed to retransmit network and network affiliate signals into local
markets.  The original SHVA legislation, passed in 1988, granted only a limited exception to the exclusive
programming copyrights enjoyed by television networks and their affiliates.  This exception recognized that
some households are unable to receive network station signals over the air and allowed direct-to-home
("DTH") satellite video providers to retransmit network signals, but only "to persons who reside in unserved
households" (also known as "white areas").  In 1998, several federal court decisions that resolved litigation
between broadcasters and DBS program distributors over violations of SHVA resulted in the termination of
network signals to approximately 1.5 million satellite customers.  Subsequently, the House and the Senate
passed separate bills authorizing DTH providers to retransmit network and network affiliate signals into local
markets.  Immediately after the law was signed, EchoStar began transmitting local network packages, selling
for $4.99 a month, to subscribers in 13 markets: Denver, New York, Los Angeles, Chicago, San Francisco,
Boston, Washington, D.C., Dallas/Ft. Worth, Atlanta, Miami, Phoenix, Pittsburgh and Salt Lake City.  The
local channel package consists of the local affiliates of ABC, CBS, NBC, and FOX.  DirecTV began
immediate service to two markets: New York and Los Angeles.  In addition to local network channels,
DirecTV will include a national PBS in each local package, which sells for $5.99 a month.  During the six
month period beginning on the date of the enactment of SHVIA, DBS providers may retransmit local signals
without consent.  Thereafter, DBS operators will be subject to retransmission consent rules similar to those
established for cable operators.  Prior to the passage of SHVIA, DirecTV and Fox Entertainment Group
entered into a retransmission consent agreement to allow DirecTV to retransmit the signals of 22 major market
FOX television stations.  Subsequently, DirecTV has reached retransmission consent agreements with NBC
for 13 major market stations, and ABC for its 10 network owned and operated stations.  SHVIA further
imposes several rulemaking and reporting requirements on the Commission.  We intend to implement these
provisions expeditiously to ensure that consumers receive the intended benefits of the Act.
75.  Changes in Ownership.  Over the past year, changes in ownership and reassignments of orbital
slots have altered the DBS landscape.  On April 1, 1999, the Commission consented to the merger of United
States Satellite Broadcasting Co., Inc. ("USSB") and DirecTV, and authorized the transfer of USSB's direct
broadcast satellite licenses to DirecTV.  On April 28, 1999, Hughes, the parent company of DirecTV,
completed its acquisition of PrimeStar's medium powered satellite business.  Subsequent to that grant,
Tempo Satellite, Inc, a former DBS licensee that did not actually commence service, was also allowed to
transfer its license to DirecTV.  These changes give DirecTV increased channel capacity, facilitate "local-
into-local" broadcast signal carriage and, for the first time, allow for DBS service to Hawaii, which has not
previously been served by DBS.
76.  On May 19, 1999, the Commission granted the application of MCI Telecommunications
Corporation and EchoStar for transfer of MCI's license to construct, launch and operate a DBS system at the
110° West Longitude location.  On June 16, 1999, EchoStar was granted authority to temporarily relocate
one of its satellites to a new orbital slot in order to improve DBS service to Alaska and to initiate service to
Hawaii.  On May 17, 1999, the Commission granted Dominion Video Satellite, Inc. authority to commence
operation of a DBS service using an EchoStar satellite currently in orbit.  This authorization permits
Dominion to commence DBS service by leasing transponder capacity on an EchoStar satellite.  Dominion is
now offering service.
77.  Competitive Barriers.  Commenters identify several barriers to the continuing success of DBS as
an MVPD competitor.  Commenters state that access to vertically integrated programming remains a "critical
issue" for DBS. According to commenters, when vertically integrated cable operators migrate satellite
delivered programming to a terrestrial delivery mode, they evade program access rules, thereby preventing
DBS operators from distributing valuable programming such as regional sports programming. Similarly,
EchoStar asserts that large cable operators, because of their size and market share, have "overwhelming buying
power in the programming market" that restricts access to independent programming as well as to vertically
integrated programming.
78.  According to SBCA, the inability to fully serve urban areas is another barrier to competition faced
by DBS operators.  In addition, it maintains that DBS is a predominantly rural service and faces obstacles to
competitive access to the suburban and urban markets.  SBCA reports that approximately 40% of DBS
subscribers do not have access to cable.  DirecTV believes that for DBS to effectively serve urban markets,
the Commission's rules on the use of over-the-air-reception devices ("OTARD") should be extended. 
OTARD applies to viewers who place video antennas on property that they own and that is within their
exclusive use or control, including condominium owners and cooperative owners who have an area where they
have exclusive use in which to install the antenna. The rule applies to townhomes and manufactured homes,
as well as to single family homes. On November 20, 1998, the Commission amended the rule so that it will
also apply to rental property where the renter has exclusive use, such as a balcony or patio.  Commenters
generally agree that the OTARD rules allow more viewers, particularly viewers in urban areas, access to
DBS. However, other conditions may continue to limit DBS access for some viewers.  For instance, DBS
antennas must face south to receive an acceptable quality signal from the satellite, which transmits the video
programming service.  According to DirecTV, renters and property owners who do not have south facing
exclusive use areas cannot opt for DBS service, and therefore must rely on cable operators, who have
previously obtained exclusive, long term, MDU contracts, as their MVPD provider.  
79.  Signal interference is also cited as a potential barrier to competition.  Commenters assert that new
services that propose to operate on a shared basis in the frequency band allocated to DBS service would cause
"unacceptable interference."  Finally, because DBS service relies on a telephone return path and can provide
only limited interactivity, commenters assert that DBS is at a competitive disadvantage to cable with its
broadband conduit to and from the home.
80.  On the other hand, some competitive barriers appear to be diminishing, as DBS equipment costs
fall and broadcast signals become available in many markets.  Indeed, some assert that the advertising for DBS
services indicates that DBS is now targeting a broader range of consumers.
81.  Data and Interactive Services.  As with cable operators, satellite providers are developing ways
to bring advanced services to their customers.  Hughes Network Systems, who owns DirecTV, offers a
satellite-delivered high-speed Internet access service ("DirecPC"), with a telephone return path.  DirecDUO,
a dual functioning DBS antenna, enables consumers to receive both video programming and DirectPC
services.  America Online and DirecTV have partnered to develop a set-top box that will provide interactive
and "web surfing" Internet services.  DirecTV has also formed partnerships with the TiVo Company to develop
a VCR-like set-top box with personalized TV functions and with Wink Communications to provide interactive
multimedia services. DirecTV recently created two High Definition Television (HDTV) offerings   a
nationally available HBO HDTV channel and a pay-per-view HDTV channel featuring movies and special
events.  EchoStar has partnered with Microsoft backed WebTV to provide Internet access through television
sets.  EchoStar and OpenTV, Inc. -- a company that produces interactive television technology -- will jointly
offer e-mail, e-commerce and on-line banking services to its subscribers early next year.  Nevertheless,
EchoStar contends that the Commission should "demand from merger applicants" a commitment to provide
access to their broadband networks to MVPDs, including DBS, on reasonable terms to be negotiated by the
parties or prescribed by the Commission upon a failure to agree.  Finally, both Motorola and Thompson have
announced that they each will produce equipment, including DBS systems with Internet access capability.
82.  DBS Public Interest Obligation.  On November 19, 1998, the Commission adopted rules
implementing Section 25 of the 1992 Cable Act, which imposed certain public interest obligations on DBS
providers. The statute requires DBS service providers to set aside a percentage of channel capacity for non-
commercial programming of an educational or informational nature.  DirecTV began providing application
packets to potential non-commercial and educational programmers in June 1999. The Commission
anticipates that a variety of new programming could soon become available on DBS systems, including
children's programming, distance learning programs, university research projects shared nationwide, and
health applications developed for rural America.  DBS licensees must also comply with the political
broadcasting rules of Section 312(a)(7) of the Communications Act which grants candidates for federal office
reasonable access to broadcasting stations, and Section 315 of the Act, which requires that licensees provide
equal opportunities for those candidates to use broadcast stations at the lowest unit charge.
83.  The effective date for implementation of the DBS public interest obligations was December 15,
1999.  DirecTV began offering such programming on that date.  On December 10, 1999, Echostar filed a
motion for a six-week extension to come into compliance.  That motion was denied and Echostar was ordered
to come into compliance by January 7, 2000, or face fines.
     A.   Home Satellite Dishes
84.  In contrast to the growth of DBS subscribers, the HSD industry, also known as C-Band, is
experiencing a steady decline of customers.  Between June 1998 and June 1999, HSD subscribership fell 12%,
from 2,028,225 to 1,783,411, as many customers move to DBS service with its smaller antennas.  For
instance, EchoStar announced a marketing agreement with TV Guide C-band unit Superstar/Netlink Group to
convert its 1.4 million current and inactive large dish HSD subscribers to EchoStar's DBS service which uses
18 inch "dish" antennas.  Despite the steady decline, SBCA expects "C-Band service to continue as a viable
business for the foreseeable future [as a] niche distribution medium" serving rural subscribers unserved by
cable.  SBCA also notes that many existing HSD transponder leases extend into the middle of the next
decade.
     A.   Multichannel Multipoint Distribution Service 
85.  MMDS systems, often referred to as "wireless cable," transmit video programming and other
services to subscribers through 2 GHz microwave frequencies, using Multipoint Distribution Service ("MDS")
and leased excess channel capacity on Instructional Television Fixed Service ("ITFS") channels.  An MMDS
system must have a line-of-sight ("LOS") path between the transmitter or signal booster and the receiving
antenna.  When using analog signals, because of capacity limitations for the frequencies, MMDS operators
have a maximum of 33 microwave channels available in each market, including 13 MDS channels and 20
ITFS channels.  Digital technology significantly increases this channel capacity, improves picture and audio
quality, and makes two-way services, such as high-speed Internet access and telephony, possible.
86.  The MMDS industry currently provides competition to the cable industry only in limited areas. 
For example, BellSouth provides competitive digital MMDS video services in areas in the southeast and GTE
provides competitive digital MMDS services in Honolulu.  Sprint Corporation and MCI WorldCom, Inc. have
acquired most of the larger MMDS operators over the past year, with the intent of using the acquired
frequencies to provide two-way communication services.  Since the 33-channel analog capacity of MMDS
systems is generally not competitive with that of most cable systems, MMDS subscribership has declined. 
One analyst believes that analog MMDS video will eventually serve only rural areas, but that digital video
subscribership will climb moderately and high-speed data access through MMDS will grow rapidly.
87.  MMDS Households and Subscribership.  In 1999, the number of homes with a serviceable line
of sight to an MMDS operator's transmission facilities was 62,500,000, and the number of homes actually
capable of receiving an MMDS operator's signal ("homes seen") was 35,750,000.  The total number of
MMDS video subscribers fell from 1.0 million to 821,000 between June 1998 and June 1999, a decrease of
17.9%.  Of the 821,000 subscribers in 1999, 721,000 were analog MMDS subscribers and the other 100,000
were subscribers to digital MMDS services.
88.  Video Joint Ventures.  Two MMDS operators, Nucentrix Spectrum Resources, Inc. ("Nucentrix"),
formerly Heartland Wireless Communications, Inc., and Wireless One, Inc., have announced joint ventures
with DBS operator DirecTV.  According to these agreements, the MMDS operator will combine its MMDS
frequencies with DirecTV's satellite video programming so that consumers can receive local broadcast and
other channels with MMDS frequencies in addition to DirecTV's full video service through a DBS dish.  The
local MMDS operator handles installation of and subscription to both services.  This service is offered to both
single-family homes and MDUs.  Many MMDS operators view MDUs as underserved by cable operators
and as a possible source for rapid revenue growth.  Nucentrix reports that it has begun offering its joint
MMDS-DirecTV service in 41 markets.
89.  Interexchange Carrier ("IXC") Investment.  Over the past year, MCI WorldCom and Sprint
have purchased a significant number of MMDS operators.  Sprint has acquired WBS America, LLC,
People's Choice TV Corporation, American Telecasting, Inc., Videotron Hollard B.V., Wireless Cable of
Florida, and Transworld Telecommunications, Inc.  These properties give Sprint the potential of offering two-
way communication services to almost 30 million households nationwide.  MCI WorldCom has purchased
CAI Wireless, which is also majority owner of CS Wireless.  MCI WorldCom has agreed to acquire
Wireless One, and Southern Wireless Video, Inc.  With these acquisitions, MCI WorldCom has the ability
to offer communication services to over 50 million homes.  Sprint and MCI WorldCom intend to use this
spectrum as a "last mile" connection to homes for the provision of high-speed Internet access.  It remains
unclear whether they will continue to provide analog video service, upgrade to digital video service, or
discontinue multichannel video service.
90.  Internet and High-Speed Data Services.  Last year, the Commission adopted new rules that
provide flexibility to MMDS and ITFS licensees to employ digital technology in delivering two-way
communications services, including high-speed Internet access, video conferencing, and distance learning. 
Currently, a few MMDS operators offer Internet service.  One such system in Phoenix, operating under
developmental authority, has over 10,000 customers for its Internet service and is competing with the local
cable operator and U S West's advanced telecommunications offering.
91.  Barriers to Competition.  WCA has several proposed recommendations for Commission action
to remove barriers to competition for MMDS operators.  First, WCA requests that the Commission
recommend that Congress amend the program access law to cover all cable networks, regardless of ownership
or method of delivery.  WCA notes that the migration of programming networks from satellite to terrestrial
delivery is accelerating, thereby limiting MMDS access to programming under the Commission's program
access rules.  WCA also contends that the consolidation and clustering of cable systems gives cable MSOs
leverage vis-…-vis local broadcast network affiliates, allowing cable operators to negotiate retransmission
consent agreements that discriminate against competing MVPDs.  WCA further reports that broadcast
networks have signed exclusive distribution agreements with cable operators for their cable networks as part
of retransmission consent agreements.  Accordingly, WCA asks that the Commission recommend that
Congress enact legislation that contains non-discrimination provisions for retransmission consent
agreements.  WCA also recommends that the Commission continue to act quickly on antenna preemption
and other access to premises issues, and that the Commission request clarification of its jurisdiction in those
areas where there may be doubts as to the scope of the Commission's authority, especially in regard to
MDUs.  WCA further asks the Commission to seek clarification from Congress concerning the
Commission's jurisdiction over "home run" wiring and its authority to adopt rules concerning the disposition
of such wiring.  WCA generally agrees with current rules concerning wiring, but states that the rules should not
allow a departing cable operator to remove its wiring when it could instead sell the wiring at depreciated value
to alternative MVPDs.  According to WCA, MDU owners may deny access to competing MVPDs out of
concern that cable companies may elect to remove their wiring, thus requiring a potentially damaging and
disruptive new installation by an alternative MVPD.
     A.   Satellite Master Antenna Television Systems
92.  SMATV systems are satellite systems used to distribute television signals to households located
in one or more adjacent buildings, primarily serving urban and suburban MDUs.  SMATV systems do not
use public rights-of-way, and thus fall outside of the Communications Act's definition of a cable system.  In
general, SMATV operators are subject to less regulatory oversight than traditional cable systems.  Some
SMATV systems use microwave transmissions and wires to serve multiple buildings that are not commonly
owned.  Under the 1996 Act, SMATV operators may use wires to connect separately owned buildings, as
long as the wires do not traverse public rights-of-way.
93.  On July 13, 1999, the Commission adopted a Notice of Proposed Rulemaking seeking comment
on a proposal to allow SMATV operators to use Cable Television Relay Service ("CARS") 12 GHz band
channels to deliver video programming.  The proceeding was initiated in response to a petition filed by
OpTel, a SMATV operator, on April 1, 1998. While OpTel sought such authorizations only for SMATV
systems, the Commission broadened the proceeding to potentially include all MVPDs as potential CARS
licensees.  The Commission also sought comment on whether the CARS band should be expanded to include
the frequency band segment from 13.20-13.25 GHz, currently designated for television broadcast auxiliary
service. 
94.  SMATV Operators.  SMATV operators, also known as private cable operators, consist of
hundreds of private and public, small and medium size firms throughout the nation.  Among the largest
SMATV operators as of June 1999, were OpTel, Cable Plus, MidAtlantic Communications, and OnePoint
Communications Corp.  These relatively large SMATV operators serve between 45,000 and 216,249
subscribers each.  Many SMATV operators serve approximately 3,000-4,000 customers.
95.  Growth.  As of December 1997, there were approximately 24.9 million year-round occupied
"households" (individual dwelling units) located in MDU housing in the United States, compromising
approximately 25% of the estimated 99.5 million total year-round occupied housing units nationwide. 
Because SMATV systems generally serve MDUs, and since a portion of MDUs are currently governed by
"perpetual" or long-term exclusive contracts with franchised cable operators, SMATV operators' potential
residential subscriber base is likely somewhat less than 25% of all households nationwide.  Last year, we
reported that there were 940,000 residential SMATV subscribers, as of June 1998.  This year, the same
source estimates that there were approximately 1.5 million SMATV subscribers as of June 1999. 
96.  Advanced and Other Service Offerings.  Over the past several years, private cable operators
offering service over SMATV systems have begun to offer many of the same services offered by franchised
cable operators, including local and long distance residential telephone service and Internet access.  In
previous years, we reported that SMATV providers offer other unique services such as closed-circuit security
monitoring, voice mail, paging, and touch-screen monitor kiosk customer service.  Video services generate
the most revenue for SMATV operators, followed by Internet access service, pay-per-view service, security
services, and telephony. OpTel, the nation's largest SMATV provider, offers bundled voice, video and data
services to MDU residents in 13 markets.  OnePoint Communications Corp., a leading SMATV operator and
licensed competitive local exchange carrier ("CLEC"), offers telephony and Internet access.  
97.  SMATV operators continue to upgrade their systems in order to increase channel capacity and
service offerings.  According to one source, average channel capacity among those responding to a recent
poll was approximately 89 channels, with a low of 50 channels and a high of 200 channels offered.
98.  SMATV/DBS Combination Services.  As we reported last year, SMATV operators have joined
with satellite providers to offer flexible, low-cost programming options to MDU consumers.  In particular,
SMATV operators combine analog antenna and DBS systems in order to offer MDU residents analog and
digital programming without the need for an individual satellite dish.  Such systems can offer residents
traditional SMATV service alone, or a "bulk service" that combines traditional SMATV with select DBS
feeds.  The bulk offerings can provide local programming and non-broadcast networks at a low-cost. 
Residents can also choose DBS on an a la carte basis and can thereby receive more channels than are available
from bulk service.  As a partner with DBS companies, SMATV operators can receive commissions on DBS
subscriptions sold or on activation bonuses.  The relationship can be beneficial to both the SMATV and DBS
industries, and is similar to the relationship DBS is building with MMDS systems.
99.  Uniform Rates and Inside Wiring.  SMATV operator OpTel remains concerned about several
issues that relate to its efforts to compete in the MDU market.  Of particular concern is a decision by the
Commission to allow franchised cable operators to offer "bulk" discounts to residents of MDUs on an
individual basis.  OpTel also raises concerns over the use of existing wiring in an MDU.  The Commission
continues its review of comments submitted in the Second Further Notice of Proposed Rulemaking on the
matter of inside wiring.  
100. Real Estate Owners and Property Managers.  The relationship between SMATV providers
and real estate investment trusts ("REITS"), national property management companies and ownership
groups, has changed.  Exclusive rights to a property in exchange for a revenue share, as described in last year's
report, is, according to one report, becoming increasingly rare.  Property managers are increasingly aware of
MVPD technology issues, and are investing in infrastructure in order to gain flexibility of choice over video
providers.  SMATV operators, on the other hand, are focusing on SMATV/DBS combination services and
advanced services, such as telephony and Internet access, to attract property managers.  Many SMATV
operators are becoming CLEC licensees, while also aligning with third-party providers of high-speed Internet
access.  One analyst notes that most SMATV operators are at least testing the bundling of video, Internet,
and telephone service.
     A.   Broadcast Television Service
101. Broadcast networks and stations are competitors to MVPDs particularly in the advertising and
program acquisition markets.  Broadcast networks also compete with MVPDs by supplying video
programming over the air, particularly to those who do not subscribe to an MVPD service.  Additionally,
broadcast networks and stations are suppliers of content for distribution directly to consumers and to
consumers through MVPDs.  Since the 1998 Report, the broadcast industry has seen continued growth in the
number of operating stations and advertising revenues.  The number of commercial and noncommercial
television stations increased to 1599 as of July 31, 1999, from 1583 as of August 31, 1998.  Broadcast total
advertising revenues reached $34.6 billion in 1998, a 6.7% increase over 1997.  Advertising revenues for the
seven broadcast networks alone reached $16.3 billion in 1998.  In comparison, cable programming networks
earned $6.9 billion in advertising revenue in 1998, an increase of 18.6% over 1997.
102. During the 1998-99 television season, ABC, CBS, Fox, and NBC accounted for a combined
52% share of prime time viewing among all television households, compared to 55% in the previous year. 
UPN and WB achieved a combined 8% share of prime time viewing, down from 9% last year.  The most
recent data available for households subscribing to cable service indicate that programming originating on
local broadcast television stations accounted for a combined 56% share of 24-hour viewing in the 1997-98
television season.  Non-premium cable networks and pay cable services achieved a combined 57% share of 24-
hour viewing, up from 54% the previous season.  (Reported audience shares exceed 100% due to multiple set
viewing.)
103. The Commission has undertaken several rulemakings regarding its broadcast ownership and
attribution rules.  On August 5, 1999, the Commission revised its local market television ownership rules (the
"TV duopoly" rule) and the radio-television cross-ownership (or "one-to-a-market") rule to reflect changes in
the media marketplace.  The revised rules recognize the growth in the number and variety of media outlets in
local markets, including cable and direct broadcast satellite, and reflect the Commission's desire to permit
broadcasters to realize the efficiencies of common ownership, consistent with diversity and competition in
broadcast markets.  The changes are intended to improve the ability of over-the-air broadcast services to
compete, and thereby to continue to provide public service benefits.  The Commission also revised its
broadcast and cable/MDS ownership attribution rules.  The attribution rules define what constitutes a
"cognizable interest" for purposes of applying the ownership rules.
104. These changes permit further consolidation in the broadcast industry.  Two major proposed
transactions have been announced.  The first is the merger of Viacom, Inc., and CBS Corporation.  The
second is a "strategic investment" by NBC for the purchase of 32% of PaxTV.  Additionally, NBC has the
option to increase its ownership up to a total of 49% of PaxTV after February 1, 2002, and to have operating
control of the company, if Commission rules will allow NBC this increase.
105. National networks have also introduced "repurposing" of content.  Repurposing generally
involves a re-run of broadcast content on a cable network shortly after it airs originally on network affiliate
stations.  Repurposing has occurred on both cable networks affiliated with the broadcaster (e.g., NBC showing
Today on MSNBC) and on unaffiliated cable networks (e.g., USA showing Law & Order, Special Victim's
Unit, an NBC show).  NBC is also reportedly, in relation to the above-mentioned deal with PaxTV,
considering repurposing some of its programming to PaxTV stations.
106. DTV could potentially enhance the ability of broadcasters to compete in the video
marketplace.  DTV allows broadcasters to transmit one very high quality signal (High Definition Television
or HDTV), several standard definition signals, or ancillary services in addition to broadcast signals. As stated
in the 1997 Report, affiliates of the top four networks in the top ten markets were required to air digital signals
by May 1, 1999.  Thirty-two of these stations are now on the air with DTV facilities.  As of December 8,
1999, all of the top ten markets had at least one affiliate of the top four networks broadcasting DTV service,
and five of those markets had all of the affiliates of the top four networks broadcasting DTV.  One or more
affiliates in Chicago, Washington, D.C., New York City, Boston, and Atlanta have been granted extensions to
complete construction.  November 1, 1999 was the deadline for the four network affiliates in Markets 11-30
(79 stations) to complete construction of their DTV facilities and to file license applications.  As of December
8, 1999, 40 of these DTV permittees have filed requests for extension of time to constrict their facilities; 36
have completed construction and are on the air; 3 have special temporary authority to be on the air with DTV
pending final action on their application.  As of December 8, 1999, 267 DTV construction permits had been
granted, with in excess of 969 additional applications pending. At present, 111 stations broadcast DTV
signals.  In addition, reports from the industry indicate that at least 27,000 DTV sets have been sold as of
August 1999, and the first digital VCR went on sale in July 1999.  Several cable MSOs and broadcast
networks have reached agreements for the carriage of broadcast digital signals, including HDTV format and
any other new services.  Simulcasts of some programming are currently available, and the major networks
are planning more for the current season.
107. At this point, there are still no "cable-ready" DTV sets.  This generally means that in order to
use a DTV set with a cable system, a consumer will need to use a set-top box.  The use of set-top boxes for all
television systems, not just those connected to cable, is expected to increase in popularity as consumer interest
in the other attributes of DTV, including data transmission, increases.  Consumer electronics manufacturers
individually and through the Consumer Electronics Association ("CEA"), formerly the Consumer Electronics
Manufacturers Association, are continuing to meet with representatives from OpenCable, individual cable
systems, and NCTA in FCC-supervised sessions with the goal of reaching agreement on the standards
necessary to produce a "cable-ready" set.  The IEEE 1394 has become the adopted standard and accepted
means of connecting the DTV set with a set-top box.  The issue of copy protection and adequate protection
of digital copying remains an issue. (Unlike analog content, digital copies can be replicated pristinely and
distributed in near-perfect condition.)  The 5C standard (the Digital Transmission Content Protection "DCTP"
Standard has been generally adopted by the manufacturers, CableLabs, and the Motion Picture Association
of America ("MPAA"), but there remain questions about licensing language and implementation. There
continue to be questions as to how best to protect digital content from being copied whether it involves cable
or satellite movies, over-the-air broadcast, or transmission over the Internet.  Since consumers' adoption of
DTV is contingent upon the availability of high-level digital content, the Commission continues to supervise
and encourage negotiations on copy protection issues in the hope of facilitating the adoption of copy protection
standards.
108. Questions have been raised about indoor DTV reception.  With DTV, as with the existing
NTSC system, there will continue to be locations where reception without an outdoor antenna will be
problematic.  The expectation is, however, that reception will continue to improve with the installation of
improved chips in next generation DTV receivers.  In September, the Commission's Office of Engineering and
Technology ("OET") reexamined the DTV modulation standard in response to a request from Commissioner
Ness.  In its report, OET recommended retention of the current 8-Level Vestigial Side-Band Standard ("8-
VSB") after concluding that the relative benefits of changing to Coded Orthogonal Frequency Division
Multiplex ("COFDM") were unclear and would not outweigh the costs of such a revision.
109. DTV has the potential to allow broadcasters to become more effective competitors with cable
operators in the MVPD market.  Possible new broadcasting services include HDTV, multicasting,
combination of frequencies to provide packages of services, and interactive services such as delivering Internet
content to computers.  For example, Geocast and Hearst-Argyle Television recently signed an agreement to
allow Geocast to use Hearst-Argyle DTV spectrum to deliver Internet content to computers. Geocast reports
that it anticipates similar agreements with larger broadcasters.  Despite these possibilities, however, it is not
clear how DTV services will develop, or how significant a competitor broadcast will be in the changing
MVPD market.
     A.   Other Entrants
1.   Internet Video

