United States General L Accounting Report to the Ch.akman, Subcommittes *‘* Office CkAO on TelecOmmunications and Finance, Committee on Energy and Commerce, :_ r‘%,. House of Representatives : -_ :Junelm TELECOMMUNICATIONS Follow-Up National Survey of Cable Television Rates and Services United States GAO General Accounting Office Washington, D.C. 20648 Resources, Community, and Economic Development Division B-226720 June 13,199O The Honorable Edward J. Markey Chairman, Subcommittee on Telecommunications and Finance Committee on Energy and Commerce House of Representatives Dear Mr. Chairman: In response to your October 2, 1989, request, this report presents the results of our recent survey of cable television rates and services. It follows up on our first cable rate survey, the results of which we reported to the Subcommittee in August 1989. Specifically, we agreed to update our survey through 1989 and to collect data from 1984 and 1985 to further study the effects of the Cable Act. In addition, we sought to determine whether cable rates have moderated during 1989 and whether cable system ownership changes have driven up cable rates. We also reviewed proposals for amending the Cable Act and the major options for dealing with the cable industry’s market power. With your permission, we coordinated our survey with the Federal Communications Commission, and we have provided the Commission with our survey questionnaire data for its analysis in conjunction with its ongoing cable policy study, mandated by the Cable Communications Policy Act of 1984. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 5 days from the date of this letter. At that time, we will send copies to interested parties and will make copies available to others upon request. Major contributors to this report are listed in appendix VIII. If I can be of further assistance, please contact me at (202) 275-5525. Sincerely yours, John M. Ols, Jr. Director, Housing and Community Development Issues Executive Summary Effective December 29, 1986, the Cable Act prohibited localities from regulating basic cable rates if the cable system was subject to “effec- tive” competition-defined by the Federal Communications Commission (FCC) as the availability of three or more over-the-air television channels in a community. As a result, cable systems located in such communities no longer were subject to local rate regulation. GAO'S survey, covering 1984 through 1989, showed that cable rates have Results in Brief continued to increase. During 1989, an average cable subscriber’s monthly rates for both the lowest priced and the most popular basic ser- vices increased by 10 percent. These rate increases were accompanied by small increases (one and two channels, respectively) in the average number of basic channels offered. Revenue to cable operators per sub- scriber increased, on average, by 5 percent during 1989. For those sys- tems changing ownership between 1985 and 1989, GAO did not find any statistically significant pattern of higher basic rate increases than those imposed by cable systems that remained under the same ownership. GAO'S survey showed, in the 3 years since deregulation, average increases of 39 and 43 percent, respectively, for the most popular and the lowest priced basic services, and a 21-percent increase in revenue per subscriber. During this period, cable subscriptions increased by 22 percent, and system penetration (total number of subscribers divided by the number of homes having access to cable) increased from 56 to 58 percent. The lack of close substitutes to which consumers can switch (which gives cable operators market power) is often cited as a reason that the subscriber base has not decreased despite substantial rate increases, although there are other potential explanations, such as improved cable programming. The continued increases in cable rates are likely to fuel further debate over regulating the cable industry. For many, promoting more competi- tion is the policy option preferred to regulation. Views differ, however, on the extent to which potential sources of competition will be available on a significant enough scale to provide much competition in the near future. This report discusses major legislative and regulatory proposals being considered, as well as various policy options to deal with the cable industry’s market power. Page 3 GAO/WED-o-1WJ Follow-up Cable Televidon Survey GAO'S survey, however, did not confirm this charge. Comparing rate increases occurring immediately after systems changed ownership with rate increases during the same period in systems that did not change hands, GAO found no statistically significant pattern of higher increases in the systems changing ownership. Changes in Other Cable GAO also collected data on other cable operations-options, premium services, revenue per subscriber, subscriptions, and cable system pene- Data tration. The availability of options and charges for premium services showed little change. Average revenue to cable operators per subscriber (covering revenue from all subscriber services) increased 2 1 percent over the past 3 years, from $21.78 to $26.36. During 1989, revenue per subscriber increased 5 percent, from $26.00 to $26.36. Total cable sub- scriptions continued to grow, increasing by 22 percent since deregula- tion. Also, the number of homes having access to cable grew by 14 percent. Cable system penetration (total subscribers as a percentage of homes having access to cable) increased slightly, from 56 to 68 percent. Policy Options Because the nature of basic cable service was fundamentally altered after deregulation, it is difficult to assess how much of the rate increases that followed is due to the market power of cable operators. However, many agree that the cable industry has structural characteris- tics that permit the exercise of market power. Views on the prospects for competition in the near future vary, and thus lead to different policy options. Chapter 3 discusses the major legislative and regulatory pro- posals currently being considered, and chapter 4 discusses the pros and cons of several policy options to deal with the cable industry’s market power, including broadening the definition of which cable systems are subject to regulation and/or returning control to localities or FCC. GAO is not making recommendations in this report or taking a position on Recommendations the various policy options discussed. GAO shared survey data with FCC.However, in accordance with the Sub- Agency Comments committee’s policy, GAO did not obtain comments on this report from FCC or from representatives of the cable industry. Page6 GAO/BcED-w)-lI)oFoUow-upCableTelevlsionSurvey Contents - Table 2.1: Average Monthly Basic Service Charge per 20 Subscriber Table 2.2: Changes in Basic Service Rates Since 20 Deregulation Table 2.3: Average Number of Basic Channels Received 21 per Subscriber Table 2.4: Types of Programming Available With Lowest 21 Priced Basic Service Tier Table 2.5: Rates for Lowest Priced Basic Service Provided 22 by Systems That Were Regulated/Not Regulated Prior to Effective Date of Cable Act Table 2.6: Percent Changes in Cable System Ownership 23 Between 1985 and 1989 Table 1.1: Average Monthly Basic Service Charge per 46 Subscriber Table 1.2: Average Number of Basic Channels Received 47 per Subscriber Table 1.3: Average Monthly Charge per Basic Channel 48 Table 1.4: Changes in Basic Service Rates Since 49 Deregulation Table 1.5: Dollar Changes in Basic Service Rates Since 50 Deregulation Table I.6: Number of Tiers of Basic Service Offered by 50 Cable Systems Table 1.7: Rates for Lowest Priced Basic Service Provided 51 by Systems That Were Regulated/Not Regulated Prior to Effective Date of Cable Act Table I.8 Rates for Most Popular Basic Service Provided 52 by Systems That Were Regulated/Not Regulated Prior to Effective Date of Cable Act Table 1.9: Types of Programming Available With Lowest 53 Priced Basic Service Tier Table 11.1:Availability of Options With Most Popular 54 Basic Service on 1213 l/89 Table 11.2:Optional Services Offered at Extra Charge 54 With Most Popular Basic Service on 12/3 l/89 Table III. 1: Number of Premium Channels Available 55 Table 111.2:Monthly Charge for Individual Premium 55 Channels Table 111.3:Monthly Charge for Packages of Premium 56 Channels Table III.4: Cable Subscribers Purchasing One or More 56 Premium Channels Page 7 GAO/RCRD-SO-1gS Follow-up Cable Televidon Survey Page 9 GAO/RCED-99-199 Follow-up Cable Television Survey Chapter 1 introduction industry has occurred. Cable subscriptions have grown from 32 million households in January 19853 to about 53 million currently, representing about 58 percent of all television households.4 During this same period, the number of cable programming services has more than doubled. Most cable systems are technically capable of offering 12 or more channels, and our survey results showed that the average cable subscriber had access to almost 40 cable channels at the end of 1989. Cable.,Television Service Cable systems may market several different services-basic, optional, premium, and pay-per-view. Basic service includes any service offering the re-transmission of local television broadcast signals, and may also include programs available via satellite transmission, such as C-Span and CNN, either as a single level of service or as two or more “tiers,” each priced individually. Additional tiers of basic service are generally referred to as expanded basic service and offer additional channels beyond the basic level of service. Optional services-such as set-top converters, remote control units, FM radio service, cable program guides, and cable outlets for additional television sets are available for an extra charge. Premium services generally include movie or other entertainment channels, such as Home Box Office and Cinemax, avail- able individually or in combination for a monthly fee in addition to the charge for basic service. Pay-per-view service offers selective program viewing for special sport events, movies, or other shows for an addi- tional fee per showing. Cable Rate Regulation The regulation of the cable television industry has historically involved a mixture of federal, state, and local entities establishing policies, regu- lations, rules, and procedures. However, the control of cable rates had its foundation primarily at the state and local levels and was limited to the lowest tier of basic service. When cable television first developed as a means of providing better tel- evision reception, many cities and a few states began regulating the basic rates charged to cable subscribers. The regulation of basic rates was a condition of the local government’s grant of a franchise or license. The franchise permitted the cable system to construct and operate cable “FCC Notice of Inquiry, MM Docket No. 89600, p. 3. %roadcastin& May 14,1990, p. 15 Page 11 GAO/RCED-SO-M4 Follow-up Cable Television Survey Chapter 1 Introduction amend the Cable Act.” Proposals include implementing measures to con- trol cable rates or making the cable industry subject to more direct competition. First GAO Cable Survey In August 1989, in the midst of this debate on cable television rates, we reported to the Chairman, Subcommittee on Telecommunications and Finance, House Committee on Energy and Commerce, on the results of our first national survey of cable television rates and services. We found that over the 23-month reporting period ending in October 1988, average monthly rates per subscriber increased by 29 percent for the lowest priced basic service. A further analysis of this increase revealed that about 62 percent of subscribers incurred rate increases of 10 to 40 percent during this period, and almost 28 percent of subscribers had increases over 40 percent. Different interpretations have been offered explaining the causes for the rate increases we reported, with no agreement over whether they were due to a one-time rate adjustment in the aftermath of deregulation, increased program costs, changes in cable company ownership, or deregulation. Industry officials explained to the subcommittee that these rate increases were one-time adjustments in response to rates being held artificially low during a period of regulation and that future rate increases would be moderate. Industry officials also noted that the cost per channel we reported showed a much smaller change, indicating that rate increases had been accompanied by corresponding increases in the number of channels offered. Continuing Congressional Concern over how to deal with complaints over cable rates and services Interest has led to the introduction in the Congress of numerous bills dealing with various cable issues, including whether to regulate rates and asso- ciated charges. Congressional hearings have centered on gaining greater insight into changes in the industry since deregulation to determine the effect industry growth has had on rates paid by cable subscribers and whether cable systems truly face effective competition. Major areas of concern include (1) the increasing concentration in cable system owner- ship (horizontal concentration), creating the possibility that cable sys- tems may engage in anticompetitive behavior because of the size of their “Actually, the legislative proposals generally purport to amend the Communications Act of 1934. The Cable Act of 1984 was incorporated into the Communications Act as Title VI. The legislative pro- posals which are discussed generally would amend Title VI. Page 13 GAO/RCEB90199 Follow-up Cable Television Survey chapter 1 introduction regulation in the video services marketplace. In addition, on January 22, 1990, FCCissued a Notice of Proposed Rulemakings to reexamine its rules regarding the regulation of basic cable rates. In particular, this notice concluded that changed circumstances in the video marketplace war- ranted a review of FCC’S three-signal standard for defining effective competition. During hearings in August 1989 on the results of our first survey of Objectives, Scope, and cable rates and services, the Chairman, Subcommittee on Telecommuni- Methodology cations and Finance, House Committee on Energy and Commerce, asked us to conduct a follow-up national survey of cable television rates and services. We agreed to update our survey through 1989 to determine whether cable rates have moderated, obtain additional historical data for 1984 and 1985 to further examine the effects of the Cable Act, and examine whether a correlation exists between sales of cable systems and subsequent rate increases.” In conducting our follow-up rate survey, we again developed a question- naire similar to the one used in our first survey. (App. VI contains a copy of our questionnaire.) However, recognizing that FCC had a legisla- tive mandate to conduct a study requiring similar information, with the subcommittee’s concurrence, we conducted our survey in cooperation with FCC to avoid duplication and an undue reporting burden on the cable industry. In designing our questionnaire, we coordinated closely with FCC and incorporated its proposed questions where appropriate. Also, we sought the comments and views of officials of the National League of Cities, the Conference of Mayors, the Community Antenna Television Association, and NCTA. Finally, we pre-tested the questionnaire with seven cable operators. We considered their comments where appropriate in final- izing the questionnaire. As in our first survey, we obtained cable system names and addresses from a data base maintained by Television Digest, Inc., publisher of the ‘FCC Notice of Proposed Rulemaking, MM Docket No. 90-4 “The subcommittee also asked us to collect cable system revenue and cost data. However, we found no workable approach, within a reasonable reporting time frame, for including such data in our follow-up survey. The lack of omformity in cable system accounting practices, different policies on aggregating costs, and concerns ~wer the willingness of cable operators to furnish confidential data were all raised by both FCC and cable mdustry officials as major problems to be overcome before a meaningful financial survey cwld bc conducted. Page 15 GAO/RCED-W-199 Follow-up Cable Television Survey chapter1 introduction We conducted our survey between January 1990 and March 1990. All cable systems received follow-up telephone calls after the original Jan- uary mailing. In order to achieve as high a response rate as possible, we sent follow-up questionnaires to nonrespondents in February, along with another round of telephone reminders. By March 31, 1990, we had received a total of 1,530 responses, a response rate of 78 percent. To obtain as many usable responses as possible, we reviewed and edited all questionnaires for consistency and contacted cable system officials by telephone to resolve any ambiguous response patterns. Also, in our questionnaire we pledged that, except for sharing our data with FCC, responses would be kept confidential and reported in summary form only and that no individual cable system’s or company’s responses would be identified by either FCC or GAO. Our first survey was conducted using a sample of cable systems in exis- tence in 1988. This follow-up survey is based on responses received from a new sample of cable systems in existence during 1989. Because both our surveys were based on two different samples, our results for 1986-88 in this report may differ slightly from comparable results we reported in our first survey for the same period. Twenty-two percent of the cable systems surveyed did not respond to our questionnaire. An analysis of these nonrespondents indicates sev- eral reasons for their not responding, including the fact that 3 percent of the questionnaires we mailed were undeliverable by the Postal Service. Thus, we believe a more accurate count of systems unwilling to respond is 19 percent. A further analysis of nonrespondents indicates that the smaller systems were less likely to respond and that those cable systems that did respond contained 86 percent of the total subscribers repre- sented in our sample of 1,97 1 systems. All sample surveys are subject to sampling error. The sampling error is the maximum amount by which results obtained from a statistical sample can be expected to differ from the true universe characteristic (value) we are estimating. At