December 17, 1998

For the reasons that follow, I must respectfully dissent from the 1998 "Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming."

As an initial matter, I do not believe that the issuance of this Competition Report fulfills our duties under the Communications Act. Instead of examining the state of competition "in the market for the delivery of video programming," 47 USC section 628(g), as the statute prescribes, the Report artificially limits its analysis to the delivery of "multichannel video programming."⁽¹⁾ There are, of course, many forms of video programming that do not come bundled in channels but that are still part of the general video distribution market. Unfortunately, the Report does not take full account of these very real forces in its investigation of competition.

For instance, the report considers broadcast service only as a competitor to multichannel video programming distributors ("MVPDs") in advertising, programming acquisition, and programming production, see supra at paras. 95-101, but not as an independent delivery source of video programming. Yet the statutory definition of "video programming" specifically includes broadcast programming. See 47 USC section 602(20) (providing that "the term 'video programming' means programming provided by, or generally comparable to programming provided by, a television broadcast station"). In focusing primarily on what is a submarket of video programming -- the "multichannel" distribution market -- rather than the entire market, the report does not fully meet the requirements of the statute.

The language of the statute also makes clear that Congress considered the delivery of video programming to constitute a single "market," see id. section 628(g) (referring to "the market" for video programming delivery), not a conglomeration of "markets," as the very title of this Report suggests in speaking of "[m]arkets" for the delivery of video programming. We should, as a plain statutory matter, have considered the delivery of video programming a single market in this Report.

In addition to the above-described statutory reasons to view the relevant market participants as more than just MVPDs, economic theory supports that conclusion.

provides a variety of entertainment, information, and even home shopping programming. Similar services may be obtained from local television stations, satellite retransmissions, local sports teams, movie theaters, video rentals, newspapers, magazines, radio stations, and retail shops.

Id. In my opinion, monopoly power, where it exists, can be limited -- or "disciplined" -- where "theaters, a large number of broadcast stations, video rentals, live events, and other diversions are readily available." Id. at 105.

Thus, in economic terms, the sources that I believe should be considered in analyzing the amount of competition to cable include, at least, broadcast televisions stations, DBS, videotape rentals, motion pictures, even theatrical productions and, at some point in the not too distant future, internet streaming video.⁽²⁾ From this perspective on the relevant product market, it would not, for instance, appear "unlikely that broadcast television will offer consumers a . . . service in competition with cable," supra at para. 100, but that they already do so.

More broadly, when considering the entire video programming market, not just segments of it, one finds that American consumers have more options for the receipt of video programming than ever before. At any time of day, any day of the year, consumers can choose from a wide and ever-widening array of video programming for their entertainment, information, and education. Among other things, they can watch free broadcast television, rent a film, go to the theatre, enjoy DBS sports programming, watch cable news, or order a pay-per-view movie. It takes some impressive intellectual gymnastics to try and find a lack of competition among the providers of these choices in video programming for the American consumer.

This general analytical problem of the proper product market manifests itself in the Report in more specific ways too. Section III looks at market share but considers only cable and non-cable MVPDs, not video programming distributors generally. These market share numbers are distorted by the use of what is, in my opinion, an inappropriate denominator. Similarly, in the discussion of concentration levels based on the Herfindahl-Hirschman Index ("HHI"), the Report measures only MVPDs. HHI numbers can be useful in considering concentration levels in product markets but they are rendered meaningless when applied to market segments instead of markets.

Likewise, Section IV, in considering instances of competition, assumes that competition only exists when there is more than one (usually facilities-based) MVPD in an area -- which of leads to the conclusion that these instances are more "limited" than if one considered the presence of other video programming deliverers. In my opinion, case studies about "competitive responses" should include, for instance, the relationship between cable and DBS systems.⁽³⁾

In sum, because the Report slices the relevant product market too thin and thereby paints many actual competitors out of the picture, its conclusions about the state of competition are skewed ab initio. I thus cannot endorse those conclusions.