110. Since our last Report, real-time and downloadable video accessible over the Internet ("Internet
video") has become more widely available.  Access to and use of the Internet is increasing, as are the number
of products available for accessing Internet video.  In addition, media companies continue to offer increasing
amounts of video over their Websites.  However, at this time, the quality of most long form programming
offered over the Internet is an open question and current Internet capacity limits the number of viewers who
can access long form Internet video simultaneously.  
111. Over the past year, Apple Computer and Microsoft began offering software for accessing
Internet video.  Real Networks, however, remains the dominant provider of Internet video software. As of
July 1999, it provided service to more than 80% of the streaming video audience.  Apple's QuickTime and
Microsoft's Windows Media and Media Player, like Real Network's RealPlayer, can be downloaded
directly from the Internet. 
112. There also has been an increase in the number of software products designed to enhance the
viewing of streaming video.  For example, Virage and Excalibur Technologies sell software that searches the
Internet for video, and enables users to access specific visual segments.  ChannelSeek and The Media
Channel catalogue and list available Internet video.  iBEAM Broadcasting has developed a technology that
allows it to deliver streaming video to hundreds of thousands of simultaneous Internet users, promising 100%
stream availability.  As of October 1999, iBEAM had entered into partnerships with more than 60 ISPs to
deliver its product.  Lariat Software offers a product that measures and reports the viewership of streaming
video.
113. The amount of Internet video content also has increased over the last year. Streaming content
has become common on many Web pages.  In addition, many Web pages are specifically designed to offer
Internet audio and video.  For example, Broadcast.com, which refers to itself as an "Internet broadcast
network," expanded its offerings in 1998 and the first half of 1999.  Broadcast.com offers connectivity to
live radio and television broadcasts featuring business and sporting events, full-length CDs, concerts, news,
audio books, and various other audio and visual options.  BreakTV.com, iCast, TV on the Web, and Den
TV.com, also offer numerous content selections.  In October 1999, the National Football League
Quarterback Club bought equity in Pseudo Programs, Inc., whose Pseudo.com began webcasting in December
1999, offering live, animated and interactive programming of football and other sports. 
114. Broadcast and non-broadcast networks are also offering increased amounts of streaming
video.  On November 17, 1999, ABC webcast a portion of The Drew Carey Show simultaneously with its
television broadcast.  On October 9, 1999, Cisco Systems, in conjunction with the United Nations
Development Program, webcast a live, world-wide, all day concert called NetAid, which was also cablecast on
VH-1 and MTV.  Organizers of NetAid claimed that the webcast of the concert was the most watched video
streaming event ever to occur over the Internet.  In October 1999, ABC news launched a thrice-weekly
webcast anchored by Sam Donaldson.  The advertiser-supported webcast is 15 minutes in duration. 
115. Because of technical demands, broadband networks provide the optimal venue for the delivery
of streamed video content.  While there is much streaming video content available to viewers who access the
Internet via telephone dial-up connections, some companies, such as Like Television, offer content exclusively
or almost entirely for broadband consumers. However, access to streaming video over cable broadband
networks can be limited.  Online provider @Home currently reserves the right to limit customers to 10-minute
streaming segments.  
116. Despite the increase in interest in Internet video, the medium is still not seen as a direct
competitor to traditional video services, and industry observers believe video streaming is in the formative
stages of development.  Internet video is still used primarily for short news segments, sports clips, and other
brief video excerpts. 
     2.   Home Video Sales and Rentals
     