the 95-percent confidence level, this means that the chances are 19 out of 20 that if we surveyed all cable systems, the results would differ from the estimates we obtained by less than the sampling error of these estimates. All sampling errors for the estimates in this report were calculated at the 98percent confidence level and are reported in each of the tables presented in appendixes I through V. The tables also contain estimates of the number of cable systems that would have responded had we sampled all systems. Page 17 GAO/RCEIWO-199 Follow-up Cable Television Survey Resultsof Follow-Up National Survey of Cable Television Ratesand Services In our follow-up survey, we surveyed cable television systems to com- pare rates and services offered as of November 30,1986, just prior to the effective data of deregulation, with those offered on December 3 1, 1989, the latest date for which we collected information. By comparison, the cutoff date for our first survey was October 31, 1988. In addition, in this survey we collected data for 1984 and 1985-2 years prior to der- egulation-to better assess the changes that took place following der- egulation. Specifically, chapter 2 addresses changes in l basic cable rates and services (for both the lowest priced and the most popular services offered by cable systems);’ l the availability of options, such as cable outlets for additional television sets; l rates for premium services; l overall revenue to cable system operators per subscriber; and l cable subscriptions. Appendixes I through V contain additional tables detailing the results of our survey. Highlighting our results for the past year, our survey showed continuing substantial increases in basic cable rates. During 1989, an average cable subscriber’s monthly rates for both the lowest priced and the most pop- ular basic services increased by 10 percent. These rate increases were accompanied by small increases (one and two channels, respectively) in the average number of basic channels offered. The availability of options and charges for premium services showed little change in 1989, compared with our previous survey results. Overall revenue to cable operators per subscriber increased, on average, by 5 percent during 1989. In the 3 years since deregulation, our survey showed average increases of 39 and 43 percent, respectively, for the most popular and the lowest priced basic services, and a 21-percent increase in revenue per sub- scriber.” Despite these sizeable increases, overall cable subscriptions ‘Because some cable systems offer more than one level or “tier” of basic service, this report (like our previous report) includes information on both the lowest priced service offered and the service to which most customa subscribe (i.e., the most popular service). Since most systems have only one tier of basic service, the most popular service is generally also the lowest priced service. ‘During this period (November 1986 to December 19891,the nation’s overall price level, as measured by the gross national product implicit price deflator, rose by about 11 percent. Taking inflation into account by adjusting 1989 cable rates to 1986 constant dollars results in increases of about 29 percent for the lowest priced basic service, 26 percent for the most popular basic service, and 9 percent for revenue per subscriber. Page 19 GAO/RCED-90199 Follow-up Cable Televidon Survey Chapter 2 Results of Follow-Up National Survey of Cable Television Rates and Services from 24 channels on November 30, 1986, to 31 channels as of December 31, 1989. Channels available for the subscribers to the most popular basic service also increased, on average, from 27 to 34. During 1989, the number of channels offered increased modestly, by one and two chan- nels, respectively, for the lowest priced and the most popular services. Table 2.3: Average Number of Basic Channels Received per Subscriber Average number of basic channels received per subscriber for: Date Most popular service Lowest priced service 11/30/86 27 24 lj31j88 - 32 -.- 30 12/31/89 34 31 Table 2.4 contains the categories of basic cable programming available to cable subscribers to the lowest priced service, showing in which cate- gories increases in the number of channels took place since 1986. Clearly, the bulk of the increase occurred in the basic cable networks.:’ The table shows that basic cable networks increased from 11 to 17 between 1986 and 1989, thereby providing more services. Our survey indicated that the availability of both local and distant stations4 remained constant. In addition, there was little change in the leased access/other category, which includes public, educational, and govern- ment access channels (commonly referred to as PEGS). Table 2.4: Types of Programming Available With Lowest Priced Basic Number of channels available to Service Tier average subscriber on: Type of Programming f1/30/06 12/31/09 Local television stations a 8 ___-~- Distant television stations 3 3 Basic cable networks 11 G Leased access/other channels 2 3 Rate Changes in Regulated Although the Cable Act restricted local rate regulation effective and Nonregulated Systems December 29, 1986, our survey showed that 24 percent of the cable sys- tems reported that they were already not regulated on November 30, “Examples of basic cable networks are CNN, USA, MTV, The Discovery Channel, etc. ‘%istant stations include “superstations”-such as WTBS, WWOR,and WGN-received by cable sys- tems via micrc-wave or satellite dish. Page 21 GAO,‘RCED-9&199 Follow-up Cable Television Survey Chapter 2 Results of Follow-Up National Survey of Cable Television Rates and Services once during that time. Table 2.6 shows, by year, the percentage of cable systems that changed ownership. Table 2.6: Percent Changes in Cable System Ownership Between 1995 and Percentage of 1999 Year of ownership Change systems 1985 0 1986 15 1987 14 1988 18 1989 13 Our survey results, however, did not reveal a pattern of basic service rate increases following the sale of a cable system. We compared the dollar amount of rate increases occurring after systems changed owner- ship with rate increases during the same period in systems that did not change hands, and found that the differences were not statistically significant. In this regard, FTC, in its comments on FCC’SNotice of Inquiry, concludes that changing cable ownership should not affect cable rates. FTC com- ments that 1‘ it is difficult to see how ‘trafficking’ in and of itself could affect the rates charged to cable subscribers The fact that a cable system changes hands would not by itself be expected to alter marginal revenue or marginal cost, so it is difficult to see how simply changing ownership would change price or output Overall, it is difficult to see how restricting ‘trafficking’ would improve consumer welfare.“” Our follow-up survey also collected information as of December 3 1, Optional Services 1989, on optional services, such as outlets for second television sets and remote control units, to compare changes in such services with changes in basic service rates.’ We were particularly interested in learning the extent to which services offered as options at extra charge in 1988 were being offered as part of basic service in 1989. Overall, we found little movement. For example, we reported in our first survey that as of October 31, 1988, 10 percent of systems offered additional cable outlets as part of their most popular basic service. Our follow-up survey “Gmments of the staff of the Bureau of Economics and the San Francisco Regional Office of the Federal Trade Commission, to FCC Notice of Inquiry (MM Docket 89-600), pp. 3&41. 7Rates for optional services generally were not subject to state or local regulation prior to the Cable Act. Page 22 GAO/RcED-go-109 Follow-up Cable Televimion Survey chapter 2 RemIts of Follow-Up National Survey of Cable Television Rates and Services about 5 percent.” The increase for 1989, $1.36 per month, is comparable to the basic rate increases we have reported-$1.45 and $1.42, respec- tively-for the lowest priced and the most popular services. The cable industry continues to grow. Total subscriptions have Cable Subscriptions increased by 22 percent since deregulation, and the number of homes and Penetration that can access cable has grown by 14 percent. Overall, cable system penetration (total number of subscribers as a percentage of the number of homes having access to cable) increased slightly, from 56 percent in November 1986 to 58 percent in December 1989. “In comparison, for the same 37.month period of our survey, the Bureau of Labor Statistics’ Urban Consumer Price Index (CPI) showed a 26-percent increase in the average consumer’s monthly bill for cable television servke (November 1986 to December 1989). The CPI showed a 3.8~percent increase from December 1986 to December 1989. Page 26 GAO/RCRD-90-199 Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act FCCis already in the midst of re-evaluating its effective competition defi- nition. In particular, FCC is gathering comments on whether (1) its existing standard should be increased from three signals; (2) existing alternative video programming sources (i.e., home satellite dish, direct broadcast satellite, private cable systems) provide effective competition to basic cable service; and (3) competition will increase if subscribers are able to purchase cable programming on a per-channel basis. FCC is revisiting its definition of effective competition because competition among cable companies and from other technologies such as direct broadcast satellites (DBS), wireless cable, and private cable has been developing more slowly than anticipated. Increases in basic service rates have also led to questions about whether cable systems have greater market power than was indicated prior to FCC’Sadoption of its current effective competition definition. Some groups argue that the existence of over-the-air television channels as well as other video alternatives offers only partial substitutes for cable television. Such alternatives cannot compete directly with cable because they do not have the wide variety of programming cable offers the consumer. Another cable system can compete, but the existence of more than one cable system within an area is rare. We identified 11 bills introduced in the Congress designed to control cable rates and associated charges. For the most part, these bills would require or allow “re-regulation” of basic cable service. Depending upon the bill, either all cable systems would be subject to regulation, or only systems in those areas not subject to a more stringent standard of effec- tive competition than under existing laws.” Some proposals would regu- late rates at the federal level. Other proposals would allow state and local authorities to regulate. Of these latter proposals, some would require localities to consult with FCCand the cable system before regulation. These legislative proposals would generally make cable operators more accountable for rate increases and restore some authority to local com- munities. These proposals would allow state and local authorities to l regulate rates for a limited “lifeline” service, . regulate basic cable service, ‘At least one bill provides that cable systems shall be presumed to be subject to effective competition if fewer than 30 percent of the households in the cable community subscribe to the cable system or the cable community is served by more than one multichannel video programming distributor. Page 27 GAO/RCEDW193 Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act 9,000 different local governments would deter cable operators’ invest- ments in new programming and plant equipment. Opponents of regula- tion also claim that re-regulation would create other problems, such as slowing system modernization, and thus would limit channel capacity for carrying both existing and new programming. Telephone companies believe that competition is the solution. Rates would be kept low, and regulation would not be needed if they were allowed to provide cable service and compete with cable systems. Some respondents also proposed to refine the definition of effective competition. These respondents stated that FCC’S three-signal standard should be increased to five or six signals, which when combined with video alternatives such as multichannel multipoint distribution service (MMDS), home satellite dishes, video cassette recorders, and movie thea- ters would create sufficient competition to local cable service. Those systems not subject to effective competition would be regulated. The Cable Act placed several restrictions on local and state govern- Changes in Franchise mental authorities over the franchise renewal process. Among other Renewal Procedures things, the act set forth specific procedures for state and local govern- ments to follow when renewing (or not renewing) a cable operator’s franchise and established renewal standards and safeguards. In this regard, franchise denial has to be based upon the cable operators’ failure to satisfy one or more of the specified standards. City officials believe the franchise renewal provisions in the Cable Act make it diffi- cult for franchise authorities to refuse to renew franchises, for example, by preventing them from soliciting competitive bids. Thus, city officials believe state and local governments have limited authority to use against cable operators providing poor service. Cable operators, how- ever, believe that the Cable Act has provided stability for good cable operators, allowing them to plan for the long term without having to worry about their assets being confiscated upon expiration of the franchise. Prior to the Cable Act, there were no federal statutory restrictions on the cable franchise renewal process. Although city officials stated that they rarely denied renewal requests, they believed that the threat of denial gave cable operators a strong incentive to provide quality cable service at affordable prices. However, cable operators had no assurance that their franchise would be renewed regardless of how well they per- formed. The term of an existing franchise is generally 10 or 15 years. Page 29 GAO/RCED-90199 FoUow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act. state and local governments to grant renewal to a cable operator whose renewal proposal meets certain statutory standards. City representa- tives object to restrictions on state and local governments’ rights to con- sider competitive proposals from other cable operators. In 1965, FCCpromulgated its “must carry” rules requiring that cable sys- “Must Carry” terns carry local television stations to ensure that cable subscribers Provisions would continue to receive both over-the-air and cable channels. The rule was designed to protect local television stations from losing viewers to the cable channels. In 1985, the DC. Circuit of the U.S. Court of Appeals held that FCC’S must carry rule violated cable operators’ and cable pro- grammers’ first amendment rights.” As a result of this decision, FCC revised its must carry rule to avoid constitutional problems, and a few cable systems dropped some lesser-viewed local stations. In 1987, the DC. Circuit Court of Appeals held that this modified rule also violated the first amendment. I Currently, must carry provisions have been included in various pro- posed bills for the purpose of assuring viewers access to news and infor- mation from their local television stations. Some legislative proposals, however, contain additional measures to protect the interests of local stations. Proposals introduced in the Congress include the following: l Cable operators would be required to carry local television stations in order to receive the benefits of “compulsory licensing.” These benefits allow cable operators to re-transmit local television programming without having to negotiate with the stations for broadcasting rights. l Cable operators would be required to carry all local programming or, in some proposals, various categories of local programming. . Cable systems would be prohibited from repositioning” local television channels in their cable channel lineup. . Localities would have the right to approve decisions by cable systems to change basic service tiers or re-position local channels, regardless of whether the system is subject to rate regulation. l Cable systems would have the option of retransmitting local television stations, but would have to pay for that right. The retransmission of ‘Quincy Cable TV, Inc. v. FCC, 768 F 2d. 1434 (DC Cir., 1985). ‘Century Communications Carp \I.Fcc, 83.5F.2d. 292 (D.C. Cir., 19871,cert. denied, 108 S.Ct. 2014 (1986). “Changing the channel on which ii broadcast station is aired Page 31 GAO/RCED-90-193 FolIow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act engaging in practices that deny subscribers access to television signals. Also, a channel positioning requirement would effectively give broad- casters a preference in channel placement over non-broadcast cable programmers. Cable systems oppose the “if carry, must pay” proposal, Their opposi- tion is based on the belief that if a cable system chooses to carry one local station, it must carry virtually all the local stations, and then would have little choice but to raise cable rates in order to compensate all the broadcast stations. The results would be higher monthly bills for cable subscribers, leading to further complaints about cable rates. In recent years, there has been growing vertical integration within the Vertical Integration cable industry. Vertical integration occurs when a company not only owns local cable systems but also has ownership interests in the produc- tion or supply of cable programming networks. About half of the basic cable programming networks are at least par- tially owned by Multiple System Operators (MSO),” and most pay cable programming is owned by MSOS.This has led to the belief that indepen- dent cable systems, cable programmers, and alternative cable distribu- tors find it difficult to compete with MSOS and their affiliated programmers. Allegedly, MSOS discriminate against programs in which they do not have an ownership interest; force cable programmers to pro- vide popular programming exclusively to their cable systems in areas where they have competitors; and refuse to sell programming, or sell only on unfavorable terms. to independent cable systems or alternative video distributors. As a result of these practices, consumers are unable to receive diverse programming. Legislation proposed to address these practices include . prohibiting cable systems or MSOS from discriminating against unaffili- ated programmers in the price, terms, and conditions of access to their cable system; . prohibiting cable programmers affiliated with MSOs from discriminating against unaffiliated cable operators and other alternative video distribu- tors in the price, terms, conditions, and availability of programming; . prohibiting cable operators from establishing exclusive distributorships for programming in a franchise area or from entering into contracts that Page 33 GAO/RCED-W-199 FoUow-up Cable Television Survey Chapter 3 Analysis of Legislative PmposaLs to Amend the Cable Act the Department of Justice questions whether regulations prohibiting or limiting vertical integration would advance consumer welfare. It believes that the current antitrust laws are adequate to protect the public. Some cable representatives oppose legislation that would “require cable networks with operator affiliation to make programming available to all financially qualified distributors, regardless of distribution technologies, at the same rates, terms, and conditions granted to cable operators.