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Statement of Reed E. Hundt
Chairman

Federal Communications Commission

on

The State of Competition in the Cable Television Industry

Before the

Committee on the Judiciary
U.S. House of Representatives

September 24, 1997




Mr. Chairman, Congressman Conyers and members of the Committee, I am pleased to appear before you today to provide the Federal Communications Commission's perspective on the status of competition in the cable television industry. The Commission, and the Commission's Cable Services Bureau, are working hard to promote the development of competition and consumer choice in the marketplace for multichannel video programming.

Mr. Chairman, on February 8, 1996, when President Clinton signed the landmark Telecommunications Act of 1996, a new course was chartered for the nation's telecommunications industry. After many years of vigorous debate, Congress, in approving the 1996 Act, rejected nearly 100 years of monopoly and restricted entry in communications and replaced them with a national commitment to open markets, competition and deregulation. Congress correctly determined that competition -- the cornerstone of our free enterprise economic system -- in the communications markets will yield lower prices and more choices for consumers, rapid technological innovation and a stronger economy.

The Telecommunications Act of 1996 embraces the right principles, but it is not a perfect law. I recently had the opportunity to put forward and discuss a number of changes to the 1996 Act that would help clear away some of the legislative ambiguity and underbrush that I believe have served as a drag on competition, particularly in local telephone markets. Mr. Chairman, I will be happy to share and discuss those recommendations with the Committee this morning, and we may develop further suggestions in the future as we gain more experience with the statute and our implementing regulations.

We also must understand that "open to competition" is not the same as "competitive." Indeed, the removal of barriers to entry is just the first step toward full competition, not its achievement. I realize that when Congress broke down the legal and regulatory barriers to competition many expected an immediate, full-out, competitive war in the marketplace. That has not happened. But it will if we stay the course and stand by our commitment to a pro-competitive policy. All revolutions, even policy revolutions, take some time.

Today, we find ourselves in a period of transition in most of our communications markets. We are moving from communications markets characterized largely by monopoly to a more dynamic and competitive environment. This trend is slower than many of us desire, but it is irreversible. We are beginning to see signs in virtually every sector of the marketplace that competition is taking hold and consumers are starting to see benefits.

In the marketplace for video programming, the Commission's 1996 Annual Competition Report to Congress on multichannel video programming distribution competition tells us that while incumbent cable operators continue to be the dominate distributors of multichannel video programming, other video providers continue to increase their share of subscribers in many markets. Last year, subscribership for non-cable distributors accounted for 11% of the total multichannel video programming subscribership. And the data show that non-cable subscribership has been increasing at an average annual rate of 22% since 1990. Preliminary analysis for our 1997 Competition Report indicates that these trends are continuing. For example, it appears that cable's total market share declined to 87% over the past year.

However, even with the cable industry's decrease in its overall share of subscribers, the actual number of cable subscribers continued to increase in 1996. In fact, between our 1995 Competition Report and the 1996 Report, the number of cable subscribers increased by two million compared to the 2.3 million increase in combined subscribership for all multichannel video programming providers. Again, our preliminary research for the 1997 Report shows this trend continues.

We also know that, as a result of acquisitions and trades, cable operators continue to increase the extent to which their cable systems form regional clusters. The number of clusters of systems serving at least 100,000 subscribers increased approximately 40% in 1996, and these clusters now account for service to 50% of the nations's cable subscribers.

Our 1996 Report also found that vertical integration of national programming services between cable operators and programmers declined in 1996, primarily due to the sale of Viacom's cable systems. Of the 16 programming services launched in 1996, 10 are not vertically integrated.

Notwithstanding the imperfections of the 1996 statute and the slow pace of competitive developments in the market, I remain absolutely convinced today that we have the right policy. And the Commission and its staff have been hard at work developing rules to make this policy transition work for consumers and the American economy.



Marketplace for Video Programming

In the market for multichannel video programming, the Commission has been particularly prolific since the adoption of the 1996 Act. We have put a number of rules on the books in record time to foster the growth of competition and give American consumers greater choices in video products and services.