117. The home video marketplace includes the sale and rental of video cassettes, laser discs, and
digital video or versatile discs ("DVDs").  In previous reports, we considered home video sales and rentals as
part of the video programming market since they provide video services similar to the premium and pay-per-
view services offered by MVPDs.  We noted that premium and pay-per-view cable services are not regulated
because they are competitive with the home video sales and rental market, and also that the home video retail
industry is highly competitive.  It is estimated that 82% of all U.S. households own at least one VCR. 
About two million homes have laser disc players.  In the two years since being introduced, the number of
homes with DVD players has reached about the same number.  There are between 25,000 and 30,000 video
specialty stores selling or renting home video programming, and several of these retailers sell video
programming through Internet sites.  The largest stores carry at least 7,500 titles in video cassette format. 
Such video programming is also available at a variety of other retail outlets, including supermarkets,
pharmacies, convenience stores, as well as at public libraries.  There are over 25,000 titles available in video
cassette format. There are 18,000 titles available on laser disc, and about 2,800 titles available on DVD,
although this number is expected to grow rapidly and could reach 5,000 by the end of 1999.  The video retail
industry is the largest source of revenue for movie studios, generating approximately $6.7 billion (or 48.5%)
of the estimated $13.8 billion domestic studio revenue in 1998.
118. In the last year, DVD player sales have continued to be strong both for low-end models
costing about $300 and for high-end players priced over $1000.  However, unlike VCRs that can cost as little
as $120, DVD players cannot record programming.  The number of homes with DVD players is expected to
grow to 4 million this year.  Last year, we reported on Digital Video Express ("Divx"), a variation of the
DVD format introduced nationwide in September 1998 by Circuit City and various partners.  Divx was
intended to be a pay-per-view alternative for digital discs using a Divx-enabled DVD player connected to a
telephone line that forwarded playing and billing information to a central computer.  In June 1999, Circuit
City and its partners announced that they were abandoning the Divx format.  The failure of Divx has been
attributed to consumers' resistance to having their viewing preferences tracked through the telephone billing
system, the lack of support of the movie studios, and the limited retail availability of Divx players due to the
unwillingness of Circuit City's competitors to carry its product.
119. A new home video technology, the personal video recorder ("PVR"), was recently introduced. 
PVRs are being developed by two companies, TiVo Inc. and Replay Networks Inc.  A PVR is a digital video
recorder, similar in size to a VCR, which records and stores television programming on a disc drive. 
Because it uses random access technology, a PVR can pause, rewind, and perform slow motion and instant
replay of a live program.  A PVR allows a viewer to watch an earlier portion of a program while later portions
are still being broadcast and, similarly, to leave and return to a live program without missing any portion of the
show.  However, PVRs cannot play prerecorded video cassettes or discs.  They are intended for use with a
service that provides an onscreen programming guide through a telephone connection.  The technology can be
used to create personal menus, and it can learn a consumer's television preferences so that it will record
programming in accordance with those preferences.  PVRs and the onscreen programming guide service are
available over the Internet and through toll free telephone numbers.  Since September 1999, TiVo's player,
manufactured by Philips, has been sold at by a number of retailers.  The price of a PVR depends on the
amount of storage, ranging from $499 for TiVo's player with 14 hours of storage to $1500 for ReplayTV's
player with 28 hours of storage.  A monthly TiVo subscription costs $9.95 and a lifetime subscription is
$199.  Replay has no monthly fee and relies solely on advertiser support. According to TiVo, as of June
1999, the number of PVRs sold and subscriptions to its service were "limited."
     A.   Local Exchange Carriers
120. The 1996 Act amended section 651 of the Communications Act in order to permit  telephone
companies to provide video services in their telephone service areas.  According to the statute, common
carriers may:  (1) provide video programming to subscribers through radio communications under Title III of
the Communications Act; (2) provide transmission of video programming on a common carrier basis under
Title II of the Communications Act; (3) provide video programming as a cable system under Title VI of the
Communications Act; or (4) provide video programming by means of an open video system ("OVS").
121. In previous Reports, we noted that while LECs were not yet a national competitor in the
MVPD market, their competitive presence was growing.  Currently, it appears that the rate of entry may be
slowing by even the most aggressive LECs, and several LECs have reduced or eliminated their MVPD efforts. 
The decline in the rate of entry of LECs into the MVPD market may indicate that some LECs have already
entered the geographic markets they consider most profitable, and are now only filling gaps in areas of service.
     1.   Current and Planned LEC Video Delivery
     
122. MMDS.  BellSouth remains the largest LEC investor in MMDS licenses and systems. Since
the 1998 Report, however, BellSouth has not launched digital MMDS services in any additional localities. 
BellSouth's MMDS service areas cover approximately 3.5 million homes in Florida, Atlanta, Louisiana, and
Kentucky.  As of the third quarter of 1999, BellSouth had 130,000 MMDS subscribers.  In addition, GTE
operates a digital MMDS system in Oahu, Hawaii.
123. In-Region Cable Franchises.  Ameritech continues to be the most significant LEC provider
of in-region cable service.  As of November 4, 1999, Ameritech had acquired 111 cable franchises in Illinois,
Indiana, Michigan, Ohio, and Wisconsin, potentially passing more than 1.7 million homes.  Ninety-eight of
Ameritech's cable franchises were operational as of November 4, 1999, and it was the 23rd largest MSO in
the country as of June 1999, serving 250,000 subscribers.  Ameritech continues to encounter significant
competitive responses by incumbent cable operators.
124. At the time of the 1998 Report, in addition to its MMDS properties, BellSouth had acquired
18 cable franchises in Alabama, Florida, Georgia, South Carolina, and Tennessee, giving it the potential of
passing 1.2 million homes.  At that time, BellSouth provided service in nine of its franchised areas. 
BellSouth now reports that it holds 21 franchises with the potential to pass 1.4 million homes.  BellSouth states
that it provides service in 12 of its franchise areas, and that it is negotiating with localities for additional
franchises.  We previously reported that GTE received ten competitive cable franchises, and one non-
competitive franchise.  GTE's non-competitive franchise in Cerritos, California, and the competitive
franchises in Ventura County, California, and St. Petersburg and Clearwater, Florida, are operational.
125. SNET, which was recently acquired by SBC Communications, holds a statewide cable
franchise in Connecticut, and currently offers service to 14 localities.  On August 25, 1999, SNET applied
for and received permission from the Connecticut Department of Public Utility Control ("DPUC") to suspend
construction of its statewide Hybrid Fiber-Coaxial ("HFC") network while it considers alternative technologies
for video deployment, such as digital subscriber line ("DSL") technology.  SNET maintains that HFC is not
an efficient technology for deployment of video services. The DPUC required SNET to continue video service
where it has already begun to do so, and declined to relieve SNET of any of its statewide construction
obligations.  SNET is required to file a proposal on new technologies and for statewide construction by
October 1, 2000.
126. U S West continues to operate video systems in Omaha, Nebraska, and Phoenix, Arizona.  In
Phoenix, U S West uses very high speed digital subscriber line ("VDSL") for distribution of video, high-speed
Internet access, and telephone service over existing copper telephone lines, and is still the only company in the
country using this distribution technology.  In addition, U S West announced that it has begun trials of an
interactive service that integrates customers' telephone, Internet access, and existing television service.  This
service, delivered over dial-up or DSL connections to television sets, allows customers to switch between Web
surfing and television watching, to do both simultaneously, to view caller ID information on their television
screens, to answer the telephone via a speakerphone on a set-top box, and to check e-mail.  Full-scale
deployment of this service was expected in the fall, but has not yet occurred.
127. Last year, we reported on concerns that SBC, then in the process of purchasing Ameritech,
might sell or abandon Ameritech's cable overbuild efforts, given that SBC previously sold or abandoned
PacBell MVPD services.  In addition, SBC's Chairman Edward Whitacre, on May 19, 1998, had declined to
commit to maintain Ameritech's video efforts.  Recently, Ameritech suspended deployment of new cable
operations and suspended negotiation of new franchise agreements.  An SBC spokesman said that the
operations would be suspended until a "deep review" of all business operations was completed.
128. OVS.  Although OVS is one of four means for LEC entry into video, the OVS rules do not
preclude non-LECs from becoming OVS operators.  Therefore some of the companies certified to provide
OVS service are not LECs.  The Commission has certified 13 OVS operators to offer OVS service in 28 areas,
with some of the areas overlapping.
129. RCN owns the only operating open video systems and holds OVS certifications in nine areas. 
RCN reports that it currently operates open video systems in areas surrounding the City of Boston, within the
New York City metropolitan areas, and within and surrounding Washington, D.C.  RCN has somewhat less
than 6,000 OVS subscribers in the areas around Boston, 50,000 OVS subscribers in New York City, and 3,000
OVS subscribers in the Washington, D.C., area.  These systems also offer subscribers high-speed Internet
access, and local and long distance telephone service.  In several areas for which it holds OVS certification,
or in subsections of these areas, RCN has negotiated cable franchises with local franchising authorities.  In
these areas, RCN will or is already offering cable service instead of OVS service.  RCN states that it has
experienced significant competitive response to its offerings.
130. RCN reports that negotiation for OVS agreements with local authorities typically last three to
four months, and proceed far more quickly than traditional cable franchise agreements negotiation.  RCN
states that its status as a certified OVS operator has allowed it to enter markets rapidly, whether or not it
ultimately operates a cable or OVS system in those markets.  While RCN has had numerous inquiries from
unaffiliated video program providers concerning access to its OVS systems, no such entity has yet elected to
seek carriage on one of RCN's OVS systems.  Recently Paul Allen, owner of Charter Communications,
made a $1.65 billion investment in RCN through Vulcan Ventures, Inc.  RCN reports that this investment will
fully fund its network building plans through 2003.  Other agreements between RCN and Charter call for a
joint venture to develop Internet portal services, and for RCN to provide telephony services for Charter in Los
Angeles.
131. In the City of Dallas v. Federal Communications Commission, the Fifth Circuit U.S. Appeals
Court remanded a portion of the Commission's OVS rules, and struck down or confirmed other portions. 
Specifically, the court reversed rules that preempted Title VI-like local franchise requirements for OVS
operators.  The court also:  (a) reversed rules that banned LECs that are also cable operators from offering
OVS in the absence of effective competition; (b) remanded to the Commission the rules that allowed OVS
operators to decide whether to allow in-region cable operators access to the OVS system; and (c) granted
BellSouth's request to allow companies to begin construction of video plant before receiving OVS approval. 
RCN states that " the decision largely undercuts the regulatory design of, and economic viability of, OVS as
a alternative mode of providing MVPD services and creates delay, uncertainty, and added expense for OVS
operators."
132. Barriers to Competition.  BellSouth, Ameritech, and RCN report that they have experienced
difficulties obtaining programming.  All mention the actual or potential problem of migration of programs
from satellite to terrestrial delivery in order to avoid the program access rules.  Ameritech and BellSouth
report difficulty in gaining access to non-vertically integrated networks, and to cable networks owned by the
over-the-air broadcast companies.  These two commenters also indicate that the trend in the cable industry
toward increased horizontal concentration and clustering will continue to exacerbate these problems. 
Ameritech, BellSouth, and CCC also report that incumbent cable operators receive steep discounts for popular
programming networks, thus putting entrants at a competitive disadvantage.  Ameritech reports that these
discounts cannot be justified by cost-based measures, as Commission rules require.  BellSouth states that the
Commission has not been sufficiently stringent in applying its program access rules, particularly in regard to
migration of programming to terrestrial delivery.
133. The commenters also report that difficulties associated with gaining access to existing MDU
inside wiring is disadvantageous for cable competitors, and ask that the Commission take further action to
correct this problem.  RCN also asserts that its competitors are using OVS rules to gain access to sensitive
competitive data, and that Commission rulings requiring RCN to disclose this information to cable companies
have contributed to this problem.  RCN further indicates that it faces increasing difficulty accessing local
rights-of-way on fair and reasonable terms.
134. Ameritech and BellSouth recommend that the Commission alter the program access rules
regarding migration to terrestrial delivery, access to non-vertically integrated programming, and programming
fee discounts.  If the Commission believes it lacks the statutory authority to make the requested changes, they
ask that the Commission recommend that Congress grant this authority.  BellSouth further recommends that
the AT&T-MediaOne merger be conditioned on a commitment that all AT&T-affiliated programming will be
made available to alternative MVPDs on nondiscriminatory terms and conditions.  Finally, BellSouth urges the
Commission to recommend to Congress that the DBS "local into local" legislation prevent broadcast stations
from denying retransmission consent to any MVPD.
     2.   Ruling on Effective Competition
     