“H They believe that limiting vertical integration would disrupt the exclu- sive rights cable companies have to their programming and reduce the differences between cable and noncable products. Differentiation in the distribution of video programming is the key to successful competition because it provides consumers with a diversity of information and entertainment and enhances choices. Horizontal concentration is also occurring in the cable industry. Hori- Horizontal zontal concentration results when a number of local cable systems are Concentration owned or controlled by one company (MO), resulting in the MS0 having a large percentage of subscribers across numerous communities. It is argued that some cable systems have grown to such a degree that they are able to control the cable television market because of their large sub- scriber base. These systems fare better in the market because they receive a volume discount on rates for cable programming. A number of measures have been proposed to limit the number of sub- scribers any one cable television company can serve, capping the number of cable subscribers at 15 or 25 percent of all U.S. subscribers. Additional legislation has been proposed that would allow localities to consider a cable operator’s media ownership interests when deciding on whether to grant or renew a franchise. Arguments in Favor of City representatives and alternative video distributors favor capping Limiting Horizontal the number of subscribers nationwide an MS0 can serve. Concentration can stifle competition when cable systems refuse to carry cable pro- Concentration gramming they are not affiliated with. In turn, this affects the diversity of programming available to cable subscribers because they have fewer programming choices. ‘Letter to Senator Inouye from SCTA, Jan 17, 1990, p. 9. Page 36 GAO/RCEDgOlsB Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act l allowing telephone companies to provide video programming, similar to cable, directly to subscribers with possible restrictions. Arguments in Favor of Telephone companies favor entry into the video market. They believe Telephone Company that a lifting of the ban on telephone companies cross-ownership of cable systems is in the public interest. Allowing telephone companies to Ownership of Cable participate in video programming would expedite technological develop- Systems ments, lower rates, increase the supply of programs, and give customers additional choices. The National Telecommunications and Information Administration also favors allowing telephone company entry, but only to provide a “video dial tone” as a regulated common carrier. The telephone companies would not be allowed to own or control the programming sent out over their cable systems. Advocates of telephone company entry argue that, since the Cable Act, cable has grown into a vibrant industry, without much competition. To keep rates down, ensure high-quality service, and ensure the availability of diverse programming, some advocate the entry of telephone compa- nies into the cable marketplace. They believe that telephone companies would stimulate competition in a cable industry that is now dominated by a few MSOs. They also believe the entry of telephone companies may result in technological innovations, such as the introduction of fiber optics. A fiber optical network would enable telephone companies to offer interactive television, video-on-demand, at-home banking and shopping, education and self-help courses, as well as many other services.12 Arguments Opposed to Cable companies and some other assorted groups oppose the entry of Telephone Company telephone companies into the video marketplace. Two reasons are given. The first argument is that telephone companies will not add competition Ownership of Cable since they intend to supplant existing cable systems, not compete with Systems them. The second argument is that the telephone industry wants to put a single wire into every home which would be the sole source of voice, data, and video service. This concept places ratepayers at risk of paying for a new technology and new facilities that may not be financially prac- tical for many years to come, and may not guarantee future benefits. Critics of the entry of telephone companies state that “Existing copper telephone wiring cannot be used for cable television service. Page 37 GAO/‘RCEDw)-199 Follow-up Cable Television Survey &ulation of CableTelevision Rates:What Are the Options? There is a concern that cable systems in many communities have enjoyed undue market power after deregulation. Comments submitted to FCCby a number of groups, in connection with its two current proceed- ings on the cable industry, generally conclude that basic cable services, with their wide range of programming, have become increasingly dis- tinct from conventional television and other video delivery technologies and that there is no close substitute presently available for these basic cable services. The results of our survey tend to confirm that view. For example, we found that while rates for the lowest priced basic service available to the average cable subscriber increased by 43 percent after deregulation, cable subscriptions and penetration nationwide have increased as well. Although there are other potential explanations, the unresponsiveness of the subscriber base to substantial price increases is frequently attrib- uted to the lack of any close substitute services to which consumers can switch. The Department of Justice, in its comments to FCC, provided a similar interpretation. If a product is provided by one seller and there are no close substitutes available in the market, then the seller is able to influence the price; that is, the seller possesses market power. Most communities have a sole cable provider and lack close substitutes for cable television services. A number of comments, submitted to FCC in response to its Notice of Inquiry, attempted to determine whether cable systems possess undue local market power. These comments generally found that local cable systems possess some degree of market power. The substantial rate increases we have reported for 1989 are likely to continue to fuel congressional debate over how to “reign in” what the Chairman of FCC and others have called an “unregulated monopoly.” Legislative proposals currently before the Congress, as well as com- ments submitted to FCCin connection with its cable proceedings, reveal several approaches and alternatives for dealing with the market power of the cable industry, including placing different degrees of reliance on government regulation versus introducing market forces to arrive at a solution. An important element of any debate over cable rate increases is know- ledge of cable system costs. We cannot state the extent to which rate increases were accompanied by increased cable system costs since it was not feasible, within a reasonable reporting time, to collect cost data as part of our survey. Page 39 GAO/UCED-90-199 Follow-up Cable Television Survey Chapter 4 Regulation of Cable Television Rates: What Are the Options? effective date of deregulation under the Cable Act, about two-thirds of cable systems were rate-regulated. As discussed previously in this report, FCCis currently reassessing its definition of effective competition. A number of comments filed with FCC recommended the adoption of a tougher standard, which would result in more cable systems being subject to rate regulation. The Department of Commerce’s National Telecommunications and Information Administra- tion recommended moving to a new standard of six over-the-air televi- sion channels, and NCTA recommended adoption of five channels as the new standard. In this regard, the results of our survey, as of December 3 1, 1989, showed that about 30 percent of cable subscribers lived in communities where six or fewer over-the-air television channels are available.’ Use of an effective competition standard composed of only over-the-air television channels, however, is open to question, since cable systems also provide distant television channels and exclusive cable program- ming for their basic service subscribers. For example, our survey showed that on December 31,1989, the average cable subscriber received, as part of the lowest priced basic service, 8 local stations, 3 distant stations, and 17 channels of basic cable programming. In this regard, the Department of Justice commented to FCC as follows: “Several reasons suggest that broadcast television is generally not a close substitute in the eyes of consumers for the full range of basic programming services now dis- tributed by cable television systems. Basic cable services offer greater variety and quantity of video programming (i.e., non-local programming) and in some areas superior signal quality than is available on broadcast television. That conventional television is not a close substitute for basic cable services is also evidenced by the very large number of consumers who pay substantial monthly charges to receive basic cable services despite the availability of broadcast television services at no direct cost. And, this consumer preference for basic cable services has persisted and increased during a period when the number of conventional television signals has increased.“” A number of commenters on FCC’Sproceedings, as well as some legisla tive proposals, have recommended the adoption of a more stringent effective competition standard that would require the existence in the ‘In our questionnaire, we askedcableoperatorshow many network affiliates, other commercialsta- tions, and noncommercialstations wereavailable over the air (significantly viewed) in their franchise area. ‘Reply Commentsof the IJ.S.Departmentof Justiceto FCCNoticeof Inquiry (MM Docket89.SOO), p, 14. Page 41 GAO/RCED-90199 Follow-up Cable Television Survey Chapter 4 Regulation of Cable Television Rates: What Are the options? Price-cap regulation, however, cannot address variations across locali- ties of the market power of local cable systems or the different regula- tory needs of local communities. In this regard, the Department of Justice, in its comments to FCC in conjunction with FCC’Scable policy study, raises a question about the need for a uniform national policy. Justice points out that since the nature and the extent of local cable market power may vary considerably among local markets, uniform national policies have some clear disadvantages, and so allowing local governments to adopt that form of regulation of local cable services that they deem most beneficial would not be inconsistent with federal anti- trust policy.4 Return Control to Local Some commenters and proposals expressed concern that the Cable Act, Communities by both deregulating rates and establishing specific criteria for franchise renewal, has greatly weakened the power of communities to control rates and service, and limited their ability to monitor cable system performance. These proposals seek to restore to local communi- ties greater control over both cable rates and the franchise renewal pro- cess as a way to improve the oversight of cable rates and service. Both the Department of Justice and ITC, in comments to FCC,support greater local control over cable rates and service. In particular, FTC calls for amending the Cable Act to return to localities greater control over the cable franchise. FK observes that the threat of franchise nonre- newal seems likely to have played a role in constraining a franchisee’s conduct, but that the Cable Act makes it more difficult for local govern- ments to threaten nonrenewal. A decision not to renew a cable franchise may not be based on the prices charged by the operator, nor on the mix, quality, or level of cable services or other services provided over the system. These are the service variables of greatest interest to cable sub- scribers. FE concludes: “Should Congress contemplate modifying the Cable Act to constrain perceived exercises of market power by cable systems, it might seriously consider altering the portion of the Act that governs the franchise renewal process.“” “Reply Comments of the U.S. Department of Justice to FCC Notice of Inquiry (MM Docket 89-600), pp. 9-10. “Comments of the staff of the Bureau of Economics and the San Francisco Regional Office of the Federal Trade Commission to FCC Notice of Inquiry (MM Docket 89600), pp. 3636. Page 43 GAO/RCFLD80-199 Follow-up Cable Television Survey Page 46 GAO/RCJ%M.I-199 Follow-up Cable Television Survey Appendix I Changes in Basic Cable Rates and Services Table 1.2:Average Number of Basic Channels Received per Subscriber Average number of basic channels received per subscriber for: Date Most popular service Lowest priced service 12/31/&l 22.0 20.5 - (k195) (kO.4) N=2987 N=2986 (k195) (k195) 12/31/05 24.6 21.8 (20.5) (kO.4) N=3348 N=3350 (k206) ____ (k206) 11/30/86 27.1 24.2 (kO.5) (kO.5) N=3988 N=4005 (k218) (i218) 12/3f/a7 30.0 27.7 (k 0.5) (kO.6) N=4704 N=4709 (k227) (k227) 12/31/80 32.2 30.2 -. (+0.6) (rtO.7) N=5429 N=5429 ______--- (k227) (2227) 12/31/89 33.6 31.2 (?0.5) (_+04) N=6327 N=6329 (f214) (f214) Note: The table above contains sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Page 47 GAO/~199 Follow-up Cable Television Survey Appendix 1 Changes in Basic Cable Rates and Services Table 1.4:Changes in Basic Service Rates Since Deregulation Percentage of subscribers whose rates changed between 11/30/66 and 12131/69 for: Chanae in rate s- Most oooular service Lowest oriced No change or decrease 3.1 10.2 (kO7) (+1X increase (percent) >o-520 13.1 10.0 (?I 8) (k1.4) 120-540 36.1 30.2 ( + 2.2) (zt 2.3) 140-560 20.2 28.0 (+_2.01 ( * 2.21 ~ I 160-580 13.8 14.3 C-t1 6) t-t 2.0) >80-5100 2.7’ 3.2’ (kO.7) (+0.9) >lOO 3.0 3.4 (-+08) (kl.0) Note. The table above contains sampling errors for the values presented. Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Most popular seruce, N = 3968 +218, lowest priced service, N = 3918 k 218 Page 49 GAO/RCED-ml99 Follow-up Cable Television Survey Appendix I Changes in Basic Cable Rates and Services Table 1.7: Rates for Lowest Priced Basic Service Provided by Systems That Were Average monthly charge per subscriber Regulated/Not Regulated Prior to in systems that in 1986 were? Effective Date of Cable Act Date Reaulated Not reaulated 12/31/84 $9.26 $10.33 N=1999 N=753 (2162) (+_llS) i2/31/85 9.93 11.14 (2 11) (k 21) N=2212 N=856 (f127) 11/30/86 11.99 (2 12) (2 23) N=2666 - -~- ~ ~. ~_ _ _ ~~ ~ N=980 (k190) (k136) 12/31/67 12.95 13.21 (k 11) (t 29) N=2997 N=1129 (+zoo) (+148) 12/31/aa .~ 14.49 ~~ ~~ ~_ ~~ ~ 14.63 (2 11) (2 32) N=3157 N=1126 (k205) (rk147) 12/31/89 16.06 15.77 (k 101 (2 35) N=3358 N=1198 ( t- 208) (2152) Percent increase 1986-89 47.1 31.6 (22.3) (251) Note The table above conla~ns sampling ermrs for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems “All these systems were not regulated as of 12/31/89 Page 51 GAO/RCED-St-199 Follow-up Cable Television Survey Appendix I Changes in Basic Cable Rates and Services Table 1.9:Types of Programming Available With Lowest Priced Basic Number of channels available to average Service Tier subscriber on: Type of programming - 12131184 1l/30/66 12/31/89 Local television stations 7.2 7.7 -___ 7.9 (kO.2) (kO2) (kO.2) Distant television stations 3.3 3.1 3.1 (k0 1) (TO.1) (-+O.l) Basic cable networks 7.8 11.1 -.__-___ 17.3 (+ 0.3) (kO.4) (kO.3) Leased access/other channels 2.3 2.3 2.5 (kO.2) (kO.1) (kO.1) Note: The table above contains sampling errors for the values presented Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems 12/31/64, N = 2484i184. 1 l/30/86, N = 3343 t 210; 12/31/89, N = 5451 t226. Page 53 GAO/RCRL%9O-199Follow-up Cable Television Survey Appendix III Premium CableServices Table 111.1:Number of Premium Channels Available Number of channels available to Date average subscriber 12/31/84 4.2 (k.10) .___ N=3041 (k191) 11/30/86 4.9 (k.07) N=4010 (+217) 12/31/89 5.2 (2.07) N=6437 Note: The table above contains samplmg errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Table 111.2:Monthly Charge for Individual Premium Channels Average charge per cable system for: Date .- Home Box Office Showtime Cinemax 12/31/84 $10.19 $10.14 $9.75 (k.10) (k.14) (f.15) N=3087 N=1676 N=1547 (k189) (k139) (k133) 11/30/86 _.~- 10.37 10.23 9.93 (k .09) (k.13) (+.lz) N=4032 N=2346 N=2340 (k214) (f164) (F168) 12/31/89 10.24 10.02 9.90 (~08) (k.11) (k .09) -~ N=5503 N=3599 N=3564 (i226) (e207) (k204) Note: The table above contams sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Page 55 GAO/RCED90199 FoUow-up Cable Television Survey Revenueto CableSystemsPer Subscriber Table IV.1: Average Monthly Revenue Each Subscriber Generates for the Cable Average revenue per System Date subscriber 12/31/84 $19.07 (2.24) N=2284’ (k177) 1213 l/85 20.91 (k .22) N=2722 - (-tG) 11/30/86 21.70 (L.21) N=3295 ...~_ ( ?I 207) 12/31/87 23.33 (k.21) ~__ N=3980 (+- 220) 12/31/88 25.00 _-.