Over-the-Air Reception Devices (OTARD)

When Congress approved the Telecommunications Act of 1996, it asked the Commission to promulgate regulations that would prohibit restrictions on so-called "over-the-air reception devices" such as small satellite dishes, wireless cable antennas, and traditional TV antennas. Well before the Telecommunications Act became law, the Commission had been working on revising its existing regulations on satellite dishes, both large and small. Congress and the Commission recognized that local governmental and non-governmental restrictions were standing in the way of competition among alternative forms of video reception and denying consumers the option of choosing a new service provider. We had heard from the satellite equipment manufacturers, from the satellite programmers, and from video distributors that local zoning ordinances and homeowner association restrictions were preventing consumers from selecting alternative video providers. Specifically, we heard from the direct broadcast satellite industry that potential purchasers of small satellite dishes and programming packages were deterred -- effectively prevented -- from buying and using 18" satellite dishes because of local zoning rules and home owner association rules and restrictions. We also learned that although theoretically it is possible for associations to change restrictive covenants, it is often difficult, if not impossible, to do so because a near unanimous vote is needed. It became clear that many of these local restrictions were based on largely outdated concerns about large satellite dishes and had not been updated to recognize that many dishes were no larger than a pizza pan.

In August 1996, the Commission implemented section 207 of the 1996 Act, acting decisively to remove these restrictions by adopting the "Over-The-Air Reception Devices" rule. The rule (which took effect after OMB clearance in October 1996) prohibits the governmental and nongovernmental restrictions that were impeding competition in the delivery of video programming. The rule makes the necessary exceptions for bona fide safety restrictions as well as for restrictions needed to protect historic sites. The rule also allows restrictions that local governments or community associations want to impose for aesthetic reasons, provided the restrictions do not impair installation, maintenance or use of the antenna. Our rule applies to small satellite dishes (one meter [39.37 inches] or smaller, except in Alaska where there is no size limit), to wireless cable antennas that are one meter or smaller in diagonal measurement, and to TV antennas. Prohibited restrictions include those that impose unreasonable expense or unreasonable delay and those that would preclude reception of an acceptable quality signal. Currently, the rule applies in those cases where the consumer owns the property where the antenna would be installed (like a single family house or a townhouse) and has exclusive use or control (like a condo owner's balcony or deck, but not the roof that is shared by other unit owners). The rule also provides that local governments or associations may seek a waiver from the Commission if there are special circumstances that justify an exemption from the rule. And the rule permits any interested party to seek a declaratory ruling from the Commission or a court to decide whether a given restriction is or is not in compliance with the rule.

Rental property and common areas are not covered by the rule in effect today. The Commission has a proceeding underway to consider whether, and to what extent, the rule could be expanded without violating the Constitution and without causing serious practical problems. The Commission received more than 1600 formal and informal comments on these issues, and we expect to make a decision on these matters in the near future.

Our experience in the 11 months the rule has been in effect has been extraordinary and has borne out the wisdom of the Congress and the Commission in removing these restrictions. We have had a phenomenal level of interest from consumers, industry, local governments, and community associations. 8,000 inquiries have come into the Commission since we adopted the rule. Many of the callers (and e-mailers) are individuals who want to install a dish or other antenna and have encountered resistance from their homeowner associations. We provide them information on the new rule and describe how the rule works.

Most of the time, arming the consumer with information about the rule is enough. Sometimes a homeowner association needs a little more explanation. So the Commission's staff, from our cable contact representatives to attorneys, will contact the association and explain how the rule works and help to resolve the dispute. Many disputes -- in fact most -- are resolved informally. When a dispute is not resolved, the antenna user can file a petition with us seeking a formal ruling on whether the restriction in question should be preempted by the Commission's rule because it impairs installation, maintenance or use of the antenna.

The Commission has reviewed or is currently considering 24 petitions for declaratory ruling. But even after a formal petition is filed we continue to try to resolve the dispute quickly and informally. To date, we have informally resolved seven petitions and are currently attempting to resolve another eight. Nine petitions have gone or are going through the formal process. We issued an Order ruling on one of these formal petitions in July. In this Order, the only one concerning a local governmental restriction, we found that the Commission's rule preempts a Meade, Kansas ordinance because it impaired installation, maintenance or use of antennas covered by the rule. The ordinance required permits and prior approval of installation, compliance with unspecified placement restrictions, and provided for a $500 a day fine for violations. We also have heard, informally, from the satellite and wireless cable industry that this rule and the way we are enforcing it is working and helping to promote competition. Now satellite retailers and wireless cable distributors can compete with cable on the basis of which offers the best service and most appealing programming at the most reasonable price.