135. The Communications Act provides that a cable operator's rates are not regulated if the cable
system is subject to effective competition.  The 1996 Act amended the effective competition provision of the
statute in order to address competition from LECs, LEC affiliates, or MVPDs using LEC facilities.  In a
Report and Order that implemented the new statutory language, the Commission determined that effective
competition exists where the LEC video service "substantially overlaps" the incumbent cable operator's
service in the same franchise area.  Potential as well as actual LEC service can be considered, and the LEC
programming service must be comparable to the incumbent cable operator's service.  The Commission
determined that for a LEC service to be "comparable" it must offer at least 12 channels of video programming,
including at least one channel of non-broadcast service.
     A.   Electric and Gas Utilities
136. Utilities are not yet major competitors in the telecommunications or cable markets, but they
possess characteristics that could potentially help them become competitively significant.  Utilities own fiber-
optic networks in some areas, and generally have access to public rights-of-way in the areas they serve. 
Utilities' provision of non-energy services may increase the value of their existing network and non-network
assets.  In addition, deregulation of utilities, accompanied by the advent of competition, is prompting more
utilities to diversify and find new revenue streams.
137. Since the 1998 Report, several utilities have announced, commenced, or moved forward with
ventures involving multichannel video programming distribution.  Starpower, a joint venture between RCN
and Potomac Electric and Power Company ("PEPCO") in the Washington, D.C. area, reports that it began
video service this year.  Seren, a wholly owned subsidiary of Minneapolis-based Northern States Power, is
currently offering cable and high-speed Internet access service as a cable overbuilder in St. Cloud and Waite
Park, Minnesota.  It has also received franchise authorizations in Sartell and Sauk Rapids, Minnesota, and
Concord, California, and has applied for franchises in Walnut Creek, Danville, Pleasant Hill, Clayton, and
unincorporated Contra Costa, California.  In Iowa, several cities have authorized their municipal utilities to
overbuild the local cable company, including Hawarden and Spencer.  In addition, the State Supreme Court
in Iowa recently found that federal law prevents the state from prohibiting city utilities who operate cable
systems from also offering other telecom services, such as telephone service.  In Ohio, an overbuild system
run by the municipal utility in Lebanon began service, and the incumbent cable operator, Time Warner,
responded with lower prices and the addition of channels and digital services.  Southlake, Texas, a
community of 20,000 near Fort Worth, granted a cable franchise to Millennium Telecom, which is partially
owned by Tri-County Electrical Cooperative, an area electrical cooperative.  Millennium Telecom is
authorized to offer cable, high-speed Internet, long distance telephone, and security services in Southlake. 
Millennium Telecom already holds a similar authorization in Roanok, Texas, and has a telephone franchise in
Fort Worth that it is seeking to expand into cable.  Millennium Telecom is also seeking additional franchises
in 13 other Texas communities.  Voters in Alameda, California, voted to grant the municipal electrical utility
authority to add video to its system's offerings.  Finally, a municipal consultant recommended that Little
Rock, Arkansas, combine with four neighboring communities to use its municipal electric and water utilities
to overbuild the local cable provider.
     CXXXVIII. MARKET STRUCTUrE AND CONDITIONS AFFECTING COMPETITION
     A.   Horizontal Issues in Markets for the Delivery of Video Programming

139. In this section, we examine two separate but related markets: (a) the market for the
distribution of multichannel video programming to households, and (b) the market for the purchase of video
programming by MVPDs.  As explained in earlier reports, the market for the distribution of multichannel
video programming is local in nature, while the market for the purchase of video programming by MVPDs is
regional and national in nature. In the distribution market, the buyers are individual households as well as
families living in multiple dwelling units ("MDUs"), and the sellers are the MVPDs including cable operators
and other video service providers such as DBS providers.  In the programming purchasing market, the buyers
are MVPDs, and the sellers are programming networks, studios and programming packagers.  
140. We first review changes in the market for the distribution of video programming, including
changes in the level of competition in that market between July 1998 and June 1999.  In our discussion of
competition for the delivery of video programming to households, we also examine developments unique to
MDUs, a significant sub-set of the market.  We then review the market for the purchase of video programming
by MVPDs, and examine the effects that changes in concentration among MVPDs at the regional and national
levels have had on this market.
               1.   Competitive Issues in Markets for the Distribution of Video Programming 
141. The market for the delivery of video programming to households continues to be highly
concentrated and characterized by substantial barriers to entry.  While competitive alternatives to an
incumbent "wireline" MVPD, i.e., a cable or OVS operator, are developing and attracting an increasing
proportion of MVPD subscribers, most consumers have limited choice among video programming distributors. 
Generally, homes are passed by one wireline MVPD and a "wireless" MVPD, i.e., DBS is likely to be the only
available alternative.  For example, of the 33,000 cable community units nationwide, 157 have been certified
by the Commission as having effective competition as a result of consumers having a choice of more than one
wireline MVPD.  In the Competitive Responses section of this report, we describe the competitive response
of both the incumbent and the new entrant in several of these communities.  Incumbent operators are most
likely to respond to wireline competition by reducing their monthly charge for cable programming services and
equipment, by offering additional channels, or by offering Internet and other telecommunications services. 