__ (k.21) N=4753 ( + 228) 12/31/89 26.36 ( -t .22) N=5532 ^^^ ( 2 Zci) Percent increase 198649 21.0 (k1.2) 190049 5.5 (kl.0) Note: The table above contains sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems page 67 GAO/RCJ2D-9O-199Follow-up Cable Television Survey Changesin CableSystemSubscribershipand Other Information Table V.1: Cable Industry Growth Percent increase between: Category 12/31/04 and l2/31/09 11/30/66 and 12/31/69 Homes having access to cable 26.1 14.4 (21.4) (k1.2) N=3397 N =4300 (k210) (I 224) Total subscriotions 35.5 22.2 (11.2) (k1.5) N=3134 N=4074 -~_~__~~__ .___- (kl96) (k219) Premium channel subscriptions 36.6 15.9 (k33) A-’ ( ? 2.0) N=2754 N=3846 (2189) (k217) Note. The table above contams sampling errors for the values presented, as well as our estimates of the number of cable systems (N) that would have responded had we surveyed all systems Table V.2: Changes in Cable System Penetration Date Percent penetrationa 1213 i/84 56.9 _______ N=2272 (k175) ii/30/86 56.1 (kl2) N=3025 12/31 I89 _~. N=4868 (k 229) Note. The table above contains sampling errors for the values presented, as well as our esttmates of the number of cable systems (N) that would have responded had we surveyed all systems Also, the estt- mated total number of homes hawng access to cable in systems reporting data I” 1984, 1986, and 1989 for both homes accessible and total subscribers are 30 1 mIllIon 2 1 4 mllllon. 40 6 mllllon f 1 8 mllllon, and 53 8 mlllion+3 0 mllllon aNumber of subscribers/number of homes hawng access to cable systems Page 59 GAO/RCED99-199 Follow-up Cable Television Survey Appendix V Cban@a ln Cable Syetem Subacrlbemhlp and Other hlfommtlon Table V.5: Number of Active Channels Carried by Cable Systems Number of channels available to Date average subscriber 12/31/84 29.0 (kO.5) N=3056 (k195) 11/30/86 33.7 (50.5) N=4CXJ4 (~~218) 12/31/89 39.8 (LO.5) N=6412 fk212) Note The table above contains sampling errors for the values presented, as well as our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Table V.6: Number of Active Channels Carried by Cable Systems Percentage of subscribers on: Number of active channels 12/31/84 11/30/86 12/31/89 >o-510 0.4 0.1 0 (kO.2) (kO.1) (k0) >lO-520 17.9 7.5 2.3 (21.7) (20.9) (20.3) >20-530 44.0 33.3 11.3 (k2.5) (1.2.2) (Irl.1) >30-140 26.7 41.9 52.5 (k1.9) (k2.2) (L2.1) >40-SO 6.7 0.8 17.5 (i1.0) (kl.2) (+1.6) >50 4.3 8.4 16.5 ( + 0.9F (_+1.3P tk1.81 Note. The table above contains sampling errors for the values presented. Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. 12/31/84, N = 3056k195, 11/30/66. N = 4004+216; Q/31/69, N = 64122212. aThese sampling errors may be understated because no systems I” certain strata responded this way Page61 GAO/RCEBsO199 Follow-up Cable Television Survey Appendix V Cbangea in Cable System SubscribersNp and Other Infhmatlon Table V.10: Regulation of Basic Cable Service Rates Percentage of: Regulation Systems Subscribers State/local/other 12/31/84 69.8 82.4 (k3.1) (k2.2) 11/30/86 67.3 78.3 (k3.0) (k2.0) 12/31/89 3.5 1.0 (kl.l) (20.3) Not regulated 12/31/84 20.3 17.1 (k2.7) (k2.2) 11/30/86 23.7 21.3 (22.7) (k2.0) 12l31/89 96.0 99.0 ( Ii 1.2) (20.3) Unsure 12/31/84 9.9 0.5 (k2.2) (kO.3) 11/30/86, 9.0 0.4 (22.1) (kO.2) 12/31/89 0.5 0 (kO.5) (*‘a Note: The estimated total number of subscribers whose systems reported regulatory status are 23.1 mrllron kO.9 million for 1984, 29.5 millronf 1 .O million for 1966, and 39.9 millionf 1.2 million for 1969 Also, the table above contains samptrng errors for the values presented. Below are our estimates of the number of cable systems(N) that would have responded had we surveyed all systems Systems Subscribsrs 12/31/04 N = 4925 t 226 3126t196 11/30/66 N = 5409+227 4051 f216 12/31/69 N = 6.525?209 6466+211 Page 08 GAO/ECED4@19B Follow-up Cable Television Swey - Appendix V Changes in Cable System Subscribership and other information Table V.12: Year of Awarding or Latest Renewal of Franchise Agreement Year Percentage of systems __-~ ~-- Before 1985 57.2 (k 2.9) N=6279 (+216) 1987 5.4 (+_1.5) N=6279) (_+216) 1988 5.2 ( I 1.6) N=6279 (+-216) i989 -.- 9A (20.8) N=6279 (+216) Other franchise arrangements (.Y, N=6279 (+_216) Note, The table above contains sampling errors for the values presented, as well as our estimates of the number of cable systems (N) that would have responded had we surveyed all systems Page 66 GAO/RCED-W-l9!3 Follow-up Cable Television Survey Appendix VI Survey Questionnaire UnitedStatesGeneralAccountingOmce Follow-Up Survey of Cable Television Rates and Services INTRODUCTION The U.S. General Accounting Office (GAO) assiststhe Please complete this questionnaire onlyfor the cable U.S. Congressin evaluating federal programsand issues system that is described in the label that appears on the that affect govemment operations. As a pan of a bottom of rhepage. Thmugh the analysis of the data you follow-up to a review requestedby the Chairman. provide we hope to obtain an objective updateof cable Subcommitteeon Telecommunicationsand Finance. ratesand sewices. With your earnesteffort to respondto HouseCommittee on Energy and Commerce,we are the questionswe shouldbe able to provide a quality surveying cable systemsto updateour information on report with statistically valid information to the Congress rateschargedand setvices offered. Your answers in this questionnaire will be This survey is beiig conductedin cooperation with the confidential. Your responseswiU be combined with Federal CommunicationsCommission@CC). The FCC thoseof other cable systemsand will be reported in requires similar data to meet its legislatively mandated summary form only. No individual cable system’sor reporting requirementsas set fond in the Cable company’s responseswilI be identified or reported CommunicationsPolicy Act. By combining our effons individually. we are minimizing the repfling burden on the cable industry. The information you provide in this Pleasecomplete this questionnairewithin 10days of its questtonnairewill go to both the GAO and the FCC to receipt. A self-addressedbusinessreply envelope is help meet both agencies’ needs. enclosedfor returning your completedquestionnaire. This cable systemwas randomly selectedas a part of a Spaceis provided at the end of this questionnairefor any nation-wide sampleof cable systems. Becausethis ccmmentsor insights into cable television ratesyou may systemrepresentsother cable systemswith a similar wish to make. If you have any questionsplease call number of subscribersyour responseis essential to the either Tom Heck or Jackie Cook at (202) 634-6068. SUCCESS of the study. Furthermore.if you mdage more than one cable systemyou may receive more than one questionnaireto complete. However. you may not We sincerely appreciateyour effon in tilling out this receive a questionnairefor every system you manage. It questionnaireand helping us pmvide accurateand timely is essential to the successof this study that you complete information to tbe Congws. If the business-reply all questionnairesyou receive. envelope has beenmisplaced,please twttm your completed questionnaireto: Mr. JohnM. 01s. Jr.. Director U.S. General Accounting Office Room 4476 441 G St., N.W. Washington.DC 20548 Page 67 GAO/RCEDSO-199 Follow-up Cable Television Survey Appendix VI Survey Questionnaire 5. PIeasefIII out tbe folIowing tables concerningthis cable system’s basic service basedon the instructionsand definitions below. A. In Column A please provide the numberof basic channelsoffered by this cable systemthat correspondsto the - specific tier of basic service for the dateslisted. (Enter number) EXAMPLE: If your “First Tier” has20 channelsand your “SecondTier” has an additional 30 channels.thenenter 20 for “First Tier” and 50 for “SecondTier” B. In Column B please enter the amount this cable systemchargedmonthly for basic sewice. including all franchise fees.for the specific tier of basic service for the dateslisted. (Enter d&m and cenrs) DEFINITION: Basic service generally refen to any service tier which includes the retransmissionof over-the-air television signals (e.g.. signals that can be received without special equipment suchas antennason tall masts). Basic service may also include a number of cable networks suchas CNN, ESPN. C-SPAN, etc. EXAMPLE: If tbis cable system charges$10.95for the “First Tier” of basic service and chargesan additional $5.00 for the “SecondTier”, then enter $10.95for the “First Tier” and $15.95for the “SecondTier.” REMEMBER: If you checkedin question 2 tbat ail subscribershave the samerate structure,then answerthe following questions for all subscribers;if you checkedthat there were different rate structures,then answeronly for the subscribersyou listed in question 3. NOTE: If this system has only ONE tier of basic serwce answerthe table for Tier I only. Tier I: Pleasecomplete Columns A and B for the basic service tier with the lowest level of basic service COLUMN A COLUMN B Number 01Basic Monthly Basic BASIC SERVICE TIER I ChannelsOffered Service Rate Charge 1. December31.1984 s 2. Decembx31,1985 I$ 3. November30. 1986 1 I$ 4. December31.1987 /$ 5. Decemter31.1988 I IS 6. December31. 1989 1 Is I Page 69 GAO/RCED-90199 FoIlow-up Cable Television Survey Appendix VI Survey Questionnaire REMEMBER: If you checkedin question2 that all SubscrItershave the samerate ~!NctWe.then anSwerthe following questionsfor all subscril~~; if you checkedthat there WZRdifferent rate sUU~N~TS. then allswer only for the subscribersyou listed in question 3. 6. Correspondingu) the basic service for Tiers I, II. and III you describedin question5. pleasespecify how many subscriberswere billed for the following tiers of basic service for the daleslisted. Also pleaseenter the total numberof subscrI&rs in the last column. DEF’IMTION: Subscriben refersto the total numberof individual subscribersand subscribersbilled on a bulk-rate basis (e.g.. if the basic tier service is $10 and a 200~unitapartmentbuilding is billed SSM),then you would co”nt $5oODlCWOsubsclibers). NOTE: The total should equal the sum of Tiers 1.II, andlI1 UNLESS this cable systemhasmore !han 3 basic service tiers. Total Number Tier I Tier II Tier III of Subscribers 1. December31.1984 2. December31. 1985 3. November30.1986 1 I I I I 4. December31.1987 5. December31,1988 1 I I I 6. December31.1989 1 Page 71 GAO/RCED9@199 Follow-up Cable Television Survey Appendix VI survey Questionnaire Il. PREMIUM SERVICE INFORMATION REMEMBER: If you checkedin question 2 that all subscribershave the samerate stntctm’e.then answerthe following questIo”s for all subsctibcrs;if you checkedthat there were different rate stmctwes. then anweronly for the subscribetxyou listed in question 3. 8. Pm the following dates, what was the “umber of 9. For the follwi”8 dates,how many subscribers (pay pmnium chatmelsoffered by this cable system? h~us.ehoIds) paid for one or more premium chamxels Pleas excIude pay-per-view channels. (Enter on this cable system? (Enw number) WWW 1. Dece”lher31.1984 2. Novemta 30.1986 3. Decemtax31.1989 IO. Mrthc foIlowIng dates.what was a subscriber’s mrmthly “on-package (a la carte) rate for each of the premium &an”& listed? (Enter dollars and cents) (If this cable system doesnot offer a non-package(a Ia carte) rate for the l&ted premium channel, the” check “Not Offered A La Carte”; if this systemdoesnot carry this channelthen check “Not Offeted At AU”.) 3. Dece”1ber31.1989 I$ I I I 5. Nove”&r30,1986 ($ 6. D.xentber31.1989 18 I I CltlI?mpX 7. Decenther31.1984 8. Novembcr30.1986 $ I I 9. December31.1989 $ 1 Page 73 GAO/RCED-SO-199 Follow-up Cable Television Survey Appendix VI Survey Questionnaire 15. For the dateslisted on eachof the following tables pleaseenter the number of channelsof eachtype listed that were available on your cable system for eachbasic service tier. (Enter numberfor each) DEFINITIONS: Local Signal: a signal that is (1) “significantly viewed” in the franchiseareaor (2) an acceptablesignal in the area as defined by the Federal CommunicationsCommission(FCC). In general theseare signals thatcan be received over-the-air without special equipment (e.g.. antennaon a tall mast). Distant Signal: a signal from anothermarket that can only be received with special equipment(e.g., antennaon a tall mast.micro-wave receiver. or satellite dish). These include “supentations” such as W’IBS. WWOR. and WGN as well asstations from closer markets. Basic Cable Networks: networks that are not associatedwith any market and can only be received with a satellite dish. Theseare channelsthat ate usually associatedonly with cable receptionand are typically includedin the basic service charge (e.g.. ESPN. CNN. USA. MTV, etc.). Leased AccessChannels: channelsset asldefor third paroesnot affiliated with the cable systemgenerally for commercial purposes. Other: channelsnot included In other categoriessuchas accesschannels(govemmenSlocal, public, r~r educational).automatedservices.cable operatororiginated channels,or other servicesthat use a full video channel. DO NOT include radio stationsas separatechannels. NOTE: If your Tier I has 20 channelspleaseaccountfor a9 20 in the Tier I table. If your Tier II has an additional 30 channelsthen pleaseaccount for ALL 50 channelsin the Tier II table. Tier I Lowest Tier of Basic Service 1 Dec. 31. 1984 1 Nov. 30.1986 1 Dec. 31,1989 1. Local network affiliates (ABC. NBC, CBS) I I I 2. Other local commercial (Indewndent) I I I 3. Local non-commercial(Public) 4. Distant network affiliates (ABC, NBC. CBS) I I I 5. Othcrdistant commercial (Independent) 6. Distant non-commercial(Public) I I 7. Basic cable networks 8. Leasedaccesschannels I I 9. Other I I I I Page 76 GAO/RCED-SO199 Follow-up Cable Television Survey 20. what was the total number of homesin this cable system’sfranchiseama and what wss tk numberof homes passedby this cable systemon the dateslisted? (Enter numberfor each) DEFINITION: Number of homespassedmeansthe numberof homesto which cable swife is available without a line extension. 2 1. For ti dateslisted. enter tbe numberof miles of plant maintainedby this cable system? (Enter nvmbcr in m&s) DEFIMTION: Miles of plant is the length. in miles. of cable passingall homesfrom the he&end to the furtkt home passed. MiksasofDec.31.1984 Miles as of Nov. 30. 1986 MiiesasofDec.31.1989 22. which of the following Ievels of govemment.if any. regulated(appmved) the rate this cable systemchargedfor basic service on the dateslisted? (For each date check alS that apply) DEFINITION: For the purposesof this question.“basic service” refers to any service that includesthe retransmissionof over-&-air signals. NOTE: Cable rates were deregulatedBSof December29.1986 by the Cable Act. Local State Government Government or Municiialii Not Aepulated other UnSU~ (11 (21 (31 MI (9 1. December31.1984 2. November 30.1986 3. December31.1989 Page 77 GAO,‘RCEWJO-199 Follow-up Cable Teletiion Survey Appendix VI survey Questionnaire r 27. As of Dezemter 31.1989. did any of tbe 25 largest multiple systemoperators(MSOs) listed below hold at least 109i ownership in this cable system?(Checkone) 1. 0 Yes 2.0 No 3. q unsure 25 Largest MSOs Adelphia Communications MultiVision Cable ATC-Warner-Paragon NewhouseBmadcasting Cablevision Industries ParagonCommonications Cablevision Systems Post-NewsweekCable Centuty Co”““l”llcatio”s Prime Cable Comcast SammonsCommunications ContinentalCablevision Scripps Howard Cooke Cablevision TCA Cable Cox Cable Communications TeleCable FalconCable TV Tele-CommunicationsInc. (TCI) JonesIntercable Tele-Media Ma&an Hunter Times Mirmr Cable TV Viacorn Cable 28. What is the geographiclocation of this cable system’s franchisearea? City (Largest. if more than one) county stge (Central) Zip Code 29. Does this cable systemhave a cable rate card available for December 1989?(Check one) 1. Cl Yes - P1ea.w enclose with completed quesrionnaire 2.0 No Page 79 GAO,‘ECEl%9MPBFollow~p Cable Tdevidon Survey Appendix VII List of Respondents In chapter 3, we use terms such as “cable systems,” “cities,” and “alter- native video distributors” to categorize organizations that responded to FCC’S Notice of Inquiry and Notice of Proposed Rulemaking and that tes- tified at congressional hearings. This appendix identifies respondents in each of our broad categories. Government Agencies Department OfJustlc? Federal Trade Commission and its San Francisco Regional Office National Telecommunications and Information Administration National Cable Television Association Cab1eRepresentatives Time-Warner Incorporated Telesat Cablevision Incorporated Competitive Cable Association Turner Broadcasting System Incorporated People’s Choice TV Cable Television Operators and Associations Bresnan Communications Cox Cable Communications Tele-Communications Incorporated Cable Television Laboratories Incorporated Hearst/ABC-Viacom Entertainment Services The Discovery Channel Showtime Networks Incorporated USA Network Heritage Communications Incorporated Adelphia Communications Corporation, et al. InterMedia Partners Cablevision Industries Corporation, et al. National Association of Broadcasters Broadcasters National Broadcasting Company Incorporated WVLA-TV United States Telephone Association Telephone Companies Southwestern Bell Corporation GTE Service Corporation and GTE Laboratories Bell Atlantic Telephone Companies Organization for the Protection and Advancement of Small Telephone Page 81 GAO/RCEDBO-199 Followup Cable Television Survey Appendix VII List of Respondents Consumer Federation of America Other Motion Picture Association of America Incorporated Glasgow Electric Plant Board and the American Public Power Association John McLaughlin, Executive Director of Program on Information Resources Policy, Harvard University Comments of Bruce Egan and Douglas Conn Comments of Richard Leghorn, Cable Investor GAO/BcED9o1B9 Followap Cable TelevLsion Survey Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 T The fiit five copies of each report are free. Addition $2.00 each. There is a 25% discount on orders for 100 or more co: single address. f \ ‘ i Appendix VIII Major Contributors to This Report Lowell Mininger, Assistant Director Resources, Thomas A. Heck, Assignment Manager Community, and Jacqueline A. Cook, Evaluator-in-Charge John A. Thomson, Jr., Senior Evaluator Economic Development Division, Stephanie A. Keith, Evaluator Jonathan T. Bachman, Senior Social Science Analyst Washington, D.C. Yesook S. Merrill, Senior Economist Office of the Chief Economist (385501) Page 84 GAO/RCED-W-199 Follow-up Cable Television Survey Appendix VII List of Respondents Companies Panhandle Telephone Cooperative Incorporated HunTel Systems Incorporated National Rural Telecommunications Cooperative Alternative Video The Wireless Cable Association Incorporated Distributors Joint Comments of National Satellite Programming Network, Beach Communications, Mid-Atlantic Communications, Stellar Communica- tions, Telecom Satellite Systems, and 21st Century Technology Group American Telecasting Incorporated Multi-Micro Incorporated Pee Dee Electric Cooperative State of Hawaii States West Virginia Public Service Commission North Carolina Utilities Commission National Association of Regulatory Utility Commissioners National League of Cities Local/City National Association of Telecommunications Officers and Advisors Representatives City of New York; City of Huntsville, Alabama; City of Portland, Oregon; and the Northwest Municipal Cable Council in conjunction with the National League of Cities and the United States Conference of Mayors City of Los Angeles, California Joint Comments of the City of Dubuque, Iowa; Montgomery County, Maryland; and the City of St. Louis, Missouri City of Boston, Massachusetts City of Laredo, Texas City of Augusta, Georgia, on behalf of the National League of Cities and the United States Conference of Mayors City of Ithaca, New York City of Tucson, Arizona page 82 GAO/RCEDM-199 Follow-up Cable Television Survey Appendix VI Survey Questionnaire plcasc make a copy of your completed quutionna n tmixe retuning it in dw enclosedpastagepaid envelope. In the went WCneed to contact you to obtain clarification of my of the infomtation in this quesdannairc.pleasepmvide the loUowing information. Personcompleting this que.stionMire: Nm.2 Title ( 1 Telephone number 30. If you have any additional commentson the issuesof cable rate.7and set-&s. plew feel free to addthem below or on an additional she* if necessary. THANK YOU FOR YOUR COOPERATION Page SO GAO/~~lOO Fdow-up Cable Television Survey Appendix VI Survey Questionnaire r 23. AS of December31.1989. with how many separate jurisdiction.