Inside Wiring

The Commission also is proposing to modify our cable inside wiring rules to more effectively promote competition and consumer choice in the video programming marketplace. One area of particular concern is the situation in apartment complexes and other so-called multiple dwelling unit buildings ("MDUs") which comprise approximately 28% of the nationwide housing market. Currently, alternative service providers often have difficulty competing to serve these buildings because the owners do not want additional wires running through the hallways and want the new provider to use the existing wiring. This resistance to multiple sets of wires can deny MDU residents the ability to choose among competing service providers. In addition, the incumbent provider often claims an ownership interest in the wiring and may refuse to sell the wiring to the new provider or to cooperate in any transition. The impact of these competitive barriers is very real and substantial. Access to these facilities is critical if new entrants are to compete effectively with incumbent video providers.

The Commission recently adopted a Further Notice of Proposed Rulemaking where we proposed to establish procedures that would provide a timely and reliable way for an alternative video provider to determine whether and how it will be able to use the existing inside wiring upon a change in service. These procedures would cover both the situations where the owner decides to convert the entire building to a new video service provider, and where the building owner is willing to permit two or more video service providers to compete for customers on a unit-by-unit basis. The Commission believes that these proposed procedures will encourage competition and consumer choice by bringing order and certainty to the process of changing service providers in apartment buildings and other MDUs.

The comments on the Commission's Further Notice are due tomorrow and reply comments are due next week. We intend to act quickly on these important issues. <



Program Access

In enacting the program access provisions of the 1992 Cable Act, Congress recognized that potential competitors to incumbent cable operators often face unfair hurdles when attempting to gain access to the programming needed to provide a viable and competitive alternative to cable. The Commission's program access rules prohibit unfair and discriminatory practices in the sale of satellite cable and satellite broadcast programming and prohibit or limit the types of exclusive programming contracts that may be entered into between cable operators and vertically-integrated programming vendors. In accordance with the 1996 Act, the rules have been extended to apply to common carriers or their affiliates that provide video programming, as well as to open video system operators.

The Commission's program access rules have been used as a tool to promote competition in the multichannel video programming distribution marketplace. Indeed, they have been credited as an important factor in the development of both the direct broadcast satellite and wireless cable industries.

To date, the Commission has resolved 28 program access matters. These include exclusivity petitions and complaints, unreasonable refusals to sell, and price discrimination complaints. For example, the Commission has resolved two complaints in favor of new entrants in the video marketplace that alleged vertically integrated programming providers unreasonably refused to sell them programming. The Commission's actions in these matters have helped to open the video marketplace to emerging competitors such as CellularVision (an LMDS licensee) and Bell Atlantic Video Services (an Open Video System operator).

Some alternative video providers have suggested that the Commission should modify its program access rules in a number of areas. For example, Ameritech New Media has filed a Petition for Rulemaking, asking the Commission to amend its program access rules to (1) impose a mandatory right of discovery to enable complainants to obtain information necessary to prove program access violations; (2) impose damages for violations of the program access rules to create an economic incentive to discourage violations of the program access rules; and (3) impose specific time deadlines for resolving program access cases.

Still other video providers have recommended that the Commission consider additional changes in our program access rules. The Commission is currently reviewing its program access rules and procedures, and may soon issue a Notice seeking public comment on the Ameritech Petition and other recommendations.



Open Video Systems

The open video system framework established in the 1996 Act provides a new alternative for local telephone companies and others to enter the market for the delivery of video programming. In accordance with Congress' statutory mandate, the Commission established final open video system rules in the six months following the adoption of the 1996 Act, including a reconsideration of those rules. The Commission's rules were designed to promote the competitive benefits that Congress sought to achieve: market entry by new facilities-based service providers, enhanced competition, streamlined regulation, investment in infrastructure and technology, diversity of programming choices and increased consumer choice.