The objective facts in the Report -- which, as opposed to the conclusions about competition, I have no quarrel with -- indicate that even in the multichannel-only product market cable today faces a significant amount of competition and that this competition is likely to grow.

The percentage of MVPD subscribers that purchase cable (85%) is not, in itself, cause for concern. This market share statistic provides no direct evidence of the availability, or lack thereof, of alternatives to cable, although it is often cited as such. On its face, it only tells us that many people have opted -- perhaps for reasons entirely apart from lack of choice -- for cable companies over other video distributors. The reasons that consumers choose certain video products over others are complicated, based on personal cost-benefit determinations, and cannot be adduced from this number.

In short, it simply does not follow from the fact that cable has a preponderance of MVPD customers that cable has an unlawful or inefficient hold on the market. The FCC should not be in the business of trying to drive down the percentage of MVPD subscribers who take cable. Instead, we should create an environment that allows alternative providers to meet market demand for these services by removing regulatory impediments like rate regulation.

The fact that cable price increases outpaced the general rate of inflation is not necessarily cause for concern either. The inflation rate measures the average increase in prices of consumer goods and services. Producers of goods and services in various industries of course face widely divergent circumstances in terms of production, labor, overhead costs, etc.; simply put, not all industries face average costs. Given that cable has invested heavily in systems upgrades, see supra at para. 9 (increase of 21% since 1996), that its programming and licensing costs have increased far faster than inflation, see id. (increase of 18.4% and 20.9%, respectively), and that cable is providing more video and non-video services to its customers than ever before, see id., a 7.3% price increase, as compared to a national average of 1.7%, is not particularly strong evidence of anticompetitive behavior.

Cable subscribership increased last year. I believe that consumers are not irrational. If they felt that cable, at the price it was offered, did not provide a service that they believed was worth the cost, they would not pay for it. They would migrate to other sources of video programming -- including, most obviously, free over-the-air broadcast programming. But cable subscribership grew by almost 2 million since the end of 1996. See id. at para. 17; App. B, Table B-1.

This evidence casts substantial doubt upon the notion that cable is somehow "overpriced," given the presence of choices for other video programming services. Either the consumers who subscribed to cable last year did not know of the availability of these services at lower prices in 1996, or the value they placed on the increased quality in cable service outweighed the intervening price increases. I find the latter more plausible.

DBS is making dramatic gains, presenting mounting competition to cable. The Report blinks reality in suggesting that DBS is not having a real competitive effect in the multichannel video programming market. DBS subscribership has jumped by 2.2 million since June of 1997, an increase of 43%. See id. at para. 62. According to Paul Kagan Associates, "DBS is on course to capture nearly two-thirds of all new multichannel subscriptions sold in the U.S. Of the 3.6 mil. projected new broadband subs in 1998, some 2.2 mil. will be sold by the three main DBS providers." Marketing New Media, Oct. 19, 1998. For these reasons, market analysts have called DBS "'the fastest-growing consumer electronics product in history.'" Antennae Attract Viewers to Satellite TV, Wall Street Journal at B-1, Dec. 1, 1998 (quoting Jimmy Schaeffler, chairman, Carmel Group).

While the Report stresses that DBS and cable are not perfectly substitutable, that is not the point; what matters is whether they are sufficiently similar such that DBS they can have a disciplining effect on each other, as explained above.⁽⁴⁾ I submit that the evidence in this report shows that DBS does just that.