%.if any, did this cable systemhave rortt~d franchise agreements? 25. On December31.1989 did this cable systemoffer low income or elderly discount rates?(Check one) 1. 0 Yes, this systemoffered a discountrate(s)for DEFINITION: A franchiseis an authorizaoon. low income or elderly subscribers typically issuedby a city or county. allowing a cable 2. 0 This systemdid NOT offer a discountrate(s) operator to constructor operate-a cable system. for low income or elderly subscribers (Check one) 1. 0 Franchiseagreementwiih onejurisdiction 26. What was the TOTAL REVENUE PER 2. 0 Franchiseagreementswith 2 - 5 jurisdictions SUBSCRIBER directly received by this cable systemfmm all subscriberservicesfor the months 3. 0 Franchiseagreementswith more than 5 listed? (Enter dollars and cents) jurisdictions 4. q No formal DEFINITION: Subscriberrcvcnuc includesbasic franchiseagreements+ SKIP TO Q. 25 service. premium services.pay-per-view. installation charges,and other rcvcouessochas additional 5. •I Other “franchising” outlets, guides,and convertor rentals.Please wrar~gemen~~;such as EXCLUDE revenuesfrom advertising.institutional municipal ownership networks.leasedaccess.home shopping myallies. and co-ops. SKIP TO Q. 25 and other non-subscriberrc”e”“cs. 24 Pleaseindicate for either the franchiseagreementthat Total Monthly ’ includesthe most subscribers.or the single franchise Revenueper agreementIf your systemopet~tes under only one, Subscriber tie year the franchisewas awardedand the year the 1. December.1984 s franchisewill expire. (Emeryears) 2. December. 1985 s Year franchiseawarded 3. December. 1986 $ Year franchiseexpwcs 4. wcemher. 1987 I 5. Deccmkr. 1988 $ 6. December, 1989 I Page 78 GAO/RCEDM-199 Follow-up Cable Television Survey Appendix VI survey Qaestionnalre Tier II - Seumd Tier of Basic Set-vice NOTE: Complete this table ONLY if this systemhas at least two tiers of basic service. If your systemhas 20 cbatmelsin Tier I and an additional 30 channelsin Tier II then please accountfor ALL 50 chanoelsin the Tier fl table Iv. BACKGROUND INFORMATION 16. For the dates listed below how many nctwot affiliates (ABC, NBC, sod CBS), odw wmmetcial stations (Indepndcnt). and noncommercial stations(Public) were available over-the-air (significantly viewed) in this cable system’s franchise area?(Enter numberfor each) CXhe~~;;;serciaI Nonwmmarcial NetworkAfliliates statlms 1. Decemter31.1984 2. November 30.1986 3. Decemkr31.1989 17. In what year did cable setvice first become available 19. To the best of your knowledge.how many times did in this franchise area? (Enter year) this cable systemchangeownershipin eachof the following years? fEnfer num6er for each year; if did 19 MI dmgc in d year. enter 0) 1985 18. Has this systemchangedownership since Dec. 31. 1984?(Check one) 1986 1. 0 Yes. this system has changedovmersbip 1987 2. Cl This systemhas not changedownership---t SKIP TO Q. 20 1988 3. q Unsure if this systemhas 1989 changedownership- SKIP TO Q. 20 Page 76 GAO/RClZD@.199 Follow-up Cable Television Survey Appendix VI survey QuestioNtalre 11. At any time during the period from December31. 1984to December31.1989. did this cable systemoffer monthly discoontsto subscriberswho ordeted more than one premium channel as a packageor combination?(Check one) 1. 0 Yes. this cable systemoffered a premium combination discoont 2. 0 This cable system did not offer a premium channel combination discount- SKIP TO Q. 13 12. Considerthis system’s most popular two. thtx. and four premium chat& discountcombinations. Excluding the basic service tier charge and other discount options (such as ptugram guides.remotecontml convertors,etc.), how much did this cable systemcharge per month on the dateslisted for the following combinations? (Emu dollars and cents) (If this systemdid not offer a combination. then check the column “Not Available”.) Two channel Three channel Four channel Not Not Not Avail- Avail- Avail- Charge able Charge able Charge able (0 (21 11) (2) IV (2) 1. Decemter31.1984 s s s 2. November30.1986 S s s 3. December31.1989 I$ 1 IIS .( IIS .I III. PROGRAMMING INFORMATION 13. For the dateslisted below, what was the total channelcapacity and the numberof active channelsfor this cable system? (Enter numberforeach) 1 Channel Capacity 1 Active Channels I. December31.19&1 I I 2. Novemtber30.1986 1 3. December31.1989 ) I 14. For the dateslisted below, what was the number of active channelsavailable through basic service. premium service (additional monthly charges),and pay-per-view service (chargesfor one-time viewing)? (Enrer numberfor each) Pay-Per-View Basic Channels Premum Channels Channels 1. December31.1984 I I I 2. November30,1986 1 3. December31.1989 1 I Page 74 GAO/RCED-90-199 Follow-up Cable Television Survey - Appendix VI Survey Questionnaire 7. Considerthe following ways that subscriberscan pay for options that may be available from this system: - NOT AVAILABLE: Option is not offered - INCLUDED IN TIER CHARGE: Option is included in the cost of the basic service tier - EXTRA MONTHLY CHARGE: Option is available only for an additional monthly charge - ONE-TIME CHARGE: Option is available only for an additional one-time charge ln the following table, please check the way that bestdescribeshow subscribersin each basic service tier paid for theseoptions asof December 31.1989. If you checkedeither “Extra Monthly Charge” or “One-Time Charge” pleaseenter the amount charged (excluding any depositsor installation charges)in the column provided. (Enter dollars and cents) CHECK ONE Extra IncludedIn Monthly One-Time Amount 01 Additional Not AvaIlable Tier Charge Charge Charge Charge (1) (2) (3) (4 (11 A. One Additional Outlet 1. Tier1 2. Tier11 I I IIS 3. Tier111 B. Remote Control Convertor 4. Tier1 5. Tier11 Page 72 GAO/RCED-90.199 Follow-up Cable Television Survey Appendix VI survey Questionnaire Tier II: PIeasecomplete ColumnsA and B for tbe basic wrvice tier with the next level of service. If this cable system doesnot have a secondlevel of basic service. tbcn skip tc question6. EXAMPLE: If your “First Tier” has 20 channelsand your “SecondTier” has an additional 30 channels.then enter 50 for “SecondTier”. If this cable systemcharges$10.95 for the “First Tier” of basic service andchargesan additional $5.00 for the “SecondTier”. then enter $15.95for the “SecondTier.” COLUMN A COLUMN B Number of Basic Monthly Basic BASIC SERVICE TIER II Channela Oflerad Service Rate Charge 1. Decembcr31.1984 $ 2. Jkemter31.1985 1s 3. November 30.1986 1 Is 4. Lkember31.1987 s 5. December31.1988 s 6. De.cember31.1989 s Tier IIIz Pleasecomplete ColumnsA and B for tbc basic sewice tier with the next level of service. If tbis cable systemdoesnot have a third level of basic service, then skip to question 6. COLUMN A COLUMN B Nutier 01Basic MonthtyBasic BASIC SERVICE TIER Ill Channels Onand Service Rate Charge 1. Decemkr31.1984 s 2. Decembcr31,1985 s 3. November 30.1986 $ 4. Lkccmber31.1987 s 5. Decembcr31.1988 s 6. December31.1989 s Page 70 GAO/RCEPBO-199 Follow-up Cable Television Survey Appendix VI Survey Questionnaire I. On December 31.1989. how many subscribersdid 2. Were any subscribersto this cable systemsubject to this cable svstemserve? (Enter numberJ different rate structm’esbaaedon facton such as geographiclocation or date of connection? Do not DEFINITION: Subscribersrefers t” the total include short-termpromotionsor discounts.(Check number of individual subscribersand subscribers One) biied on a bulk-rate basis (e.g.. if the basic tier setvice is $10 and a 2C@unitapamnent building is I. 0 Yes biied $500. the” you would wunt $500/$10=50 2. 0 No-SKIPTOQ.4 subscribers). Total number of 3. Of the total number of subscribersindicated in SUbSCi-JkrS question 1. how many were subject tc the most wmmon rate structure? (Enrer number) Number of subscribers belonging tc the mcst cornm”n rate struchue IMPORTANT PLEASE READ: Complete the rest of this questio”nak only for those subscribersyou listed in QUESTION 3. For example. if you had a total of lO,ooOsubscribersbut only 9.Mx) listed in Question3 then answer the rest of the questionnaireONLY for the 9,CNXlsubscribers. 1. BASIC SERVICE INFORMATION Basic service generally refersto any service tier that includes the retransmissionof over-the-air television signals (e.g.. signals that can be received without special equipment suchas antennason tall masts). Basic service may also include a number of cable networks such as CNN. ESPN, etc. By first tier we mea” the lowest level of service while the secondtier and third tier (etc.) representexpandedbasic service. If you only have ONE tier of basic service, answerquestions4 - 7 ONLY for Tier I 4. How many tiers of basic Servicedid this cable systemoffer on the following dates? (Check one box per date) Number of Basic Set-&a Tters Offered Page 68 GAO/RCED9@199 FoIIowvp Cable Television Survey Appendix V Changea In Cable System Submribemldp and other l”formation TBble V.13: Year of Expiration of Current Franchise Agreement Year Percentaae of svstems 1990 3.1 ( ? 0.9) N=6267’ (k216) .__ 1991 3.6 ( f 0.9) N=6267 (k216) 1992 4.1 (k10) N=6267 (k216) 1993 3.8 (k1.0) N=6267 (~216) 1994 4.8 c+1.11 N=6267 (k216) - 1995 7.1 (k1.5) N=6267 - (+216) After 1995 64.6 (k 2.8) N=6267 (t216) Other franchise arrangements (3, N=6267 (+216) Note: The table above contains sampling errors for the values presented, as well as our estimates of the number of cable systems (N) that would have responded had we surveyed all systems Page 66 GAO/RCRBB@l98 Follow-up Cable Television Survey Appendix V Cbangea in Cable System Subscrlbership and other Information Table V.ll: Number of Separate Jurisdictions Covered by Franchise Percentage of Agreements as of l2/31/99 Number of jurisdictions systems 1 52.6 (i2.8) 2 to 5 29.1 (22.4) More than 5 11.7 (?I 3) No formal franchise agreement 5.3 (k15) Other 1.3 ( k 0.81 Note: The table above contains sampling errors for the values presented Our estimate of the number of cable systems(N) that would have responded had we surveyed all systems is N = 6514+210 Page 64 GAO/RCEBpO-199 Follow-up Cable Television Survey Appendix V Changes in Cable System Subscribership and Other Information Table V.7: Changes in Cable System Ownership Between 1985 and 1989 Ownership Percentage of systems Chanqed one time 39.9 (k2.9) Changed more than once 13.8 Note. The table above contains sampling errors for the values presented. Our estimate of the number of cable systems(N) that would have responded had we surveyed all systems is N = 6524k209 Table V.8: Percent Changes in Cable System Ownership Between 1985 and Year of ownership change Percentage of systems 1989 1985 7.8 1f 1.5) 1986 15.1 (22.0) ~ , 1987 14.5 (k2.1) 1968 17.7 (22.4) 1989 12.9 (k2.1) Note The table above contains sampling errors for the values presented. Our estimate of the number of cable systems (N) that would have responded had we surveyed all systems IS N = 6524+209 Table V.9: Availability of Discounts for Low-Income or Elderly Subscribers as of 12/31/89 Availability Percentage of systems Discounts offered 18.0 (k2.1) Note. The table above contalns sampling errors for the values presented Our estrmate of the number of cable systems(N) that would have responded had we surveyed all systems IS N = 6315k214. Page 62 GAO/RCED9@199 Follow-up Cable Television Survey Appendix V Chuyles in Cable System Subscribership and other InfonMtlon Table V.3: Number of Over-the-Air Channels Available in Cable Community Number of channels available to Date average subscriber 12/31/04 7.9 (kO.2) N=2973 (?I931 11/30/86 8.4’ lkO.21 Ni3670’ (+216) 12/31/09 8.9 (kO.2) N=6230 Note: The table above contains sampling errors for the values presented, as well as our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Table V.4: Number of Over-the-Air Channels Available in Cable Community Percentage of subscribers on: Number of channels available 12/31/84 1l/30/86 12f31189 0 0.8 0.6 0.5 (kO.3) (TO.2) (kO.2) l-3 5.8 4.0 2.8 (fl.1) (20.8) (k0.6) 4-6 37.2 31.4 27.4 - (+ 2.4) (k2.2) (k2.0) 7-9 31.0 35.1 33.8 (k2.1) (k2.1) (k2.0) IO-12 12.4 15.8 19.5 (k1.7) (k 1.7) (kl.9) Over 12 12.7 13.0 16.0 ( f 1.6) (51.5) lk1.5) Note: The table above contains sampling errors for the values presented. Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. 12/31/84, N = 2973* 193; 11/30/M, N = 3870+216, 12/31/89, N = 623Ok216 aThese sampling errors may be understated because no systems in certain sampling strata responded this way. Page 60 GAO/RCED90-199 Follow-up Cable Television Survey Append!x IV Revenue to Cable system Per Subscriber Table IV.2: Revenue Qenerated per Subscriber by Systems That Were Average monthly revenue r subscriber In Regulated/Not Regulated Prior to systems that in 19 k 8 were:’ Effective Date of Cable Act Date Regulated Not regulated 12131 f04 $19.98 $19.70 ( f .28) ( 2.49) N=l544 N=562 ( f 147) (k96) 12/31/85 20.99 20.90 1k ,251 > , lk .47) \ I N=1857 N=638 (kl63) (+106) 1 l/30/86 21.78 22.11 (k.23) ( + .53) N=2252 N=793 (k176) (k120) 12/31/87 23.40 23.32 ( f .23) (k.51) N=2627 N=915 (kl91) (5132) 12/31/00 25.04 25.24 (k .24) (+a) N=2866 N=955 (k199) (2134) ~--___ 12/31/89 26.41 26.74 (k .25) (k.51) N=3043 N=1052 1 k 203) (+I421 Percent Increase 1966-1969 21.3 20.9 (k1.7) (12.7) Note: The table above contains sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems. aAll these systems were not regulated as of 12/31/89. Page 68 GAO/RCEDS@199 Follow-up Cable Television Survey Appendix J.U Premium Cable Services Table 111.3:Monthly Charge for Packages of Premium Channels Average charge per cable system for: Date Two channels Three channels Four channels 12/31/84 $18.33 $25.88 $34.28 (k.36) (2 58) N=1536 rd=aa4 (1135) (La3) (k59) 11/30/86 i8.33 26.03 34.17 (+ 29) (k 37) (k.42) N=2429 - N=1542 N=1033 (i169) (k107) (282) i2/3i/a9 17.50 24.61 31.95 (k.20) (i.33) (Ai) N =3429 N=2430 N=1525 (k203) (f161) (CkllO) Note, The table above contams sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems Table 111.4:Cable Subscribers Purchasing One or More Premium Channels Date Percentage of subscribers 12/31/84 55.6 ___... (512) N=2549 (+lao) 11/30/86 53.7 (509) N=3497 ( k 209) 12/31/89 52.2 (k0.a) N=6111 Note The table above contains sampling errors for the values presented, es well as estimates of the number of cable systems(N) that would have responded had we surveyed all systems The estimated number of subscrlbers whose cable systems reported both total and premium subscrlptlon data IS 19.9 million * 0.6 million in 1964. 26 9 mlllion f 1 .O millton I” 1966, and 38.5 million k 1 1 milllon in 1989 Page 66 GAO/RCED-99-199 Follow-up Cable Television Survey Appendix II Availability and Ratesfor Cable Television Options Table 11.1:Availability of Options With Most Popular Basic Service on 12/31/69 Percentage of systems providing: Added Remote Set-top Program Availability outlets control converter guide Included m basic charge 12.9 3.6 50.9 27.0 (k20) ( k 0.9) (k3.0) (k2.7) Addedmonthly charge 77.2’ 72.2’ 23.6’ 18.9 ~ ~~__~ (k26) (k 2.9) (k2.a) (k2.3) One-hme charge 6.3 6.7 9.26 a (*I 9) <i I .a) (k2.l)b Not avallable 1.5 17.4 16.1 533 ( f o.a)b (i2.6) (k 2.5) (k3.1) Note. The table above contarns samplrng errors for the values presented Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Added outlets, N = 61382218. remote controls, N = 581Ok223; set-top converter, N = 56722 225; program gurde. N = 5580 ? 226. aNone of the cable systems respondrng to our survey answered thus way “These sampling errors may be understated because no systems rn certarn samplrng strata responded thrs way Table 11.2:Optional Services Offered at Extra Charge With Most Popular Basic Averaae extra charae per cable svstem Service on 12/31/69 Optional service Monthly charge One-time charge Addrtional outlet $2.99 $17.69 (k.10) (kl 68) N=4711 N=451 ( f 229) (k113) Remote control 3.38 65.58 t +- ,061 If 5.60) N=4164 N=391 ~~~-_____-- (*220) (k104) Set-top converter 2.03 28.54 ~ -.