142. As of June 1999, Ameritech was the largest overbuilder, offering video service to 98 cable
communities.  Questions remain regarding the long term viability of some of these overbuilds.
Overbuilding often requires "deep pockets" to withstand competitive responses from incumbents that lower
prices and increase services.  Some commenters also asserted that difficulties obtaining programming and
steep discounts enjoyed by incumbent cable operators can hinder overbuilders' ability to compete effectively
in the video distribution market.
143. Several wireless MVPDs, including MMDS, SMATV, and DBS, also deliver video
programming to households and MDUs.  Although DBS service is presumed to be technically available
nationwide, DBS service may not be available to subscribers living in MDUs or in households that are not
within the line of sight of a DBS signal.  Moreover, DBS historically has not been able to deliver local
television signals and may require higher overall payments during the first year of subscribership than cable. 
Thus, DBS may not be a viable alternative to wireline service for some households.  Recently, SHVA was
amended to authorize DBS providers to retransmit network signals into local markets.  Other wireless
MVPDs, such as SMATV, do not provide service throughout a local cable franchise area.  MMDS often serves
larger areas than SMATV, but generally offers fewer channels than cable systems.
144. NCTA asserts that cable's dominance of the market for distribution of video is not indicative
of absence of competition in that market.  NCTA states that DBS, cable's primary competitor, has the ability
to distribute "a good substitute" for cable to consumers in any geographic market, thus constraining cable's
ability to exercise market power.
145. Recent Developments in the MDU Market.  The MDU market is a significant segment of
many local MVPD markets.  MDUs comprise a wide variety of high-density residential complexes, including
high and low-rise rental buildings, condominiums, and cooperatives.  As of December 1997, there were
approximately 24.9 million year-round occupied "households" (or individual dwelling units) located in MDUs
in the U.S., comprising approximately 25% of the total 99.5 million year-round housing units nationwide. 
Historically, cable and SMATV operators were the primary providers of MVPD services to MDU
subscribers.  More recently, however, DBS has begun to supply programming to operators that serve MDUs
and to MDU residents directly.  
146. SMATV operators, also known as private cable system operators, deliver an integrated
package of services to MDUs using a variety of delivery technologies, including one or more microwave
links.  Traditional cable operators as well as the DBS providers (DirecTV and Echostar) also serve this
market.  Unlike traditional cable operators, private cable operators do not use public rights-of-way. 
Recently, several private cable system operators have joined with DBS operators to provide video
programming to MDUs.  Moreover, DBS operators have formed marketing-distribution alliances with
several LECs aimed at MDUs and the household market.  Such alliances permit the LECs to offer "one-stop-
shopping" for telecommunications service including voice, data, and video.
147. OpTel, Cable Plus, MidAtlantic Communications, and OnePoint Communications are the
largest SMATV operators, specializing in serving high density local MDU markets.  OpTel reports that it is
the largest SMATV operator with 217,100 subscribers as of May 1998.  In addition to video, OpTel provides
local telephone service to its subscribers in areas where it operates its own central office switch.  OpTel also
provides long distance telephone service to its subscribers through a resale agreement with an interexchange
carrier ("IXC"). 
148. Traditional franchised cable operators appear to be combining nonvideo communications
services with their multichannel video offerings in order to compete more effectively, particularly in the MDU
market.  For example, Cox Communications, the fourth largest MSO, offers video programming and local
telephone service to MDUs in many of its service areas.  Some cable firms offer price discounts for MDU
service, especially where they face a competing provider.  In New York City, for example, Time Warner
offers a significant discount to subscribers who live in MDUs where RCN is the competing provider.  Like
other competing providers, cable operators often seek to negotiate contracts with MDU owners that provide for
some form of exclusivity.
149. Several LECs report that they are providing MVPD services to MDUs.  During the year
ending June 30, 1998, Ameritech reached agreements to provide cable service to 442 MDUs (with a total of
36,147 units) in communities in which it is a franchised cable operator.  Of the 620 MDUs (with 62,542
units) in these communities that declined Ameritech New Media's cable service, 322 MDUs (with 40,912
units), or approximately one-half, have cited their exclusive agreements with incumbent cable operators as the
reason for the denial. 
150. RCN uses a variety of technologies to serve MDUs, including cable, OVS, and SMATV
systems. In the last year, RCN continued to expand in the MDU market in East Coast metropolitan areas. As
of June 30, 1999, RCN had a total of 11,000 subscribers in the Boston metropolitan area.  In the New York
City metropolitan area, RCN had 50,000 subscribers.  The majority of RCN's subscribers in the Boston and
New York metropolitan areas live in MDUs.  Starpower, an RCN affiliate, has 3,000 subscribers in
Washington, D.C., all of whom live in MDUs.  In all three areas, RCN offers a combination of video, high-
speed Internet access, and local and long distance telephone services.
151. DBS providers currently offer video programming service directly to approximately 75,000
MDU subscribers.  DirecTV and EchoStar are expected to increase their combined share of the MDU market
from less than 1% in 1999 to approximately 9% in 2007.  In addition, DirecTV has agreements with some
regional Bell operating companies ("RBOC"s), whereby the RBOCs market a co-branded DBS service to
MDUs in their service areas.  DBS operators are also combining their service with SMATV operators.  For
example, in a recent survey of private cable operators, 43% of the respondents indicated that they plan to add
DBS into their SMATV-based operation.
152. Competitive Issues in the MDU Market.  As explained below, commenters raise a number of
issues that they contend affect their ability to serve the MDU market.  These include lack of access to inside
wiring due to MDU owners objections for aesthetic, safety or practical reasons, exclusive and/or perpetual
contracts between incumbents and MDU owners, the Commission's over-the-air-reception devices
("OTARD") rules which they contend should be expanded, and targeted discounts by incumbent cable
operators to subscribers in MDUs when the operator faces competition. 
153. Several commenters suggest that exclusive or perpetual contracts between incumbent MVPDs
and MDU owners hinder entry into the MDU market.  According to commenters, exclusive contracts often
were entered into before the arrival of alternative MVPDs in the MDU market, and the continued existence of
these contracts prevents the MDU owners and their tenants from having an opportunity to select among
competing providers.  Similarly, BellSouth argues that "access to premises" is usually not available to a new
entrant in the MDU market due to perpetual contracts between the MDU owner and the incumbent MVPD. 
According to the Independent Cable Telecommunications Association ("ICTA"), a significant portion of the
approximately 25 million MDUs in the U.S. are currently covered by perpetual contracts with incumbent
franchised cable operators. 
154. DirecTV argues that MDU residents have limited choices among MVPD providers because
exclusive contracts between incumbents and property owners either discourage new entrants or make it
impossible for them to enter the market.  On the other hand, OpTel argues that the availability of an 
"exclusive right-of-entry" for any property is a significant factor in a new entrant's decision to enter the MDU
market.  OpTel suggests that exclusive agreements between the new entrant and MDU owners are usually
awarded on the basis of competitive bidding and the result is usually beneficial for both the new entrant and
the subscribers.  However, according to OpTel, there are numerous pre-existing exclusive contracts between
incumbent cable operators and MDU owners, which perpetuate the ownership of inside wiring by the
incumbent and are therefore anticompetitive.  OpTel asserts that large segments of the MDU market in
Southern California, Phoenix, and Southern Florida, for example, have been foreclosed to new entrants by such
agreements. 
155. Several commenters assert that the costs of duplicating inside wiring, as opposed to acquiring
wiring from an existing provider who no longer has a legally enforceable right to remain on the MDU premises
(using the Commission's inside wiring rules), can be costly and discourages potential new entrants. 
Ameritech asserts that incumbent MVPDs have threatened MDU owners with litigation over the ownership of
inside wiring in cases where the later provided access to competing MVPDs.  RCN states that it faced
"lockouts" in numerous MDUs based on the incumbent's assertion that it owns the inside wiring or that it has
the right to exercise dominion over the inside wiring under an agreement with the owner.  RCN also states that
incumbents cite state mandatory access laws as a legal basis for remaining in an MDU and retaining control of
wiring.  Ameritech asserts that incumbent MVPDs have refused to remove lockboxes that prevent access to
inside wiring owned by the MDU owner.  According to Ameritech, MDU owners in such cases are reluctant
to remove incumbent's lockboxes for fear of litigation.
156. On October 9, 1997, the Commission adopted a Report and Order and Second Further Notice
of Proposed Rulemaking that amended its cable inside wiring rules to enhance competition in the video
distribution market.  In spite of the changes brought about by the rules, some commenters assert the inside
wiring rules do not go far enough to promote competition in the MDU market.  For example, WCA argues
that the inside wiring rules do not give MDU owners sufficient certainty as to their rights upon termination of
an incumbent cable operator's service.  WCA further argues that the rules allow incumbent operators to
remove all inside wiring when they leave a building, forcing the new entrant to "postwire" or rewire the
premises.  According to WCA, MDU owners prefer to avoid postwiring for aesthetic and safety reasons. 
WCA contends that the Commission should adopt a rule stating that, if the MDU owner or successor MVPD
wishes to purchase the incumbent's home run wiring, it should have the right to do so at a price equal to the
depreciated book value of the wiring.  DirecTV suggests that the Commission should adopt rules that would
require cable incumbents to allow alternative MVPDs to share cable-owned inside wiring in MDUs.
157. MediaOne, on the other hand, argues that the inside wiring rules give SMATV operators an
unfair advantage in MDU market by affording them access to wiring installed at the expense of the incumbent
operator.  Similarly, NCTA contends that the rules favor cable's competitors because they allow SMATV
operators to engage in "cream skimming" by entering only the lucrative MDU market, since, unlike many
cable operators, SMATV operators do not have to serve entire communities and comply with expensive
franchise obligations.  MediaOne further contends that due to a recent Commission decision, SMATV
operators are now in a position to expand their service areas using common carrier video transport between
service locations.  According to MediaOne, this gives SMATV operators the benefits of a cable franchise
without commensurate regulatory and franchise obligations. 
158. Some commenters assert that the Commission's OTARD rules should be expanded to cover
common areas for MDU residents.  The OTARD rules, adopted on August 6, 1996, generally prohibit
governmental and nongovernmental restrictions on household installation of antennas one meter or less in
diameter.  On November 20, 1998, the Commission extended the OTARD rules to allow renters to install
antennas within their 'exclusive use' areas, i.e., apartments, homes, gardens, patios, terraces, and balconies. 
The rules, however, do not extend to installation of antennas on common property or on property to which a
viewer does not have a right of access.  SBCA states that while the existing OTARD rules have contributed
to creating a more competitive environment if the satellite industry is to offer choice to consumers in MDUs,
then all MDU residents should have access to satellite programming.  Similarly, DirecTV states that while
the Commission's OTARD rules have encouraged some MDU owners and landlords to use a single common
dish for reception to prevent "dish clutter," the rule should to be extended to renters and owners who do not
have exclusive use of areas suitable for satellite reception.
159. OpTel argues that as a result of the Commission's new rules regarding bulk rates, incumbent
operators are better able to leverage their advantages when a new entrant seeks to serve an MDU or group of
MDUs in a franchised area.  Specifically, OpTel asserts that an incumbent can now respond to the threat of
competition by offering targeted discounts only to those subscribers that have a competitive alternative, while
maintaining higher prices for the balance of their subscribers.
160. Many of the concerns discussed above were addressed in the Report and Order and Second
Further Notice of Proposed Rulemaking on the inside wiring rules.  The Second Further Notice also sought
comment on several issues including: (a) whether there are circumstances where the Commission should adopt
restrictions on exclusive contracts in order to further promote competition in the MDU market; (b) whether the
Commission should preempt state and local mandatory access laws in order to broaden the applicability of the
Commission's inside wiring rules enforceable; (c) whether the Commission should exempt small MVPDs
from signal leakage reporting requirements; (d) whether the Commission should extend its rules regarding
customer access to cable inside wiring before termination of service to cover all MVPDs in the same manner
that they apply to cable operators; and (e) whether to allow MDU owners to require that incumbent MVPDs
share their wiring with competitive MVPDs.  The Commission is currently reviewing the comments filed in
this proceeding. 
               1.   Competitive Issues in Markets for the Purchase of Video Programming 
161. As explained in the 1998 Report, the buyers of video programming are MVPDs including
cable operators and other video service providers, and the sellers are primarily non-broadcast programming
networks.  This market tends to be regional or national since programmers seek to develop networks much
broader than local cable franchise areas.  Also, some programming services are intended for a national
audience (e.g., CNN, USA) and others for regional audiences (e.g., NY1, New England Sports Channel).
                    a.   Regional Market
162. For the past several years, cable operators have engaged in a regional strategy called
"clustering."  Many of the largest MSOs have concentrated their operations by acquiring cable systems in
regions where the MSO already has a significant presence, while giving up smaller holdings scattered across
the country.  This clustering is accomplished through purchases and sales of cable systems, or by system
"swapping" among MSOs.   
163. Competitive Issues Related to Clustering.  Clustering of cable systems can create greater
economies of scale and size.  Accordingly, it can enable cable operators to offer a wider variety of broadband
services at lower prices to customers in geographic areas that are larger than single cable franchise areas. 
Clustering can thus make cable operators more effective competitors to LECs whose local service areas are
usually much larger than a single cable franchise area.  The General Accounting Office, in its report on the
changing status of competition to cable television, also found that ownership ties and clustering strategies may
provide cost savings and possible competitive advantages.
164. Several commenters assert harmful effects of clustering and regional concentration on
program distribution.  BellSouth argues that since a programming service cannot be successful without
access to a critical mass of subscribers, programmers are becoming more reliant on large, well clustered MSOs
that effectively control distribution on a national and regional scale.  Commenters also argue that clustering
can facilitate evasion of the Commission's program access rules.  Specifically, it is likely that cable systems
in a large cluster will be linked through a fiber optic network enabling operators to offer telecommunications
services as well as a cost-efficient means of delivering programming to its systems.  However, if MSOs have
an ownership interest in programming, fiber optic networks may give them an added incentive to "migrate"
programming from satellite delivery to terrestrial (fiber optic) delivery because only satellite delivered
programming is subject to the program access rules.  Therefore, a vertically integrated incumbent may be able
to prevent competitors from gaining access to terrestrially delivered programming.  For example, Ameritech
argues that AT&T is creating a large cluster in the Chicago area, a market that Ameritech also seeks to serve. 
Ameritech contends that clustering may lead to an increase in terrestrial delivery of programming by AT&T,
which could thereby result in the circumvention of the Commission's program access rules to the detriment of
Ameritech. 
165. Recent Developments in Clustering.  Since the previous report, cable MSOs have continued
to undertake or announce system mergers, acquisitions, divestitures, swaps, and joint ventures with the
objective of creating regional clusters of contiguous cable systems.  Most of these transactions resulted in the
expansion of existing regional clusters of cable systems in the southern, eastern, and western United States. 
Analysts report that in 1999, MSOs sought to create clusters of regional cable systems similar to the telephone
systems owned by the regional Bell operating companies in order to better enable cable operators to provide
local telephone and Internet services.  Each of the top ten MSOs have significant clusters in major
metropolitan areas.  AT&T, for example, has clusters in Chicago, San Francisco/Oakland/San Jose, and Dallas,
serving nearly 80% of the cable subscribers in these areas.  Similarly, Comcast's major clusters are in the
Washington/Baltimore, Philadelphia, and Detroit areas.  Charter is building major clusters in the Los Angeles
area and in the Pacific Northwest.  Clustering is not limited to large systems.  Some small systems are also
acquiring systems with the intent of increasing the size of their existing clusters.  Recent transactions include
Millennium acquisition of Horizon Cable's 43,000 subscribers in Michigan and Summit Communication's
approximately 43,000 subscribers in Baltimore and Seattle. 
166. Between July 1998 and June 1999, there were a total of 129 transactions having an aggregate
value of approximately $72 billion and involving 19.7 million subscribers, all intended to increase the size of
existing cable clusters.  Although the total number of clusters declined from 117 at the end of 1997 to 103
at the end of 1998, the total number of subscribers associated with these clusters increased from 34.3 million
to 40.4 million between the end of 1997 and 1998.  In the largest cluster size category (over 500,000
subscribers), the number of clusters increased by 31.3% between 1997 and 1998, and the number of
subscribers in these clusters increased by 64.7%.    
167. System Mergers and Acquisitions.  In April 1999, AT&T announced its intention to acquire
MediaOne and its nearly five million subscribers for approximately $69 billion.  Century, previously the tenth
largest MSO, was acquired by Adelphia for $5.2 billion in March 1999.  In July 1999, Vulcan Ventures, owned
by Microsoft co-founder Paul Allen, announced its intention to acquire Charter (which had previously acquired
Falcon), one of the largest cable MSOs.  In April 1999, Comcast acquired majority interest in Jones Intercable. 
In May 1999, Cox announced its intention to acquire TCA and its 1.8 million subscribers for $3.6 billion.  In
November 1999, Comcast agreed to buy Lenfest Communications from AT&T for $6.71 billion in stock and
debt.  These transactions appear designed to better position the cable operators to deliver Internet and
telephony services.
168. System Trades.  As discussed in the 1998 Report, system-for-system "swaps" or trades enable
MSOs to increase their regional clusters while minimizing financial outlays and avoiding capital gains taxes. 
Since our last report, many of the largest proposed swaps, as measured by number of subscribers, involved
AT&T and Time Warner, the two largest MSOs.  For example, AT&T recently swapped approximately
656,000 of its subscribers in Illinois, New Jersey, Oregon, Pennsylvania, and Wyoming for Time Warner's
approximately 618,000 subscribers in Florida, Hawaii, Maine, New York, Ohio, Texas and Wisconsin.  In
a swap announced in February 1999, Time Warner will receive 350,000 of MediaOne's subscribers in Ohio,
California, and Maine in exchange for 310,000 subscribers in Massachusetts, New Hampshire, and Georgia. 

                    a.   National Market
169. Cable operators may have incentives to coordinate their decisions in the market for the
purchase of programming on a national level.  Concentration of ownership among buyers in this market is one
indicator that coordinated behavior among buyers will be successful.  Economic theory suggests that the level
of competition is positively correlated to the number of firms in the relevant market, given there are no barriers
to enter the market.
170. Competitive Issues.  Several commenters raise concerns about the anticompetitive effects of
horizontal concentration of ownership on the purchase of programming.  Ameritech, for example, cites an
economic study by Dertouzos and Wildman that indicates that the largest MSOs are able to obtain
programming on more favorable terms than smaller MSOs, including new entrants.  Dertouzos and Wildman
report that an MSO's large size, rather than its efficiency, explains the lower programming price paid by an
incumbent cable operator compared to a new entrant.  According to Dertouzos and Wildman, the ability to
obtain programming at a lower cost gives the incumbents the ability to thwart entry by competitors.
171. Another concern is that excessive concentration of ownership may create "media gatekeepers"
that could potentially bar entry of new programmers and reduce the number of media voices available to
consumers.  In the 1992 Cable Act, Congress recognized the potential harm of excessive concentration of
ownership on new programming, and directed the Commission to place limits on the concentration of
ownership of cable systems at the national level.  At the same time, Congress also recognized the potential
benefits to subscribers resulting from the size and scale of MSOs.  In 1998, the Commission adopted a
horizontal ownership limit prohibiting any person from having an attributable interest in cable systems that in
aggregate reach more than 30% of cable homes passed nationwide.  The 30% rule was intended to strike a
balance between:  (a) limiting the possibility that large cable MSOs might exercise excessive market power in
the purchase of video programming; and (b) ensuring that cable operators could continue to benefit from
economies of size in order to encourage investment in new video programming delivery technology and the
deployment of other advanced technologies and services.
172. Recognizing changes in the MVPD market, the Commission amended its horizontal
ownership and related attribution rules in October 1999.  Under the newly adopted rules, calculation of the
horizontal limit is based on MVPD subscribers served rather than homes passed.  The actual number of
subscribers served is a more accurate indicator of market power in the programming market than the number
of homes passed.  In addition, the calculation of ownership limits in the new rules is based on all MVPD
subscribers and not solely on the number of cable subscribers.  For example, although DBS providers pass
almost every home in the country, DBS provides service to approximately 12% of all MVPD subscribers.
This change reflects the changing nature of the national market for the purchase of video programming and,
specifically, the growing impact of DBS on the market.
173. The Commission's new horizontal ownership rules prohibit any person from having an
attributable interest in cable systems that in the aggregate reach more than 30% of MVPD subscribers (as
opposed to cable homes passed) in the U.S.  The 30% limit on ownership balances the interests of new cable
networks and cable operators.  Although a lower ownership limit would likely reduce the chances of collusion
among cable operators and thereby increase a new cable network's chances of carriage, an ownership limit of
30% permits cable operators to cluster systems in order to gain efficiencies related to economies of scale and
scope in administration, deployment of new technologies and services, and extension into previously unserved
areas. 
174. Concentration in the National Market for the Purchase of Video Programming.  Over the
past year, non-cable MVPDs continued to increase their presence in the program purchasing market. For
example, DirecTV and Echostar, have become two of the top ten MVPDs nationwide.  Nevertheless, cable
operators continue to be the primary distributors of multichannel video programming, controlling 82.45% of
total MVPD subscribers.
175. The top four purchasers of video programming for distribution at the household or MDU
market are AT&T (with a share of 20.5%), Time Warner (with a share of 15.95%), DirecTV (with a share of
9.23%), and Comcast (with a share of 8.26%).  The share of subscribers of these top four MVPDs, has
declined slightly over the past year.  In 1998, the four MVPDs with the largest subscribership served 54.6% of
all MVPD subscribers.  In 1999, the top four MVPDs served 53.93% of all MVPD subscribers nationwide. 
However, the share of the top ten MVPDs increased by more than 3% between 1998 and 1999.  
176. To assess the potential for market power resulting from concentration in the market for the
purchase of programming, we employ the Herfindahl-Hirschman Index ("HHI").  Since MVPDs purchase
programming on a "per-subscriber" basis, the reported MVPD shares can be appropriately translated into HHI
figures.  The nationwide purchaser MVPD HHI is 923   considered "unconcentrated" under the Merger
Guidelines.  The HHI is 173 points lower than the HHI of 1096 reported last year.
177. The HHI and the market shares reported above are based on number of subscribers served by
MSOs as of June 30, 1999.  Our data on concentration in the market for the purchase of programming do not
include transactions that have been announced but have not yet been consummated.  For example, MediaOne
and AT&T are treated as separate entities because their merger has not been consummated. 
178. To summarize, our examination of national MVPD concentration currently reveals that the
market for the purchase of video programming by MSOs is less concentrated than the market for distribution
of video programming to consumers which remains highly concentrated.  In the regional and national markets
for the purchase of video programming, a number of large MSOs are consolidating their subscriber base,
although the share of the two largest MSOs (AT&T and Time Warner) has declined during the past year. 
For example, AT&T's share of MVPD subscribers fell from 26.5% in 1998 to 20.5% in 1999.  Time Warner's
share changed slightly from 16% in 1998 to 15.95% in 1999.  This explains for the drop in the HHI between
1998 and 1999. Because programmers have an incentive to minimize transaction costs by obtaining carriage
on a single large MSO, thereby gaining access to the large number of subscribers which are needed for
viability, larger MSOs have significant bargaining power, especially vis-a-vis startup programming networks
that need to reach a certain critical level of subscribership quickly to maintain their viability.  However, it
appears that currently no single MSO or pair of MSOs currently control a large enough share of cable
subscribers to effectively block entry by a new programmer. 
     B.   Vertical Integration and Other Programming Issues