The Report itself states that "to meet competition and customer demands for more video channels and advanced services, MSOs must continue to improve their systems through increased channel capacity," supra at para. 38, and documents large infrastructure investments, id. at paras. 37-41 (noting, among other things, that the largest MSOs have "spent as much as half a billion dollars each on capital expenditures"). These facts are reflective of a market in which, increasingly, cable will play catch-up with DBS. See, e.g, Satellite TV rivals to merge services, Washington Times at B-7, Dec. 15, 1998 (noting that Hughes Electronics' purchase of USSB would "expand DirecTV's 185-channel programming lineup to more than 210 channels" and that Echostar Communication's purchase of News Corp. satellites "will mean more channels and services for Echostar subscribers, including 500 channels, Internet access and other date services"). Sounding not at all like monopolists, cable companies are now asserting, in response to actions taken by DBS, that they can still compete in the MVPD market. Antennae Attract Viewers to Satellite TV, Wall Street Journal at B-1 ("'Any cable system with an upgraded technical platform can be fully competitive with any DBS company'") (quoting Julian A. Brodsky, vice chairman of Comcast Corp.).

Moreover, DBS has recently made serious inroads on the "competitive disadvantages" of its service. To deal with the issue of local broadcast signals, DBS companies are now "simply adding a separate advanced antenna to their satellite package" to "give customers the local channels they want." Id. These "powerful new antennae [are] capable of tapping local to channels with the mere zap of a remote control." Id.

Prices on equipment are still falling, from about $150 to as low as zero in some circumstances. As the Report explains, some DBS companies are providing customers with free dishes. See supra at para. 73; see also Dish Network Advertisement, Philadelphia Inquirer at A-33, Dec. 6, 1998 (offering free digital satellite tv system, after rebate, with guarantee of no rate increases until 2000 with one-year subscription). Also, consumers can decide to pay for professional installation at relatively low prices, or they can choose free do-it-yourself packages. See id. (offering $49 installation or free self-installation kit)

Almost two years ago, based in part on research conducted by economists Leland Johnson and Deborah Castleman, I concluded that "[o]nce the cost of receivers, including installation, falls to about $500, DBS should render traditional cable service contestable, assuming that it and cable deliver a similar array of services with equivalent reception quality." Crandall & Furchtgott-Roth at 92. Today, the cost of receivers and installation is well below $500; cable and DBS provide similar programming (even without local broadcast, which they now, in any event, facilitate with antennae sales, as described above); and DBS is considered by many to have not just similar but superior reception, as well as sound, quality. In my view, the day has already come when DBS creates a market disciplining and thus pro-competitive effect.

New entrants are on the scene. The Report chronicles well but, unfortunately, then downplays the many innovative providers now on, or waiting in the wings of, the video scene.

For example, electric and gas utilities, either on their own or in partnership with others, are providing facilities-based video, telephony, and internet. See supra at paras. 120-121. So are local exchange carriers, who are doing overbuilds in many areas. See id. at paras. 112-117. New, aggressive SMATV operators are making their presence felt too, sometimes in combination with DBS providers, see id. at paras. 90-93, and new technologies are expected to further boost SMATV systems, see id. at para. 92.

Internet video, while admittedly not currently comparable to broadcast programming, is around the corner. With digital television, broadcasters, already providing an alternative to cable for the delivery of video programming, will become stronger competitors. Wireless has had its difficulties, but the Commission recently loosened regulatory restrictions on two-way transmissions, see supra at para. 85, which the wireless industry now plans to put to use in the market. The wireless industry also plans to take advantage of digital technology. See id. at para. 84.

These are just a few of the new kinds of companies that have entered the video programming delivery market. Others are described in the factual sections of the Report. Suffice it to say that many new and improved services are now here and more are coming into being.

Perhaps it is a question of seeing the glass as half empty or half full, but I believe that we have a significant amount of competition in video programming delivery and that, moreover, the imminent future holds a great deal of promise for even more video competition.

4. Even if substitutability were the point, the Report's suggestion of non-substitutability conflicts with the judgment of the Department of Justice, which has concluded that "[w]hile the programming services are delivered via different technologies, consumers view the services as similar and to a large degree substitutable." United States v. Primestar, Inc., No. 1:98CV01193, Complaint at para. 63 (D.D.C. May 12, 1998).