---~(+-.ogL (k2.74) N=1339 N=487 (k169) _ (k117) Program guide 1.36 b (2 07) N=1052 (?I331 Note The table above contams samplrng errors for the values presented, as well as estrmates of the number of cable systems(N) that would have responded had we surveyed all systems aThrs samplrng error may be understated because no systems WIcertain samplrng strata responded thus way ‘None of the cable systems respondrng to our survey answered thus way Page 64 GAO/RCED-SO-199 Follow-up Cable Television Survey Appendix I Changes in Basic Cable Ratrs and Services Table 1.6: Rates for Most Popular Basic Service Provided by Systems That Were Average monthly charge per subscriber in Regulated/Not Regulated Prior to systems that in 1966 were? Effective Date of Cable Act Date Regulated Not regulated 12/31/04 $9.62 $10.56 (k 10) (k 24) N=2045 N=768 (k163) (k116) 12131165 10.36 11.44 (k 11) (+ 23) N=2258 N=856 11/30/66 11.55 12.31 (2 11) -(‘:‘2) N=2694 N=988 (2190) (2137) 12/31/87 13.46 13.50 (2 11) (2 17) N=2998 N=1129 (i200) (~148) 12/31/88 14.93 14.94 (+ 11) (2 30) N=3169 N=1138 (i205) (k146) 12/31/89 16.42 16.24 (k 10) (? 29) N=3358 N=1202 (i208) (k152) Percent increase 1966-69 42.1 31.9 (k211 1+351 Note The table above contam samplmg errors for the values presented, as well as est!mates of the number of cable systems (N) that would have responded had we surveyed all systems “All these systems were not regulated as of 12/31/89 Page 52 GAO/RCEDW-199 Follow-up Cable Television Survey Appendix I Changes in Basic Cable Rates and Services Table 1.5: Dollar Changes in Basic Service Rates Since Deregulation Percentage of subscribers whose rates changed between IllSO/ and 12131/69 for: Change in rate Most popular service Lowest priced service ~$2.00 12.0 17.6 (+I 9) (k2.1) >$2.00-~$4.00 30.0 26.5 (k2.0) (k2.1) >$4.00-~$6.00 36.6 33.9 (k 2.2) (k2.4) >$6.00-zz§8 00 16.6 17.6 (T17) (k 2.0) >$8.00-~$10.00 4.0 3.9 (0 9) (k1.1) 0.4 0.1 (+a 1) (kO.O)a >$12.00 - 0 0.3 (LO) (kO.1) Note The table above contams samplmg errors for the values presented. Below are our estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Most popular serwe, N = 3968 t218; lowest priced service, N = 3918?218 aThese sampllng errors may be understated because no systems in certain sampling strata responded this way Table 1.6: Number of Tiers of Basic Service Offered by Cable Systems Percentaqe of systems offering: Date One tier Two tiers Three tiers + 1 Z/3 l/84 75.1 21.9 3.1 _____ -~-._ (k2.3) (k2.1) (21.1) ii /30/86 74.3 22.5 3.2 (k2.3) (k2.2) (kO.9) 12/31/89 63.4 13.5 3.1 ( + 1.9) (kl.7) ( rt 0.9) Note The table above contans sampling errors for the values presented. Below are our estimates of the number of cable systems(N) that would have responded had we surveyed all systems 12/31/84, N = 4585+224 11/30/S N = 5258&227, 12/31/89. N = 6527k209 Page 50 GA0/RCED.90.199 Follow-up Cable Television Survey Appendix I Changes in Rasic cable Rates and Services Table 1.3: Average Monthly Charge per Basic Channel Average subscriber charge per channel for: Date Most popular service Lowest priced service 12131 , ,I04 5.43 8.46 (k.01) (k.01) N=2971 N=2968 (?195) (*G) 12131 /a5 .a A7 Ck.011 (k.01) NL3336’ NL3335’ (~206) ( 2 206) 11/30/86 .44 .47 (k.01) (k.011 N=39ao’ N=3995 (kzla) (+2ia) 12/31/87 .45 .48 (k.01) (k.01) N=4696 N=4701 (k227) ( ?I 227) 12131 /aa .47 .49 (k.01) (k 01) N=5380 N=5380 ( + 227) ( ? 227) 12/31/89 .49 .51 (*.ol) (k.01) N=62i33 N=6284 (k215) (k2151 Note: The table above contains sampling errors for the values presented, as well as estimates of the number of cable systems(N) that would have responded had we surveyed all systems. Page 48 GAO/RCRD-SO-199 Folkw-up Cable Television Survey Appendix I Changesin Basic CableRatesand Services Table 1.1:Average Monthly Basic Service Charge per Subscriber Average basic service charge per subscriber for: Date Most popular service Lowest priced service 12/31/84 $9.04 $9.50 (k.10) (k.09) N=3033 N=2968 (+I961 (+I951 12/31/85 ‘10.60 ‘10.19’ (k.10) (2.10) N=3385 N=3335 (+207) (k206) 11/30/86 11.71 11.14 (2.10) (k.11) N=4002 N=3995 (1-218) (k2la) 12/31/87 13.47 13.01 (k.10) (k.10) N=4706 N=4701 (~227) (k227) 12/31/aa 14.91 14.50 (k.11) (k.11) N=5405 N=5380 ( + 227) ( t 227) 12/31/89 16.33 15.95 (k.10) (k.10) N=6289 N=6284 (k215) (k215) Percent increase 1988-89 9.5 10.0 (k1.4) 1986-89 39.4 (21 Y) (k2.1) Note: The table above contains sampling errors for the values presented, as well as estimates of the number of cable systems (N) that would have responded had we surveyed all systems. Page 46 GAO/RCEB90199 Follow-up Cable Television Survey Chapter 4 Regulation of Cable Television Rate% What Are the Options? If localities are charged with the major responsibility for regulating local cable rates, it may be desirable for FCC to take a greater role in estab- lishing a regulatory framework. The Cable Act authorizes FCCto estab- lish a framework for local rate regulation, but current FCC rules contain only procedural requirements. FCC is considering requiring cable systems to adopt accounting standards that would enable communities to better identify costs and rates of return. FCCis also considering re-instituting the annual financial reporting system in place prior to 1983. Under this system, cable operators were required to submit detailed financial infor- mation to XC. Regardless of whether rate regulation is returned to the local communi- Redefinition of Cable ties or granted to FCC, a decision is needed on what portion of cable ser- Service Subject to vice to regulate. In legislative proposals and comments submitted to FCC, Regulation a wide range of views and opinions has emerged. At one end of the spec- trum, several proposals would regulate only basic cable “lifeline” ser- vice, which generally would include the national network channels, one public broadcasting channel, and any local independent channels. At the other extreme, the National League of Cities and others proposed to grant franchising authorities the right to regulate all cable service, both basic and premium, even if it was never before regulated.” The existing standard, like that prior to the enactment of the Cable Act, is that only basic service is subject to regulation. (Currently, any service that includes over-the-air channels is regarded as a basic service.) Thus, cable systems might be able to shift some of their channels away from regulated basic service by setting up multiple service tiers. This would allow them to continue to confine rate regulation to only a portion of their overall subscriber offerings. A regulatory scheme that controls only a fraction of a cable subscriber’s monthly bill is not likely to have much regulatory impact. If federal law continues to prohibit regulation of more than basic service, regulatory authorities must be able to deter- mine a minimum standard for basic service. FCC would presumably be called upon to establish a federal regulatory framework for these deter- minations by state and local authorities. “Comments of the City of New York, National League of Cities, United States Conference of Mayors, City of Huntsville, Alabama, City of Portland, Oregon, and the Northwest Municipal Cable Council to FCC Notice of Inquiry (MM Docket 89400), pp. 22-23. Page 44 GAO/RCED-99-199 Follow-up Cable Television Survey Chapter 4 Regulation of Cable Television Rates: What Are the Options? cable community of a competing multichannel video provider, such as MMDS, DBS, or a second cable system. Since industry sources estimate that very few cable systems face competition from these alternative sources, the majority of cable operators would be subject to regulation under this standard at least for the next few years, until alternatives become viable sources of competition. Another possible standard for effective competition, suggested by a few commenters and legislative proposals, is the “subscription threshold standard.” Under this standard, if the percentage of subscribers in a community exceeds a certain threshold, then it is presumed that there is no effective competition; a high penetration rate beyond that threshold is interpreted to mean that consumers have no other choice than to sub- scribe. However, as FCCpointed out in its Notice of Proposed Rulemaking, the use of a threshold standard” also can have the perverse effect of penalizing cable systems for offering a popular service that is attracting new customers, and possibly may encourage systems to raise rates to drive away customers and thereby avoid regulation. Greater FCC Role in Cable Instead of returning the power to oversee rates to thousands of local Regulation franchise authorities, some proposals would assign it to FCC. The goal of these proposals is to remove rate setting from the political decision- making process of local communities, where the cable industry claims delays frequently occurred in the past. There are two principal options for regulation at the federal level: tradi- tional rate-of-return regulation and price-cap regulation. Rate-of-return regulation would require FCCto estimate both the cost and demand con- ditions facing cable systems and set a rate that just recovers cable oper- ators’ costs (including what their capital could have earned if invested elsewhere). An obvious disadvantage of this approach is that it would impose a heavy administrative burden on FCC by requiring it to deal, in a timely manner, with thousands of rate increase requests each year. Under price-cap regulation, cable systems could be allowed to annually raise their basic rates without case-by-case approval from FCC or local regulatory authorities. FCCcould set the amount or the percentage of the rate adjustments, possibly in line with increases in the cost of living. This approach avoids the need to individually adjudicate rate increase requests. ~‘Sweral proposals we reviewed recommended a subscription threshold of 30 percent. Page 42 GAO/RCELNJO-199 Follow-up Cable Television Survey chapter 4 Regulation of Cable Television Rates: What Am the Options? Many cable policy proposals seek to achieve a more competitive environ- Focus on Market ment by eliminating legal barriers to new entrants in the video program- Competition ming market. Potential rivals of existing cable operators include second cable systems (overbuilds), MMDS, DBS, and provision of cable services by telephone companies. However, eliminating legal entry restrictions alone will not, in the near future, ensure the entry of second cable systems or new technologies. The real barrier to entry by second cable systems appears to be the inherent characteristics of existing cable television technology: the cost of providing service in a given area is lowest when provided by a single cable system. This is because the presence of more than one operator in a given cable market necessitates duplicate investment in receiving equipment and wiring. The few instances of successful head-to-head competition between cable systems, even in communities where franchising authorities have encouraged the entry of a second cable system, illustrate this point. Thus, competitive solutions to the cable industry’s market power tend to stress the emergence of new, alternative technologies. But even if legal barriers are removed, it is not certain when these new technologies will enter the market or how successful they will be. Therefore, even if policymakers wish to rely primarily on market competition and the removal of legal restrictions to entry, some form of interim rate regula- tion may be desirable. The policy question revolves around what types of interim regulation, if any, are needed to control rates of cable systems not subject to effective competition. Regulatory Options Redefine “Effective” Several proposals seek to make more cable systems subject to rate regu- lation by applying a more stringent standard of “effective” competition. Competition The Cable Act charged FCCwith establishing criteria for determining whether cable systems faced effective competition and thus were no longer to be subject to regulation of basic rates. In 1985, FCC ruled that the existence of at least three over-the-air television channels in a cable community would ensure a competitive environment. The result of FCC’S decision was that only 3.5 percent of cable systems remained rate-regu- lated as of December 31, 1989, according to our survey. By comparison, our survey also showed that on November 30,1986, just prior to the Page 40 GAO/RCED-99.199 Follow-up Cable Television Survey chapter 3 Analysis of Legislative Pmposals to Amend the Cable Act “the home entertainment video market is currently a highly competitive one. Cus- tomers have several suppliers to choose from (that is, over-the-air, home video, cable and satellite) and the average cable network today of 36 channels already offers a viewer over 1,000 programming choices per day. Telco [telephone company ownership], however, does not intend to add to that competitive environment, but eliminate it....More importantly, fiber [optics] to the home does nothing to improve our country’s ability to have information services...and is wholly unnecessary since this added ratepayer cost burden brings no new value to the consumer.“13 ‘3Statementof ThomasGill&t, Vice Presidentof BusinessDevelopmentand TechnologyTransfer, CableTelevision Laboratories,Incorporated,beforethe Subcommitteeon Telecommunicationsand Finance,HouseCommitteeon Energy and Commerce,Apr. 19,1990,pp. 4,6,7. Page 38 GAO/RCEDWl93 Fbllmvap We Tel- Survey Chapter 3 Analysis of Le&lative Proposals to Amend the Cable Act Arguments Opposed to Some cable representatives oppose limiting the number of subscribers a company may have. They believe a cap on subscribers is unsupported Limiting Horizontal by any known economic theory or their experience. The Department of Concentration Justice commented that the cable industry is currently not highly con- centrated. No cable company has a large enough market share to influ- ence the market, as defined by the Herfindahl-Hirschman Index and the Top Four Firm Ratio.” The Cable Act prohibits telephone companies from providing video pro- Ownership of Cable gramming to subscribers in their telephone service area, except in speci- Systems by Telephone f’ie d circumstances. This is known as the ban on telephone cross- Companies ownership of cable systems. The objective of this provision is to deter anticompetitive and discriminatory practices that might occur when the telephone company already has a telephone service monopoly in the local community. One exception is that telephone companies can offer cable services in rural areas of less than 2,500 people because it is more practical for telephone companies to operate cable systems than it would be for a separate cable system. To offer cable service within its service area, a telephone company must first apply for a waiver from FCC.~~’In addition, the Cable Act allows telephone companies to con- struct, maintain, and lease transmission facilities for franchised cable operators that provide video programming to the public. In addition, the Modified Final Judgment, in U.S. v. AT&T, prohibits the regional Bell operating companies from offering information servicesi Provisions vary among the bills introduced that would alleviate barriers to a telephone company’s entry into the cable industry. They include l allowing telephone companies the right to operate a cable system but provide only cable programming that is owned and controlled by other companies, and “Both measure the potential for market power abuse by determiniig the market share concentration. The Herfindahl-Hirschman Index was applied to the top 20 cable MSOs and had a resulting value of 862.4. This falls below the threshold of concentration at 1,000. The Top Four Firms ratio had a com- bined market share of 44 percent, which is also lower than the 50.percent threshold that defines a concentrated market. “‘As of February 1990, a tot&l of 418 telephone companies had applied to FCC for a waiver to pro vide cable television service. Of these, 387 applications were granted, 5 were denied, and 17 were withdrawn. The remaining applications arc still pending. “U.S. v. AT&T, 552 Fed. Suyp 131 (D.D.C., 1982) aff’d sub nom Maryland v. U.S., 460 US 1001 (1983). Page 36 GAO/RCED90-199 Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals ta Amend the Cable Act prevent other distributors from purchasing programming and other pro- grammers from gaining access to a cable system. All of the provisions described above seek to ensure that the owners of cable programming are providing their programs to all video distribu- tors, both large and small cable systems, as well as to alternative video distributors. This would be done by providing equal access to all pro- gramming, prohibiting exclusive contracts, or prohibiting the discrimi- nation of video programming among cable systems. Arguments in Favor of Almost all interest groups-including some cable companies, broad- Legislation to Limit casters, alternative video distributors, telephone companies, city repre- sentatives, and consumer groups-believe the Congress should adopt Vertical Integration legislation limiting the vertical integration of cable companies because all groups should have fair access to video programming. Although rea- sons vary as to why vertical integration should be controlled, a common argument can be summarized as follows: “If the Congress does not take action, in a few years a small handful of MSOs and their affiliated pro- grammers may totally dominate the programming choices of American consumers. The price consumers may pay for such dominance is a signif- icant increase in cable rates and a corresponding decrease in the diver- sity of programming on cable systems.