          1.   Status of Vertical Integration

179. This section updates the status of vertically integrated video programming networks in the
MVPD market.  Vertical integration occurs where a video programming distributor has an ownership interest
in a video programming supplier or vice versa.  These vertical relationships may have beneficial effects,
or may deter competitive entry in the video marketplace, and/or limit the diversity of programming.
180. The total number of programming networks has grown and cable operators continue to
consolidate and develop new ownership interests, however the proportion of vertically integrated channels
continues to decline.  In 1999 there were 283 satellite delivered national programming networks, up from 245
in 1998, an increase of 16%.  Of the 283 networks, 104 networks, representing 37%, were vertically integrated
with a cable MSO.  This is a decrease from 1998 when 95 of 245, or 39% of national programming networks
were vertically integrated, and 1997 when 40% (68 of 104) programming networks were vertically integrated. 

181. One or more of the top six cable MSOs holds ownership interests in each of the 104 vertically
integrated services.  AT&T, the nation's largest MSO, holds ownership interests in 50 programming
networks, 18% of all programming networks, through its subsidiary, Liberty Media.  In 1998, prior to its
merger with AT&T, TCI was the largest cable MSO and held ownership interests in 67 of the 242 national
programming networks or 28%.  Time Warner has an ownership interest in 24, or 8% of all programming
networks.  Cablevision, through its programming subsidiary, Rainbow Media, owns 11 programming
networks, 4% of all national networks.  Cox Communications has interests in 23, or 8% of national
programming networks.  MediaOne, with ownership interests in 12 national programming networks, controls
4% of national programming.  Comcast, with its six networks and control over two national networks through
Jones Intercable, has ownership interests in 3% of all national programming networks. 
182. Vertical integration is not only associated with the largest cable system operators, but also the
programming networks with the largest number of subscribers.  Currently, eight of the top 20 video
programming networks ranked by subscribership are vertically integrated with a cable MSO.  In 1998, nine
of the top 15 were vertically integrated, whereas seven of the top 15 services were vertically integrated in
1997, and eight of top 15 were vertically integrated with a cable system in 1996.  However, it appears that a
significant amount of MVPD programming is controlled by approximately twelve companies, including cable
MSOs, broadcasters, and other media entities.  For example, of the top 50 programming networks in terms
of subscribership, 46 are owned by one or more of these 12 companies.  According to Comcast, a vertically
integrated cable MSO, consolidation in the cable industry is not unexpected, parallels consolidation in other
telecommunications industry segments, and is "a competitive response to challenges from DBS, LECs, and
others."  In addition, currently eight out of the top 15 video programming networks ranked by prime time
ratings are vertically integrated with a cable MSO.
183. This year we found 72 programming services that have been planned but are not yet
operational, an 11% increase from the 1998 Report's count of 65 planned services. The planned services count
includes some overlap from previous years because it can often takes several years from the announcement of
a new programming network to launch the network and begin service.  In the 1997 Report, there were 77
planned services and the 1996 Report reported 63 prospective services.
     2.   Other Programming Issues 
     
184. The Notice, in addition to requesting information on video programming networks, requested
comment on a number of related programming issues.  The Commission sought comment on whether there are
specific types of programming (e.g., movie, sports, or news channels) that an MVPD needs to provide in order
to be successful.  We also requested information on electronic programming guides offered by cable operators
and other MVPDs.  We sought comment regarding local and regional programming networks, Public
Educational and Government (PEG) access channels, and a la carte offerings.  We also sought comment on the
effect of increased programming costs on rates, and the effectiveness of the Commission's program access
rules.
185. Sports Programming.  Several commenters maintain that sports programming, in particular,
regional sports programming, is important to the success of MVPDs.  Of the 56 regional cable channels
counted in this year's report, 20, or 36%, are sports channels.  Regional sports networks last year generated
$264 million in advertising revenue and $525 million in affiliate licensing fees.  It is in this context that
commenters assert that sports programming providers, both vertically integrated and non-vertically integrated,
act as gatekeepers that allow access to sports programming to some MVPDs but not to others.  For example,
a vertically integrated, regional sports channel may shift from satellite to terrestrial distribution and no longer
be subject to program access requirements.  Where the regional sports channel is non-vertically integrated,
a cable MSO may enter into an exclusive contract with the program provider in order to deprive its rivals of
the programming.  
186. DirecTV asserts that the current program access rules allow the "unfair practice" of
"eliminating DBS access to previously satellite-delivered regional sports programming."  Similarly, RCN,
a competitive MVPD, alleges that Cablevision, a vertically integrated MSO, shifted its sports programming to
terrestrial distribution in order to thwart RCN's efforts "to establish a competitive foothold in the New York
City market."  Hiawatha Broadband Communications calls for a blanket prohibition of exclusivity
agreements for regional sports programming.
187. Consolidation in the programming industry is also said to have a significant impact on the cost
of providing sports programming.  Regional sports programming is dominated by Fox Sports Net, which owns
14 of the 20 existing regional sports networks.  Last year, Fox acquired AT&T subsidiary Liberty Media's half
of the Fox Liberty Sports networks in exchange for 51.8 million shares of News Corp stock.  Fox Sports Net,
owned by News Corp., and ESPN, owned by Disney, reach 68 million and 76 million television households,
respectively.  In addition, both News Corp. and Disney have interests in sports teams and sports venues.
Commenters assert that, with such vast sports assets, these programmers have no incentive to constrain their
costs and simply pass on increased costs to MVPDs.  For instance, Cablevision reports that Fox's Sports Net
affiliates fear a double-digit price increase if Fox obtains a programming agreement with a major sports
property such as major league baseball.  Commenters also note that because most sports programming
affiliate fees are based on subscriber volume, only well clustered, large MSOs can take full advantage of
discounts on programming.     
188. News Programming.  Although sports programming dominates regional networks, news is
also a growing regional offering.  Of the 56 regional programming networks, 15, or 27%, are regional news
networks.  Unlike sports programming, regional and local news networks have a more diverse ownership and
serve smaller markets.  A number of regional news networks are vertically integrated with cable MSOs. 
Cablevision Systems, the sixth largest MSO, owns news networks, including MSG Metro Traffic and Weather
in New York and the News 12 group of regional news services in Connecticut, New Jersey, and Westchester
County, New York.  Time Warner, MediaOne, AT&T, and Adelphia, all among the top ten cable MSOs, each
own or have ownership interests in regional or local news programming networks, often in partnership with
newspaper or publishing companies.  Nine regional or local news networks are non-vertically integrated with
a cable system operator.
189. News networks are moving into smaller markets with several serving a single city, versus a
region or group of cities, and providing information such as school closings and coverage of high school
sports.  Regional and local news programming networks are considered viable in these smaller markets
because they can offer lower advertising rates than local broadcast stations.  New England Cable News
("NECN"), one of the oldest cable news networks, reports a 139% increase in national advertising sales
between 1997 and 1998.  National advertising now comprises 35% of NECN's total advertising sales,
compared to no national advertising when the network started in 1992.
190. The use of digital production technology has enabled "hyper-local news" to thrive in the
MVPD market.  Digital production facilities enable journalists in the field to do their own camera work,
resulting in a smaller payroll than a comparable analog news production facility.  Consequently, 24-hour
local news operations can be viable in smaller markets.
191. PEG Programming.  Public, educational, and government ("PEG") channel set-asides are
often required on cable systems by local franchising authorities.  Approximately 16% of all cable systems
actively carry PEG programming.  Cable operators do not have ownership interests in PEG access
programming, although some franchise agreements require that they provide services, production facilities,
and equipment for the production of local programming.  PEG programming is not, therefore, considered
vertically integrated.
192. The Alliance for Community Media, which advocates on behalf of PEG access centers
nationwide, has raised concerns regarding the use of PEG channels by non-access entities and argues that PEG
channel capacity should remain reserved for use by people in communities.  The Alliance also contends that
the Portland, Oregon, broadband access case and the arrival of digital television will have an impact on PEG
channels as "crunches on channel capacity" puts pressure on municipalities to turn over channel capacity to
non-PEG uses.
193. Electronic Programming Guides.  In the Notice, we requested information on electronic
programming guides ("EPGs") offered by cable operators and other MVPDs.  EPGs generally display text
information in a grid format indicating which television programs are currently showing.  This allows viewers
to navigate the channels offered by MVPDs.  EPGs are considered an important technology because of their
potential to influence channel selection and facilitate current and future interactive television functions such
as e-commerce or Internet access.  Gemstar International Group is the major provider of EPGs to VCR,
television, and set-top box manufacturers.  Microsoft, which uses Gemstar technology in its WebTV set-top
boxes, and America On-Line, which is planning an interactive television service with DBS provider DirecTV,
are also licensees of Gemstar.  In October 1999, Gemstar accepted an offer to merge with its former rival, TV
Guide.  TV Guide had developed and marketed its own EPG and had filed a patent infringement suit against
Gemstar.  The merger is expected to be completed during the second quarter of 2000.  Competitors to
Gemstar include Replay Networks and TiVo.  Both companies have separately developed video recorders that
use a computer hard drive, instead of video cassette tape, to record television programs.  These hard drive
recorders provide their own on-screen program guides.
194. In the 1998 Report, many commenters expressed concern that vertically integrated
programmers could steer viewers to their own programming through the design of their EPGs.  The
Commission, when implementing Section 629 of the Communications Act in the Navigation Devices Order,
stated that it is "committed to encouraging the development of the market for electronic programming guide
services as part of our broader goal of promoting consumer choice," but noted that the limited record available
made it impossible to "adequately address the extent of any obligation of MVPDs to make EPG services
available pursuant to Section 629 or otherwise."  The Commission stated that it would continue to monitor
developments with respect to the availability of electronic program guides in order to determine whether any
future action is appropriate.
195. Programming Costs.  The Commission's most recent (May 1999) report on cable industry
prices ("1998 Price Report") asked cable operators to describe factors which led to changes in their rates. 
Competitive and noncompetitive cable operators attributed much of their rate increases to increases in
programming costs.  According to the 1998 Price Report, increases in existing programming costs accounted
for an average of 33% of cable operators' rate increases.  Within the programming segment of costs,
competitive cable operators attributed 63% of their programming cost increases to general entertainment
programming, 4% to children's programming, 9% to news programming, and 24% to sports programming for
the year ending July 1, 1998.  Non-competitive operators attributed 69% of their programming cost increases
to general entertainment programming, 3% to children's programming, 6% to news, and 22% to sports. 
MediaOne states that "sports programming currently comprise over 19 percent of all its programming costs"
and contends that "rising programming costs among all programming categories [has resulted in] upward
pressure of MediaOne's prices, and shrinking profit margins for the company."  According to NCTA
estimates, cable systems spent 7.4 billion on programming in 1998, an increase of 16% over the $6.4 billion
spent in 1997.  This increase is consistent with annual increases since 1994.
196. Commenters assert that programming discounts benefit large MSOs more than newer and
smaller MVPDs.  ACA contends that smaller and rural cable systems have higher per-subscriber operating
costs than larger systems because smaller and rural systems generally do not qualify for programming
discounts due to the low number of subscribers that they serve.  Similarly, Ameritech asserts that "cable
incumbents are able to negotiate substantial discounts for popular programming   discounts which, because of
their size, are unavailable to new entrants."  In addition. Ameritech cites a study that found "industry
discounts ranging from 14 to 91 percent and a mean discount of 45 percent for cable programming
networks."  NCTA, however, warns that requiring programmers to charge uniform prices would either
artificially suppress programmers' revenues and expenditures, or artificially raise the price paid for
programming by more efficient operators, and increase rates for cable subscribers.
197. Finally, the emergence of digital technology has affected programming costs.  According to
Cablevision, it costs a programmer between $150 million and $200 million to launch an analog channel but
only $2 million to $5 million to augment that existing analog channel with a digital channel.  In addition,
digital channels may attract advertisers at a lower audience threshold than analog channels (5 million versus
20 million viewers) because of more desirable demographics.  Many established programming networks
base new digital tiers on an existing channel.  For example, Discovery offers, in a digital format, Discovery
Civilization, Discovery Home & Leisure, Discovery Kids, Discovery Science, Discovery Wings, Discovery
Health and Discovery People.
198. A La Carte/Unbundling of Cable Programming Services Tiers.  In the Notice, we sought
information on the extent to which MVPDs offer or plan to offer consumers programming choices on an "a la
carte" or individual channel basis rather than in tiers of channels.  Currently, the majority of programming
networks are offered in tiers.  Premium channels, such as HBO and Showtime, and some sporting events, such
as boxing, are offered on an a la carte basis.
199. Unbundling of programming tiers is thought to provide more subscriber choice and greater
competition among program services.  However, operators maintain that tiering enables delivery of MVPD
programming at the lowest per channel costs.  In addition, because most cable subscribers do not have
addressable set-top boxes, a la carte delivery is not always technically feasible.  It is also thought that
subscribers are more likely to view new programming channels that are bundled on a tier with established
programming.
200. Hiawatha states that it has invested in a technology that allows it to provide programming on
an a la carte basis.  It asserts, however, that the pricing and channel placement requirements of some cable
programmers have prevented Hiawatha from implementing its a la carte service offerings.  For example, an
affiliate agreement between Outdoor Life Network and Speedvision required that the two sports channels be
offered as part of a package that included at least two other programming services, and could not be offered on
an a la carte basis.
201. Some industry watchers cite the sunset of cable rate regulation and the growth in digital
channels as incentives for cable operators to be more flexible in their packaging of programming channels. 
Comcast, for instance, offers its subscribers a low-priced basic service tier and several small cable
programming tiers, at different prices.  It contends that by offering these mini tiers, subscribers have the ability
to tailor their programming purchases to their individual tastes.
202. Regulatory Issues Related to Program Access, Carriage Rules The Commission has
established rules prohibiting unfair and discriminatory practices by vertically integrated cable operators. 
The program access rules seek to promote competition and diversity in the multichannel video programming
market.  Most commenters focused specifically on concerns related to the migration of channels from
satellite delivery to terrestrial delivery and on price discrimination.
203. As previously noted, several commenters assert that terrestrial migration weakens the intent
of program access rules and threatens the development of a competitive MVPD market.  In 1998, the
Commission found that the record did not support claims of anticompetitive impact from programming being
moved from satellite to terrestrial delivery. However, the Commission noted that terrestrial migration may in
the future impact the ability of alternative MVPDs to compete in the video marketplace. 
204. Several commenters advocate extending the program access rules to non-vertically integrated
programmers.  Alternative MVPDs indicate that certain programming networks not owned by cable
operators (e.g. fX, MSNBC) are not available to them. The CCC contends that exclusive agreements between
unaffiliated programmers and incumbent cable operators is a significant barrier to competition.  Similarly,
EchoStar asserts that cable operators are able to use their "overwhelming" buying power in the programming
market with both vertically integrated programmers, as well as independent programmers at the expense of
noncable MVPDs.  The Commission, in its 1998 Program Access Order, declined to extend the program
accesses rules to non-vertically integrated programming networks, finding that the record did not support such
action.
205. Non-vertically integrated programmers respond that they actively seek widespread
distribution and audience share and thus have no incentive to disadvantage competing distribution outlets. 
Independent programmers, like Viacom, argue that exclusivity agreements allow them to gain distribution,
recognition, and the subscriber base necessary to successfully launch a start-up network and therefore, actually
add to program diversity. NCTA disputes that an anticompetitive effect results from the unavailability of
terrestrially delivered or non-vertically integrated networks, and asserts that product differentiation and
exclusivity are legitimate, pro-competitive strategies that increases choices and the amount of programming
available to consumers.
206. In a related issue, BellSouth asserts that consolidation and clustering can have a "chilling
effect on the willingness of programmers to sell their product to cable's competitors."  NCTA maintains,
however, that consolidation and clustering result in cost savings and efficiencies that promote competition. 
     C.   Technical Advances