Since the Commission finalized its rules, we have certified nine open video system applications. Each applicant that has applied for open video certification has been certified. Two open video systems are now operational and providing direct competition to the incumbent cable operators in their areas.

We are aware that some concerns have been raised about the OVS model as a viable alternative and our rules. For example, some have suggested that the Commission's rules have failed to address or resolve issues associated with the payment of fees to local authorities, the control of the OVS platform, and how telephone companies are to allocate their costs between telephone and video services.

In the 1996 Act, Congress did not require open video system operators to obtain a cable franchise. However, in return for this, the 1996 Act requires an open video system operator to make 2/3 of its capacity available to unaffiliated programmers, pay up to 5% of its gross revenues to the local government in lieu of a franchise fee, provide public, educational and government channels, and carry local broadcast signals. Congress intended the proposition to be either/or: either obtain a cable franchise and be regulated as a cable system operator, or operate an open video system and accept the requirements set out in the statute. Video providers have the option of complying with the cable franchise requirements or the open video system rules. It seems that some potential video providers want to have it both ways.



High Penetration Basic Cable Service

I also continue to believe that a high penetration basic cable service tier would produce several competitive and consumer benefits.

First, a high penetration basic tier would mean that cable service was affordable for most consumers. Second, by making it possible to extend the cable wire into an increasing number of households, the cable industry will find itself in a better position to exploit its network to compete in new markets for nonvideo communications services. Thus, increased cable penetration is likely to enhance competition in the markets for internet access and telephone services.

This is particularly true with internet access services where the cable industry's networks are tailor-made for the new emerging world of data services. No competitor currently has the advantages of cable's existing networks; cable's co-ax network to the home is 30 times faster than the fastest telephone-line connection. Current estimates indicate that cable modem service is now available to 2 million U.S. households, and the cable industry will have 300,000 internet access subscribers by the end of the year. Increased market penetration can only make the cable industry a more formidable competitor in the market for internet access services.

While more challenging from a technical standpoint, the same can be said for other nonvideo services like telephony. A two-wire world -- where cable networks reach into an increasing number of households -- will enhance the prospects for meaningful facilities-based competition in the market for local telephone service.

Finally, a high penetration basic cable service also may permit some cable operators the pricing flexibility they need to respond to new pressures in an increasingly competitive market for video programming. At the same time, by making a service tier that contains the over-the-air broadcast signals more widely available, many consumers will, for the first time, have a realistic option to subscribe to a second video provider for other programming services. This could give a boost to some of cable's competitors which currently do not provide local broadcast signals as part of a programming package. The Commission's Cable Pricing Flexibility proposal was designed to promote these policy objectives. While the Commission has not acted on the proposal, we should continue to pursue policies that will promote the increased penetration of basic cable service.



Social Contracts and Rate Resolutions

The Commission is aware that some concerns have been raised about the use of social contracts and rate resolutions. The Commission has found social contracts to be a useful tool for providing for the upgrade of cable facilities allowing operators to expand service offerings. It has found rate resolutions to be a fair and cost-effective way to deal with thousands of cable rate complaints. In some cases rate resolution provisions have been incorporated in social contracts. Both social contracts and rate resolutions have worked to provide certainty to operators about the operation of the rate regulation rules.

The Commission entered into social contracts with MediaOne (formerly Continental Cablevision, Inc.) and Time Warner, and has proposed to enter into a social contract with Comcast Corporation. These contracts arise from determinations the Commission made shortly after the adoption of the Cable Television and Consumer Protection and Competition Act of 1992. At that time, the Commission noted that one of the policy goals Congress established in the 1992 Cable Act was ensuring that cable operators continue to expand their capacity and the programs offered over their systems, where economically viable. The Commission stated that the goal of promoting economically justified system upgrades, as well as the goals of the 1992 Cable Act, could be advanced by the development of an incentive regulation approach to upgrading cable services, similar to the incentive plans the Commission had previously implemented for telephone carriers. The Commission determined that it would consider entering into social contracts where the contracts would permit operators to recover the cost of their upgrades, while continuing to provide stable and reasonable rates for their customers.