“7 Alternative video distributors state that, at times, satellite dish and wireless cable services (which have a multichannel capacity somewhat similar to cable) have been blocked out of local video markets because video programmers affiliated with MSOS restrict the availability of their programming. When they can purchase programming, it is at a discrimi- natory price. Limiting vertical integration would help alternative video distributors compete with the cable industry because the legislation would provide these competitors with access to programming at nondis- criminatory prices, terms, and conditions. Arguments Opposed to Both the Department of Justice and the National Telecommunications Limits on Vertical and Information Administration commented that it has not been estab- lished whether vertical integration has resulted in the unavailability of Integration cable programming. Cable programming appears to be readily available to both cable distribut.ors and home satellite dish owners. As a result, ‘Statement of Charles Devanry. Mayor, Augusta, Georgia, before the Subcommittee on Telecommuni- catmns and Finance, House Commiwe on Energy and Commerce, Apr. 19, 1990, p. 23. Page 34 GAO/RCED90199 FoUow-up Cable Television Survey Chapter 3 analysis of legislative Proposals to Amend the Cable Act local channels would be barred unless the cable system carried a comple- ment of local stations and paid an annual re-transmission fee to FCC. This is known as the “if carry, must pay” proposal. The first two provisions would essentially re-institute the must carry rules as defined by FCC in 1965. If enacted, these provisions would allow franchise authorities to require cable operators to carry local commu- nity programming of interest to subscribers on the lowest priced tier. The last three provisions-prohibiting channel repositioning, regulating re-tiering, and enacting “if carry, must pay”-would be new must carry rules. Arguments in Favor of City representatives generally favor many of the must carry provisions. The basis for this support is their belief that local television stations are Must Carry Provisions important sources of local news and information to communities. The proposals would protect the cable subscribers’ rights to view local tele- vision channels. Broadcasters favor must carry proposals. They also favor the “if carry, must pay” proposal because cable systems have benefited from the availability of “free” local television stations, which are the channels most watched by cable subscribers, without having to pay local stations for their coverage. The “if carry, must pay” plan seeks to redress what broadcasters see as a competitive imbalance between the cable and broadcast television industries. That imbalance-the cable system’s right to re-transmit a broadcaster’s signal without any compensation- can be redressed by a cable system which recognizes a broadcaster’s property interest in its signal, and provides compensation for the value the signal brings to the cable system. Arguments Opposed to Cable representatives are willing to support some type of must carry Must Carry Provisions rules but believe current proposals go far beyond any compromise solu- tion they could support. For example, NCTA opposes expanding the number of channels cable systems must set aside for carrying local tele- vision stations, abandoning the “audience share test” as a means of determining whether a local station qualifies for cable carriage, and using the condition of compulsory licensing as a means to comply with the requirements to carry television stations on certain cable channels. Some cable systems also oppose provisions prohibiting channel reposi- tioning. They believe there is no evidence that the cable industry is Page 32 GAO/RCED-9@199 Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act Complaints concerning the franchise renewal process have resulted in legislative proposals to amend the Cable Act to loosen the restrictions on state and local governments’ authority over the renewal process. For example, several of these proposals would authorize state and local gov- ernments to solicit competitive bids when considering franchise renewal and prohibit courts from overturning a state or local government’s deci- sion to deny renewal as long as the decision is not arbitrary or capri- cious. In this regard, they would ensure that cable operators could not avoid the consequences of past behavior. Arguments in Favor of City representatives argue that the legislative proposals contain reason- Changing Renewal able provisions for protecting state and local governments’ “legitimate rights.” They believe that state and local governments should have Procedures broad authority in the renewal process to consider other public interest factors and competitive proposals from cable operators when making their renewal decisions without fear of court suits. Also, state and local governments should be allowed to make cable operators accountable for actions that violate the franchise agreement-that is, not allowing them to avoid the consequences of past shortcomings simply by correcting their behavior in the future. However they believe that the uniform, shortened franchise period (10 years) will afford a certain amount of protection to cable operators to make a reasonable return on their investments. Arguments Opposed to Cable representatives believe that these legislative proposals should not Changing Renewal be enacted because of the following negative impacts: Provisions l Cable operators would be stripped of their “due process” protection during franchise renewal, as it is currently guaranteed by the Cable Act. Furthermore, the added flexibility that state and local governments would have in establishing their own renewal standards could result in a reoccurrence of the “unbridled political shenanigans” that occurred before the Cable Act. l Cable operators would lose the incentive to reinvest revenues in their systems because of greater uncertainty over franchise renewal and would be forced to maximize their return on investment during the term of the existing franchise. While cable representatives believe that the legislation goes too far, city representatives also acknowledge that some of the pending bills have a number of shortcomings, including provisions which continue to require Page 30 GAO/RCRD-90-199 Follow-up Cable Television Survey Chapter 3 Analysis of Legislative Proposals to Amend the Cable Act l regulate charges for installation and rental fees for equipment necessary to receive basic cable service, . require cable systems to obtain approval for any rate increase higher than five percent or higher than the percentage increase in the Con- sumer Price Index for the preceding twelve months, or 9 regulate cable systems as a common carrier or utility. Many of these proposals would allow state and local authorities to regu- late as they did prior to the Cable Act. These include, for example, regu- lation of only a lifeline or basic service tier, or regulation of cable systems as a common carrier or utility. In comparison, regulating all cable services or having regulation at the federal level, instead of at the state and local franchise level, would be markedly different from the pre-Cable Act environment. Arguments in Favor of Many groups have indicated that they favor some type of rate regula- Rate Regulation tion as a means of controlling soaring cable rates. They believe that because true competition does not exist, the government needs to inter- vene. For example, city representatives favor establishing a new defini- tion of effective competition that would prohibit basic rate regulation only in areas where there is competition from another cable system or a multichannel video programming distributor. In all areas not meeting the proposed definition of effective competition, state and local authori- ties could impose rate regulation. City representatives have also responded that they favor legislation that would permit localities to regulate rates not just for basic service but also for all cable services offered. They argue that eliminating the regulatory distinction between basic service and other cable offerings would prevent cable systems from (1) avoiding regulation by creating a new limited basic service tier subscribed to by only a few consumers and (2) charging high fees for equipment rental and installation, which can make cable unaffordable to potential subscribers. Arguments Opposed to Cable representatives, as well as telephone companies, oppose rate regu- Rate Regulation lation. For example, NCTA believed that a return to local government reg- ulation of cable rates would be an overreaction to what was a transitional problem. Re-regulation of cable rates by city councils would be a mistake because a return of regulatory authority to more than Page 28 GAO/RCED-S&199 Follow-up Cable Television Survey Analysis of Legislative Proposalsto Amend the CableAct Numerous bills have been introduced in the current session of the Con- gress dealing with the cable industry, which we believe is il~l indication of public concern with existing federal cable television policy. Com- plaints to the Congress, FCC, and FTChave been lodged by consumers and local governments about rate increases and poor cable television service. In addition, state and local governments have expressed dissatisfaction because they believe the Cable Act has weakened their ability to ade- quately oversee local cable operations to address their citizens’ griev- ances. These mounting concerns and complaints have resulted in an examination of the need for changes in cable policy. This chapter addresses the major legislative proposals to amend the Cable Act. A number of issues are addressed in the bills. We highlighted what we believe are the major issues, and the major arguments in favor of and opposed to these proposals: regulating cable rates and associated charges, changing the cable franchise process, requiring cable systems to carry all local television channels (known as “must carry”), restricting vertical integration in the cable industry, restricting horizontal concentration in the cable industry, and allowing telephone companies into the cable industry. Our discussion is drawn from congressional testimony, public comments in response to FCC’Stwo cable proceedings,’ and legislative analyses by the National League of Cities and NCTA. Appendix VII contains a list of the respondents we drew upon to formulate these arguments. The Cable Act allows state and local governments to regulate basic cable Regulation of Cable rates only in those areas not subject to effective competition as defined Rates by FCC. As discussed in chapter 1, FCC defined effective competition as the existence of at least three over-the-air television signals significantly viewed by the cable community. This definition had the effect of deregu- lating rates of approximately 96 percent of all cable systems, according to our survey results. Proposals would either directly subject all cable systems to some type of rate regulation or re-define effective competi- tion in such a way that more cable systems would become subject to regulation. ‘Notice of Inquiry, MM DocketNo. 89-600,and Noticeof ProposedRulemaking,MM DocketNo.90-4. Page 26 GAO/BCED-90199 Follow-up Cable Television Survey Chapter 2 Results of Follow-Up National Survey of Cable Television Rates and !&vices showed that as of December 31,1989,13 percent of systems offered added outlets as part of their basic service. Conversely, we found a slightly smaller percentage of systems offering set-top converters as part of their most popular basic service, from 54 percent in our first survey to 51 percent in our follow-up survey. The percentage of systems offering remote control units and program guides as part of their basic service also showed little change. In contrast to basic service rate increases, rates for premium services Premium Services have decreased slightly since deregulation, both individually and for combinations of premium channels.* Average rates charged by cable sys- tems for three popular premium channels decreased by $.13 to $.21 per month for each channel from November 30,1986, to December 31,1989. Average monthly rates as of December 31,1989, showed varied changes, from a decrease of $.07 to an increase of $.07 per channel com- pared with our October 3 1, 1988, results, reported in our previous survey. Likewise, average rates per month for combinations of two, three, and four premium channels also decreased, by $.83, $1.42, and $2.22, respectively, from November 30,1986 to December 31,1989. Average rates per month as of December 31, 1989, for the combinations of two, three, and four premium channels also showed slight decreases of $.32, $.55, and $.66, compared with the results reported in our 1988 survey. The number of subscribers purchasing premium channels increased by 16 percent from November 1986 to December 1989, but the proportion of total cable subscribers purchasing one or more premium channels decreased from about 56 percent to 52 percent. Revenue per subscriber includes the revenue received by cable systems Revenue per from all subscriber services, such as basic and premium services, instal- Subscriber lation, pay-per-view, and options. Average revenue to cable operators per subscriber increased from $21.78 to $26.36 between November 30, 1986, and December 31, 1989, an increase of 21 percent. During 1989, revenue per subscriber increased from $25.00 to $26.36, an increase of 8Rates for premium services were never subject to state or local regulation prior to the Cable Act. Page 24 GAO/RCJXD90199 Follow-up Cable Television Survey Chapter 2 Results of Follow-Up National Survey of Cable Television Rates and Services 1986, prior to the date the Cable Act took effect.” For those systems reporting data for both 1986 and 1989, a comparison of rates charged for the lowest priced basic service by those systems that were regulated versus those systems that were not regulated in 1986 showed a signifi- cant difference. As table 2.5 shows, the systems that were regulated in 1986 (but not regulated in 1989) showed rate increases of 47 percent between 1986 and 1989, from an average of $10.92 to $16.06 per sub- scriber for the lowest priced service. Systems that were not regulated in 1986 (and not regulated in 1989) showed rate increases of 32 percent, from an average of $11.99 to $15.77 per subscriber. This large per- centage difference may be explained by the fact that the average basic rate for systems not regulated on November 30, 1986, was $1.07 higher than the average rate for regulated systems. A further comparison of these rates shows that basic rates for regulated systems lagged behind those not regulated, by over $1.00 per month, as far back as 1984. However, during 1987 and 1988, in the aftermath of deregulation, basic rates for systems formerly regulated quickly started to catch up, and they now are comparable to the rates of systems previ- ously not regulated. Table 2.5: Rates for Lowest Priced Basic Service Provided by Systems That Were Average monthly charge er subscriber in Regulated/Not Regulated Prior to systems that in 1166 were: Effective Date of Cable Act Date Regulated Not regulated 12/31/W $9.26 $10.33 11/30/86 10.92 11.99 12/31/87 12.95 13.21 12/31/0FJ 14.49 14.63 12/31/89 16.06 15.77 Impact of Changes in In recent years, a number of cable systems have changed ownership. Cable System Ownership Critics charge that “trafficking” has resulted in increased cable system costs that must be recouped from subscribers through higher cable rates. Our survey results confirmed that many cable systems have changed ownership. Since 1985,53 percent of cable systems have changed owners at least once, with 13 percent having changed owners more than “Our survey also showed that only 3.6 percent remained regulated on December 31,1989, a number too small for meaningful statistical analysis. Page 22 GAO/ECEDgOl9O Follow-up Cable Television Survey Chapter 2 Results of Follow-Up National Survey of Cable Television Rates and Services increased by 22 percent during the same period, and cable system pene- tration (total number of subscribers divided by the number of homes having access to cable) increased from 56 to 58 percent. As shown in table 2.1, during 1989 an average cable subscriber’s Basic -. Rates and monthly rate for the lowest priced basic service increased from $14.50 Services to $15.95, an increase of 10 percent. Rates for the most popular basic service also showed a lo-percent increase, from $14.91 to $16.33. Over the 37 months since deregulation covered by our survey-November 30, 1986, through December 31,1989-monthly rates for the lowest priced basic service increased by 43 percent, from an average of $11.14 to $15.95 per subscriber. By comparison, for the same period, the monthly rates for the most popular basic cable service increased by 39 percent, from an average of $11.7 1 to $16.33 per subscriber. Table 2.1: Average Monthly Basic Service Charge per Subscriber Average basic service charge per subscriber for: Date Most popular service Lowest priced service 11/30/86 $1171 $11.14 i$31;88 1491 14.50 12/31/89 1633 15.95 Examining basic rate increases in more detail, table 2.2 shows the range of percentage increases that subscribers have incurred. In summary, since deregulation roughly half of all subscribers incurred rate increases of more than 40 percent for both the lowest priced and the most popular service. Table 2.2: Changes in Basic Service Rates Since Deregulation Percentage of subscribers whose rates changed between 11/30/66 and l2/31/69 for: Change in rate Most popular service Lowest priced service Nochangeordecrease 3 IO Increase(percent) ___--~ --PO-S20 13 IO .