207. In this section, we update the information provided in the 1998 Report regarding technical
developments, and discuss recent activities relating to the commercial availability of the equipment used to
access video programming and other services.  Cable operators and other MVPDs continue to develop and
deploy advanced technologies, especially digital compression techniques.  These technologies allow MVPDs
to deliver additional video options and other services (e.g., data access, telephony) to their customers.  To
access these wide ranging services, consumers use "navigation devices."  Navigation devices are television set-
top boxes, converter boxes, interactive communications equipment, and other equipment that a consumer uses
to access video programming and other services offered by MVPDs.  The most common navigation devices in
use are television set-top boxes that access cable television, and which typically include a descrambler and
tuner.  
     1.   Deployment of Digital Technology
     
208. Cable operators continue to deploy digital compression and upgrade their facilities to increase
the number of video services that they can offer.  The manner in which cable operators deploy this capability
differs among companies.  For example, AT&T's Headend In the Sky ("HITS") service and Time Warner's
AthenaTV offer a mix of advertising supported and subscription supported networks on their digital tiers. 
Alternatively, Comcast and MediaOne offer premium channels, multiplexed movie channels and pay-per-view
programming on their digital services.  As cable operators deploy digital compression technology and
advanced hybrid fiber-coaxial cable architecture, programming networks, such as A&E, Nickelodeon, ESPN,
BET, and MTV, are developing more channels of specialized programming.  Digital compression also
permits cable operators to provide other digital and data services, including cable modem and Internet services,
IP telephony, other data delivery, and general cable telephony. 
209. In addition, MVPDs are beginning to distribute programming in high definition television
("HDTV").  Programming networks, including HBO, Showtime and Discovery, are now producing
programming in HDTV or are converting existing programming to this format.  In particular, DirecTV now
offers the HBO HDTV channel to consumers on a national basis and an HDTV channel featuring pay-per-
view movies and selected special events including concerts and sports.
210.  Last year, we reported that, in addition to deploying digital compression to provide increased
video channel choices, the cable industry was redoubling its efforts to take advantage of its large bandwidth
capacities from its coaxial and optical fiber cable in order to compete with other MVPDs.  Cable operators
are continuing to upgrade their systems for bandwidth expansion through other technical methods, including
the electronic component upgrading of existing amplifiers which may allow for an incremental increase in
bandwidth capacity of the coaxial cable plant (e.g., 750 MHz to 860 MHz) without physically relocating or
installing new amplifiers on the existing coaxial cable plant.  This added bandwidth capacity permits the
cable operator to offer more programming channels and other services, including Internet access.
     2.   Navigation Devices
     
211. Section 629 of the Communications Act directed the Commission to adopt rules to ensure the
commercial availability of navigation devices in order to expand the opportunities for consumers to purchase
this equipment from sources other than their service providers.  Since the 1998 Report, the Commission
amended its rules implementing Section 629 on reconsideration.  The revised rules are intended to further
the goal of providing competition in the telecommunications marketplace by facilitating consumers ownership
of the equipment used to access video programming and other services.  Specifically, with regard to analog
devices, the Commission deferred application of the rules requiring a separate security module for analog-only
devices.  We explained that January 1, 2005, was chosen as a reasonable period of time for an MVPD to
transition its inventory to unbundled equipment.  The Commission also stated that it expects that the standards
developed through the OpenCable process will enable manufacturers and designers unaffiliated with MVPDs
to build devices that can be sold through national retail distribution.  In addition, we clarified that the
components of the security module should be closely related to the security functions of the navigation device,
and enhance, rather than assume, a function of the host device.  
212. Cable industry groups continue to develop standards consistent with the rules and goals of
Section 629 through the OpenCable project of Cable Television Laboratories, Inc. ("CableLabs").  In
particular, the rules require that MVPDs must separate security functions from non-security functions by July
1, 2000, and make modular security components available by that date.  As part of the standards setting
process, the cable industry is required to file semi-annual status reports with the Commission to assure that
there is steady progress in meeting the schedule submitted by CableLabs for the development of specifications
for a digital security module and for a digital security module interface.  The reports also are intended to
apprise the Commission of CableLabs' efforts to foster the retail availability of navigation devices.  The first
two reports were submitted on January 7, 1999, and July 7, 1999, respectively, and indicate that CableLabs
continues to meet the milestones set forth in the proposed schedule.  In accordance with that schedule,
specifications for the digital security module were developed by December 1998.  In addition, specifications
for the digital security module interface were approved by the Society of Cable Television Engineers ("SCTE")
in December 1998.  In the first status report, the cable industry reported that the Motion Picture Association
of America ("MPAA") and others believed that an encryption scheme should be adopted to provide protection
of digital content across the interface between the module and host device.  Since that report, a specification
has been advanced within an SCTE working group.  Furthermore, a preliminary digital security module
prototype was completed on June 15, 1999, meeting the only milestone established for the January through
June 1999 period. 
               1.   Cable Modems
213. Depending on the services offered by the cable operator, a cable modem may allow
subscribers high-speed access to data services, including the Internet, Internet Protocol ("IP") telephony, video
conferencing and telecommuting.  Cable modem deployment increased substantially in 1999. Initially,
cable operators deployed proprietary network equipment and cable modems that subscribers leased from their
cable operator.  To allow for the distribution of cable modems through retail sale, CableLabs initiated the
CableLabs Certified Cable Modem Project, formerly known as Data Over Cable Service Interface
Specification or DOCSIS.  The project defines interface requirements for high-speed cable modems.  It also
provides a method for certifying that cable modems are in compliance with the DOCSIS specification. 
Cable modem equipment suppliers whose cable modems receive DOCSIS certification are entitled to denote
that this equipment is CableLabs Certified when it is sold at retail outlets.  CableLabs Certified cable modems
will communicate with any DOCSIS qualified headend systems. CableLabs anticipates wide-scale deployment
of DOCSIS certified headend equipment.
214. As of September 1999, CableLabs had certified 11 modems as DOCSIS compliant for retail
sale.  CableLabs also has qualified three suppliers of high-speed cable data headend equipment.  Cable
operators have brought cable modem service to over 100 television markets.  Cable operators and consumer
electronics retails have been conducting retail pilot programs selling DOCSIS certified modems in several
regions.  However, widespread retail availability of DOCSIS certified modems is not expected until well into
2000 for several reasons, including prices that are considered too high at about $300 and unresolved issues
relating to arrangements between retailers and cable operators.
215. Another CableLabs project is PacketCable, which is intended to identify, qualify and support
Internet-based voice and video products over cable systems.  Approximately 240 cable, telecommunications,
and computer industry companies are participating in PacketCable.  This project is developing interoperable
interface specifications for delivering advanced, real-time multimedia services over two-way cable plant. 
PacketCable will use IP technology to enable a wide range of services, such as IP telephony, multimedia
conferencing, interactive gaming, and general multimedia application. CableLabs is in the process of
conducting interoperability testing of equipment and protocols based on PacketCable specification.
     CCXVI.    COMPETITIVE RESPONSES    
217. During 1999, the Bureau examined a number of cases where the incumbent cable operator
faced "head-to-head" competition from one of a variety of new entrants including municipalities, LECs, public
utilities, and DBS operators.  In communities where head-to-head competition is present, the incumbent cable
operator has responded to competitive entry in a variety of ways, such as by lowering prices, providing
additional channels at the same monthly rate, improving customer service, or adding new services including
high speed Internet and telephone services.
218. In section A below, we describe the initial response of both incumbents and new entrants in
several local franchise areas where the incumbent cable operator is facing competition from a new entrant.
The samples of competitive responses discussed below include localities in which an incumbent cable operator
was found by the Commission to face effective competition from a new entrant, as well as communities for
which a petition for effective competition has been filed and is pending before the Commission.  These case
studies examine situations in which an incumbent is faced with effective competition from a single new
entrant, and do not necessarily reflect potential competitive responses if an area was to have more than one
effective competitor.  In section B we summarize our preliminary findings based on the case studies and
examine the nature and the duration of competitive responses of both incumbents and new entrants.
     A.   New Case Studies

