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Federal Communications Commission
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This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).

January 13, 1998


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

Much in this year's Report on the status of multichannel video competition has a familiar ring: there are pockets of head-to-head competition to cable, and some additional gains by DBS, but overall the cable industry retains its overwhelming dominance. Cable still controls 87% of multichannel video programming subscribers nationwide. All of cable's competitors -- e.g., DBS, MMDS, SMATV, HSD -- account for only 13% combined. Perhaps the most troubling aspect of these figures is that they do not reflect any quickening in the pace of competition. This year's modest 2% drop in the percentage of multichannel video subscribers controlled by cable was similar to the reductions tracked in the Commission's reports for 1994, 1995 and 1996.

This is not the dramatic change in the competitive landscape that was hoped for and expected with the passage of the Telecommunications Act of 1996. In particular, the 1996 Act freed telephone companies to compete head-to-head with cable operators in their telephone service areas. It was expected that telephone companies would seize the opportunity to enter the video market and provide consumers with a real alternative to the incumbent cable operator. But, with a few exceptions, this type of broad-based entry has yet to occur and there is little evidence that such competition is in the offing. To the contrary, some telephone companies seem to be actively withdrawing from previous efforts to explore full-scale entry into the video marketplace.

I am not convinced that DBS can fill that competitive vacuum. First, of course, DBS services do not carry local broadcast stations. Second, the current "up front" costs associated with DBS are substantial and place it out of reach for many Americans. As the Report indicates, the up front costs for DBS equipment and installation can amount to several hundred dollars. Moreover, in order to receive service on more than one television set -- not an unreasonable assumption in most homes -- a consumer must incur an additional substantial equipment charge and a monthly charge for each additional set. Because it fails to adequately reflect these costs, I expressly do not join in the comparison of cable and DBS prices in paragraphs 39-42 of the Report. While the comparisons do include a DBS equipment cost of $200, the Report spreads that cost over a five-year period without any adjustment for the fact that these costs must be paid in advance. And while the Report does note that installation costs and the costs of providing service to additional sets should be considered, I believe that omitting any numerical analysis renders the comparisons virtually meaningless. Consumers cannot assume away up front costs, or spread out such costs over five years interest-free. Consumers do not want to know whether it is possible to construct cable and DBS packages with similar per channel costs. They want to know how much each service is going to cost them and when. The comparison of cable and DBS prices would have been far more helpful had it attempted to answer that question.

My concerns about concentration in the video programming distribution marketplace also apply to concentration within the cable industry itself. Since 1990, the top MSO's percentage of cable subscribers has risen from 24% to 29.3%; during that period, the percentage claimed by the top four MSOs combined has risen from 45.6% to 62.3%. Even these figures may not reflect the entire story. As detailed in the Report, some of the largest MSOs are entering into joint ventures and other business arrangements with each other on an unprecedented scale. None of these transactions are at issue here and I express no opinion on their respective merits. I do believe, however, that the Commission owes it to the parties and to the public to remove the current confusion surrounding our horizontal ownership rules as soon as possible. As the Report notes, those rules were voluntarily stayed in October 1993 in light of the D.C. district court's decision that the 1992 Cable Act's horizontal ownership provisions were unconstitutional. In August 1996, the D.C. Circuit held in abeyance any further review of the horizontal ownership provisions, and the Commission's rules promulgated thereunder, until the Commission completed its reconsideration of its rules. Thus, in effect, the Commission was waiting for the D.C. Circuit to rule, and now the D.C. Circuit is waiting for the Commission. This situation has now become particularly untenable, since depending how the recent transactions among large MSOs are treated, it appears that the horizontal limits originally issued by the Commission may be breached. I hope that the Commission will act to clarify this situation as quickly as possible.

My concern about concentration issues is heightened by rising cable rates. As the Report indicates, cable bills rose by an average of 8.5% last year, several times the rate of inflation. The cable industry has argued that much of these rate increases are due to increases in programming costs. I express no opinion on the existence of these additional costs, but I would make a few observations. First, it is difficult to make rational judgments about the effect of rising programming costs without accurate information. To that end, I believe that the Commission should consider some type of survey or reporting requirement so that actual programming costs can be reported, without revealing any confidential information, in next year's Report. Second, cable operators have two choices for recovering programming cost increases -- they can increase subscriber rates or they can increase advertising rates. Our current rules provide the cable industry little incentive to charge these costs to advertisers (not a captive audience), since we permit all of the costs to be passed on directly to consumers. Third, the Report describes several situations in which cable operators face actual head-to-head competition. Generally, the operators' responses were to offer customers new and improved services at similar or reduced prices. I am aware of no evidence that these operators are in financial difficulty or are unable to offer an attractive programming package to their customers.

Part of the answer to the dilemma of rising cable rates may not involve rates at all, but simply expanding consumer choice. One of the general underpinnings of our rate rules is that consumers should pay about what they would pay in a competitive video programming marketplace. I am coming to the conclusion, however, that consumers are being forced to pay for packages of programming that they would not buy in a competitive market, even at a reasonable price. In other words, even if our per channel prices were consistent with the per channel prices that would be charged in a competitive market, consumers may still be paying too much because they are being forced to purchase additional channels that they did not ask for and do not want. This may not have been a significant problem in a 30 or 40 channel universe, but in a 70, 80 or 100 channel universe, these unwanted channels can have a dramatic effect. As loudly as consumers complain about rates, they complain just as loudly about having to pay for additional programming services that they do not want and did not ask for.

This does not necessarily mean that all cable programming should be offered a la carte. It simply means that the cable industry can and should afford consumers more choice. In a competitive market, consumers would be able to choose from a range of video products because consumers have different needs and different resources. Some would choose the basic "Chevy" service; others would choose the fully-loaded "Cadillac"; others would choose a model in between. The cable industry's current position seems to be that all Chevy owners must upgrade to a Cadillac or do without a car. That is not the way a competitive market would act. This is not an argument about price -- the Cadillac may be worth every penny the cable operator is charging -- but about consumer choice.

While we all hope that one day competitive factors will hold cable rates in check, wishful thinking will not fulfill our statutory mandate to keep rates reasonable. I do not believe it is enough to simply tell consumers that competition is "just around the corner." Consumers need protection now. I challenge the cable industry to provide consumers with the additional choice that they want and deserve. And I urge my colleagues to take our statutory mandate to protect consumers seriously by continuing to take a hard look at this issue.

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