The Commission's social contracts with cable operators are designed to carry out this objective. The Commission has entered into social contracts with cable operators after it determines first, that the upgrades proposed by an operator are significant capital expenditures to be used to improve the quality of service or to provide additional services, and second, that the cost of the proposed upgrades attributable to rate regulated service equals or exceeds the additional charges that the social contract would allow. The Commission has not sought to determine what technology an operator would select for its upgrades, which specific franchise areas would be upgraded under a contract, or the time at which any particular upgrade will take place within a contract's term. Importantly, the Commission's social contracts have allowed recovery for upgrades only through adjustments to rates charged for cable programming services tiers, the tiers that are within the Commission's exclusive jurisdiction. They do not permit adjustments to pay for the contracted upgrades to rates for basic service tiers, equipment or installation.

The social contracts adopted by the Commission specifically state that they do not supersede any previous upgrades committed to by an operator and do not preclude any franchising authority from seeking upgrades in excess of those mandated by a social contract. Throughout the social contract process, the Commission has preserved the discretion of local communities to negotiate with cable operators as to the nature and amount of expenditures appropriate for their communities.

The Commission also has approved eight Rate Resolutions and Rate Resolutions with two companies are currently pending. The final Rate Resolutions have resolved more than 3000 rate complaints and have provided $29 million in total refunds to 17 million subscribers. The pending Rate Resolutions provide for approximately $6.7 million in refunds to more than 1.2 million subscribers. The rate resolution provisions of the two social contracts have resolved approximately 2,660 rate complaints and have provided nearly $16 million in refunds to more than seven million cable consumers. In total, the Commission's Rate Resolutions and social contracts will provide more than $50 million in consumer refunds and reasonable future rates.

In considering the adoption of social contracts as well as Rate Resolutions, the Commission has used procedures designed to maximize input from affected franchise authorities. Before adopting a social contract, the Commission issues a Public Notice summarizing its terms, specifying how copies of the proposed agreement can be obtained and announcing the commencement of a public comment period. Copies of proposed social contracts and Rate Resolutions have been mailed to the franchise authority for each affected franchise area. In addition, any time rate complaints are proposed to be resolved a copy of the resolution document has been mailed to each non-governmental complainant with an explanation of the comment period and how comments can be filed.

Comment periods have been for a minimum of 30 days for initial comments and 10 days for reply comments. However, in each case in which a franchise authority has asked that the comment period be extended, the Commission has granted the request for additional time. The Commission received extensive comments from franchise authorities and others in connection with each social contract and several Rate Resolutions and has made changes to proposed agreements to reflect those comments.



Cable Television Rates

The rates charged for cable television services also have been the focus of attention in recent months. Like most consumer products and services, the price for some cable television services has increased over the last year. Some measures suggest that cable rates are again rising much faster that the general rate of inflation.

To determine the behavior of cable rates and the reasons behind the changes in cable rates, the Commission initiated its annual Cable Price Survey in June. As directed by the 1992 Cable Act, the Commission will use the data collected in the Price Survey to compare rates charged by competitive cable systems with rates charged by systems that are not subject to competition.

The Cable Services Bureau is just beginning to assemble and review the data and information collected through the Price Survey. It is too early to draw any definitive conclusions from the information collected, but we believe the Survey will help us better understand the behavior of cable rates over the last 12 months.

A preliminary review of the information suggests that the bulk of the increase in cable rates in the past year can be attributed to the following four factors:

Conclusion

Mr. Chairman, this may be my last appearance as Chairman of the Federal Communications Commission before a Committee of Congress. I have mixed emotions about my imminent departure. I will always cherish this experience but do look forward to spending more time with my family, particularly my children.

It has been the highest privilege of my professional career to serve as Chairman of the FCC. I have often said that this is the best job in Washington that you don't have to be elected to. I really believe that.

There has never been a more exciting or eventful time to be involved in the communications policy arena. It has been a great honor, over these past four years, to work with the President, Vice President Gore, many Members of Congress, and the Commission staff to help shape and then implement the landmark Telecommunications Act of 1996.

Thank you for the opportunity to provide the Commission's perspective on these important matters. I will be happy to answer any questions.