               1.   Royal Oak, Huntington Woods, and Clawson, Michigan
219. Ameritech New Media ("Ameritech"), a subsidiary of a LEC, was awarded a cable franchise
in June 1997 by the City of Royal Oaks, Michigan.  In July 1997, Ameritech was granted cable franchises by
the Cities of Huntington Woods and Clawson, Michigan.  Ameritech began offering video services to Royal
Oaks in December 1997, to Clawson in March 1998, and to Huntington Woods in April 1998.
220. TCI Cablevision of Oakland County, Michigan, is the incumbent cable operator in all three
communities.  According to TCI, Ameritech has reached penetration levels of 44%, 32% and 40.5% in Royal
Oaks, Huntington Woods, and Clawson, respectively.  TCI's penetration rates are 51.8% in Royal Oaks, 66.1%
in Huntington Woods, and 52.9% in Clawson.    
221. As of June 1998, Ameritech charged $9.95 per month for its basic tier which included
primarily local broadcast channels.  Its "Americast" expanded basic tier had 60 channels and was priced at
$29.95 per month.  To promote its Americast services, Ameritech offered a variety of promotional packages
to its new subscribers, including free cable service for two months, $120 worth of grocery coupons, a free
premium movie channel, and free installation.
222. In June 1997, prior to Ameritech's entry into the Royal Oaks, Huntington, and Clawson areas,
TCI had added new channels to its "cable plus" package and raised monthly rates by 13%.  When Ameritech
was granted its franchises, TCI reduced its monthly rates for the cable plus package from $32.20 per month to
$28.95 per month, a 10% reduction, and moved the Disney Channel from a premium service to a basic service
tier (Ameritech also offered the Disney Channel as a basic service).  In addition, TCI offered its subscribers in
the Royal Oaks area discount coupons worth $10.  TCI offered a free converter box and remotes in Royal
Oaks and Clawson.  TCI also offered "money back guarantees" on premium programming in all three
communities. 
223. TCI petitioned the Commission for a determination of effective competition in the Royal
Oaks, Huntington Woods, and Clawson areas.  The Cable Services Bureau granted the petition on February 5,
1999.  The Bureau found that Ameritech had overbuilt TCI's systems in each of the affected communities and
was competing for subscribers with TCI in those areas.  Also, Ameritech's extensive marketing efforts and
press coverage of its construction ensure that potential subscribers were aware of the availability of
Ameritech's service. The Bureau also noted that as a result of competition in the above communities, cable
rates were lower, new channels were added, and equipment was provided free of charge.      
               1.   West Point, Georgia
224. On June 1, 1998, ITC Globe, Inc., d/b/a/ KnoLogy ("KnoLogy"), began providing its cable
service in the City of West Point, Georgia.  KnoLogy is affiliated with the incumbent LEC, Interstate/Valley
Telephone Company.  Its 750 MHz system is capable of providing video and high- speed Internet services.
225. Initially, KnoLogy offered a 17 channel basic service package for $8.75 per month, and a 59
channel extended basic package for $25.95 per month.  Its extended basic package included a number of
channels that were unavailable on the incumbent cable operator's channel line up.  KnoLogy later reduced its
extended basic rate to $19.95 per month and added six additional channels.  It also offered free installation and
a "30-day money back guarantee" to its subscribers.
226. KnoLogy also discounted its "bundled" Internet and cable services.  Specifically, KnoLogy
charged $29.95 per month to its cable customers for its "Olobahn" high-speed Internet access service, but
charged its non-cable subscribers $49.95 per month for the same service.  KnoLogy's subscribers could also
opt for a consolidated bill for cable, telephone, and Internet services.
227. Marcus, the incumbent cable operator in West Point, responded to KnoLogy's entry in a
variety of ways.  According to Marcus, it recently:  (a) upgraded its 350 MHz system to a 750 MHz system;
(b) added six new programming services to its expanded basic package and reduced the price for that package;
(c) implemented an overall price reduction of up to 48% for its basic, extended basic, and premium packages;
(d) ceased charging customers for its wire maintenance protection plan; and (e) implemented various
marketing and advertising plans detailing its rates and service changes.  As of August, 1998, 205 of Marcus'
subscribers had switched to KnoLogy.  Marcus reported that KnoLogy had a subscriber base of 214 compared
to its own subscriber base of 1,200. 
228. Marcus petitioned the Commission for a determination of effective competition in West Point. 
The Bureau granted the petition on January 26, 1999.  The Bureau found that KnoLogy had overbuilt Marcus'
system, and that potential subscribers were aware of the availability of KnoLogy's service.  Also, potential
subscribers were able to receive KnoLogy's service for little or no additional investment and without
encountering regulatory and technical difficulties.  The Bureau also noted that cable rates were lower and
additional services were being provided as a result of competition in West Point. 
               1.   Somerville, Massachusetts
229. On December 16, 1997, the City of Somerville awarded a cable franchise to RCN-BecoCom,
L.L.C. ("RCN").  Previously, RCN, a telecommunications company, was certified by the Commission to be an
OVS operator in Somerville.  RCN has been providing video and other services to Somerville residents since
October 1997.  
230. Prior to providing cable services in Somerville, RCN launched a $2.25 million advertising
campaign that offered telephone, Internet, and cable services at a lower "bundled" rate than anywhere else in
the country.  In response to RCN's advertising campaign and impending entry, Time Warner launched its
own advertising campaign, offering its subscribers a free subscription to TV Guide, an additional channel, and
lower rates for its universal remote control.
231. RCN offered a standard service consisting of 75 channels for $24.95 per month.  Its standard
service included channels such as the Disney Channel, The History Channel, and the Discovery Channel.  The
monthly charge for RCN's standard service was further discounted to $19.97 per month for subscribers who
also bought local telephone service from RCN.  RCN also offered unlimited high-speed Internet access for
an additional $19.95 per month.  The monthly charge for Internet access was discounted to $17.95 if
subscribers also subscribed to RCN's cable or telephone services.  Time Warner charged $26.48 for its 56
channel "standard"` service.  RCN offered free standard installation whereas Time Warner charged $30.64 for
installation.
232. In November 1997, Time Warner announced a 10% price increase for its standard cable
services in 82 Massachusetts communities, but did not increase rates in Somerville.  In June 1998, Time
Warner reduced monthly charges for its basic and standard services in Somerville by $0.19 and $0.09 per
month, respectively.  As of June 1998, Time Warner was charging $26.20 for its 56 channel standard service. 
Time Warner's standard service had 19 fewer channels than RCN's.  Moreover, unlike RCN, Time Warner's
standard service did not include Disney Channel, Discovery Channel and The History Channel.  Time Warner
charged $9.50 a month for the Disney channel and $.75 a month for the Discovery and The History channels.
233. After entry by RCN, Time Warner reduced rates for certain premium services.  For example,
prior to RCN's entry, Time Warner was charging $12.55 for three channels of HBO.  As of June 1998, Time
Warner reduced its rate for the three channel HBO package to $11.50, an 8% reduction.  RCN charged $11.95
for two channels of HBO.  At the same time, Time Warner offered its subscribers more flexibility in
selecting programming packages by allowing them to buy premium services without having to subscribe to its
standard service.  In early 1999, Time Warner announced that it would freeze its rates in Somerville during
1999. 
234. According to one report, as of March 1999, between 2,000 to 2,500 of the approximately
19,000 Time Warner subscribers in Somerville switched to RCN.  A number of RCN's subscribers purchase
"bundled" services, including Internet access and telephone service.  Currently, Time Warner does not offer
Internet or telephone service in Somerville.  However, Time Warner is planning to swap its Somerville system
with MediaOne, and the latter is expected to provide Somerville with Internet and telephone service in addition
to cable services.
235. Time Warner filed a petition requesting a finding of effective competition in the City of
Somerville.  The petition was granted on February 5, 1999, recognizing that potential subscribers were
reasonably aware of the availability of RCN's services, and that subscribers in wired areas were able to receive
RCN's cable service for only a minimal additional investment and without encountering regulatory or
technical obstacles.
               1.   Various Communities, Vermont
236. In May 1999, Adelphia Cable Communications ("Adelphia") filed petitions challenging the
certification of the Vermont Public Service Board to regulate Adelphia's basic cable service and equipment
rates in ten franchise areas.  In the petitions, Adelphia argued that its cable systems faced effective competition
because DBS providers offered comparable programming to at least 50% of households in the franchise areas,
and the subscriber base of competing MVPDs exceeded 15% of households.  In September 1999, the Bureau
granted Adelphia's petitions.    
237. DBS service is presumed to be technically available to all subscribers due to its nationwide
satellite footprint, and is presumed to be actually available if households in a franchise area are made
reasonably aware that the service is available.  Adelphia provided evidence of advertisements in local media
about the availability of DBS service in each of the affected franchise areas. 
238. According to local newspaper advertisements, DirecTV offered three months of  "Total
Choice" programming free to new subscribers.  This programming package consisted of 85 channels including
the Disney Channel, Lifetime, ESPN, and A&E Channel.  Also, DBS dealers offered free professional
installation or a free "do it yourself" installation kit.  
239. Adelphia, in the affected Vermont localities, offered between 7 and 15 channels on its basic
service tier.  Adelphia's "CableValue" tier, on average, had 24 channels, including CNN, A&E, Nickelodeon,
ESPN and the New England Sports Channel.  The Disney Channel was offered as a premium service in its
systems.
240. In nine of the ten affected franchise areas, DBS penetration rates ranged from 16% to 63%. 
In three of the ten affected franchise areas, the penetration rate for Adelphia ranged from 38% to 41%.  In one
of the affected franchise areas, Adelphia's share of residential MVPD market was only 11%, smaller than DBS
penetration in that area.  In Vermont as a whole, Adelphia is the dominant cable operator, serving 70% of all
households in the state.
241. Unlike the cases described above, direct evidence of a reduction in monthly charges or change
in services offered by the incumbent cable operator is unavailable.  Although Adelphia upgraded a majority of
its systems in Vermont, it is not clear whether the affected franchises were part of that upgrade nor whether the
upgrade was undertaken as a competitive response or was previously scheduled.
               1.   Lebanon, Ohio
242. In August 1997, the Lebanon Bureau of Telecommunication Services ("LBTS") was awarded
a cable franchise by the city of Lebanon.  LBTS is a part of the Lebanon Department of Service   Division of
Electricity.  LBTS has been providing cable services to Lebanon residents since February 1999.  LBTS
charges $5.99 per month for basic cable service and provides 27 channels on this tier.  For its combined basic
and deluxe cable service, LBTS charges $20.98 and provides 61 channels.  In addition to cable service, LBTS
is also planning to provide dial up Internet access at $19.99 per month and cable Internet service at $39.99 per
month.  As of February 1999, LBTS' cable system passed 70% of the households in the City of Lebanon and
the remaining 30% were to be wired shortly. 
243. Time Warner is the incumbent cable operator in Lebanon.  Prior to LBTS' entry, Time
Warner provided service to nearly 3,000 of approximately 7,300 potential subscribers.  Upon LBTS' entry,
in March 1999, Time Warner started to offer significant discounts to retain its subscribers and to win back
subscribers who switched to LBTS.  Time Warner offered a special rate of $45 per month for a service that
included all of Time Warner's "standard" services plus several premium channels and two set-top boxes.  Prior
to LBTS' entry, Time Warner charged $57.10 a month for a similar package. 
244. By one account, as of July 1999, LBTS had 800 subscribers.  A significant majority of LBTS'
subscribers are former Time Warner subscribers.  In June 1999, Time Warner reduced its 23 channel limited
basic tier rate from $7.74 per month to $5.99 per month, a reduction of about 23%.  Also, Time Warner
reduced its 67 channel extended basic tier rate from $28.17 per month to $20.98 per month, a 25% reduction. 
In July 1999, Time Warner further reduced its extended basic rate to $14.99 a month.  Moreover, Time Warner
authorized its marketing representatives to offer promotional discounts that included free movie channels to
subscribers who were planning to switch to LBTS.    
245. Time Warner also announced that its Lebanon system would be one of the first Time Warner
systems to offer a digital package that would include channels such as the Golf Channel and the Disney
Channel.  Time Warner also plans to offer high speed cable modem service to its Lebanon subscribers for
$39.95 per month.  LBTS, in turn, was considering reducing its previously announced monthly rate of $39.99
for high-speed Internet service.
     
     B.   Preliminary Findings

246. The case studies suggest that subscribers have benefited from "head-to-head" competition. 
Generally, in the communities studied, subscribers:  (a) paid lower monthly charges for services and
equipment; (b) have received additional program offerings; (c) have access to alternative sources of
telecommunications and Internet services; (d) have received new digital services; and (e) may expect better
customer service from the incumbent cable operator. The Vermont case study also suggests an absence of
competitive response by the incumbent when faced with "non-wireline" head-to-head competition such as
from DBS.  The Vermont case is the first instance where the Bureau granted an incumbent cable operator's
petition for a determination of effective competition due to the presence of competition from DBS.
247. It appears that the incumbent operators in the localities described above have made greater use
of  "price" rather than "non-price" competitive responses.  With the exception of the case in Vermont, the
incumbents in the above examples have reduced their rates for basic or standard and premium services.  In the
Michigan communities studied, the incumbent cable operator also reduced equipment charges.
248. The cases described above also indicate that the new entrants in West Point and Somerville
sought to attract subscribers by providing "bundled" cable and high speed Internet access services at a
discounted price.  To counter these service offerings, the incumbent operator in West Point responded by
significantly upgrading its system.  
249. The benefits of competition do not appear to accrue to subscribers in areas adjoining those
communities where head-to-head competition is present.  For example, reduced prices and additional services
enjoyed by subscribers in Somerville and Lebanon were not available to subscribers in nearby areas. 
Ameritech notes that subscribers in communities adjacent to competitive communities pay more for similar
services than subscribers in competitive communities.  For example, in Independence, Ohio, Cablevision
charges a total package price of $50.69 for a channel line-up nearly identical to that offered in nearby
Brooklyn, Ohio, for $30.90 where it competes with Ameritech.  Similarly, in Auburn, Michigan, AT&T
charges $45.98 for a package identical to that offered in nearby Rochester, Michigan, for $39.40 where it faces
competition from Ameritech. 
250. Some of the benefits enjoyed by subscribers in competitive areas may be short lived. In our
1998 Report, we noted that, given the economies of scale in delivered video programming services, there are
few competitive overbuild systems that will be economically viable over the long term.  For example, head-
to-head competition between the incumbent Coaxial and the new entrant Ameritech in Columbus, Ohio,
discussed in our 1997 Report, has been costly to the incumbent. Due to mounting losses and large sums of
required to upgrade, in August 1998, Coaxial sold a 75% stake in its Columbus operations to Insight
Communications Company. 
     CCLI.     ADMINISTRATIVE MATTERS
252. This 1999 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).  
253. It is ORDERED that the Office of Legislative and Intergovernmental Affairs shall send copies
of this 1999 Report to the appropriate committees and subcommittees of the United States House of
Representatives and the United States Senate.
254. It is FURTHER ORDERED that the proceeding in CS Docket No. 99-230 IS TERMINATED.
                         FEDERAL COMMUNICATIONS COMMISSION
                         
                         
                         
                         
                         
                         Magalie Roman Salas
                         Secretary