~____~.. ___- >20-540 36 30 >40-~60 28 29 >60 19 21 As illustrated in table 2.3, cable subscribers received additional basic channels to accompany the rate increases. Basic channels available to subscribers to the lowest priced basic service increased, on average, Page 20 GAO/RCED-90199 Follow-up Cable Television Survey Chapter 1 introduction We appreciate the cooperation of those cable operators who took the time to answer our questionnaire. Because responses to the survey were voluntary, the cooperation of cable operators, associated corporate offi- cials, and industry representatives was essential to the success of this survey. As part of our follow-up survey, we also reviewed the major pieces of cable legislation currently before the Congress and analyzed public com- ments submitted to FCC in conjunction with its two ongoing cable pro- ceedings. Chapters 3 and 4 of this report discuss the cable policy implications (pros and cons) of these proposals, particularly with regard to proposals for dealing with increasing cable rates. To carry out this work, we reviewed the legislative history of the Cable Act, reviewed and analyzed pending legislation, examined the public comments filed with FCC concerning its two cable initiatives, and reviewed congressional hearing documents, analyses of legislative proposals, and other avail- able studies and reports. We also had discussions with officials from a number of organizations, including FCC, the Department of Justice, the Federal Trade Commission (FTC), the Bureau of Labor Statistics, NCTA, the National League of Cities, the National Rural Telecommunications Cooperative, and the National Association of Regulatory Utility Com- missioners to obtain their views on the policy and legislative issues. Our detailed work in preparing this report took place between Sep- tember 1989 and May 1990. While we shared survey data with FCC, in accordance with the Subcommittee’s policy, we did not obtain comments on a draft of the report from FCC or representatives of the cable industry. Page 18 GAO/RCEJM&1@9 Fokwup Cable Television Survey Chapter 1 Introduction annual Television and Cable Factbook, a well-known industry reference book. Television Digest, Inc., canvasses cable systems annually, updating its data base. We contracted to purchase its data base of 9,850 cable systems, specifically system names, addresses, and subscriber figures, updated as of November 1989. Sample Selection The cable television industry has a wide range of different-sized sys- tems, based on number of subscribers. To capture the industry’s diver- sity and accurately represent any significant differences in rates and services based on size, we designed our sample using five size groupings (or strata) of systems, based on the number of subscribers. However, to sample by cable system size, it was essential that the universe of sys- tems from which we selected our sample include a subscriber count for each system. Of the 9,850 systems in Television Digest’s data base, we eliminated 895 systems from our universe that did not have an accom- panying mailing address or subscriber count, leaving 8,955 systems usable for our survey. As shown in table 1.1, we selected a total of 1,971 systems for our survey, from the 5 different-sized groupings created, to receive our questionnaire. Table 1.1: GAO Sample Selection Methodology Number of systems Universe, according to Number of Response Television GAO subscribers rate Size of cable system Digest sample (millions) (percent) I-1,000 5,111 500 0.17 706 l,OOl-3,500 1,703 -~425 0.82 74.8 3.501.10,000 1,070 450 2.69 79.3 lO,OOl-50,000 900 425 9.32 82.6 50,001 and up 171 171 16.12 88.3 Total 6,955 1,971 29.12 77.6 Our sample of 1,971 cable systems contained about 29 million sub- scribers, according to Television Digest, Inc. This sample represents about 20 percent of the universe of cable systems but accounts for about 62 percent of the universe of subscribers. Our coverage of subscribers was greater than the 20-percent coverage of cable systems because we selected larger samples from the larger-sized systems. Page 16 GAO/RCED-90199 Follow-up Cable Television Survey Chapter 1 Introduction subscriber bases; (2) the increasing ownership interests in the produc- tion or supply of cable programming networks by companies owning cable systems (vertical integration); (3) the unreasonableness of limita- tions on local governments’ ability to oversee cable operations in order to ensure quality cable service and reasonable rates; (4) the effects of the elimination of FCC’S “must carry” regulations, whereby cable sys- tems no longer have to carry local over-the-air broadcast channels; and (5) the question of whether competition in the cable industry should be increased by allowing telephone companies to own and operate cable systems. In defense of the cable industry, the President of the National Cable Tel- evision Association (NCTA) has testified before the Congress that the Cable Act has been a success and that the deregulation of basic cable rates has benefited consumers, citing examples of expenditures the industry has made to improve cable service. For example, he said that the industry has spent millions of dollars to improve the quality and diversity of cable programming; expenditures increased from $300 mil- lion in 1984 to nearly $1 billion in 1989. Spending on programming by basic cable networks and premium services increased from $1 billion in 1984 to $2 billion in 1989. In 1984, 57 percent of the nation’s cable cus- tomers had access to 30 or more channels. Today, that figure has risen to 87 percent of customers. He further explained that expenditures for improvements in plant and equipment have increased from about $200 million in 1984 to over $500 million in 1989, and that franchise fees paid to local communities have tripled, from $200 million in 1984 to $768 million in 1989.” Ongoing FCC Studies The Cable Act directs FCC to conduct a study on the impact of the Cable Act 6 years after enactment, and to recommend legislative changes, if appropriate. FCC’Sstudy is currently underway and is scheduled for completion in July 1990. As part of its study, FCC has revisited its earlier analyses of a number of controversial issues, including its definition of effective competition. On December 29, 1989, FCC issued a Notice of Inquiry7 as a first step towards meeting its reporting mandate. The notice requested comments on a number of issues. FCCwill use the com- ments to analyze the effects of substituting market forces for cable rate “Statement of James P. Mwmry. I’resldent of the National Cable Television Association, before the Subcommttee on Telecommunirations and Finance, House Committee on Energy and Commerce, Mar 1, 1990. ‘FCC Notice of Inquiry, MM Docket No. 89.600 Page 14 GAO/RCED-99-199 Follow-up Cable Television Survey Chapter 1 lntroductlon facilities and systems, and to use local streets and rights-of-way to con- nect cable subscribers. The franchise agreement could also be used by the locality to prevent cable operators from charging unreasonably high basic rates for what was seen as an essential service in these areas. In addition, cities viewed the ability to deny or delay a requested rate increase as a useful tool to enforce other provisions of a franchise agree- ment, such as the obligation to provide service to all residents of the service area. Passage of the Cable Act The objective of the 1984 Cable Act was to transform the existing mix- ture of local, state, and federal regulations into a more coordinated national cable policy. The goals of this policy included (1) creating pro- cedures for use by localities when selecting a cable franchisee that would encourage cable industry growth and development, using an orderly process for franchise renewal that would protect cable operators against unfair renewal denials; (2) encouraging a wide diversity of infor- mation sources and services for the public; and (3) promoting competi- tion in cable communications. The Cable Act generally prohibits state and local governments from reg- ulating basic cable television rates in communities where the cable system is subject to “effective” competition, as defined by the Federal Communications Commission (FCC).FCC has determined that effective competition exists if residents of a locality can receive three or more television stations using their own antennae as an alternative to cable service. As a result, after December 29, 1986, the effective date of rate deregulation, any cable system located in an area with three or more over-the-air stations would no longer be subject to local rate regulation of its basic cable rates. Our follow-up survey showed that only about 3.5 percent of the cable systems continued to be subject to local rate regula- tion as of December 31, 1989, in comparison with 67 percent regulated prior to rate deregulation. After rate deregulation, complaints started to be heard from a number of sources about increases in cable rates. Congressional hearings have been held, and a number of legislative proposals have been introduced to Page 12 GAO/RCJXD4JO-199Follow-up Cable Television Survey Chapter 1 Introduction Cable television rates, once subject to broad control at the local or state level for the lowest priced basic service, have been deregulated since late 1986 in most communities, following the Cable Communications Policy Act of 1984 (Cable Act). Since then, local officials and consumer groups around the country have expressed concern about increases in cable rates, and a number of bills have been introduced in the Congress to “re-regulate” cable rates.’ Cable industry officials, on the other hand, report that rate increases are moderating and have been justified by a number of factors, including increased costs, upgrading of systems, and improvements in customer services. In August 1989, we reported and testified on the results of our first survey of cable television rates and services to the Subcommittee on Telecommunications and Finance, House Committee on Energy and Com- merce.’ At that time, the Chairman of the Subcommittee requested that we continue to monitor cable rates. This report is our follow-up survey of cable television rates and services. Cable television service continues to evolve from its original purpose Background over 40 years ago of providing residents in rural areas with better tele- vision reception to providing residents with a full range of entertain- ment services. Today, cable service offers a wide range of video programming to millions of subscribers, including not only over-the-air television channels but also movies, sporting events, and other program- ming available only to cable subscribers. In rural areas, cable television is seen by some as an essential service, serving as a window to the outside world because of otherwise poor television reception. In other parts of the country, however, cable is more broadly categorized as a multichannel video entertainment service, competing not only with broadcast television but also with other sources of entertainment, such as movie theaters and video rental stores. According to cable industry representatives, recent industry growth and development can be attributed for the most part to the relaxation of industry regulation brought about by the passage of the Cable Act. In 5-l/2 years since passage of the Cable Act, major growth in the cable ‘The Cable Act deregulated cable rates only in those localities where the cable system was subject to “effective” competition, as we discuss later in this chapter. ‘Telecommunications: National Survey of Cable Television Rates and Services (GAO/RCED-89.193, Aug. 3, 1989) and National Survey of Cable Television Rates and Services (GAO/T-RCED-89-60, Aug. 3, 1989). Page 10 GAO/RCED90-199 Follow-up Cable Television Survey Table IV. 1: Average Monthly Revenue Each Subscriber 57 Generates for the Cable System Table IV.2: Revenue Generated per Subscriber by Systems 58 That Were Regulated/Not Regulated Prior to Effective Date of Cable Act Table V.l: Cable Industry Growth 59 Table V.2: Changes in Cable System Penetration 59 Table V.3: Number of Over-the-Air Channels Available in 60 Cable Community Table V.4: Number of Over-the-Air Channels Available in 60 Cable Community Table V.5: Number of Active Channels Carried by Cable 61 Systems Table V.6: Number of Active Channels Carried by Cable 61 Systems Table V.7: Changes in Cable System Ownership Between 62 1985and1989 Table V.8: Percent Changes in Cable System Ownership 62 Between 1985 and 1989 Table V.9: Availability of Discounts for Low-Income or 62 Elderly Subscribers as of 12/31/89 Table V.10: Regulation of Basic Cable Service Rates 63 Table V. 11: Number of Separate Jurisdictions Covered by 64 Franchise Agreements as of 12/31/89 Table V. 12: Year of Awarding or Latest Renewal of 65 Franchise Agreement Table V.13: Year of Expiration of Current Franchise 66 Agreement Abbreviations CPI Consumer Price Index DJX3 direct broadcast satellite FCC Federal Communications Commission FTC Federal Trade Commission GAO General Accounting Office HBO Home Box Office multichannel multipoint distribution service MS0 multiple system operator NCTA National Cable Television Association Page 8 GAO/RCED-SO-199 Follow-up Cable Television Survey Contents Executive Summary 2 Chapter 1 Introduction Background Objectives, Scope, and Methodology Chapter 2 19 Results of Follow-Up Basic Rates and Services 20 Optional Services 23 National Survey of Premium Services 24 Cable Television Rates Revenue per Subscriber 24 and Services Cable Subscriptions and Penetration 25 Chapter 3 26 Analysis of Legislative Regulation of Cable Rates 26 Changes in Franchise Renewal Procedures 29 Proposals to Amend “Must Carry” Provisions 31 the Cable Act Vertical Integration 33 Horizontal Concentration 35 Ownership of Cable Systems by Telephone Companies 36 Chapter 4 39 Regulation of Cable Focus on Market Competition 40 Regulatory Options 40 Television Rates: Redefinition of Cable Service Subject to Regulation 44 What Are the Options? Appendixes Appendix I: Changes in Basic Cable Rates and Services 46 Appendix II: Availability and Rates for Cable Television 54 Options Appendix III: Premium Cable Services 55 Appendix IV: Revenue to Cable Systems per Subscriber 57 Appendix V: Changes in Cable System Subscribership and 59 Other Information Appendix VI: Survey Questionnaire 67 Appendix VII: List of Respondents 81 Appendix VIII: Major Contributors to This Report 84 Tables Table 1.1: GAO Sample Selection Methodology 16 Page 6 GAO/RCEDwFlBO Fdlow-up Cable Teletiion Survey Executive Summary Principal Findings Basic Cable Rates and GAO’S survey showed that, during 1989, an average cable subscriber’s Channels monthly rate for the lowest priced basic service increased by 10 percent, from $14.50 to $15.95.:’ Rates for the most popular basic service also showed a lo-percent increase, from $14.91 to $16.33. Between November 30,1986, and December 31,1989, monthly rates for the lowest priced basic service increased by 43 percent, from an average of $11.14 to $15.95 per subscriber. By comparison, the monthly rates for the most popular basic service increased by 39 percent, from $11.71 to $16.33. Cable subscribers received additional basic channels to accompany the rate increases. During 1989, the number of channels available to sub- scribers increased modestly, by one and two channels, respectively, for the lowest priced and the most popular services. Overall since deregula- tion, the number of basic channels available to subscribers to the lowest priced basic service increased, on average, from 24 to 31 channels. The number of channels available for subscribers to the most popular basic service also increased, on average, from 27 to 34. Rate Changes in Regulated The cable systems that were regulated in November 1986 had greater and Nonregulated Systems rate increases through December 1989 than those systems that were not regulated. (Twenty-four percent of cable systems were already deregu- lated at that time.) Rates for the regulated systems increased by 47 per- cent, compared with a 32-percent increase for the nonregulated systems. This difference may be explained by the fact that the average basic rate for systems not regulated on November 30, 1986, was over $1 .OOhigher than the rate for regulated systems. By December 31, 1989, however, basic rates for systems formerly regulated had caught up with rates of those systems previously not regulated. Changes in Cable System GAO found that 53 percent of cable systems had changed ownership Ownership since 1985. Critics have charged that “trafficking,” or the frequent buying and selling of systems, has resulted in increased cable system costs that must be recouped from subscribers through higher rates. “GAO’s survey results are based on responses received from 1,530 cable systems of 1,971 systems randomly surveyed nationwide--a response rate of 78 percent. Page 4 GAO/RCED-SO-199 Follow-up Cable Television Survey Executive Summary Cable television rates, once controlled at the local or state level, have Purpose been deregulated in most communities since late 1986, following the Cable Communications Policy Act of 1984. The Cable Act sought to encourage the development of cable systems to provide a wide diversity of information sources and services to the public. Since deregulation, the cable industry has grown tremendously, but accompanying rate increases have caused concern over whether the industry has begun to abuse its market power. In August 1989, GAO reported and testified on the results of a cable tele- vision survey covering changes in rates and services between December 1986 and October 1988.’ The survey reported a 29-percent increase in the average cable subscriber’s monthly rate for the lowest priced basic service.2 As requested, GAO updated its survey through 1989 and col- lected data from 1984 and 1985 to further study the effects of the Cable Act. In addition, GAO sought to determine whether cable rates have mod- erated during 1989 and whether cable system ownership changes have driven up cable rates. GAO also reviewed proposals for amending the Cable Act and the major options for dealing with the cable industry’s market power. Cable television service has continued to grow and evolve. Originally Background designed to provide residents in rural areas with better television recep- tion, cable has expanded to metropolitan areas and is now viewed as a multi-channel video entertainment service competing with broadcast tel- evision, movie theaters, and video rental stores. Cable systems market several services-basic, optional, and premium. Basic service includes the re-transmission of local television channels, but may also include such cable channels as C-Span, CNN, ESPN, and “superstations,” offered as a single level of service or as two or more “tiers” of service. Optional services include such features as remote con- trol units and cable outlets for additional television sets. Premium ser- vice generally includes movie and other entertainment channels, such as Home Box Office (HHO) and Cinemax, available for an extra monthly fee. ‘GAO/RCED-89-193 and GAO,?‘-RCEDSQ-60, Aug. 3,1989 ‘Because sxne cable systems offer more than one level or “tier” of basic service, GAO collected data on both the lowest priced service offered and the service to which most customers subscribe, i.e., the most popular service. Since mwt systems have only one tier of basic service, the most popular service is generally also the lowest priced service. Page 2 GAO/RCED-90-199 Follow-up Cable Television Survey
Telecommunications: Follow-Up National Survey of Cable Television Rates and Services
Published by the Government Accountability Office on 1990-06-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)